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governance scandals have hurt trust in the markets. Sarbanes-Oxley and other actions have helped, but it will take a long time for corporate America to rebuild that trust. September 11, had a devastating effect on our economy. The two wars we have had since then have also not helped.
The reason why most of these events have been so harmful to this economy is because they have created uncertainty in our markets. If there is one thing that shakes the markets, it is uncertainty. I am afraid that talk of not renewing FCRA is creating a lot of uncertainty in the financial markets. If we have 50 different privacy standards, it will be difficult for financial companies to sell their products nationwide. If counties and municipalities get in the act, and some already have, it will be even more difficult.
I think it is crucial that we pass an FCRA extension this year. We must bring some certainty back to the markets if we are ever going to grow this economy and prevent a double-dip.
Again, Mr. Chairman, thank you for holding this important oversight hearing.
PREPARED STATEMENT OF SENATOR DEBBIE STABENOW Thank you, Mr. Chairman. I will be brief because I want to get quickly to our witness today. I appreciate your calling this hearing and I hope that we, as a Committee, will move quickly to address the expiring provisions of the Fair Credit Reporting Act.
This session of Congress is going to move quickly and with just over 14 actual work weeks left before our target adjournment, the sooner we can began to move, the greater chances of having a thorough debate and passing the must-do legislation behind today's hearing.
The FCRĂ has served our country well over the past 33 years. Indeed, as a result of the statue, the improved access to consumers' previous credit-related behavior has allowed creditors all over the country to extend credit more quickly and priced on appropriate risk. People with low-credit risks as a result of FCRA can now get lower rates and those with higher risks can now get credit with higher rates when previously they would have probably just been denied any credit at all. In addition, we no longer have to wait days and days or even weeks to get credit decisions. We can get them instantaneously. Furthermore, credit scoring models have taken much of the arbitrariness and guess work out of extending credit. All of this makes our economy more efficient saving time and allowing us to allocate the costs of borrowing appropriately.
Mr. Chairman, I believe we should do everything we can to bolster the system we have in place today. I hope as we reexamine the FCRA we will be careful to take no actions that would undermine or limit the effective and appropriate sharing of credit information. I also hope that we would make sure that consumers have full information about and absolute control over their personal credit information. We should also ensure that there are appropriate privacy safeguards under our law.
I commend you for your leadership on this issue, Mr. Chairman, as well as others on our Committee such as Senator Tim Johnson who has taken an active interest and has his own legislation dealing with FCRA. I look forward to working with all of my colleagues as we take up the reauthorization of the expiring provisions of the FCRA and I look forward to our FTC witness, before us today.
PREPARED STATEMENT OF J. HOWARD BEALES, III
MAY 15, 2003
Mr. Chairman and Members of the Committee, my name is Howard Beales, and I am Director of the Bureau of Consumer Protection of the Federal Trade Commission (Commission or FTC). I am pleased to have this opportunity to provide background on the Fair Credit Reporting Act (FCRA).1 The Commission has played a central role in interpreting and enforcing the FCRA since the law was enacted in
1 While the views expressed in this statement represent the views of the Commission, my oral presentation and responses to questions are my own and do not necessarily reflect the views of the Commission or any individual Commissioner.
1970. I appreciate the opportunity to discuss the FCRA and its role in regulating credit report information. Consumer Credit Reporting
The development of consumer credit was a phenomenon of the post-World War II years. Prior to that time, consumer credit relationships were largely personal because many consumers lived in one place all their lives and dealt only with local merchants and banks. After World War II, the American population grew and became vastly more mobile. Consumer credit also exploded for many reasons, including pent-up demand for consumer goods and services and fading of the cash-only Depression psychology. At the same time there was an increased demand for homeownership. In response, the Government supported the growth of a long-term consumer credit market. For all these reasons, the amount of consumer credit outstanding has grown exponentially.2 Indeed, consumer spending accounts for over two-thirds of U.S. gross domestic product and consumer credit markets drive U.S. economic growth.3
The credit reporting industry developed in tandem with the burgeoning of consumer credit. Early on, credit reporting was local or regional and relatively unsophisticated; the amount of information collected was limited and not standardized. Credit bureaus (consumer reporting agencies) 4 manually recorded consumer information on index cards, updated irregularly, and often retained indefinitely. Over time, however, small credit bureaus grew to become large repositories of information on consumers.5
Today, the credit reporting system, consisting primarily of three main credit bureau repositories, contains data on as many as 1.5 billion credit accounts held by approximately 190 million individuals.6 Creditors and others voluntarily submit this information to centralized, nationwide repositories. Lenders analyze this data and other information to develop sophisticated predictive models to assess risk, as reflected in the consumer's credit score.? The flow of information enables credit grantors to make more expeditious and accurate credit decisions, which benefits consumers as a whole. These benefits are illustrated by a study of credit bureau files that found that nearly 20 percent of the currently reported active accounts had been open for less than 12 months.8
The modernization of credit reporting has played a key role in providing American consumers rapid access to consumer credit. It was not that many years ago that applying for credit required a personal visit to a loan officer. The loan officer, if he did not know you personally, contacted your references, including other creditors, before making a decision on your application. If you were new to the community or applying for credit for the first time, you might get turned down or be approved for only a small, entry-level loan. The decision would often take days and would be based solely on the judgment of the loan officer.
2 In 1946, the beginning of the post-war period, total outstanding consumer credit stood at $55 billion; by 1970, the time of enactment of the FCRA, it had grown to $556 billion. (Figures adjusted for inflation.) Today it is $7 trillion. See Fred H. Cate, Robert E. Litan, Michael Staten, and Peter Wallison, “Financial Privacy, Consumer Prosperity, and the Public Good: Maintaining the Balance," AEI-Brookings Joint Center for Regulatory Studies, March 2003, at 1.
31d. at 8.
4 "Consumer reporting agency” is the term used in the FCRA, and reflects the fact that consumer information is collected and reported for a variety of purposes in addition to credit transactions. In common terminology, however, the agencies are known as “credit bureaus” or “credit reporting agencies.” (Similarly, “credit report” and “credit history” are commonly used nontechnical terms for "consumer report.") The term “repository” is most often reserved for the large, national bureaus that collect and store information on over 190 million consumers. The “repository” agencies, in turn, are sometimes referred to as the "big three,” in recognition of the three major companies that have predominated for several years—Equifax, Experian, and TransUnion. A fourth company, Innovis Data Services (an affiliate of CBC Companies), also maintains “a national database of consumers with unfavorable current or past credit histories.” See http://www.innovis.cbc.com/products.htm.
5 For a more complete recitation of the early history of the consumer reporting industry, see Retail Credit Co., 92 F.T.C. 1 at 134 36 (1978).
6 See "An Overview of Consumer Data and Credit Reporting,” Federal Reserve Bulletin, February 2003, at 49.
7 Scoring products are based on analyses of historical consumer credit data, which allow creditors to develop models that help them predict the risk of default of a particular consumer. (The products are thus sometimes referred to as "risk scores” or “credit scores.") When the consumer applies for credit or other goods or services, the scoring programs that are developed from the complex analysis of past data compare the scoring factors to the individual information of the particular consumer, with the result reflected in a score that is generated for that application.
8 See "An Overview of Consumer Data and Credit Reporting," Federal Reserve Bulletin, February 2003, at 52, table 2 (“All credit accounts and balances. . .").
By contrast, consumers today can use the Internet from the comfort of their home to comparison shop for a wide array of credit products and get a virtually instantaneous offer, including rate and other terms. Or, they can obtain a five-figure loan from an auto dealer they have never been to before and drive a car away from the showroom the same day. In each instance, their eligibility for the lowest rate or most favorable terms depends on a sophisticated credit scoring system that produces rapid, reliable scores based on information from a consumer report.
Chairman Greenspan of the Board of Governors of the Federal Reserve System put it well when he recently testified that “...there is just no question that unless we have some major sophisticated system of credit evaluation continuously updated, we will have very great difficulty in maintaining the level of consumer credit currently available because clearly, without the information that comes from various credit bureaus and other sources, lenders would have to impose an additional risk premium because of the uncertainty before they make such loans or may, indeed, choose not to make those loans at all. So it is clearly in the interests of consumers to have information continuously flowing into these markets. It keeps credit available to everybody, including the most marginal buyers. It keeps interest rates lower than they would otherwise be because the uncertainties which would be required otherwise will not be there.” 9
Before describing some of the primary elements of the FCRA, let me describe briefly how the consumer reporting system works in this country today. Creditors voluntarily report account histories to consumer reporting agencies. 10 Typically, creditors report full account payment information, both “positive” information that the account is current,
as well as “negative” information, such as delinquencies and collection accounts.11 This contrasts with practices in some other countries (and, indeed, with some credit bureaus in the early years of their development in this country) where only negative payment history is reported. 12
Although the credit reporting industry has developed uniform reporting formats and methods, 13 not all creditors necessarily report to all major repositories. Moreover, credit reporting agencies have different schedules and procedures augment individual consumer files with updated data from creditors. Consumer reporting agencies also obtain information from other sources, such as public record data. For all of these reasons, at any given point in time, each of the credit reports on an individual as supplied by the three major repositories may contain somewhat different information. 14 As a result, in the residential mortgage market, for example, creditors use credit reports produced by resellers who consolidate the data available from the three major repositories.
When a consumer applies for credit, lenders obtain consumer reports by providing identifying information on the consumer to the credit bureau. The credit bureau provides a full report listing all accounts and payment histories and/or a credit score, which is a numerical classification based on information in the consumer report. 15 The credit agencies also handle other functions (including those required by the FCRA, such as responding to consumer disputes) through uniform industry processes. 16 The importance of these additional functions has grown along with concerns about identity theft, 17 because credit reporting agencies play a major role in limiting the damage and correcting the fraudulent records that identity thieves leave behind. FCRA Overview BACKGROUND
9 Remarks following testimony by Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System, April 30, 2003, House Financial Services Committee, at 12.
10 Each of the three national credit reporting companies receives more than 2 billion items of information each month. See “An Overview of Consumer Data and Credit Reporting,” Federal Reserve Bulletin, February 2003, at 49.
11 Although the majority of creditors report full account information, some types of accounts are typically reported only when the payment history turns negative, most often when the debt is transferred to a debt collector. Accounts related to medical debts, telecommunications, and power companies are the most common examples. See “An Overview of Consumer Data and Credit Reporting,” Federal Reserve Bulletin, February 2003, at 50, 68. To the extent that consumers have positive payment history only from nontraditional credit such as rent and utilities, this may limit their access to credit.
12 See, e.g., The World Bank, “World Development Report 2002,” at 95 (2002); John M. Barron and Michael Staten, “The Value of Comprehensive Credit Reports: Lessons from the U.S. Experience,” at 14, available online at http://www.privacyalliance.org/resources / staten.pdf (2000) (comparing the United States comprehensive credit reporting system to the Australian negativeinformation-only system).
13 See http://www.cdiaonline.org/data.cfm for information on the uniform reporting format utilized by most creditors and other furnishers of information to consumer reporting agencies.
14 See “An Overview of Consumer Data and Credit Reporting,” Federal Reserve Bulletin, February 2003, at 50–51, 70–71.
15 Between 2 and 3 million consumer reports are issued by credit bureaus each day. See http:/ | www.cdiaonline.org/about.cfm. For a brief description of scores, see Note 7, supra.
16 The Consumer Data Industry Association (CDIA) is a trade association for major consumer reporting agencies. Among other steps to promote standardized automated procedures between and among consumer reporting agencies and furnishers of information to agencies, CDIA oversees a system for credit bureaus to forward consumer disputes to furnishers for investigation. Disputes are forwarded on standardized Automated Consumer Dispute Verification (ACDV) forms. The system now has a web-based component, E-OSCAR, that is intended to further enhance the flow of consumer disputes, update information, and other data. The automated dispute system not only provides a uniform format for conveying the disputes, it also serves an implicit authenticating function—a creditor who receives a consumer dispute via the system knows that the forwarding entity has been approved by CDIA for use of the system.
Along with the growth of consumer credit, and the parallel development of consumer reporting agencies, concerns began to surface about the treatment of consumer information in credit reporting. The credit reporting industry had evolved piecemeal, and there was little consistency in methods of data collection or, before the FCRA, standards of retention or accuracy. For example, there were no Federal legal restrictions on access to consumer credit data, so reporting agencies were free to share a wide range of information with credit grantors and others, without regard to the purpose for which the information was sought. Consumer awareness of credit reports was low due, in part, to the fact that users of reports were contractually prohibited by credit bureaus from disclosing the reports to consumers.18 Even if a consumer could learn what was in his or her credit report, there was no way for the consumer to challenge erroneous information.
In response to rising concerns about the consumer reporting system, and recognizing its importance to business and consumers, Congress held hearings that resulted in passage of the FCRA to provide a framework for the industry and to secure protections for consumers. In enacting the FCRA, Congress specifically recognized that consumer credit “is dependent upon fair and accurate credit reporting.” 19
The 1970 FCRA imposed duties primarily on consumer reporting agencies, with very limited requirements on those that use credit reports, and no provisions aimed at those who furnished information to the reporting agencies.
The consumer reporting industry and the consumer credit economy changed tremendously in the decades following the enactment of the FCRA. The computerization of credit histories into vast databases accelerated markedly. The industry further consolidated, eventually comprising three major credit bureau repositories that maintain large, automated databases of consumer information, and a limited number of other agencies.20 Logistical challenges associated with increased computerization and further changes in the industry led to an increase in complaints about mixed files—inclusion in a single file of information belonging to two or more different individuals—and other consumer report inaccuracies. More generally, the American public has become increasingly aware of privacy issues related to personal information.
In 1996, after several years of legislative consideration, Congress passed significant amendments to the FCRA. The amendments built on the core elements of the original FCRA and provided added protections to consumers in several key areas. The amendments also permitted greater sharing of consumer report information by
17 Identity theft occurs when someone commits fraud by using another person's identifying information, such as date of birth, Social Security number, or credit account numbers. The fraud could include applying for or using credit in another's name, obtaining bank loans, employment, utility services (including cell phones), or similar illegal conduct in the “true name" identity of the consumer whose information was misappropriated.
18 Congress was especially concerned about this lack of awareness in the context of “investigative consumer reports”—reports on a consumer's character, general reputation, personal characteristics, or mode of living, obtained through personal interviews with neighbors, friends, or associates of the consumer-and thus provided special notice and disclosure requirements, together with other provisions, for investigative reports. Section 606 of the FCRA; 15 U.S.C. $ 1681d.
19 Section 602(a)(1), the Congressional findings and statement of purpose for the FCRA. 15 U.S.C. $ 1681(a 1).
20 At present, the three largest bureaus are TransUnion, Experian (formerly owned by TRW), and Equifax. Although some local bureaus still remain, most are affiliated in some fashion with one of the “big three” repositories. The industry has also witnessed the emergence of companies that collect and report specialized information such as check writing histories, rental records, and employment applications. The 1990's saw the growth of “resellers,” consumer reporting agencies that purchase consumer information from one or more of the major repositories and then resell it, usually after reformatting, categorizing, or otherwise treating the information. All of these entities are covered by the FCRA.
affiliated companies under certain conditions,21 and granted more flexibility to
As I discussed earlier, the FCRA establishes a framework that enables businesses
As recognized by Congress in its initial passage of the FCRA, the confidentiality of consumer report information is a fundamental principle underlying the statute 24
Permissible purposes. The FCRA is designed to protect consumer privacy in a number of ways. Primarily, it limits distribution of credit reports to those with specific, statutorily defined “permissible purposes." 25 Generally, reports may be provided for the purposes of making decisions involving credit, insurance, or employment.26 Consumer reporting agencies may also provide reports to persons who have a “legitimate business need” for the information.27 Under the FCRA, Government agencies are treated like other parties—that is, they must have a permissible purpose to obtain a credit report.28 The written instructions of the consumer may also provide a permissible purpose for a consumer reporting agency to furnish a credit
21 Section 603(d)(2)(A)(iii) exempts from the FCRA communication of information among affiliates, if it is clearly and conspicuously disclosed to the consumer that the information may be communicated and the consumer is given the opportunity to opt out of such information sharing. 15 U.S.C. $ 1681a(d)(2XAXiii).
22 Prescreened offers, which are discussed in more detail below, are unsolicited “firm offers” of credit or insurance that are based on information from consumer reports. Generally they take the form of lists of consumers to whom credit grantors make offers of credit—the most obvious example is mailed promotions of credit cards. These lists are assembled by credit bureaus based on criteria set by the credit grantor; the bureau screens its consumer files (except those that have opted out of prescreened offers) for all consumers who meet the creditor's criteria. Generally speaking, the FCRA requires that all consumers who survive the prescreen must receive a “firm offer" of credit. Prescreened lists are thus an exception to the general rule that credit reports can be furnished only when a consumer initiates a transaction or has a preexisting relationship with the creditor seeking a copy of the report. See H. Rep. 103–486, 103rd Cong., 2nd Sess., 32–33 (1994).
23 “It is the purpose of this title to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information. Section 602(b) of the FCRA; 15 U.S.C. $1681(b).
24 The Congressional findings note the “. need to insure that consumer reporting agencies exercise their grave responsibilities with fairness, impartiality, and a respect for the consumer's right to privacy.” Section 602(aX4); 15 U.S.C. § 1681(a)(4). Under the “reasonable procedures” portion of the statement of purpose for the FCRA, Congress noted the importance of the "confidentiality" of consumer report information. Section 602(b); 15 U.S.C. $ 1681(b).
25 What constitutes a "consumer report” is a matter of statutory definition (Section 603(d); 15 U.S.C. $ 1681a(d)) and case law. Among other considerations, to constitute a consumer report, information must be collected or used for “eligibility” purposes. That is, the data must not only "bear on” a characteristic of the consumer (such as credit worthiness, credit capacity, character, general reputation, or mode of living), it must also be used in determinations to grant or deny credit, issue insurance, make employment decisions, or make other determinations regarding permissible purposes. TransUnion Corp. v. FTC, 81 F.3d 228, 234 (D.C. Cir. 1996).
26 Section 604(a/3); 15 U.S.C. $ 1681b(a/3). Credit reports may also be furnished for certain on-going account-monitoring and collection purposes.
27 15 U.S.C. 16816(a)(3)(F). See also Note 33, infra, and text accompanying:
28 Under Section 608 of the FCRA, Government entities may obtain limited identifying information (name, address, employer) without a “permissible purpose.” 15 U.S.C. $ 1681f. The FCRA, additionally, now contains express provisions on Government use of consumer reports for counterintelligence and counter-terrorism. Sections 625 and 626, respectively; 15 U.S.C. $$ 1681u, 1681v.