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Mr. Beales, could you hold the microphone-usually, we ask people to bring it closer. I am going to ask you to bring it further away.
Thank you. You have a booming voice.
Yes, there is two key provisions about accuracy, two key mechanisms for providing accuracy.
The credit reporting agencies themselves are required to have reasonable procedures to assure maximum possible accuracy. And that is one of the key requirements, to make sure that information is correct.
Maybe more important is the requirement for adverse action notices to consumers when a decision is based on information in a credit report. That lets the consumer know the source of the information was a credit report, where that credit report is, and it gives the consumer access to that credit report to examine it and see if there is any mistakes.
And it is the consumer, after all, who is in the best position to know and has absolutely the right incentives to try to make sure that the information is accurate and reflects their credit history appropriately.
Once the consumer indicates that there is a problem, or disputes an item, credit bureaus have to reinvestigate, furnishers have to reinvestigate, and unless the information can be verified as accurate, it has to be deleted.
But I think that those are the two key mechanisms that address accuracy.
Senator CARPER. Let me ask your thoughts on whether or notif we permit December 31 to come and go and we do not restore the preemption provisions, what do you think are the downsides to our failure to act, and what, if any, are the upsides?
Mr. BEALES. The Commission hasn't taken a position on what you should do.
I think that the failure to renew the preemptions runs the risk that what is now a national system begins to fragment, that it does so in ways that make it harder to share information across state lines and within what are increasingly national credit markets.
I believe the potential benefit of allowing the preemption to expire, would be letting States innovate with different approaches and try out different schemes to try to protect consumers or to try to balance these conflicting interests in slightly different ways.
And as I say, the downside of that is we may not like some of those experiments and they may interfere with the uniformity that we currently enjoy in credit markets.
Senator CARPER. Looking back, I was not here when the preemption language was adopted. But why was it adopted?
Mr. BEALES. I was not involved in that debate, either, and I do not know.
Why was it adopted? I think it was in order to assure the uniformity of some key aspects of the system. And it certainly has accomplished that.
Senator CARPER. Is the rationale for taking that action any less relevant or correct today?
Mr. BEALES. I think that remains the benefit of extending preemption, is that you assure the continued uniformity of the system.
That, however, limits the ability of States to try other approaches and experiment with other approaches that may teach us something.
Senator CARPER. All right. My time is expired. Mr. Chairman will there be another round?
Chairman SHELBY. Sure. Senator CARPER. Thank you. Chairman SHELBY. Senator Dole. I think she was here first. Senator DOLE. Thank you. The average American moves, I am told, every 6 years. That is more than two-thirds higher than any other country.
I think you would agree that our national uniform credit system plays a significant role in increasing the mobility of labor and the ability of consumers to move, while they preserve the opportunity to get cheap credit through the portable credit system.
But tell me how important do you think this is to our economy?
Mr. BEALES. It is hard to know, and actually, we are very much looking forward to some research that is in the works on what the consequences would be of losing some kinds of information out of the credit reporting system.
And I think that will be very interesting to see, and we will be able to have a much firmer assessment once that research is concluded.
But I think it clearly makes it easier to be able to move to a new town and it doesn't matter that there is no one there who knows you and can vouch for you, that there is access to a credit report from elsewhere with a system that creditors know they can depend on to provide accurate and complete information upon which to base a decision.
If you had to go to a separate State or systems, it would be far more difficult and far more uncertain for the creditor, which in turn would likely get reflected in worse terms offered to the consumer.
Senator DOLE. Now, I have heard the case made that other modern economies throughout the world, in Europe, in Latin America, and Asia, do not have credit reporting systems like ours, and that some countries are considering right now adapting our system, our credit reporting system, the preemptions.
Can you provide the Committee with some details of how our credit reporting information or information-sharing system would contrast with other countries', in the G8, for example?
Mr. BEALES. Just speaking generally, and not about any particular country, probably, there is two kinds of differences between the U.S. system and various foreign systems.
One, our system is voluntary. In some countries, credit reporting is essentially a public utility or provided by the government, even in some instances. Our system is voluntary, market-driven. It depends on what information furnishers are willing to provide to credit bureaus and what information credit bureaus think it is important to try to get and provide to their customers.
Second, ours is a system of full-file reporting. Both positive and negative information about the consumer is reported. A number of other countries only have negative information reported.
What is important about full-file reporting is there is a real difference between someone who has no negative information because they have never had credit before, and someone who has no negative information because they have had credit extensively, they have used numerous different accounts, and they have always paid them off. Those two people aren't the same. But in a system that only reports negative information, you cannot tell them apart.
So the full-file reporting is a really useful feature of the American system.
Senator DOLE. And finally, could you just give us a run-through of what credit card pricing might look like without prescreening? Say prior to 1990, compared to today.
Mr. BEALES. It is difficult to attribute causality to any of the changes that have happened since 1990. But what credit card pricing looked like in 1990 was essentially everybody offered an interest rate that was at the legal usury ceiling.
Cards generally had relatively high annual fees. There were no, or virtually no, ancillary benefits. You did not get airline miles. You did not get discounts. You did not get free insurance.
What you see today is a wide variety of rates, of credit limits, numerous cards with no annual fees, a lot of different benefits, whether it is contributions to your favorite charity or the ability to display the logo of your school or even cash discounts in some cases. And interest rates that reflect much more closely the risk that a particular consumer creates or poses for the creditor.
I think prescreening has been an important part of that shift. It has been an important competitive weapon, as people have entered credit card markets with different kinds of terms.
But there is also obviously a lot of other changes that have happened that have likely influenced those developments as well.
Senator DOLE. Okay. Thank you, Mr. Chairman. I think my time is expired.
Chairman SHELBY. Thank you.
COMMENTS OF SENATOR TIM JOHNSON Senator JOHNSON. Thank you, Mr. Chairman. I have a full statement that I would like to submit for the record.
Chairman SHELBY. It will be made a part of the record, without objection.
Senator JOHNSON. I want to thank the Chairman for holding this hearing. Thank you, Mr. Beales, although I have to express disappointment that the Administration has, so far, been unwilling to exert greater effort at pushing for passage of legislation to extend the preemption.
My own view is that a failure to act on the preemption by January 1, 2004, will be utterly disastrous for the economy of this country and for consumers all over America.
A uniform reporting system that could break into as many as 50 reporting systems, all with different standards, different requirements, different procedures, and a credit reporting system which in many ways has become a model for the world, would be degraded significantly.
I think that while there are those who want to utilize this necessary legislation as a vehicle for taking up other issues, and I respect that, I would hope that the Senate will keep a close eye on the notion that what is at stake here is access to credit.
And that is the principal reason why we are having this debate, and the uniform system, in fact, in full-file reporting has enhanced citizens' ability to secure credit, has enhanced the ability of financial institutions to make intelligent decisions relative to lending.
Now, Mr. Beales, can you tell us whether this evolution of the credit reporting industry and the FCRA has resulted in personal credit histories being more portable?
In other words, if someone applies for credit out of State, or moves a residence and applies for credit in their new home State, does that create any problems related to credit histories or obtaining reliable credit report information under what we have nowa uniform, full-file reporting system?
Mr. BEALES. No. I think the current system clearly facilitates exactly that kind of transaction. It facilitates a bank in California competing for the business of a consumer in Florida or Maine, and having reliable information about whether that consumer is a good risk or a bad risk.
It facilitates the ability of that consumer to move from Florida or Maine to California and reestablish credit with new accounts, with merchants that have never heard of them before, because there is a uniform system that provides reliable information and creditors know that they can rely on that information to make an accurate risk assessment.
Senator JOHNSON. So this system, better than a 50 different standards system, best facilitates dealing with the problems of a very mobile society.
Would you say that that is a fair statement?
Mr. BEALES. Yes. I mean, I think the uniformity really facilitates mobility. I think that is probably right. And that is the benefit side of having a uniform system.
Senator JOHNSON. And you note in your testimony that a Federal Reserve study of credit bureau files found that nearly 20 percent of currently reported active accounts have been open for fewer than 12 months. And you concluded that this number illustrates how a national credit system enables creditors to make better creditgranting decisions.
Could you explain that conclusion a bit more and elaborate a bit on why those statistics and that uniformity is so key for creditgranting decisionmaking?
Mr. BEALES. What we have heard, and I think the point we are trying to make was simply this—what we have heard in the context of identity theft debates in particular is maybe credit shouldn't be so easy.
I think the point of that statistic is that for a large fraction of the population, because they are opening new accounts all the time, easy access to credit is an important issue, that you do not want to make access to credit more difficult, given how many people are opening accounts on an ongoing basis.
Senator JOHNSON. Do you think there has been enough done to investigate and prosecute identity theft crimes? And what are some of the impediments to investigating and prosecuting identity theft crimes?
Mr. BEALES. We are continuously working to do more to provide information to assist law enforcement in prosecuting identity theft.
We are also active in trying to educate consumers as to how they can reduce the risks and how they can reduce the consequences, and I think that is an important part of it.
And we are very involved in assisting businesses to try to reduce the risks, both from a business education perspective, to try to reduce the risks that information that is entrusted to them would be used to compromise somebody's identity.
We have also gone after businesses on security grounds, where we thought that there was not sufficient security in place to protect sensitive information about the consumer. And that, too, has implications for identity theft.
And we have an ongoing program of training law enforcement officials in order to help them better bring identity theft kinds of cases.
Senator JOHNSON. I notice my time is expired, Mr. Chairman I have some other things that I am interested in in terms of prescreening and credit cards and how a national system facilitates that.
Chairman SHELBY. We will have other rounds.
Senator JOHNSON. But I will wait for a later time, and I yield back.
Chairman SHELBY. Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING Senator BUNNING. Thank you, Mr. Chairman. I have an opening statement that I would like to submit for the record.
Chairman SHELBY. It will be made part of the record in its entirety, without objection.
Senator BUNNING. Thank you. Since FCRA enactment in 1996, did the same number of complaints on FCRA-related issues to the FTC increase, decrease, or stay the same?
Mr. BEALES. Our reporting system has changed so much over that time period, that I am not sure you could draw comparisons from that.
I do not know, but we would be happy to supply that information for the record of what the numbers of complaints have been like.
Senator BUNNING. Okay.
Mr. BEALES. But I do want to note that the changes in our information system have really made it harder to make those comparisons over time.