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Later in your testimony, Mr. Pratt, you indicate-and I quote again-"We could do an even better job if everyone used our newest data standard and also if every one of the 30,000 furnishers of information would also use the online system for processing consumer disputes." I believe those were your words.

Mr. PRATT. Yes, sir.

Chairman SHELBY. I assume that by "we," you mean the credit repositories.

Mr. PRATT. Yes-although when you look at-large at the community of furnishers who are providing data, I do not think you would find a single executive in a company who will say, "My goal is to report bad data" or to declare somebody dead. But in the bigger picture, yes, the more we can run through the automated processand I think Evan has made a couple of comments about one of the challenges of automation is that you have to automate, you have to communicate-in fact, the law required in 1996 that we build an automated system under FCRA to allow for error correction so that I could correct my error just once. It used to be historically that I could correct it in one file, and then it would be in another file, and I would not find out until later.

So one of the challenges was to-and, in fact, lenders were obligated to report corrections to all nationwide consumer reporting agencies-it is always a challenge to try to convey with absolute precision the nature of the consumer's dispute, at the same time to do it quickly, at the same time to get it done in 30 days, and at the same time to handle

Chairman SHELBY. Quickly and accurately.

Mr. PRATT. Yes, sir, quickly and accurately-do not work coterminously all the time. We do have that challenge of doing both, yes, sir.

Chairman SHELBY. By the word "better," I also assume you mean more accurate.

Mr. PRATT. We definitely could be more accurate if that were the


Chairman SHELBY. Okay.

Mr. Brobeck, I have raised the issue that we do not have a firm handle on the true level of accuracy in the system at this point in time. While your study provides-and I thought your study was very interesting-a sense of where things are right now, don't we need to be better-informed about this issue in the future?

Mr. BROBECK. Yes. We know that at least a significant minority of consumers can be adversely impacted by inaccurate scores, even annually. We cannot at this point assign a specific number

Chairman SHELBY. An inaccurate score will cost you over time possibly hundreds of thousands of dollars.

Mr. BROBECK. Yes, sir, it could-if, for example, you purchase a subprime mortgage instead of a conventional mortgage, it could cost you well over $100,000.

We would agree with the recommendation that a Federal Agency, perhaps the FTC, should be given the authority and the responsibility to continuously monitor this issue and also assume some responsibility for reviewing the dispute resolution process.

Chairman SHELBY. I think it is very, very important.

Gentlemen, we have a lot of questions, as I said, for the record as we build this record. And I think we have a great opportunity here in the Banking Committee, here in the Senate and the House, to put together a comprehensive bill that will be good for the economy, that will be good for the financial services industry, but will be good for the American people.

Mr. JOKINEN. Mr. Shelby, if I may.

Chairman SHELBY. Yes, sir.

Mr. JOKINEN. This has been the best day I have had in over 2 years. Thank you.

Chairman SHELBY. Thank you-and I want to say this-I will sign an affidavit-I believe you are very alive.


Chairman SHELBY. The hearing is adjourned.

[Whereupon, at 1:12 p.m., the hearing was adjourned.]

[Prepared statements, response to written questions, and additional material supplied for the record follow:]


This morning, we take up one of the most important issues, if not the most important, associated with the FCRA: The accuracy of the information contained in consumer credit reports.

Changes in our financial services industries have made accuracy more important than ever. Credit report information is increasingly used as the key determinant of the cost of credit or insurance.

By way of risk-based pricing, gone are the days when lenders merely lumped borrowers into the “qualified” or “unqualified" category. The use of risk-based pricing allows lenders to extend credit to a broader range of borrowers predicated on the assumption that borrowers receive credit terms which are commensurate with the credit risk they pose.

As a result, credit report information has a direct impact on the amount and the interest rates at which credit is offered. With respect to large credit transactions, such as mortgages, rate differences can translate into hundreds of thousands of dollars over the course of a loan.

Even in smaller dollar credit transactions, such as credit cards, rate differences can mean large amounts of money. Furthermore, with the practice of credit card companies reviewing credit reports and adjusting rates in real time becoming more prevalent, the application of risk-based pricing to consumer finances is practically an every day event. Let me try to further illustrate these points.

This first chart provides some rough indication as to the effects that particular entries on a credit report can have on a person's credit score or credit worthiness. As is indicated, some entries, such as a bankruptcy filing can greatly reduce a person's credit worthiness. There is nothing wrong with this; consumers who have failed to pay their debts DO pose a considerable risk to creditors.

But what if a bad rating is based on inaccurate information? What if you had never been bankrupt and such an item appeared on your credit report? The second chart highlights the spreads in interest rates that people with differing credit scores would pay for some sample products. As the chart shows, the differences are very real. So are the financial consequences. Consider the cost differences for a $200,000, 30-year fixed mortgage. A borrower classified as a "marginal" risk pays almost $90,000 more in interest than someone with an "excellent" credit rating. Someone classified as a "poor" credit risk would pay $124,000 more in interest than the person with "excellent" credit.

Credit rating matters for other transactions as well. Someone financing a $24,000 new car with a “marginal” rating can expect to pay 127 percent more in interest (about $3,300) than a person with "excellent" credit. Someone with "poor" credit can expect to pay 255 percent more in interest (about $6,700). Again, what if the information that leads to a bad credit rating is inaccurate?

With the rewards for good credit so meaningful, and the penalties for bad credit so severe, it is absolutely critical that credit reports accurately portray consumers' true credit histories.

Thus, the focus of today's hearing-examining the FCRA and the operation of our credit markets to determine whether or not the present system provides optimum


With a system as large and complex as ours, involving the transfer of billions of pieces of information, it is almost a certainty that there are going to be some errors which occur. On the other hand, the credit reporting agencies are paid to properly handle the data.

And furnishers, who also happen to be the largest consumers of credit report information, take advantage of the efficiencies provided by the system. Both derive significant benefits from this system. Both also have a significant responsibility to get things right.

So let us consider: How and why do errors occur in credit reporting? Can more be done to prevent errors in the first place? If some errors are not preventable, does the system enable them to be quickly recognized? Who most efficiently recognizes them? Once recognized, does the system work to ensure that errors are quickly corrected?

I look forward to examining these questions with the witnesses.

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