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AFFILIATE SHARING PRACTICES
AND THEIR RELATIONSHIP WITH
THE FAIR CREDIT REPORTING ACT

THURSDAY, JUNE 26, 2003

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:07 a.m. in room SD-538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

First of all, I want to thank the witnesses for being here today. This morning, we are examining the provisions of the Fair Credit Reporting Act which established the rules for information sharing among affiliated entities.

I believe that this is an area which deserves particularly close scrutiny in the reauthorization process because of the considerable changes that have occurred in the financial service sector since the passage of the 1996 Fair Credit Reporting Act amendments.

Frankly, activities which were once strictly prohibited now commonly occur within the industry. The changes made to the financial services laws permit financial services firms to engage in new lines of business and to operate using larger and much more complex corporate structures.

The purpose of this hearing is to consider this contemporary landscape and assess how well the Fair Credit Reporting Act operates in the context of current practices. To do this, I believe we must consider the types of affiliate structures firms use and look at the kinds of information they share and ascertain the purposes for which they share it.

We must also examine the level of consumer understanding of information-sharing practices are the consumers aware that their financial information is shared, do they recognize the range of entities it is shared with, does such sharing pose any threats to them, do they have concerns about such sharing, do they have choices regarding controlling the sharing?

Hopefully, through the course of today's hearing, we can address these issues. As we go forward, we will have to closely measure these issues in order to be able to develop a product that achieves the most effective, efficient, balanced, and fair system possible. Senator Johnson.

STATEMENT OF SENATOR TIM JOHNSON

Senator JOHNSON. Well, thank you, Chairman Shelby, for holding today's hearing on affiliate sharing and the Fair Credit Reporting Act. I would like to welcome today's witnesses whose thoughtful written testimony has been helpful in laying out both the benefits of information sharing and some concerns that we should keep in mind as this debate goes forward.

I would also like to extend a special welcome to Terry Baloun, who is a Regional President and Group Head of Wells Fargo Bank in South Dakota, North Dakota, Montana, and Western Minnesota. Terry has spent a good deal of time in communities throughout our State, and he knows firsthand the challenges of bringing meaningful credit opportunities to rural America. We face particular challenges, from low population density to specialized issues related to agricultural lending, and Wells Fargo plays an important role in the financial services sector in the Upper Midwest.

In fact, national firms like Wells Fargo and Citigroup, which is also represented here today, are critical to the economic vitality of rural States like South Dakota. While smaller local banks and credit unions are the lifeblood of our communities, and provide critical lending services to people throughout rural States, their services are complemented by larger financial conglomerates like Wells and Citi. Some people prefer to patronize small banks, some prefer credit unions, and some prefer the one-stop shopping they find at larger financial services firms.

The point is that people have choice. And in rural America, we do not take that for granted. For example, in the area of health insurance, by August, we will have only two insurance companies left in my State offering individual policies, and the lack of competition has had devastating results on farmers, ranchers and other selfemployed workers. But the nationwide system of credit that now permits companies to operate around the country with one set of rules overcomes the negative economics of a small population living across a large State.

The expanded choice in the financial services marketplace extends beyond simply the type of financial institution to an exploding array of financial products now available to retail customers, ranging from complex to the simple. For example, Citigroup allows mortgage customers to pledge from a Smith Barney brokerage account to collateralize the loan rather than liquidate the portfolio to come up with a downpayment. By the same token, Wells Fargo customers can pay their mortgage at any local branch or ATM, even though the mortgage company and the bank are separate entities within the same corporate family. Neither of these services would be possible without information sharing among affiliates.

On the retail side, affiliate sharing has benefits as well as Mr. Prill notes in great detail in his written testimony. These range from making computerized returns without a receipt, to storage and retrieval of warranty information, to returns of Internet purchases to a brick-and-mortar storefront, to screening for bad checks through an instant authorization system. And of great relevance to our discussion last week, customer information is critical in preventing identity theft in both the retail and the banking sectors. In fact, Special Agent Caddigan of the Secret Service and Mr. Beales

of the Federal Trade Commission stated unequivocally that information sharing, and in particular information sharing among affiliates, can play a critical role in our enforcement efforts against identity theft.

Are these financial services absolutely necessary? Well, probably not. The world does not come to an end in a cash economy. And I want to make clear that I take seriously the concerns some of today's witnesses raise about affiliate sharing. But the impact of product innovation on economic growth, consumer choice, and the democratization of credit have been undeniable.

It is this very balance between growth and innovation on the one side, and individual privacy rights on the other, that drove Congress' decision in 1996 to preempt seven critical provisions of the FCRA from State action. We wanted to encourage a national marketplace for credit that maximizes appropriate consumer access to affordable credit and, to a remarkable degree, we have succeeded. Again, I believe this issue fundamentally is about consumer choice. And that includes a consumer's right to choose not to be part of an affiliate-sharing arrangement. The first opportunity to choose comes when a consumer decides to establish a relationship with a company: in some sense, the decision to do business with a larger or smaller institution is the ultimate opt in. The second opportunity to choose comes when the consumer is presented with an opportunity to opt out of affiliate sharing. To be effective, this option must be clear and meaningful. I am interested in hearing from the witnesses what steps, if any, they would suggest beyond the mandatory privacy notices to give customers a meaningful opt out opportunity.

So thank you, Chairman Shelby. I thank you, Senator Sarbanes, for your leadership on this issue, and I look forward to the opportunity to hear more from this panel. I have several other conflicting obligations, and I will likely have to excuse myself prior to entire panel being concluded.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Bennett.

STATEMENT OF SENATOR ROBERT F. BENNETT

Senator BENNETT. Thank you, Mr. Chairman.

I remember from my own business experience that one does not seek a bank, one seeks a banker. One seeks a relationship where you are known, your background is known, and therefore you can deal with a sense of confidence, and the banker can deal with a sense of confidence about your background.

If we put up artificial barriers within financial institutions to the sharing of information, we create a situation where one cannot be known. As Senator Johnson has said, the first opt in is the choice you make as to the organization with whom you deal, and once you have made that choice, it seems to me, as a consumer, you want everyone in that organization to know all about you so that the good reasons they have to give you credit or offer you products in one part of the organization will go with you to the other part of the organization, and you will not have to reintroduce yourself again and again to try to get those services.

If you find, as some witnesses have suggested in previous hearings, that you are being badly dealt with as a result of the way that information is shared, this is America, and you can walk out the door and take your business someplace else. I am always interested that many of the people who get upset about activities that businesses engage in assume that the business exists to fleece you. I can assure you that business exists to get a consumer to come back.

Business exists to try to have as much repeat business from reliable consumers as it possibly can. I am using the wrong pronouns here. Business people, there is no such thing as a business, business people want to have as many repeat customers as they possibly can. They want to build brand loyalty and customer loyalty, and as I have heard some horror stories that said a bank did this or bankers did this or that with my information, the immediate reaction I had was why would any customer ever deal with that banker again if, in fact, that was done? The ultimate opt out is the one to which Senator Johnson has referred, that you take your business, and you go someplace else.

So intelligent businessmen and women will do everything they can to use the information within affiliates in a way that will benefit the consumer so that the consumer will want to come back, will want to stay with that institution and all of its affiliates, and that is the way successful businesses are built, and that is the way consumers want it, and that is one of the magic aspects of American

commerce.

We have more flexibility, consumers have more choices, they have more opportunities to expand their purchasing options in America than anyplace else, and I think the sharing of information intelligently and for the purpose of trying to build repeat business is one of the reasons that American consumers are so well-served. So, I will look forward to the testimony from the witnesses, and hope that the prejudices and preconceptions that I have just outlined will either be confirmed or corrected, depending on the information the witnesses have to share with us today.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Mr. Chairman, thank you very much. I commend you for holding what I regard to be quite an important hearing on affiliate sharing practices and regulation.

I think it is fair to say an affiliate used to be one of a small group of companies performing a similar business. Today, an affiliate could be one of hundreds or more companies, many of which engage in different businesses, and the question, of course, is in the minds of many consumers, that broad scope of affiliates are often thought of as third parties. So there has been a quantum expansion, I think, in the concept of affiliates, and we need to bear that in mind.

Of course, we are looking now at the problem of whether to extend the Federal preemption of State law which governs affiliate sharing and, if so, under what conditions, and that poses important

questions about the right of consumers, in terms of what can be done with their confidential financial information.

The information under current law which can be disclosed is really quite far-reaching: savings and checking account balances, certificate of deposit maturity dates and balances, checks individuals write, checks deposited in a customer's account, stock and mutual fund purchases and sales, life insurance payouts and so forth.

So that the universe of confidential and sensitive financial information that is being shared or sold has not only increased dramatically over the past several years, but I am not sure consumers are fully abreast of how widespread it is.

This is underscored, of course, because every survey shows considerable sensitivity on the part of people with respect to the privacy of their financial information. In California, where privacy has become a major issue, statewide polls show from 75, 85, 90 percent say consumers should provide their permission for the use of the financial information. There have been efforts at legislation. In California, I understand that this issue may go to initiative. So it may be put to the electorate in a very different form than the ability to work at it, as one can do, in a legislative context.

Hopefully, this hearing will help to develop what specific consumer data financial institutions circulate to affiliated businesses, for what purposes the affiliates use such data, the awareness of consumers as to which businesses are receiving their information. These are all important questions, and obviously the sensitivity across the country, I think, to the question of the privacy of financial information is growing and growing. And I think we have to figure out some way to address it. I hope we will hear, in that regard, from the panel, including the representatives of the financial institutions, which after all have a major interest in this question as well, but I do not think the issue in the country has reached anything approaching equilibrium, where people are satisfied with a situation. Therefore, until that occurs, there are going to be continuing calls for action of one sort or another, whether it be regulatory, legislative, or even, as California is considering, actually initiated right from the electorate to try to deal with this issue. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Thank you, Mr. Chairman. I will be brief. I just want to thank you right at the start for holding this hearing. I want to thank the witnesses for agreeing to be on the panel. You being a part of this discussion is really important. It is not always easy to get away from your jobs and businesses to be here, but I look forward to hearing your comments.

Information sharing is a vital part of the U.S. financial and business systems and it has contributed to the vibrancy of the U.S. economy. While it is necessary to protect a consumer's personal information, certain sharing of information is necessary for U.S. financial and business systems to function and operate smoothly. Affiliate sharing allows the operation of our national credit reporting system by enabling lenders to perform effective credit underwriting and credit monitoring. This ability is important for the

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