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U.S. House of Representatives
Subcommittee on Financial Institutions and Consumer Credit
Committee on Banking and Financial Services
Washington, DC.

    The subcommittee met at 10:07 a.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema, [chairwoman of the subcommittee], presiding.

    Present: Chairwoman Roukema; Representatives Kelly, C. Maloney of New York, Watt, Sherman, Inslee, and Moore.

    Chairwoman ROUKEMA. If you'll be a little patient, we will wait one more minute or so until our third panelist arrives. We believe he is en route, and I do apologize for the fact that more Members are not here.

    I understand that a number will try to be coming in shortly, but there are evidently a lot of conflicts with a lot of other committee hearings or final legislative proposals in some of the other committees. So, we will see what we can do.

    Senator, I understand that you are going to be on your way shortly, but I think we will be able to deal with it in a timely manner. So, we will just wait for a minute or more. Thank you.
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    All right, with Mrs. Maloney's concurrence here, I believe we are going to start. I thought that Mr. Ford would be here by this time.

    But, let's make a couple of opening observations and greet those who are on the first panel, and certainly I want to, for all who are here, to understand why Mrs. Maloney is standing in today for Congressman Vento.

    But, I did want you to know that Congressman Vento is now home recovering from his illness.

    He had another setback last week, but the information in the last two days is that Mr. Vento is now home from the Mayo Clinic and doing well. But, for those who want to send messages to him about and urging his quick recovery, Kirsten, his staff member—Kirsten Johnson-Obey—will be happy to give you the address. I think she will distribute it to all the Members of the subcommittee, so that you can extend to Mr. Vento your thoughts and prayers for him.

    I do want to say this—Very fine, Congressman Ford has arrived.

    But, I do want to say this, and I mean this sincerely. I hope Kirsten is here and other Members on both the Republican and the Democratic side, that we are going to miss Mr. Vento in any case, because he is not running for re-election, as you know.

    I just want to say, since this is the last—I believe it is the last of our subcommittee hearings before the election and before he retires from the Congress—I want to say that—and I think everyone will understand this—there will be a few smiles about this—that Mr. Vento and I worked for a good many years together on various issues.
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    We have always agreed to disagree on numbers of issues. I think you know what that means.

    But, the bottom line is that Mr. Vento was always a gentleman and a scholar, and we are going to desperately miss him in the next Congress.

    But, we wish him well and wish him a long and happy time back in his home State.

    With that as introduction, let me now give an introductory statement, and we will put everything in the full record.

    But, I am very happy today to be chairing this subcommittee hearing. I wish we could have had it a little earlier in the year.

    But, that wasn't possible, but I want to recognize that this topic is, in fact, garnering more and more attention every day—that is, namely, the use of credit scores. Credit scores, as you should know, are used by lenders to help them make decisions about who should received credit and what are the appropriate terms of that credit.

    The computer models take the information in a consumer's credit report and calculate a three-digit number. The credit score is critically important, because it is used by lenders, including mortgage lenders, and its use is growing.

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    Yet, for most Americans, this is relatively new information for them, because they do not know their credit score and have no reasonable method to obtain their score.

    The Fair Credit Reporting Act does not require that credit bureaus disclose a credit score.

    Therefore, consumers have no specific information to help them understand their particular score, and they have no assurance that the credit score accurately represents their credit history.

    Americans have little information available to help determine how to raise their score and, therefore, get more affordable credit.

    This hearing is set up to help us understand the whole process and the multiple number of things that really have not been brought before the public, or really in any coherent form before this subcommittee previously.

    I want to especially thank Congressman Cannon who initially brought this subject a year ago, I believe, to our attention.

    Unfortunately, we haven't gotten here earlier, but I think this now proves to be propitious timing.

    In retrospect, it is propitious timing. I certainly agree with Mr. Cannon and others here in the Congress who are taking up this issue, that we literally have to spread some sunshine on this subject and give credit scores that could benefit the consumers.
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    Absent a compelling reason as to why it would be detrimental—and that is why we are holding these hearings—to hear the pros and cons—I believe consumers should have ready access to all factors that impact credit availability.

    In addition, information to help them understand the credit score is also necessary.

    But, there may be, as we are going to learn today, perhaps, some practical considerations that need to be addressed in that context.

    There are many different types of credit scores, including those conducted specifically for mortgage lending.

    Disclosing scores without additional information, explaining those scores, could lead to misuse or unfair use of these scores.

    I am sure that all the witnesses will agree that our common goal here is to help the consumer.

    In fact, States are getting involved in the issue of credit score disclosure.

    Most notably, California has passed such legislation, which is awaiting the Governor's signature.
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    I certainly hope the testimony here today will be able to allow us to develop a consensus on this issue with respect to Federal law.

    We must also ensure that credit scores are accurate and unbiased, and that they are true determinants of credit risk.

    It seems that most of the industry operates under the assumption that credit scores are flawless.

    Considering how important these issues are—these scores are to consumers, it is incumbent that the scores are fair and impartial.

    This is an even greater concern for Americans today than it was in the past, since now the terms of credit are often based on those scores.

    It is in everybody's best interest to have the highest possible score.

    The hearing, as I referenced earlier, is a particularly timely one, considering the recent report by the OCC that, generally, weakening in credit underwriting standards has led to an increase in troubled debt.

    There may be an overlap here. It is not a directly correlated issue, but there is a reason for us to look at that component of it and the increase in troubled debt as perhaps relating to the whole question of credit scores.
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    Now, the question of who can best disclose a credit score—the credit bureau or the lender—is something that I hope the witnesses today will elaborate on.

    A key factor in this debate is how the credit reports are used in determining a score and what is actually retained in that report.

    I want to recognize that there has been some progress lately that has shed some light on this.

    Fair, Isaac, the developer of the FICO credit score, has listed on its website information on what factors are taken into account in calculating that score.

    While this is helpful, I do not believe it is enough and that additional progress can be made.

    By the way, may I just throw this in as, not an aside, but an additional component.

    I don't know if anyone on any of our panels today is going to address this, but we do have another contingent question, which is whether or not there would be liability—legal liabilities—for any misinformation that either credit unions or banks are giving out.

    Before I close, I want to hear, of course, from other Members of the subcommittee and their opening statements.
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    But, I also want to particularly recognize—again recognize the contribution of Congressman Cannon who originally brought this to our attention, and the other Members of Congress who are appearing on the first panel.

    We will reference them in specific terms in a few moments.

    But, now, Mrs. Maloney, who is sitting in on Mr. Vento's behalf, and I will turn it over to her for any remarks or observations she wishes to make.

    Mrs. MALONEY. Thank you very much, Madam Chairwoman.

    First of all, on behalf of the Democratic Minority, we would like to join our voice with yours in expressing our concern for Congressman Vento's health and our appreciation of his many long and distinguished years of service here in Congress, in particular, on this subcommittee and on the Banking Committee.

    First, I would like to welcome the great Senator from the great State of New York, who has, in the tradition of Chuck Schumer, already been working on this issue for many years, and we welcome you.

    We thank you, Mr. Cannon, for coming forward, and of course my colleague and dear friend, Mr. Ford.

    I look forward to your comments, and, very briefly, over the course of the last year, certain housing issues have been the emphasis of repetitive hearings in Banking subcommittees.
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    I think the subcommittee owes it to our constituents to hold hearings and take action on a wide range of housing issues, including predatory lending and access to credit report and credit scoring information.

    Credit scores, the topic of today's hearing, is an issue that profoundly impacts Americans as they strive to own their own homes.

    I am concerned that there is a lack of understanding among the general public about how credit scores work and the importance of monitoring credit reports to ensure that they are accurate.

    A study by U.S. PIRG indicated that 70 percent of credit reports contained some kind of error.

    As part of any basic financial education, individuals should be encouraged to periodically check the accuracy of their own reports.

    Beyond credit reports, it is a mystery to some consumers as to how the reports are transformed into scores that determine whether they are mortgage-worthy.

    In this regard, I am encouraged by some industry efforts to increase access to credit scores.

    I look forward to today's hearing to hear more about what needs to be done.
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    Finally, one of the issues that I am most concerned about is the practice of lenders not forwarding information about borrowers who make their payments on time.

    These lenders seek to prevent consumers from improving their credit histories for fear they may lose profitable customers who may be borrowing at high rates.

    I look forward to any comments our witnesses may have on this practice and to the hearing.

    I only wish this hearing had been held earlier in the session, so that we would have had a reasonable chance to pass legislation to improve the situation.

    In the interest of time, I would like to submit my longer comments to the record.

    Again, I thank the Chairlady and our distinguished panel.

    Chairwoman ROUKEMA. Thank you.

    Mrs. Kelly.

    Mrs. KELLY. Thank you, Madam Chairwoman. I want to thank you again for agreeing to hold the hearing on this issue.

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    As the Senator from New York knows, Sy Syms says ''Educated consumers are the best customers.''

    Understanding how one's financial activity affects the credit is an important part of that education.

    In the past weeks, my staff and I have discussed the issue with a number of individuals and associations who have expressed some interest in this issue.

    Before we debate what information consumers do or do not have a right to, I believe there exists an area of agreement within the industry and the public that we can come together on.

    Additionally, it is my understanding that the credit bureaus are planning to include credit score information on credit reports in the near future.

    I think they deserve recognition for this kind of a proactive approach to the issue.

    It is my hope that we can emphasize the areas of agreement today, so that hopefully this information can be properly provided to the consumer without the need for a new law.

    As a subcommittee, we should promote every responsible action that can assist consumers in understanding the implications of their credit choices.
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    I really want to thank our distinguished colleague, Senator Schumer, Congressman Cannon, and Congressman Ford for being here and taking time out of their schedules—which I know are very busy—to share their considerable knowledge with us here today.

    I look forward to discussing the issues with all of you, and I thank you Madam Chairwoman for holding the hearing.

    I yield back the balance.

    Chairwoman ROUKEMA. Thank you.

    Let me just note for the Members and for staff that are here that all the witnesses' testimony, as is usual in these—before all our hearings—that oral testimony and entire written testimony for all the witnesses will be included in the record.

    That is the pro forma way we conduct this hearing.

    Second, Members will be able—and staff, I hope you will make notice to the Members who are not present today, who had unavoidable conflicts—but please note to them that they will have two weeks in which to submit written questions to our witnesses if they so desire.

    That is normal procedure, so, without further ado, I want to warmly welcome our first panel here—our colleagues.
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    We are very fortunate to have Senator Schumer from New York here.

    By the way, you will note that this is quite representative of regional interest as well. We have New York, Utah—Congressman Chris Cannon—and Tennessee—Congressman Harold Ford.

    I extend that warm welcome to you, but also look forward to hearing from you.

    I think you have heard an intense interest on all our parts to expedite consideration of this legislation in the best way possible and get strong bipartisan support.

    Senator Schumer is, of course, welcome here today. He is known by all of us because of his previous presence before——

    I don't know. Did you graduate, or were you demoted when you went to the Senate? Oh, well, we won't talk about that.

    But, we do miss you on this subcommittee, Senator.

    Senator SCHUMER. Madam Chairwoman, when I left the House for the Senate, somebody said the intellectual caliber of both bodies went up.

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    Chairwoman ROUKEMA. Oh. Good point. All right, but we miss you. We miss you and your sound judgment—let me put it that way—your sound judgment.

    Again, we agree to disagree on some occasions, but it is sound judgment, which you will now present us.

    We certainly welcome your interest and expertise on this issue, and without further ado, I will recognize Senator Schumer.


    Senator SCHUMER. Thank you, Madam Chairwoman. It is truly a pleasure to be back.

    I very much appreciate being in this room where I guess I served on the Banking Committee for 18 years, and I have enjoyed every minute of it, made many friendships, got a lot done.

    I have always particularly enjoyed working with you, Madam Chairwoman, who, as you say, we have sometimes disagreed, sometimes agreed, but always were able to work out the differences amiably.

    I thank you for that. I want to welcome my two New York colleagues, Congresswoman Maloney, who is just a tiger in fighting for the interests of New York in her District, and Congresswoman Kelly, who is also doing a very fine job.
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    We recently took a walk in the woods with some Friars and the National Park Service and came to a very amiable agreement between the two who were fighting.

    So, I am glad to be back, and I want to apologize to my fellow witnesses and to the subcommittee, that after I finish my remarks, I will have to, by prior agreement, leave and go back to other business in the Senate.

    Well, I want to thank you, Madam Chairwoman, not only for everything I mentioned, but for allowing me the opportunity to testify at this morning's hearing and for you and the subcommittee taking the lead on this issue of critical importance to American families.

    For most families, obtaining a home loan is the most important financial decision they will ever make.

    Yet, their credit score, which is the principal factor used to determine an individual's creditworthiness, and thus the loan terms they receive, is shrouded in mystery.

    But, this is a pointless and outdated mystery that only confuses consumers and costs them money.

    Generally, a company develops a credit score formula using specific financial information about a consumer that will include the types of accounts opened, their record of making timely payments, the amount and type of outstanding debt, and the length of their credit history, among other factors.
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    The company then licenses the credit score software to credit bureaus, who furnish both the consumer's credit score and their credit report to lenders who ultimately make the decision as to whether and at what terms to extend the loan.

    Currently, near 80 percent of all mortgage loan decisions made use of the credit score as the primary determinant of those decisions—80 percent.

    Yet, consumers are totally in the dark about how their score—what their score is and how it is calculated.

    Madam Chairwoman, let's flip the light switch on.

    Earlier this month, I introduced S. 3063, the Consumer Credit Score Disclosure Act.

    S. 3063 would lift the veil of secrecy and create greater opportunity for consumers to secure a home mortgage at considerably lower costs.

    The bill would require lenders to supply consumers with their credit score, what the score means, and to disclose up to four key determinants which negatively affect an individual's credit score.

    Additionally, the bill compels lenders to provide the name and contact information about the company that created the score, and would prohibit companies from prohibiting lenders from telling the consumer their score, because, if we don't do that, you will still find consumers in the dark.
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    They'll say, ''We'll give you this information, but you can't tell the consumer.''

    The bill that we introduced is modeled largely after legislation that recently passed California State Assembly's Banking Committee with broad, bipartisan support.

    S. 3063 has received the support of a broad cross-section of diverse groups—consumer advocates like Consumers Union and U.S. PIRG, and real estate-industry leaders like the National Association of Realtors, as well as online mortgage lenders, such as E-Loan.

    You are going to be hearing from them later today.

    By providing consumers with access to their credit score and the factors which negatively affect their score, we can help consumers improve, not manipulate as opponents of this legislation cynically would argue, their credit behavior.

    The bill helps consumers improve their credit, protect them from usurious rates and mistakes, and ultimately improves access to home ownership.

    Additionally, and most importantly in this case, the disclosure of their credit score will provide consumers with the tools to shop for the best mortgage terms.

    I find it, not only wrong, but somewhat, well, almost sinister, that, in the mortgage process, lenders have access to all the decision-influencing information and consumers are left totally in the dark.
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    It is a complete imbalance that would make Adam Smith turn over in his grave.

    Freddie Mac reported that one-third of all borrowers overspend on their mortgage by upward of $100 million each year, because the loan terms they received were higher than warranted by their credit score.

    So, now you know who benefits by keeping the score secret.

    For consumers, shaving one-and-a-half percentage points off the term of a $150,000 mortgage would save them $1500 a year that could be used to save for the kids' college education or to go on a vacation, or for medicine or for anything else, but $1500 a year out of the consumers' pocket when they didn't have to pay that much, all because they don't know their credit score.

    That is real money, and they can save that money by having access to the most basic information a consumer should possess.

    As our Nation's economy, Madam Chairwoman, continues to prosper, more and more families will seek out ways to purchase a home.

    By demystifying the black box that is the credit score and providing full disclosure of all information that goes into an individual's score, we can help bring individuals and families closer to the American dream, home ownership.
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    Madam Chairwoman, I want to thank you, not only for holding this hearing, but for helping bring thousands of families a step closer to this dream.

    I hope in a bipartisan way we can work, and in a bicameral way, we can work to pass legislation this session of Congress.

    I also want to thank Congressman Cannon, Congressman Ford, for their efforts on this important issue, and apologize that I won't be able to hear their testimony. Thank you, Madam Chairwoman.

    Chairwoman ROUKEMA. All right, thank you, Senator Schumer.

    Is there a question? I have no question for you. I think your statement is very clear, and certainly your legislation will be gone over with the subsequent panels.

    Does anyone have a question—a brief question for the Senator before he leaves?

    [No response.]

    Chairwoman ROUKEMA. All right, thank you very much. We will be back in communication with you, and, if subsequently——

    By the way, I will submit to you a question in connection with the report from the OCC that has just been disclosed about credit underwriting—well, about troubled debt and its increase, and whether or not you see a relationship and how you would apply your legislation, if in any way, to deal with that question.
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    Senator SCHUMER. I'd be happy to answer that.

    Chairwoman ROUKEMA. We'll submit that to you. Thank you.

    Senator SCHUMER. Thank you, Madam Chairwoman. Thank you.

    Chairwoman ROUKEMA. Congressman Cannon, again, as I noted, your leadership in the introduction, we are particularly happy to have you here today and look forward to your continued leadership and partnership working with us on this subcommittee, and hope you will be able to tell us how you were able to take such a leadership position.

    We need your kind of foresight. Thank you.


    Mr. CANNON. Thank you, Madam Chairwoman. I would like to thank my friend, Senator Schumer, as he leaves, for his kind words and for other things kindly said.

    If it is appropriate from the witness table, I would like to associate myself with your remarks about our mutual friend, Congressman Vento.

    I am on the Resources Committee with him, and, while we have intense disagreements, they have never been unpleasant. Always been very pleasant.
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    We will miss him as a Congressman and individually.

    Thank you, again, Madam Chairwoman, and Members of the subcommittee for holding this hearing on the important issue of consumer credit scoring.

    I became involved with this issue a year ago when a constituent, Chuck Colebrook, called my office requesting help in obtaining access to all the information on his credit report.

    Mr. Colebrook wanted to see his credit score and the economic indicators that creditors look at to judge his creditworthiness.

    Under current law, creditors and credit-reporting agencies do not have to allow Chuck to see his credit score or risk predictors that are available to any creditor that looks at his credit file.

    This is a problem, of course, for Chuck. It was a problem for our good Senator and for our colleague, Harold Ford, who, speaking of intensity, we agree intensely on this issue, I might note.

    So, we are all stuck without this personal information that is had by the credit companies and is withheld from us.

    The credit score weighs heavily on a creditor's decision as to whether or not to extend credit to a consumer for the purchase of a house or a car.
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    It affects the amount of credit extended and the rate of interest a consumer must pay.

    While I believe that there needs to be a fair method of risk assessment for creditors, consumers should have access to the same information which pertains to them in such a personal way.

    As a response to the request of Mr. Colebrook and in an effort to bring the situation to light, last year I introduced H.R. 2856, the Fair Credit Full Disclosure Act.

    This simple bill will give creditors the right to see their credit scores and all the information contained in their credit reports.

    There has been a lot of activity in response to this legislation.

    Since the introduction of H.R. 2856, organizations such as Fannie Mae have announced that they will discontinue use of credit scores and develop their own system for measuring the risk of a consumer.

    Fair, Isaac has announced that it will disclose what information is used to develop the credit score.

    As of yet, however, consumers cannot see the actual credit score or the ratios used to develop the score.
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    I have heard the arguments against disclosure of credit scores, as well——

    Consumers won't understand the score.

    Consumers will be able to fix their scores.

    Where does the scorer reside?

    Every creditor weighs the score differently.

    I believe that those who are making these arguments are seriously underestimating the intelligence of consumers and their level of frustration.

    Consumers understand that they have a credit score that affects them, and, yes, consumers want to be able to fix their credit scores.

    That is the point of this legislation. Consumers want to have the best credit possible.

    Without the knowledge of what goes into the score, how can they know what they need to do to improve their credit risk?

    Currently, it is impossible to get a clear answer. For example, if a consumer pays his bills on time every month, will this person's credit score go up? Well, maybe.
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    If a consumer uses only two credit cards instead of five, will he score go up? Well, maybe.

    If a consumer earns $60,000 instead of $40,000, will his credit score go up? Well, maybe.

    Consumers should know what they need to do to become good credit risks.

    Educated consumers—I am just responding—or reflecting what the good Senator said—educated consumers are a powerful force.

    They know what loans they best qualify for and where to get those loans. Knowledge is the best defense against problems such as predatory lenders or scam artists that are giving the financial-services industry a black eye.

    We need to unlock the score. The time has come. Again, thank you, Madam Chairwoman, for allowing me to testify on this important issue.

    Chairwoman ROUKEMA. Thank you, again. I do not have any questions for you at this moment in time.

    But, again, I would like to have your observations regarding the OCC recent report in the increase in troubled debt and its relationship, if any, from your experience to the reforms that we are looking for here.
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    Mr. CANNON. We'll be happy to get that to you.

    Chairwoman ROUKEMA. Yes, I think that is additional evidence that it is long overdue. Thank you.

    Congressman Ford.

    I'm sorry. Mrs. Kelly, do you have a question for Mr. Cannon?

    Mrs. KELLY. Well, actually I do for Mr. Cannon and Mr. Ford. Should I wait or——

    Chairwoman ROUKEMA. What is your preference? Shall we hear from Mr. Ford first? Whatever your preference is.

    Mrs. KELLY. I would rather hear from Mr. Ford first.

    Chairwoman ROUKEMA. Excellent. Very good.

    Mr. CANNON. And I have the latitude of being able to stay here for a few minutes.

    Mr. FORD. Likewise.

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    Chairwoman ROUKEMA. All right, thank you.

    Congressman Ford.


    Mr. FORD. Madam Chairwoman, thank you and thank you certainly, Congressman Watt, Mrs. Kelly, and all of the Members of the subcommittee.

    I am delighted to be here, and I am glad that, Madam Chairwoman, you have decided to hold this hearing.

    I certainly share and associate myself with all the things that have been said about Mr. Vento, who served with my dad for so many years in the Congress.

    I have been fortunate to develop and, in many ways, inherit part of that relationship.

    Much has already been said about the purpose of today's hearing. I would like to try to address maybe three points briefly and a summary of my testimony.

    The first is the importance of educating and empowering consumers to become better investors and borrowers.
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    The second is the need for a consumer to understand their credit score.

    Third is how legislation—all of us have legislation here, but particular legislation that I have introduced and some Members of this subcommittee have signed on to—how it addresses those concerns.

    You know, with the click of a mouse, Madam Chairwoman, or the punch of a computer key, consumers can now compare interest rates on mortgages, qualify for car loans, open bank accounts, or create stock portfolios.

    Consumers can now make the investment and lifestyle decisions that were once dictated to them from the boardrooms of banks.

    Those who access more information become more likely to make the investment decisions which expand prosperity.

    Educated consumers are more likely to buy a home or car, open a business, or even finance their or their children's education.

    As consumers gain more information and expand their ability to make their own financial decisions, they are relying more and more on their own credit to ensure their financial freedom.

    Consumers are relying on their ability to keep and maintain good credit.
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    Lenders and creditors are then basing their decisions on a mysterious world of credit scores. In a credit score, years of a consumer's financial information become condensed into one raw number.

    That number determines whether a bank will offer a mortgage at nine percent or seven percent.

    It allows consumers to own a credit card with an 11 percent interest rate, or it penalizes them with a card which has a 20 percent interest rate.

    The score supposedly lets banks determine whether someone is a good risk. Good risks are able to finance homes and education. Bad risks have a tougher time doing that.

    The central concept of my legislation is to educate consumers and provide them with the resources to become better customers, borrowers, and investors.

    First, this legislation would allow consumers one free credit report annually. As of now, six States, including your own, Madam Chairwoman—New Jersey, Maryland, Colorado, Georgia, Massachusetts, and Vermont—allow consumers one free annual report upon the consumer's request.

    This allows anyone to monitor what information is on their credit report.

    In the six States that have this open access, it is not, as some have suggested, imposing an onerous burden on credit-reporting agencies.
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    Part of the argument against the disclosure laws that my colleague, Congressman Cannon, Senator Schumer, and I propose is that banks and retailers could face additional liability if they provided full information.

    I flatly disagree with that reasoning. It seems to me that correcting mistakes through full disclosure before loan applications are made will lessen, not increase, any liability.

    In fact, most consumers would be grateful for the ability to correct these errors.

    Banks and financial institutions, in turn, would be able to offer these consumers a greater array of products, enhancing the financial fortunes for themselves and their customers.

    The second feature of my legislation and the focus of today's hearing is that this legislation, like Congressman Cannon's bill, would allow for the disclosure of the credit score with the credit report.

    I believe that this information is vital for consumers. Senator Schumer certainly agreed with this as well.

    This raw number is what banks, creditors, and lenders use to determine the financial health of consumers.
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    However, my legislation differs just slightly from my dear friend from Utah's bill.

    My legislation would include a clear—would require, rather, a clear and concise summation of the risk factors which affect a consumer's credit along with the consumer's credit report.

    Only providing a raw score for a consumer does little help to answer the questions surrounding this number.

    What good would it do to any of us if we see, on a credit report, a 400 or a 900, or a 750? How would we know what is good, what is deficient, or what we could do to better manage our financial lives?

    Credit scoring as a concept has helped to end much of this objective discrimination which plagued the borrowing process a generation ago.

    It blindly condenses consumers to a raw number which does not recognize race or gender, yet what good is a system based on a series of quantitative factors if no one knows what these factors are?

    The final aspect of my bill, as I close, Mrs. Chairlady, which I find equally important, is that it recognizes the difficulty many of the poor and the young in our communities have in establishing good credit.
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    I have proposed a one-time mitigation of debts of less than $100 if a consumer first settles the bill and takes a class in financial management.

    In many of our States, our Department of Motor Vehicles allows for new drivers to erase traffic violations if they take a defensive-driving course.

    This proposal would work on the same principle. In my District, there are literally thousands of people who are forced into sub-prime and predatory markets, because their credit report contains a missed phone or cable bill.

    Madam Chairwoman, this hearing has significant importance.

    At the height of our national prosperity, it is incumbent upon us to expand the breadth of our wealth.

    Today, personal prosperity has become inexorably linked to good credit. Credit has almost become a medium of exchange in our information economy.

    Yet, our laws do not allow consumers to access this information. Thank you for the opportunity to testify today.

    Chairwoman ROUKEMA. I thank you—both of you for your very concise and intelligent and informative analysis of the issue before us.

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    Mrs. Kelly, would you like to be the first?

    Mrs. KELLY. Well, I thank you, Madam Chairwoman. I am interested in your bills. I think they seem to be good bills.

    But, there is one question that they both raise in my mind. There are a number of different types of credit scores out there.

    Your bills are silent on which credit scores you are talking about. I wonder if you could clarify that for me, and I am asking both of you to do that.

    Mr. CANNON. Thank you. We have some major credit scoring units out there. We would hope that those are covered by the bill.

    Over time, as others are developed to the degree that credit agencies are using those, we would hope that the context for those scores would be included.

    Mrs. KELLY. Well, are you talking about an insurance score, home mortgage score, a second-mortgage score, or a late-payment score?

    Which scores are you talking about in your bills? There's all these different scores.

    Well, I can understand, for instance, mortgage scores being used. I am not sure about the others, and I am not sure which are covered by your bill.
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    Mr. FORD. Mrs. Kelly, you raise an interesting point. We don't know. I mean, I think that is an appropriate question for those who will come later.

    I wish I could answer that question. You can imagine, if Chris Cannon and I are confused—and we're the sponsors of the legislation—you can imagine how people in your District, how people in his District and my District may feel when it comes to receiving——

    First of all, you can't receive a credit report until you are denied credit. Then, you have to phone the credit agency.

    There you get an answering machine, and you have to leave on the answering machine your name and address and where you——

    They tell you where you can send some sort of request form. You send a request form, and you wait a few weeks to get your credit report back.

    If you find a mistake or you have questions on the credit report, you then phone. You never reach a person, so I can appreciate your question.

    As straightforward and as simple as it may sound, that is part of what I think the bills are trying——

    The legislation, as least from my part—and I can't speak for my colleague, Mr. Cannon—but I would gather that his legislation is trying to get at that as well.
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    I guess—I am ashamed and embarrassed to say somewhat—to answer the question by saying we don't know, and second to say I think that is what these bills are trying—this legislation is trying to answer.

    Mrs. KELLY. I understand that. I think we need some more information about that, because we may want to make sure these bills don't have an unintended consequence.

    I know that when I was in business, I could buy a credit report on myself through channels.

    You can hit the internet, and you can buy a credit report. You can do that for yourself, actually, if you subscribe to certain services.

    I think we need to take a look at just what we are dealing with in terms of this legislation, because we may need to look at it from a refinement standpoint, so we don't inadvertently do something in the credit industry that we don't intend to do.

    Mr. FORD. But what would that be? I'm just—out of curiosity, because it seems to me that, if and when a mistake is made on the part of a credit agency—and we all make mistakes—consumers are immediately penalized.

    But, when it comes to correcting those mistakes, consumers are required to jump through multiple and burdensome hoops, first of all, to gain the attention of them.
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    I would like to know that internet site that you visit to pay and to receive a copy of your credit report.

    I would be happy to even share that with my constituents back in Memphis.

    But, you have to jump through all of these hoops to get a credit report. Then, if you determine or you learn that there might be some mistakes or errors there, it then takes 60 to 90 to 120 days to try to get these things corrected.

    Then, your score is not adjusted once a correction is made on the part of these agencies.

    Again, perhaps it is my misunderstanding about how this industry works, but, as a consumer and a Congressman, I think it is patently unfair to require consumers, who have done nothing wrong sometimes, to have to go through all of the rigamarole to gain the attention of the credit agency, then to try to get matters corrected; then first and foremost to even gain an understanding of how these scores are computed.

    I think it is just an issue of consumer fairness in a lot of ways.

    I would be more than willing to work with you to try to refine the bill to address your concerns.

    Mrs. KELLY. Congressman Ford, there are a number of credit bureaus that have 1–800 numbers that you can call.
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    Mr. FORD. You try calling them, Ms. Kelly.

    Mrs. KELLY. I've tried it. I've tried it, believe me. I was in business before I arrived here in Congress, so I know. I've tried it.

    But, my concern—the other thing is I remember when there were some great big gray computers up in Massachusetts that had everybody's credit information.

    Now, that isn't so, but they were the controlling entity, and, if they made a mistake, it really fouled up everybody's credit.

    You couldn't get a live person on the phone, and I am talking about years and years ago.

    But, my concern is that, if a consumer wants to get credit scores, they need to know what scores they are getting.

    They need to know if—as Senator Schumer pointed out and Chris pointed out in his testimony, is it a late-payment score?

    What is the score that they are getting from that credit bureau?

    I think I would like to work with you to try to just enlarge our understanding of what the bills do. I think they are good bills.
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    I want—as I said in my statement, an educated consumer is our best—our best constituent.

    We want to help people learn. We want to help them have access to information, but we need to have them understand what the information is that they are getting.

    That is the basis for my question. I just want to make sure that they know if they are getting a late-payment score or if they are getting a home-mortgage score, or if they are getting an insurance score, because these scores are different.

    They can rate you at a different level, so that is what my question is about. Thank you.

    Thank you very much, Madam Chairwoman.

    Chairwoman ROUKEMA. Congressman Cannon, did you want to respond to that in a short way?

    Mr. CANNON. Just very briefly. Let me say that we really definitely don't want to create a problem with unintended consequences.

    Second, we don't want to constrain the market. I mean, this is the time when many, many things are happening that are new and different and interesting.

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    So, we would be happy to work with your office on the issues of how to be clearer and narrower in what we are doing and not constraining on the technology that is emerging, that has been, as you pointed out, so very helpful.

    I mean, it started out cumbersome, but it has gotten very much more helpful these days. Thank you.

    Chairwoman ROUKEMA. Mr. Cannon, from my own point of view, I would ask you that, in writing, if you would submit for the record—and Mr. Ford, as well, if you would like—but Mr. Cannon, particularly, to what extent you believe that your legislation should be expanded to include a definition of the elements that go into that report, so that we can avoid those unintended consequences, but at the same time give full disclosure on the essential elements that are necessary, which I think is what Senator Schumer and Congressman Ford are trying to get at.

    It may not have been defined completely, but that is something that I would like your insight on based on your history and study of the subject.

    Mr. CANNON. I'd be very happy to do that.

    Chairwoman ROUKEMA. Any other questions for the panel?

    [No response.]

    Chairwoman ROUKEMA. All right, we thank you. We are very grateful. Anything further that you want to submit for the record, we will be happy to receive.
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    Again, I pledge that we are going to do everything we can to expedite consideration of the legislation.

    Now, if our next panel will come forward, hopefully we can get started before there is a vote on the floor.

    Panel of one for panel two. The next person to testify is Ms. Peggy Twohig. I hope I pronounced your name correctly.

    We are very happy to have you here today speaking on behalf—or testifying on behalf of the Federal Trade Commission.

    Ms. Twohig serves as Assistant Director in the FTC's Division of Financial Practices, and she is presenting testimony—the testimony, officially, of the Commission.

    The FTC enforces the Fair Credit Reporting Act, and it governs many activities of credit bureaus.

    Credit bureaus are the main source of information used to compute credit scores, and therefore we warmly welcome you.

    You heard the previous questions, and I am sure that you are going to be able to address them from the FTC's point of view. I thank you.

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    Ms. TWOHIG. Good morning, Madam Chairwoman and Members of the subcommittee.

    I appreciate the opportunity to appear before you today on behalf of the Federal Trade Commission to discuss the important issue of credit scoring.

    As you have heard, credit scoring is a statistical tool used by creditors to evaluate the risk of extending credit to a consumer.

    Credit scoring provides many important benefits to consumers, compared to judgmental systems used to evaluate those risks.

    Loans can be processed more quickly at less cost. Credit decisions are likely to be more objective and more consistent.

    Credit scoring should also lead to better lending decisions, because scoring models are based on tested data about what factors really make a difference in predicting who is a good credit risk, and not based on assumptions.

    While credit scoring has many benefits, consumers have expressed concerns about credit scoring.
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    They are particularly concerned when their credit scores and the scoring process are kept secret.

    Many consumers want to obtain their credit scores and understand the process. They want someone to open that black box that you have heard about, so that they can understand what their score is, what information was considered, and what steps they can take to improve their scores.

    Because of these concerns, last year the Commission held a public forum on credit scoring.

    The forum was designed to provide an opportunity for industry, Government, and consumer groups to engage in a public dialogue about credit scoring.

    The focus of the forum was on credit scoring and mortgage lending, where the stakes are the highest for many consumers.

    A transcript of that forum is available on the Commission's website for the public's use.

    It was clear from the discussion at the forum that consumers and those who counsel them want and need more information about credit scoring.

    Moreover, many industry panelists at the forum, including representatives from the mortgage broker, the real estate broker, and lending industries agreed that consumers need more information about credit scoring, along with explanatory information to help them understand the scoring process.
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    Consumers want answers to what seem to them fundamental and reasonable questions.

    What information was used to calculate the credit score? How important is each factor in the analysis?

    How many credit accounts are too many or too few? How can I improve my score?

    In light of the clear need for more information expressed at our public forum, the Commission supports the disclosure of credit scores and information regarding those scores in a context that is useful and meaningful to consumers.

    Information about credit scoring may be especially meaningful when provided in the context of a specific loan transaction.

    A lender that is using a particular scoring system is in the best position to provide information to a consumer about his score and what it means to that particular loan decision.

    The lender can explain what the number means to them. Did it cause the loan to be denied?

    Did it cause the price that was charged to be higher? What factors contributed most significantly to the calculation of the score?
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    Were other factors considered in the loan decision in addition to the score?

    Consumers may also benefit from receiving a credit score directly from a credit bureau if that score is provided with sufficient explanation.

    A credit score standing alone is not very helpful and, indeed, could have the potential to confuse and mislead consumers.

    For example, credit bureau files are updated frequently, and the updated information will affect the scores.

    If a consumer gets a credit score with her credit report from the bureau, was the score based on information currently in her credit file or based on previous information no longer in the file?

    If the score was generated at an earlier time, it may no longer accurately reflect the consumer's credit risk and may actually cause more confusion than clarification about credit scoring.

    Now, the Commission recognizes that providing meaningful information to consumers is not without difficulty.

    While the questions consumers want answered seem reasonable, such as how many credit cards are too many, the answers are not necessarily that simple.
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    The statistical models used are complex and based on information that is constantly changing.

    For example, the optimal number of credit cards one should own to maximize a credit score will depend on the circumstances of a particular consumer.

    It may be beneficial for one consumer to close some credit accounts, particularly if that consumer has far too many open.

    But, for another consumer, closing accounts and consolidating that debt into one credit line might actually have a negative effect on the factor of credit utilization, which is the amount of debt a consumer has outstanding to the amount of credit available.

    While there are many complexities, that is not reason enough to keep credit scores a secret from consumers.

    If consumers are given their scores along with explanatory information about what they mean and what is significant, over time consumers will better understand what factors typically make a difference in lending decisions.

    Consumers also may be able to use that information as a valuable shopping tool.

    For example, in the sub-prime lending market, consumers with relatively high credit scores have been sold loans by sub-prime lenders.
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    If these consumers were armed with their credit scores and information about what they mean, they may be better able to shop for loans at more favorable rates.

    Thank you for the opportunity to appear before you today and speak on this important consumer issue.

    The Commission has submitted a more detailed statement for the hearing record, and I would be happy to address any questions you have.

    Chairwoman ROUKEMA. Thank you very much. I am going to ask a quick question before we recess to go for a vote.

    But, you will be here, I am sure, because I am confident that there will be other questions to be asked.

    I appreciate your testimony, but getting back to the point of unintended consequences that were raised on the first panel and some expression of concern that I and others on this subcommittee are questioning, could you put in the context of unintended consequences, as you see it, clarification of your statement where you said something concerning disclosures being valuable shopping tools.

    Then, you went on to express some concern of that, and I didn't quite understand it.

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    Could you put that in the context of the concern about unintended consequences?

    Or, is this an entirely different subject, and how do we deal with that?

    Ms. TWOHIG. Certainly. I think that it could be confusing to consumers if they get a score in the abstract.

    That might be the case if they are getting a score just from the credit bureaus along with their credit report, because that score might no longer relate to their current credit information.

    The other problem with unintended consequences, if you just come at it that way, is that the consumer won't know what that number meant to the lender that got that score.

    So, I think what is important to keep in mind is, for consumers to really understand what the score means, I think it is more helpful for them to know what did it mean to that lender—the lender that actually ordered the scoring and used it in some loan transaction.

    Did it cause the rate to go up, or did it cause the loan to be denied?

    Lenders have different score cutoffs. They have different scoring models.

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    Only that lender can really help the consumer understand what that score meant to them.

    Chairwoman ROUKEMA. You can't do it now, but would you supply in writing some expansion or clarification of that perspective in terms of how it would translate into the actual legislation?

    Ms. TWOHIG. Certainly.

    Chairwoman ROUKEMA. If it is possible. Will you please do that?

    Ms. TWOHIG. We would be happy to.

    Chairwoman ROUKEMA. I appreciate it.

    I think, at this point, we might very well recess for this vote and then return as soon as possible to hear the rest of the questioning.

    This is a very important subject, and Mrs. Twohig has really given us great potential for insight into how we fashion this legislation.

    Thank you very much. We will recess and return promptly.


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    Chairwoman ROUKEMA. All right.

    Ms. Twohig, I don't know what is detaining some of our other Members. I am sure that Mrs. Kelly will be back soon. But, evidently she has been delayed on the floor for whatever reason, so we will continue here.

    Do we have a question on this side of the——

    [No response.]

    Chairwoman ROUKEMA. No? No questions? My goodness. Pardon me. All right. Let me then see if you wanted to supplement anything that you said earlier in response to my question, which I asked you to put in writing about the unintended consequences or how we compose this legislation so that the disclosures are really relevant.

    Somebody said a valuable shopping tool. Was that in your testimony that these disclosures——

    But, can you be a little bit more explicit about what should be—I hate to use the word ''mandated,'' but evidently we have to ask that question—mandated.

    What could be mandated or should be mandated in this reform legislation that will make them valuable shopping tools?

    Then, I have a follow-up question with respect to whether or not there are any problems or potentials out there for liability—malpractice—you know, legal liability for either the credit groups or the banks, as you see it.
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    Yes, what would be your cautions there?

    Ms. TWOHIG. Taking your questions in order and, first, in terms of what would be the most helpful for consumers, the Commission hasn't taken a specific position on the particular legislation before the subcommittee.

    But, the Commission, as I said, does support the disclosure of credit scores for consumers in a way that would be meaningful to consumers.

    As I said, lenders are in the best position to do that in terms of what it actually means in the context of a loan decision.

    So, there's different ways you could come at this, but one way you could come at it is by requiring the lenders to disclose the score.

    Lenders are already required to disclose in an adverse-action notice under the Equal Credit Opportunity Act and Regulation B.

    They are already required to disclose the four principal reasons why someone is being denied a loan when a credit scoring system is being used.

    So, it seems to me to be a fairly simple matter, if you wanted to come at it that way, to amend the Equal Credit Opportunity Act so that lenders would be also required to provide consumers the actual score, with some explanation about what it means in addition to the four factors that were the principal reasons that drove that score.
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    Chairwoman ROUKEMA. But, the components of that disclosure are very important.

    How can those components be structured so that they are true risk-predictors, so to speak?

    Ms. TWOHIG. I think actually that is already in the regulation. In other words——

    Chairwoman ROUKEMA. Do you think they are adequate?

    Ms. TWOHIG. Well, what is not adequate is the consumer doesn't know the score, so the consumer——

    What is most important for the consumer to know is the principal reasons that are driving a particular credit decision.

    There are two things that aren't adequate. One is, I think, it also is important for the consumer to know that number, because that might help them in understanding where they stand, and in shopping.

    The other problem in coming at it that way is, right now currently under current law—the Equal Credit Opportunity Act and Regulation B—a consumer will not necessarily be told if that credit score is causing a higher price to be charged, because that is not part of the current law.
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    The consumer only has a right to an adverse-action notice if there is a higher price charged and they reject the loan.

    So say you have a situation where a lender is not going to deny the loan. They are going to offer a loan at a higher price, and the credit score may be in whole or in part driving that.

    If the consumer accepts that loan, they don't have any right under current law to know that the credit score was a factor.

    So, that could be addressed under the Equal Credit Opportunity Act.

    Chairwoman ROUKEMA. Well, again, would you submit in writing to me what your analysis is of the legislation that is before us and whether or not it is adequate to deal with that kind of disclosure requirement that would make it relevant and a true risk-predictor?

    Ms. TWOHIG. We'd be happy to do that.

    Chairwoman ROUKEMA. All right, thank you.

    Yes, who would be next for questions? Mr. Watt? Are you interested in questions?

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    Mr. WATT. Madam Chairwoman, I think I will pass in the interest of time.

    Chairwoman ROUKEMA. All right, thank you, and with Mrs. Kelly not here, I am sure that you will be more than happy to submit any additional questions that she has in writing.

    Ms. TWOHIG. Thank you.

    Chairwoman ROUKEMA. Thank you very much.

    Will the next panel come forward, please? Thank you. We have a good range of opinions here and industry and consumer representatives here.

    You, of course—your industries and consumer groups are all actively involved in this issue, certainly.

    You live with it day to day, and certainly you know better than any of us why the interest has been heightened across the country and across the board.

    The first witness on the panel—and I will introduce you each in the order of your testimony—and I believe you are properly stationed at the table in the proper order.

    The first witness on the panel is Ms. Cheryl St. John. Ms. St. John is a Senior Vice President of Fair, Isaac & Company. Fair, Isaac is a global company headquartered in San Rafael, California, and it is pioneered in the credit scoring model known as the FICO score.
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    If you will explain to us in further detail exactly how you gather that data and from what credit reports, and so forth, and what use you are making of it and your perceptions of the legislation before us.

    Ms. St. John.


    Ms. ST. JOHN. Thank you, Madam Chairwoman. I am very pleased to be able to represent Fair, Isaac.

    We very much appreciate the opportunity to testify regarding H.R. 2856 and to answer any questions you or the other subcommittee Members may have.

    Fair, Isaac is the world's leading developer of statistically based credit risk evaluation systems commonly known as credit scoring systems.

    Over the past 40 years, credit scoring has become an essential part of many credit decisions.

    Thousands of credit grantors use the FICO scores which are generated by Fair, Isaac's algorithms implemented at the three major credit bureaus.
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    Fair, Isaac has also developed hundreds of custom credit scoring systems for the Nation's leading lenders.

    Consumers have benefited tremendously by the greater availability of credit, given these risk-assessment tools and given credit scoring.

    Fair, Isaac believes consumers have the right to understand the lending process, including scoring.

    We support the goal of better informing consumers about credit scoring and how it is used in the decisions affecting them.

    We support the disclosure of scores to consumers, provided that it is conducted in a way that provides meaningful and helpful information.

    Fair, Isaac is already on record supporting the disclosure of credit scores in the context of a bona fide mortgage lending decision.

    We feel strongly that the score has the most context in—or has the most meaning in the context of a specific lending decision.

    Given the importance of the mortgage-loan decision to both the borrower and the lender, we feel that each will make the necessary effort to explain and understand the complex subject of scoring and how it is used in the mortgage lending process.
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    To be helpful, we feel the scores disclosed should be those actually used in the decision and be accompanied by the underlying credit report plus the score reason factors.

    Fair, Isaac does have concerns with the current language in H.R. 2856 in terms of providing meaningful information to consumers.

    Scoring is a complex topic, and there are a number of issues to consider.

    These are detailed in my written testimony, but to summarize a few, there isn't just one kind of credit score. In fact, there are many kinds of credit scores.

    They are designed to predict different things. Different scores use different numeric scales, and different lenders have different acceptable risk thresholds.

    Lenders use other factors besides scores in making their decisions. It was mentioned earlier that scores change over time.

    Attempts by a consumer to raise his score overnight can backfire.

    We believe recently announced initiatives by Fair, Isaac and others will meet the consumer's need for more information on scoring and its role in the lending process.

    I would like to take a minute to update the subcommittee on the recent initiatives Fair, Isaac has undertaken toward the goal of providing consumers useful and helpful information about scoring.
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    First, in June, we posted on our corporate website the complete set of factors that FICO scores consider, along with the relative weighting of each category.

    We also republished our consumer booklet with this expanded information and are working with several consumer groups to reprint and distribute it to their constituents.

    Second, we are currently in beta mode with a FICO score explanation service.

    This will provide lenders or brokers, on behalf of the consumer, the ability to enter the consumer's FICO score and reason codes, and receive back a plain-language explanation of the score, where it falls relative to a national distribution, an explanation of each of the top factors why the score wasn't higher, and advice on how to improve that individual's credit standing over time.

    Third, Fair, Isaac recognizes the desire of some consumers to obtain a FICO score in advance of applying for credit.

    As I have indicated, we support a FICO score delivery service done properly.

    Fair, Isaac has initiated discussions with the credit reporting industry regarding our interest in providing such a service to consumers.

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    To recap:

    One, we believe the score is most meaningful in the context of a specific lending decision;

    Two, we support the disclosure of scores actually used in a credit decision with sufficient explanation for preventing the opportunity for manipulation;

    Three, we have concerns with the general disclosure of scores, but, done right, we see the beneficial aspects to consumers.

    To us, ''done right'' means it should be a score widely used in lending decisions, it should be accompanied by the underlying credit report, and it should include an explanation of the score and the primary reasons why it wasn't more favorable.

    Again, thank you for the opportunity to provide this testimony.

    That concludes my prepared remarks, but I would welcome the opportunity to answer any questions you or the subcommittee may have.

    Chairwoman ROUKEMA. Thank you. Thank you.

    The second person is Mr. Stuart Pratt on this panel, Vice President of Associated Credit Bureaus, Inc., also known as ACB. This organization, ACB, is the international trade association representing consumer information companies, that include—it includes companies that provide credit reports, so you have had a lot of experience in this area, and we are anxious to hear your analysis and advice and counsel on this complex subject.
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    Mr. PRATT. Well, Chairwoman Roukema and Members of the subcommittee, we appreciate very much the chance to be a part of this today.

    I think the predicate that you offered to all of us in your press release is really the reason why we are here.

    That is, as you said, ''the debate over credit score disclosure has intensified as consumers learn of the critical role of scores in credit decision.''

    Really, there has been a nexus that I think has evolved over time, where consumers are now very aware of the score.

    In fact, we established a task force at the beginning of this year that cuts across several different types of ACB memberships—companies that produce mortgage reports, companies that produce the traditional credit report. Some of our members are score developers—companies—and, in doing this, we attempted to ensure that, as we saw this year unfold and in response to the interest that we saw generally in the marketplace—you could call it the pressure in the marketplace—by consumers themselves to guide our policy in terms of where we would go from here as a trade association.

    In fact, we ourselves, as an association, received an indicia of where our members wanted to go in terms of announcements a number of them have made with the intention to include a score on a file disclosure, as an example of the kinds of intentions that some of our members have indicated.
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    There are many other—you might say this is a watershed year, however, for the issue of credit scoring.

    Had we held a hearing, perhaps, when the Cannon bill was first introduced, the story might be far different than it is today.

    In this year, we have seen, for example, the secondary market for mortgage lending make announcements of their own intentions to create transparency to ensure consumer understanding of how their criteria influences the primary market in the mortgage-lending context.

    As Cheryl has already indicated, Fair, Isaac has made a number of progressive steps to attempt to address from their perspective, as a leading score developer and as a significant business partner with our own members, what to do to ensure consumers have the right tools in their hands.

    The press releases that I have mentioned and the intentions of our own members are a good indicia of where our membership is going.

    We are committed, by the end of the year, to offering our members a better system of guidance, really, and this echoes the concern that I think we both share.

    That is to make sure that, whatever score is disclosed, that it is disclosed in a way that is truly helpful for the consumer.

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    I think that Ms. Twohig's comments from the FTC were on point when she said disclosing a number by itself doesn't do a lot of good.

    The question is how to put context into that. How does a consumer understand what that score is? Where does it come from? How is it used?

    Really, of course, there is this relationship between the score and the credit report.

    In other words, scores ultimately are an analytical tool used by lenders. Credit bureaus don't make the lending decision.

    The traditional credit bureau, as you and I might think of it, doesn't even store a score in the file, which is one of the reasons why the current Fair Credit Reporting Act makes clear that there is no obligation to produce a score along with a file disclosure.

    There is no ''score'' in that ''traditional'' credit-bureau file, as we think of it.

    But, that is not an excuse now for trying to find a better system to create that right nexus between the credit-reporting industry, the score-development industry, the consumers that are out there, and so forth, and so forth.

    So, I think that is our commitment to you, is that you can expect more from us along the way here in terms of providing our members with better guidance, where they choose to make scores available.
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    Let me emphasize some points that you have heard before—and one of which Ms. St. John made as well.

    That is, there are lots of scores. It is very important. If you are looking at a legislative approach, we have to realize the FCRA is not—well, it says Fair Credit Reporting Act.

    It is not a law that governs just credit bureaus. It is a law that governs a whole array of information products in the marketplace—employment screening, tenant screening, check services.

    As an example of an unintended consequence, were a bill to go through requiring score disclosure in all contexts, this would mean that, for example, a check-services system which prevents or attempts to help prevent and reduce the 1.2 million fraudulent checks written in this country a day, we would be disclosing to the criminals the basic triggers and mechanisms that would cause us to be able to prevent that fraudulent check from being written.

    We are not saying that is the intention of the bill. That is just one of the consequences.

    So, there is a tailoring, I think, that has to be done as we go forward.

    For now, we are still looking at what the marketplace is doing, and we still have members who are in the marketplace proactively making decisions about how to bring new answers down to the level of consumers and make sure that they have something that is constructive.
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    I think that you will see, as this subcommittee continues to monitor this evolution of answers, that you will see better answers in the future.

    In fact, today, I think consumers have more information than they might have even had 9 or 12 months ago.

    So, we are here to just make sure you know that we are a part of this process, and we do have members that are interested.

    Our task force's work is not yet completed. We will be happy to report to you later this year when its work is done. Thank you.

    Chairwoman ROUKEMA. Thank you.

    We have our next panelist, Ms. Jan Barnes. Ms. Barnes is a realtor in Charles County, Maryland, and is here today representing the National Association of Realtors, which has an intense interest in this subject. Thank you.


    Ms. BARNES. Chairwoman Roukema and Members of the subcommittee, I am Jan Barnes, an Associate Broker in the firm of Century 21 New Millenium in Lexington Park, Maryland.
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    I am pleased to be here this morning to present a realtor perspective on the credit scoring disclosure bills pending in this subcommittee.

    I have been a realtor since 1976 and during this time, I have been active in the Maryland Association of Realtors and the National Association.

    I served as the 1994 President of the Southern Maryland Association of Realtors and held various offices in the Maryland Association.

    I was named 1994 Realtor of the Year, and most recently I was Chair of NAR's Public Policy Political Forum.

    I am now a member of the National Association's Conventional Finance and Lending Committee.

    I want to thank you, Madam Chairwoman, for this hearing to focus attention on the need for disclosing credit scores to homebuyers.

    This is an important consumer question that deserves consideration, as information technology starts to have its impact on the mortgage lending and real estate transaction.

    Mortgage lending is evolving from a paper-intensive activity to a more integrated process facilitated by technology.
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    The credit scoring bills pending in the subcommittee address important issues as credit- and risk-scoring become more prominent and more widely known to mortgage credit consumers.

    These bills are an important first step toward raising awareness about the impact that credit scoring may have on homebuyers as these mortgage-credit consumers make what, for many, may be the most important financial acquisition of their life.

    Credit scoring is gaining increasing acceptance in the mortgage lending transaction.

    Since Fannie Mae and Freddie Mac adopted automated underwriting technologies and included credit scoring as an element in evaluating mortgage loans sold in the secondary market, daily, more than 30,000 mortgage loans are processed through Fannie Mae's and Freddie Mac's individual automated underwriting systems.

    Realtors believe that the mortgage lending and credit scoring landscape are sufficiently changed to require rethinking some basic assumptions about credit score disclosure.

    NAR supports disclosure of risk predictors that would lead the mortgage lender to fund or not fund a mortgage.

    Sufficient information should accompany the score to provide a rationale for the offer of a mortgage and related terms.
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    Realtors support the following regarding credit score disclosures:

    The credit score and the range of possible credit scores;

    No less than four factors that adversely affect the credit score in the model used, including any reason code generated with respect to the credit score;

    An explanation of the credit score and the reason code;

    The date the credit score was created; and

    The name of the person or entity that provided the credit score or credit file upon which the credit score is based.

    Consumers do not have enough information regarding their credit scores to make an informed decision about mortgage products offered by lenders or to judge whether the lender is steering them into a more expensive product.

    Without knowing their score and information that puts the credit score into context, consumers are at a disadvantage.

    This situation should end. Where mortgage credit is granted, the consumer should be able to know whether they received the best rate and terms available.

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    If the borrower does not desire the terms offered, they should be able to continue comparison shopping for more acceptable terms.

    Homebuyers need mortgage credit scores with meaningful information to shop more efficiently for mortgages and mortgage products.

    The prospect of credit scoring legislation in California contribute to recent lender and industry changes regarding credit score disclosures.

    Both Fannie Mae and Freddie Mac made public the factors used by their automated underwriting services.

    Freddie Mac called on Fair, Isaac to ensure that borrowers can receive and interpret the FICO scores used in mortgage funding decisions.

    Fair, Isaac recently announced the comprehensive list of factors used in its FICO credit bureau risk scores.

    Realtors applaud these actions and urge additional industry efforts toward more transparency regarding credit score disclosure.

    Madam Chairwoman, the credit score bills pending in this subcommittee are an important initial step in focusing attention on the role that credit scoring plays in the mortgage transaction.

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    Credit-risk assessments, when used properly, will broaden mortgage availability for homebuyers, whether their credit history is pristine or not.

    Realtors believe that disclosing the credit score, the range that the score is in, the key factors that account for the score, and other supporting information will facilitate the mortgage-lending process.

    Knowledgeable consumers will be better able to select appropriate mortgages for their financial needs.

    Moreover, consumers in the sub-prime mortgage market would also be less likely to become victims of predatory lending practices.

    Thank you, Madam Chairwoman, for the opportunity to present the realtors' view on this pending legislation.

    I conclude my remarks and would be pleased to respond to questions from you and the subcommittee Members.

    Chairwoman ROUKEMA. Thank you very much.

    Now, our fourth witness is Mr. Edmund Mierzwinski, and I should know how to pronounce that name because, after all, you have testified before this subcommittee on a number of prior occasions.

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    You are the Consumer Program Director for PIRG, fully known as the United States Public Interest Research Group.

    This is a consumer group that takes a particular perspective, and we are looking forward to the PIRG testimony today.


    Mr. MIERZWINSKI. Thank you, Madam Chairwoman, Congresswoman Maloney, Members of the subcommittee.

    On behalf of U.S. PIRG, I am pleased to testify today on the important matter of credit scores.

    Although it is not noted in my written testimony, the National Consumer Law Center, one of the leading organizations representing low-income consumers, also signs on to our testimony.

    I apologize that, due to my frenetic travel schedule this week, I was unable to have other consumer groups review the testimony.

    But, as you may know, Consumers Union has been a long-time supporter of credit scoring disclosure and was instrumental in putting the bill in California onto the Governor's desk.
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    I will ask them and the Consumer Federation to submit additional material for the record, because they do also both support the concept of credit score disclosure.

    The long-time support of consumer groups, of course, is well known.

    However, I want to acknowledge the critical role that is played by a number of the witnesses around me in getting this hearing and getting this issue moved along as far as it has.

    Over the years, the banks, the credit bureaus, Fair, Isaac, and, unfortunately, even the Federal Trade Commission have not supported as strongly the disclosure of credit scores.

    Nevertheless, in the recent couple of years, the realtors, the mortgage brokers, and E-Loan, one of the new startup banks on the internet, have helped to bring this issue to the forefront and have really forged a powerful coalition, along with consumer groups in California.

    So, now, we are to the point where we have the potential to enact national legislation, not only legislation in California.

    So, it is also important to recognize, by the way, that the credit bureaus and Fair, Isaac have moderated their stance substantially from even earlier this year.

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    Now, we are just waiting for the banks and the credit unions. We'll probably be waiting some time, but that is the way it is often with consumer protection legislation.

    I want to point out just five quick points on the consumer groups' perspective on the legislation today.

    We strongly support the idea that credit bureaus should disclose credit scores and that, in circumstances where credit reports were required to be disclosed for free, then credit scores should also be disclosed for free as part of those credit reports.

    In other circumstances, credit scores should be incorporated as part of credit reports at no additional fee.

    As a matter of public policy, we believe that any final legislation enacted by the Congress should prohibit any contractual clauses from the credit score model companies or the credit bureaus that would prohibit a lender from also disclosing any proprietary score.

    The California legislation and, I believe, Senator Schumer's legislation, which I haven't had a chance to review yet, both include prohibitions on contractual provisions that would prevent companies, such as E-Loan, from disclosing credit scores. We strongly think that that should be in any final bill.

    Fourth, we understand that the credit bureaus are developing their own generic credit scores, as opposed to the concept of a proprietary score—the specific commercially generated score—that is provided to a lender.
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    We don't necessarily oppose the idea of a generic credit score disclosure.

    However, we would suggest, as, again, is in the Liz Figueroa legislation—S.B. 1607 in California—that any final Federal legislation include a provision that states that, if a generic score be allowed to be shared in lieu of the most recent proprietary score, that there be some sort of minimal standards—some sort of truth-in-credit scoring provision—that makes sure that the generic score is substantially similar in result to the proprietary score.

    Otherwise, it will be meaningless in the marketplace. Consumers want to know why they were denied their loan.

    They don't want to get some other kind of substitute disclosure that won't help them.

    So, that would be our fourth recommendation.

    Finally, our fifth recommendation, as we often make, we would encourage the Congress not to preempt the right of the States to go further.

    If Congress enacts any Federal legislation, allow the States to enact stronger legislation.

    One final point. The disclosure of credit scores is an issue of transparency.
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    It is an issue of giving consumers access to information, an issue of giving buyers access to information.

    Industry-sellers have much more information than they ever had before about consumers.

    They are using it to make credit and other underwriting decisions about consumers.

    This is simply an example of a way to give consumers who are the buyers in the marketplace more information and to balance the scales between the buyers and the sellers.

    Another important thing that you should do is to take a look at something that Congresswoman Maloney brought up earlier, which is the issue of selective disclosure of information.

    Just as the non-transparency and credit scoring may lead to consumers paying too much for credit cards, too much for home loans, the idea that some banks, particularly in the sub-prime marketplace, may be withholding information from credit-reporting agencies and only reporting partial information to the credit-reporting agencies, is another problem that may cause consumers to pay too much to be stuck in the sub-prime market too long.

    I would encourage the subcommittee to hold hearings on that problem.

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    I know that Mr. Hawke over at the OCC has issued a couple of statements on this over the last year-and-a-half, or so, and that the credit bureaus have done what they can to solve the problem, but I would encourage the subcommittee to consider holding hearings on it in the future.

    Thank you very much.

    Chairwoman ROUKEMA. Thank you. That was concise and straightforward.

    Mr. Chris Larsen. We are very pleased to have you with us today, Mr. Larsen. You are Chief Executive Officer of E-Loan, Inc. E-Loan is an online mortgage lender. Talk about the new technologies, here we are, and we have you here today. You are based in California and have been, certainly very active in the credit score debate. Please, the forum is yours.


    Mr. LARSEN. Thank you, Madam Chairwoman, Members of the subcommittee. Again thank you very much for allowing us time to speak on behalf of consumers and their need to access their credit scores, and the factors that determine those scores.

    E-Loan strongly supports legislation to allow consumers access to their personal credit scores, along with all of the factors and data that go into those scores at any time and as often as the consumer desires.
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    Over the last 5 years, credit scores—specifically FICO scores—have become the single most important piece of data used to determine whether a consumer can get a loan and, more importantly really, how much their consumer pays and what terms they receive.

    As Senator Schumer mentioned, over 75 percent of all mortgage decisions use credit scores in the underwriting process.

    Credit scores are also widely used in auto lending, credit card decisions, and other consumer transactions as diverse as insurance, and even rent eligibility.

    A low score can cost a consumer a substantially higher financing cost.

    For example, recent auto lending criteria would enable a consumer with a FICO score of 720 or higher—considered an excellent score—to secure a rate of 7.5 percent, whereas a consumer with a score below 680—that is only 40 points below—would pay a rate over ten percent, so there is a substantial penalty when the score is lower.

    Now, because credit scores have become so profoundly important in determining a consumer's participation in credit markets, E-Loan believes that it is essential to show consumers their score so they can better understand their credit prospects and better manage their finances.

    As such, E-Loan began showing consumers their credit scores in February of 2000 as part of our online debt-management service.
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    Using a secure web page, consumers can obtain, for free, their credit—FICO credit—score with links to information about what typical ranges of the score meant, what factors affected their credit scores, and what a consumer could do specifically to improve their score.

    During the first four weeks, over 25,000 consumers accessed their credit scores for free using the E-Loan service.

    Response from consumers, many of which didn't even know they had scores, let alone the importance of obtaining a score, was overwhelmingly positive.

    Unfortunately, in April of 2000, E-Loan's free credit score program to consumers was shut down by the credit bureaus under intense pressure from the creator of FICO scores, Fair, Isaac.

    Now, while E-Loan could still get access to credit scores for processing our loans internally as a lender, the data feeds were only made available as long as E-Loan did not show scores to consumers.

    Consumer reaction to the shutdown of the E-Loan service was one of great disappointment.

    People couldn't understand why they didn't have a right to view this extremely important personal data, particularly when lenders are given complete and unfettered access.
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    Now, a reason often cited by the credit industry in refusing consumer disclosure is that consumers simply will not understand what their scores mean.

    Now, E-Loan's experience in releasing credit scores to the consumer has really shown just the opposite.

    Of the 25,000 people that successfully accessed their credit scores prior to the shutdown, there seemed to be a very high level of understanding and positive consumer awareness.

    The internet, in particular, is an extremely effective medium for communicating score data, giving consumers instant access to their scores linked to specific factors, and data that built the scores as well as general data on credit scoring.

    In our experience, the lack of score disclosure is much more confusing to consumers.

    Now, another reason often cited by the credit industry in refusing disclosure is that, once consumers know what goes into their scores, they will, ''game the system'' by engaging in activities that result in better scores.

    E-Loan believes this is precisely why credit scores need to be disclosed.

    Consumers need to be able to improve their financial health through knowledge and understanding.
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    We call this effective consumer debt management, really analogous to the way consumers manage their assets.

    We see this as an emerging trend in managing consumers' debt portfolios.

    Now, after recent legislation requiring disclosure of credit scores moved through the California Assembly and State Senate, Fair, Isaac announced that general credit score factors would be made available to consumers.

    While this is a step in the right direction, Fair, Isaac has still refused to allow the disclosure of actual scores for the specific factors that adversely affect an individual score.

    E-Loan's attempts to re-establish its data feeds for its free credit score disclosure have been consistently refused by the bureaus under continued contractual restrictions from Fair, Isaac.

    At this point today, there is still no source available for consumers to access their scores.

    Now, we believe credit scores are actually a very effective measure of consumer creditworthiness and have led to increased efficiency in the lending industry.

    However, a lending market based on credit scores can only be truly efficient and fair if both lenders and consumers have full transparency into the scoring systems.
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    Now, as it stands today, a key market participant, consumers, do not have transparency, preventing them from optimizing their credit decisions.

    Credit score transparency to consumers should make markets more efficient.

    The lack of transparency should be seen as somewhat of a market failure, in that a single company is blocking the benefits of many market participants.

    We believe that legislation is needed to correct this market failure.

    Thank you very much.

    Chairwoman ROUKEMA. Thank you, Mr. Larsen, and our final witness today is Mr. Alexander Arader.

    Mr. ARADER. Arader.

    Chairwoman ROUKEMA. Arader. Mr. Arader is the President of a company, Arader & O'Rourke, a licensed mortgage banker and brokerage firm based in Stamford, Connecticut.

    So, we are anxious to hear you, another component of this puzzle that we are putting together.

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    Mr. ARADER. Chairwoman Roukema, Senator Schumer, Congressmen Cannon and Ford, and Members of the subcommittee, thank you for the opportunity to testify before you today on consumer credit reform contemplated in H.R. 2856, the Fair Credit Full Disclosure Act.

    The following testimony supports lower interest expense for homebuyers and greater market efficiency for mortgages and mortgage-backed securities.

    Three modest proposals can effectively and immediately improve the environment for borrowers in the United States.

    These are scores, metrics, and reporting, simply.

    Scores: Every holder of a valid Social Security number should have access to their credit scores at each of the three dominant credit bureaus—Experian, TransUnion, and Equifax.

    Metrics: The credit-risk model creators, Fair, Isaac and others, should be materially more forthcoming regarding exactly what their software measures.

    Tell the people where the rocks are, and those willing will walk on water.

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    Reporting: All secured lenders on all single-family homes in America should be required to report borrowers' payment histories to each bureau.

    Outside the purview of this specific legislation, the bureaus urgently need to improve customer service to borrowers commensurate with legitimate requirements of their other customers, the lending community.

    While the subcommittee should encourage immediate reform from within the bureaus, the subcommittee should also contemplate under what circumstances Government may be required to play a far more active role in the critical function of accurate credit-data collection and management.

    Background on scores: As a mortgage broker engaged in developing appropriate financing structures for homebuyers, I am driven by competition with other mortgage brokers and retail branches of banks to identify optimal pricing for given structures and income levels.

    Since the beginning of the year 2000, in particular, most of the large lenders with whom we deal have engaged in various campaigns marketing risk-based pricing.

    Consumers generally have no say or role in affecting their credit scores by the time a lender reviews every detail of their finances, while the transaction, typically the largest financial commitment of their lives, looms urgently.

    Comment: Consumers deserve information material affecting their living costs. The Fair Credit Reporting Act already effectively requires the bureaus to mail consumers credit reports upon request.
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    The existing acquisition process appears to be reasonable for both consumer and bureau, thereby evidencing prior successful legislative reform.

    An additional requirement to include the credit score in the copy to consumer empowers the consumer dramatically and gives them the opportunity to actually become a better risk at virtually no incremental expense to the bureaus charged with disclosure.

    Metrics: Very few consumers, rich or poor, have any idea what credit scores measure or how they are constructed. Most people, especially those with little background in banking or finance, don't understand the harm that they do to themselves and to their future borrowing costs when they pay their bills late.

    I often use the example of taking an imaginary cinder block over my head and say, ''You would rather I stand on the roof of your car and throw this cinder block through your windshield than put derogatory information on your credit report with respect to your mortgage, because that will cost you more.''

    That will often get people's attention and get them on the road to credit improvement.

    Comment: Fair, Isaac and other software designers should lead consumers to develop superior risk profiles.

    Rather than saying what the negative aspects are, they ought to develop targets—''Your credit score would be 50 or 100 or 150 point higher if you did this, if you did that.''
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    If a timely payment of all your obligations for 12 months, 24 months, or 36 months is an element of that, then so be it.

    People ought to know that. Sometimes, if they have made mistakes, just time alone will be what will improve them.

    But, that should be disclosed specifically and set a target for the borrowers, rather than saying what was wrong with their report in the past, because, often, those messages do not really appear consistent or helpful.

    Even if only 20 percent of Americans with less than perfect credit are willing to adopt the rigorous discipline to train themselves to actually become better credit risks, that is progress.

    Profit opportunities would diminish for lenders who charge premium pricing for those upwardly mobile, self-improving, newly credit conscious consumers.

    But, efficiency in the capital markets is second only to home ownership as the quintessential American icon, and therefore deserving of enthusiastic support by this subcommittee.

    Reporting: Sub-prime lenders do not uniformly report payments to credit bureaus.

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    Sub-prime borrowers may make their payments for 2 to 3 years without any incidences of late payments and then seek to refinance at ''A'' credit interest rates, which are normally much lower than sub-prime rates.

    If the sub-prime lenders had intentionally failed to report the timely payment history to the bureaus, then there is no public record of that borrower's timely history of payment, and the borrower may not be eligible to refinance.

    Withholding in the comment. Ask. Tell.

    Withholding of timely payment information is tantamount to financial slavery and abuses the dignity of lender and homeowner alike.

    If you have a secured interest in an American's home, you should report payments to the bureaus, even if it requires an Act of Congress.

    The three points raised above deal largely with information to empower consumers before the home-buying process begins and before derogatory information becomes part of the public record.

    By keeping these three proposals modest and achievable, this writer believes improvement can be effected at very little expenditure of time and money.

    Outside the purview of H.R. 2856, back to the bureaus themselves, garbage in, garbage out.
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    The mere fact that I see credit score ranges of more than 100 points on more than 30 percent of my clients proves that much of the data actually on file at the respective bureaus is conflicting, and therefore necessarily inaccurate.

    Call a good mortgage broker today and ask for all three of your credit scores. You may be surprised at the variance from one bureau to the next, and you will be disadvantaged if your middle score is lower than certain thresholds.

    I have seen hundreds of examples of borrowers who would have excellent credit but for relatives of similar name with bad credit, ex-spouses bent on credit-report damage, fraudulent credit card use by criminals, and myriad other derogatory credit line items which were not the fault of the borrower.

    I recently had a client with a 550 credit score, I believe, largely because a former college friend had filed a judgment in the public record for $100 of disputed concert tickets. There are no late payments in his profile.

    When consumers attempt to telephone the bureaus directly, the wait times are unacceptable.

    Consistency and accountability on customer-service issues do not exist, and there is an implicit guilty-until-proven-innocent convention in evidence in virtually every communication I have ever witnessed or taken part, with Experian, TransUnion, and Equifax.

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    The deletion, once and for all, of certain derogatory information in one's credit profile is something every consumer should have the opportunity to approach fairly.

    The only word fit to describe the existing condition process is ''disgraceful.''

    On the other hand, since every consumer with legitimate derogatory tradelines, which is to say accurate reporting of late payments and defaults, would be advantaged by having such information taken out.

    There is enormous risk and expense in determining which people have legitimate complaints and which people simply abuse the system in an attempt to engineer an improved score.

    FICO scores, for me, make it a lot easier, a lot cheaper, a lot quicker to get somebody a loan approval.

    I have had somebody just the other day who had been living in Hong Kong for the last 9 years, and was trying to get an international credit report.

    Instead of $10 or $12, it is going to cost between $300 and $400 and going to take two weeks, so having the scoring process is very helpful.

    It just needs to be improved a little bit. Perhaps the optimal action step for the subcommittee is to invite the bureaus to report on their progress since the passage of FCRA in walking the fine line between managing accurate information and preventing fraudulent obfuscation by borrowers unwilling to face facts about their past, and commence constructive credit rehabilitation, which often requires time as well as discipline.
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    Very few Americans love the Internal Revenue Service, and very few will ever love Experian, TransUnion, or Equifax.

    If I ran one of the bureaus, however, and I didn't want Congress to legislate my firm out of existence and address issues of legal liability and issues such as who owns the credit data—is it partially owned by the consumers who create it—I would place the highest priority on measuring customer satisfaction with borrowers as well as lenders, and then bringing in whatever help I could get to optimize both—optimizing meaning that some borrowers should be unsatisfied, because they can't clean up their records magically.

    Credit-report expense would likely increase, but more people would pay better attention to their credit.

    It is not easy being the most creditworthy Nation on earth, but it is best for the United States.

    Thank you.

    Chairwoman ROUKEMA. Thank you. Thank you very much. We have had a lot to absorb and a wide range of concerns here.

    Without giving you the opportunity now, Mr. Arader, to comment, I just want to say I don't think I quite got the cinder block reference.

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    But, we won't talk about that now unless you want to integrate it into the overall discussion we are having here.

    I will tell you, I am not quite sure that I understood with any sense of certainty what Ms. St. John and Mr. Pratt were saying with respect to their opposition here.

    Having heard now the rest of the panel, I wondered if you wanted to come back with more precision on why not full disclosure?

    I am not sure—I mean, I certainly didn't understand the integral parts of your objection.

    Certainly some specific questions have been raised by every one of the other four panelists on the subject.

    Would you like to very briefly respond, and then, if there is a longer, more annotated response, you will submit that in writing to me.

    Yes, Ms. St. John and Mr. Pratt, please, and hopefully I am going to look for my final question as to whether or not there is a possibility of finding some common ground here. Go ahead.

    Mr. PRATT. If I could respond first.

    Chairwoman ROUKEMA. Yes, please.
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    Mr. PRATT. And I don't think we've been—we've not done our job right if we have left you with the impression that we are wholly opposed to the idea of disclosing scores, I think what we have tried to say.

    So, let me say it again. We have a task force. We are going to provide our members with clear guidance, which I think meets with the general objectives, even, of some of what the realtors suggested in their testimony.

    If you are going to disclose a score, how should it be done so that, in fact, it makes sense to the consumer, so that, in fact, it does allow a consumer, when they are working with their mortgage broker, or if they are going to E-Loan, so that they have a better sense of where they stand, if you will——

    Chairwoman ROUKEMA. Excuse me. Do you have a timeframe in which this task force is to be reporting? Are they in operation now?

    Mr. PRATT. The task force is likely to be submitting our final proposal to our Board of Directors in November.

    Chairwoman ROUKEMA. All right, thank you. Continue.

    Mr. PRATT. That is the most important message that I think I can leave you with, is that we are trying to find a way to do it right.

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    We will have—our members are score-developers as well. Some of our largest companies develop scores, just as Fair, Isaac develops scores.

    They feel that they do have a responsibility to make sure that the products they produce are available and make sense to consumers.

    So, I think that is the short answer—as short as I can make it.

    Chairwoman ROUKEMA. Ms. St. John.

    Ms. ST. JOHN. Thank you. I would add that really the point that we were trying to make is trying to address the questions that Mrs. Kelly was asking earlier, in the sense that there are many different kinds of scores out there.

    So, it is really the question of pending legislation that would require full disclosure of ''the'' score.

    Which score is it? What information should accompany that? How do we make that most helpful to consumers?

    We feel that it is most helpful in the context of a specific lending decision, because the lender is in the best position to explain which scores were used, how they were used, and how they ultimately influenced the decision.

    That is difficult if it is simply disclosure of all scores that may be calculated by a credit-reporting agency. There could be hundreds.
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    Mr. PRATT. And that was why, in our written testimony, you will find a more complete description of some of the concerns—and I emphasize ''in its current form''—with the Cannon bill.

    So, we have tried to do that in order to help the subcommittee as a whole understand the complexity of the issue that you have in front of us.

    I suspect today you have a much better handle on the complexity of the issue that you have in front of you. We are sympathetic——

    Chairwoman ROUKEMA. In fact, I was about to say that it is very difficult to absorb the full range of concerns and conflicting approaches here.

    So, you have given us a lot to think about and a lot to study.

    Again, I will be, I'm sure, submitting further questions to you in writing, but you have opened the door here for, hopefully, finding common ground.

    But, we shall see. Further, Mr. Larsen or other members of the panel want to respond to the current circumstances in the context of finding that common ground, or not?

    Mr. LARSEN. Well, you know, again, I think it is a positive thing for the markets—disclosure.

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    I don't think it is necessarily a burden on the industry. Just the opposite. We actually think you can grow the industry——

    Chairwoman ROUKEMA. Could you speak into the microphone more directly?

    Mr. LARSEN. Excuse me. We think disclosure actually will grow the industry, so we think that is the common ground for everybody.

    That helps the credit-reporting agencies, even Fair, Isaac, E-Loan, and we think that just makes things more efficient.

    To the point about many scores, though, I do have to say that, in our experience, while there are many scores out there and there are many companies that are trying to compete with Fair, Isaac, Fair, Isaac has done a wonderful job in creating very effective scores.

    The consequence of that is it really dominates the capital markets.

    The capital markets' lenders look to that FICO score, whether that is branded as a different name. The markets really use those engines.

    They are very effective, so, when consumers need to see their score, they need to see something that is based on that.

    In our experience working with the credit bureaus, we have requested over two million credit reports with scores since we have started.
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    We really never have to specify what score we are looking for. Everybody knows what score you mean that is being used to drive a mortgage decision.

    So, I think it is just a matter of allowing that same score that us as lenders use, being able to give that to the consumer so they can make good decisions.

    Chairwoman ROUKEMA. But, of course, along with that, there has to be more transparency, that is, what components make up those scores, correct?

    Mr. LARSEN. Absolutely. We think that is essential. That is something we did on our site.

    We link the score with general information about the ranges. We would love to get the specific data to link if that could be made available today, that really has not been made available to the market.

    But, we think that is an essential part of understanding——

    Chairwoman ROUKEMA. Without unintended negative consequences, and that is where we'll have to have an in-depth discussion and analysis if we are to find common ground there.

    Yes, Mr. Pratt, and then I'll leave it to Mrs. Maloney for her questions.

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    Mr. PRATT. Well, I'll keep it short to make sure we have all the time we need.

    I wanted to respond to this question of using the FICO score as the sole score to be disclosed.

    We resist that strongly. We resist it, though, because it isn't the only score in the marketplace, because we don't believe that the marketplace will be dominated in the future solely by Fair, Isaac.

    Fannie Mae has indicated that they are moving away from using the FICO model as an element of their entire underwriting system.

    They represent an enormous element of the marketplace in terms of conforming loans that are brought into the secondary marketplace and securitized as an example of the capital markets.

    In light of that, it is important for companies, I believe, to be given the chance to build general creditworthiness scores that are built on the same predicate as the type of score that Fair, Isaac is producing in order to allow us to move consumers to something that they can understand, which will cut across their experience whether their loan is moving into one type of secondary market for a capital-market purchase or another marketplace.

    So, we think it is very important that this subcommittee not, if you will, create a system that endorses an almost monopolistic, if you will, approach to competition by forcing us to disclose a particular score when we think we can build other scores that will allow us to do just the very same thing.
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    Mr. LARSEN. If I can respond to that——

    Chairwoman ROUKEMA. Well, I was going to say I thought we were concluding this, but I think that your last statement warrants a response, yes.

    Mr. LARSEN. I absolutely agree with that point. I think the point that I was making is that it is not so complicated on who dominates the scores.

    But, I think, absolutely, the point being made here is that you don't want to view this just in the context of a company.

    But, to the same point, all the credit bureaus will use an engine. If a lender is requesting a score, they will use an engine that is being required by that lender.

    I think what is important is that the consumer have access to that same engine, whatever it might be.

    Today, it is really FICO. They dominate. Now, that could change.

    But, the bottom line is, when a lender requests the score from the credit bureau, they will pick an engine and they will issue a score.

    All we are saying is that that consumer needs to have the same access to that score.
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    Chairwoman ROUKEMA. All right, thank you.

    Mrs. Maloney.

    Mrs. MALONEY. Thank you very much. I would like to ask Fair, Isaac & Company and Ed Mierzwinski to respond.

    I want to get a sense of the impact on the American home ownership in our country.

    Do you know what percentage of loans evaluated by automated underwriting at Fannie Mae, Freddie Mac, FHA, or other large lenders use scores that were created by Fair, Isaac? Do you have any sense——

    Ms. ST. JOHN. My understanding is over 75 percent of the mortgage loans that were originated within the last year did involve a FICO score as one of the elements that were considered.

    Mrs. MALONEY. Well, with all of the inaccuracies that are known to be part of a consumer's credit report——

    According to the U.S. PIRG report, they indicated that 70 percent—I read your report—of credit reports contained some kind of error.

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    How could it be fair and accurate to use credit reports to develop credit scores for risk-based pricing, or, frankly, any pricing, when the error rate is reported by U.S. PIRG and others to be so high?

    Ms. ST. JOHN. We evaluate the actual data in terms of those factors most predictive of future performance by observing, with large samples, actual performance and then the data proven most predictive.

    Credit reports have been a very, very useful tool for many years in lending decisions and increasing home ownership.

    In fact, the United States enjoys a much, much greater degree of credit available and lower rates being made available than other countries, largely because of the value associated with the data that is available for better decisions and the tools for looking at that.

    We have looked at credit scores over a great deal of time—over the last 10 years.

    With respect to the very question you are asking—is it influenced by potential errors in the credit report—we find that data extremely predictive and a much better job of being able to weigh a number of compensatory factors that look at various aspects in a much more timely fashion and much more comprehensive fashion than, say, an underwriter using human judgment trying to evaluate those credit reports might.

    Mr. MIERZWINSKI. Congresswoman, I think you raised a very important point.
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    As Mr. Arader pointed out earlier, his mortgage brokers look at all three of the credit scores.

    One is generated from each of the repositories or credit-reporting agencies.

    They find a variance sometimes of up to 100 points or more, I believe he stated.

    Our view is very simple. If we require the disclosure of credit scores, that will enhance consumer understanding of the need—I'm sorry, enhance consumer understanding of their credit reports and put greater pressure on the bureaus to improve the accuracy of the reports.

    But, I think you have pointed out a very important problem.

    I think, for the consumer who doesn't have any mistakes on his or her report, he or she is going to get a score that is quite reflective of their creditworthiness.

    By shining some light onto this system, we'll deal with consumers in the middle, put greater pressure on the score-makers to fix the problem for those of us who don't have perfectly accurate credit reports, and that will improve the scores for the rest of us.

    Mrs. MALONEY. Last week at the identity theft hearing at the Full Banking Committee, we heard from a young man who was unable to open up a bank account and couldn't get credit cards or student loans because his Social Security number had multiple users.
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    It had been stolen, and no doubt his credit scores were in the trash heap.

    How is it that, even after posting a fraud notice on his credit report, he testified he still couldn't get credit?

    Anyone who would like to respond.

    Mr. PRATT. I'll take my shot at this. I can't tell you what happens on the other end of it.

    In other words, I can't tell you what Mr. Larsen's company does when they receive a credit file that has a security alert on it.

    But, I can tell you that we are committed to putting the security alerts on the file, to standardizing the security alerts as part of our initiatives, and making sure that we give our customers a very standardized approach to identifying when we feel that a file has gone through an investigation associated with identity theft, so that Mr. Larsen's company and our business, we produce the best product we can to make sure that he has the best opportunity to make the decision he needs to make in working with that consumer.

    Mrs. MALONEY. Would anyone else like to comment?

    Mr. LARSEN. I would say that is an important component—having the fraud alerts.
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    That does work in many instances, but I think, equally as important, it does underscore why the scores need to be disclosed.

    Consumers are the best filter for determining of errors or discrimination, or some other kind of factor like fraud has occurred.

    That is why they need to be brought into this process, so I think it just underscores the importance for disclosure.

    Mrs. MALONEY. Well, I personally believe that his case—this particular case—goes to the very heart and point of this hearing, that scores should be disclosed.

    Because someone stole your identity, your credit shouldn't be cut off, which was what he was experiencing.

    Unfortunately, in the district that I represent, there is a great deal of credit theft, and it is a huge problem in the district I represent.

    Would anyone else like to comment?

    Mr. MIERZWINSKI. Congresswoman, if I could comment briefly, I think that is, again, a very important point that was raised in that hearing.

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    It is my understanding—and the bureaus or Fair, Isaac can correct me if I am wrong—but it is my understanding that, if a consumer has a fraud-alert flag on his or her credit report, that that would not necessarily be reflected in a credit score.

    It might be reflected in a credit report, just as a consumer dispute over an error would be reflected in a narrative credit report.

    But, neither a fraud flag nor the existence of a dispute will be reflected in a credit score.

    That is one of the reasons that some of the identity-theft legislation has proposed that a consumer-fraud flag be a mechanism for blocking the issuance of a credit score in order to prevent, in certain cases, the issuance of credit on a fraudulent basis.

    Mr. PRATT. If I could respond, first of all, we have asked our systems the question is a score affected by the security alert?

    You wouldn't want that to drop a score down, because you have taken the responsible step of putting the alert on the file.

    The answer is no, we do not have scores that will target the security alert and then drop the score down.

    That is good. I mean, I realize that would seem very obvious why would you do that.
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    But, we wanted to make sure the technology wasn't working against the consumer, too.

    Ed, I will go back and look again, but we have asked our systems consistently, and the element that we use, if you will——

    The field we use to convey the security alert is an FCRA-required field, which means we must transmit it with every file, whether it is a score, whether it is a full disclosure, whether it is printed out, whether it is a computer-to-computer transmission.

    So, we believe that we are delivering the security alert along with every score and have no problem with that concept.

    It only makes sense that, whether you are receiving a highly codified or analyzed version of the file or whether you are receiving the full file, both the lender and the consumer deserve the protection and the notice of the security alert.

    Mrs. MALONEY. You said you were going to check that.

    Mr. PRATT. I'll check it again. I am only saying—I keep hearing this.

    We keep asking the question, and we keep getting the same answer, Congresswoman Maloney, and that is we convey the security alert with every score, every file, no matter what the format.
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    Mrs. MALONEY. OK, thank you.

    Ms. ST. JOHN. I would also like to add, with respect to disputed information, if the consumer does dispute a specific element on the credit file—a balance or a delinquency that they claim, and it is confirmed is not associated with that consumer, the FICO score will bypass specific disputed information that is marked as such.

    If it is more than the overall fraud alert or an overall narrative, that is conveyed in the way that Stuart was indicating, it's a flag that would tell the lender there may be additional information here above and beyond what the FICO score is able to consider.

    But, if the consumer does dispute a very specific piece of information on that credit file, the FICO scores will not consider that information.

    Mr. ARADER. Does the FICO score consider it again if the bureau does an investigation within 30 days and hears back from the original creditor that, yes, in fact, that was a late payment, then FICO would—the score would reflect it as a late payment again? Is there a 30-day limit on that blinding?

    Ms. ST. JOHN. It is based on the information that is actually marked as disputed by the credit-reporting agencies.

    I will have to defer to Stuart in terms of exactly how that is represented.
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    But, it is the information either during that time period and/or if it has been confirmed as being under dispute, obviously it would come off the file, and therefore the FICO scores would not see it at all.

    Chairwoman ROUKEMA. Yes, one last comment, and then we'll have to summarize. Yes, go ahead.

    Mr. ARADER. I think Fair, Isaac is faced with enormous competitive pressures to maintain the accuracy of the—the predictive aspect of their model, particularly if the information comes primarily from the last 10 years in a given interest-rate environment, in a given stock-market value, in a given home-value environment.

    It could be very different circumstances 2 or 3 years from now.

    The predictability of the default is very much in question. They have really got their work cut out for them.

    It is also protected as a private business enterprise. They have to be successfully predicted.

    The issue, I think, is really what is at the credit bureaus, and the process to correct that erroneous information is not working now.

    I would defer really to the bureaus to say how do you propose to solve that, because the alternative is the Government plays a far more active role in collecting and managing that data.
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    Then, if somebody is lying about their credit report, they are lying to the Government, and they would be less likely to do that.

    Chairwoman ROUKEMA. Well, should that be ACB, or should that move on to some modification of the FTC in their operations?

    One last comment. I don't know whether or not the realtors want to get in on this act here.

    Mr. Pratt, did you want to directly address what Mr. Arader said now, and then we'll go to the realtors.

    Mr. PRATT. Absolutely. I appreciate that. I appreciate that very much.

    It is just—keep in mind we have heard this several times. In fact, I appreciate the fact you compared how we work in this country to other countries.

    I guess that is the fundamental predicate. We have a system here where the World Bank holds a conference in Florida for all of Latin America, because Latin America is, ''Wow, I wish we had a system like the one we have in this country.''

    So, I think we have to start with that baseline of how good the system is based on the fact——
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    We have a record number of consumers in home ownership right now, and that is to the credit of secondary markets, primary markets.

    It is to the credit of the mortgage brokers who, I think, are still probably bringing to the table, what, 50 percent of the total number of mortgages in this country?

    It is to the credit of the efficiencies, and, candidly, it is to the credit of the economics—or the efficiencies of having an information infrastructure like credit reporting.

    Keep in mind we are managing data coming in every month—two billion elements a month—180 million credit files, some of the most complex systems of database in the world.

    We have probably 8,000 data furnishers out there. One of the challenges we have is that we can try to turn a dispute around as quickly as possible.

    It is something we must do in partnership with the data furnishers who provide the information to us.

    So, there's several pieces to this puzzle, and we just want to make sure the subcommittee Members—that all of you have that in your minds when you think about our industry and what we are doing today.

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    Chairwoman ROUKEMA. Yes, Ms. Barnes.

    Ms. BARNES. As a realtor, let me simplify this the way I see it.

    I don't normally know all this information. We don't have access to all this information.

    I am currently working with two young adults who have just gotten out of college and are now teachers.

    Both of them are teaching in the same school. One of them came to me because I sold a home to their parents years ago.

    I sent them to my lender, and my lender does know that I am working with credit scores.

    So, this particular person does allow me to know a little bit more information about my clients than most agents would find out.

    My first guy goes in to the lender. The lender came back and said ''You are good to go. You've got loan approval today. All I need is a piece of property. I have loan approval subject to an appraisal.''

    He went back and told his friend he is going to buy a house. The friend comes to me and wants to buy the same type of property in the same neighborhood.
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    I sent him to the lender before I ever took him out, and his credit score was lousy.

    Now, I have to explain to this young man why he doesn't have approval that day.

    While I am trying to explain it to him, which I really don't—I'm not supposed to know that he's got bad credit scores.

    I get into the credit scoring, and I try to explain it, and he said, ''Oh, credit scores are like the SATs of credit.''

    That is how he related it—and that is the way that I think a lot of the realtors look at it, is that we need to educate these people on what credit scores are.

    We need to disclose to them what credit scores are. We take our kids from the elementary school level and take them all the way up through high school, and gear them toward the SATs.

    They know what they have to do if they choose to go into a higher education.

    The same thing applies to these people who come out and would like to buy a house.
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    Even if they are not going to college, they need to know what it takes to get good credit scores and good credit.

    That is what I look at. I don't look at what is inside of the credit scores or how they got there.

    I just need to know what I can work with when someone wants to buy a home.

    Chairwoman ROUKEMA. When there is a challenge to one of your customers, OK, or one of your clients, I should say, how do you question——

    I mean, do you take completely without question the credit scores, or do you challenge?

    If you do challenge, what is the percentage of that that you——

    Ms. BARNES. They don't normally tell me what the credit scores are, so I don't know that information, and I don't have a way of working with it.

    Chairwoman ROUKEMA. But you know it has been denied?

    Ms. BARNES. I know that the loan has been denied, but I don't know why.

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    So, I don't have the information I need. Sometimes we like to work with clients and educate them on what they need to do to come back in 6 months or come back in a year and maybe be able to buy a house. If I had the credit scores, I could work with that.

    Chairwoman ROUKEMA. All right, thank you. Thank you. One last comment, and then we will conclude.

    Mr. ARADER. Madam Chairwoman, one model that might be useful is, when people—new drivers—get driver education, they qualify for lower rates for insurance on their cars.

    A similar—somebody mentioned a class in financial management.

    If there were such a class, I hear constantly people saying ''What good is my English degree? They send us all these credit-card applications in college. I didn't know that, if I had $14 late for 4 months, that was going to stop me from borrowing $300,000 a year later.''

    So, if you could somehow link a six-week or four-week class——

    Chairwoman ROUKEMA. Do you mean there should be consumer education classes in high school?

    I'm not teasing. I'm not being facetious about it, but I hear what you are saying.

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    Mrs. MALONEY. May I ask one last question?

    Chairwoman ROUKEMA. As a former high-school teacher, I understand what you are saying. Yes? Very, very briefly, please.

    Mrs. MALONEY. Very, very briefly. Thank you. Only because Mr. Mierzwinski raised it as a problem, but I would like to ask Mr. Pratt and Ms. St. John the lender question.

    Now, some lenders may not be forwarding information to reporting agencies on borrowers who have some blemish on their credit reports and are paying higher rates as a result.

    I would like to know, in your opinion, how prevalent is this. Is this a problem?

    Has the advisory opinion that came out from Comptroller Hawke had an impact. Just very briefly.

    Mr. Pratt.

    Mr. PRATT. The system we have is a voluntary system. Let's make sure we start with that.

    We build that system based on trust, based on the right management of the data, so we have to go out to a lender and explain why there is value to reporting to the system.
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    So, it is a voluntary system. That is the first predicate.

    We think we have been very successful in penetrating the markets out there.

    This issue has been one of concern for us, and the best I can do would be to go back and report back to you subsequent to the hearing, with regard to whether or not there has been progress, and so on.

    Mrs. MALONEY. Anybody else like to comment very briefly?

    [No response.]

    Mrs. MALONEY. Thank you.

    Chairwoman ROUKEMA. All right, thank you. I thank you, Mrs. Maloney, and I am sorry that there are not more Members here.

    But, we will be sure to get this report out and I am sure working with the staffs.

    I think this is clearly an issue that we have to pursue in the next Congress if we don't have time in this one, obviously, but it will be a growing issue of concern, both to the consumers and to the industry.
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    Oh, by the way, in that regard, the mortgage bankers were invited to testify here today.

    They were unable to find—to have someone here, but the record is open for any testimony that they want to submit.

    We shall be looking to other banking—the American Bankers' Association. They have some conflicting concerns, particularly with what is going on in California now.

    We will be pursuing some advice and counsel from the American Bankers' Association as well.

    But, in any case, I think we have made a firm commitment now to find some common ground.

    Hopefully, we will be able to discover that. It will be in discovery phase in the early days of the next Congress. I thank you very much.

    The hearing is concluded.

    [Whereupon, at 11:46 a.m., the hearing was adjourned.]