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The Role of FCRA in the Credit Granting Process

Thursday, June 12, 2003
U.S. House of Representatives,
Subcommittee on Financial Institutions and
Consumer Credit
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 10:11 a.m., in Room 2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding.
    Present: Representatives Bachus, Royce, Lucas of Oklahoma, Capito, Tiberi, Feeney, Hensarling, Brown-Waite, Barrett, Hart, Renzi, Miller, Sanders, Maloney, Watt, Meeks, Gutierrez, Waters, Velaquez, Hooley, Hinojosa, Lucas of Kentucky, Crowley, Israel and Davis.
    Chairman BACHUS. [Presiding.] Good morning.
    Our hearing today is another installment in a series of hearings the subcommittee is holding with respect to the Fair Credit Reporting Act. The provisions in FCRA that guarantee a single national standard with respect to many of the FCRA provisions are set to expire January the 1st of 2004. As I Stated last week, my primary focus throughout this debate will remain on providing consumers and the economy with the strong protections and benefits of the law.
    At our last hearing, we had more than twenty witnesses. They described why and how FCRA is important to consumers, and the economy as a whole. Today we will focus on the credit granting process and the role of FCRA in facilitating the most robust credit market in the world.
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    The process of applying for a personal loan, car loan or even a credit card has become increasingly simple. The consumer fills out a brief application, and within a matter of minutes, the consumer will know whether he or she has qualified for credit. The Chairman of the Federal Trade Commission, Timothy Muris, has referred to this as the miracle of instant credit. Even the mortgage underwriting process has become much less complicated, as millions of Americans are demonstrating each month.
    Today, new homeowners can spend more time picking out new curtains and wallpaper, because they spend less time on mortgage paperwork and stress. It should be obvious that these improvements in the credit-granting process benefit consumers.
    Our witnesses today will provide us with the complete picture of how FCRA operates as part of the credit-granting process. Our first panel will focus on how lenders assist millions of Americans in realizing the dream of home ownership. Just as importantly, we will also learn how a credit reporting agency, commonly known as a credit bureau, facilitates the credit-granting process.
    The first panel will also include witnesses representing consumer groups. Our second panel will review the credit-granting process in a broader scope. We will hear from representatives of a credit union, smaller banks, a large bank and a credit card issuer. Each will describe how the FCRA affects their ability to make credit widely available to American consumers.
    We will hear from other witnesses describing some potential pitfalls of the credit-granting process. I, for one, am particularly interested in how the national standards established by certain provisions of FCRA relate to the credit-granting process. For example, I am interested in learning whether FCRA has facilitated a national credit market and whether having a national system is beneficial.
    More importantly, if the national uniformity in place today were replaced with a patchwork quilt of inconsistent State laws, would consumers face a less convenient and more expensive credit-granting process?
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    I want to thank Chairman Oxley, Ranking Member Frank and Mr. Sanders for working with me on FCRA re-authorization. I believe the bipartisan cooperation that we have had on this important issue to date has been helpful in the debate.
    Today, we have accommodated all four of the minority witness requests.
    I look forward to our witnesses' testimony on how the FCRA facilitates the most advance credit underwriting process in the world and how it benefits consumers.
    The Chair now recognizes the ranking member of the subcommittee, Mr. Sanders, for any opening statement he would like to make.
    [The prepared statement of Hon. Spencer Bachus can be found on page 68 in the appendix.]
    Mr. SANDERS. Thank you very much, Mr. Chairman, for convening this very important hearing. We have an excellent panel of witnesses. And I look forward to hearing from them all.
    I will be running in and out because of other commitments. But I will be listening attentively to what all of our witnesses have to say.
    What I have been hearing from the banking and credit card industry is that consumers have never had it so good, that consumers are reaping billions of dollars in savings due to lower interest rates and that consumers have a much easier time accessing credit.
    It may be true that the credit card industry and the CEOs have never had it so good. According to the FDIC, credit card lenders and the banking industry reported record-breaking profits in the first quarter of this year while revenue from credit card fees have increased dramatically, from $7.3 billion in 1994 to $23.9 billion in 2001.
    So I think one of the areas, Mr. Chairman, that we are going to want to take a hard look at is what is going on with credit card fees, not just interest rates. And fees now account for 31 percent of credit card industry income. And that is an issue, I think, that needs a lot of study.
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    Is gaining access to credit a good thing? Well, obviously, it is in many instances, but sometimes it is not. According to Dr. Manning, credit card debt has skyrocketed, from approximately $51 billion in 1980 to over $610 billion in 2002. At the same time that consumers are bombarded by a record 5 billion credit card solicitations. Now, that is an incredible number.
    My understanding is, and somebody else can do the arithmetic, that the American people receive 5 billion credit card applications a year. And I suspect my son receives about half of them. Not his father, but my son.
    And the largest increase in credit card debt is among consumers making $10,000 a year or less. Three-fourths of college students use their student loans to pay their credit card bills. And the average credit card debt per consumer has risen from $10,000 in 1998 to $12,000 in 2002, which is not good.
    Mr. Chairman, there is another issue that I certainly am going to be focusing on today, and I hope you will, as well. And there were major stories in The New York Times, ABC World News, Washington Post on what I consider to be a scam, and nothing less than a scam. And that is, as part of the 5 billion solicitations that take place each year, the credit card companies say, Well, sign up with us, 3 percent interest rate. Not a bad deal. Somebody signs up for 3 percent interest rate. Suddenly, three months later, they are paying 25 percent, 29 percent interest rate. What happened?
    Did they not pay their credit card payments on time? Were they late? Did they default? The answer is in every instance, they may well have paid what they owed the credit card on time, but perhaps they borrowed some money, went to the bank as the result of an illness in the family, borrowed some more money. Maybe they were late paying an auto loan two months before. Maybe 3 years ago they were late on their mortgage, and out of nowhere their interest rates have skyrocketed.
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    This is a scam. It is causing severe problems for large numbers of credit card borrowers in America, and it is something that we want to address.
    So, Mr. Chairman, this is an important day. We have got a lot of excellent panelists. And I thank you very much for working with us to bring those panelists here.
    I would yield back the balance of my time.
    Chairman BACHUS. Thank you.
    Are there other members who wish to make an opening statement?
    Ms. Hooley?
    Oh, Mr. Gutierrez, I am sorry.
    Mr. GUTIERREZ. Thank you, Mr. Chairman.
    Well, I am happy to be here today to discuss the role of FCRA in the credit-granting process. A major concern I have is the increased use of the insurance scores and the lack of information about these scores available to consumers. I think we should research the increased use of credit-based insurance scoring and excessive negative impact it is having on the consumer's ability to purchase insurance coverage. Low credit scores can prevent someone from being insured at all. In fact, this has stirred complaints across the country, from consumers who feel that the use of credit scoring for services unrelated to credit is both discriminatory and invasive.
    The mix of information is used to compile a credit score, which includes much more than just the timeliness of payments. The methodology includes items such as outstanding debt a person has and the number and type of open credit lines. Given the fact that currently 90 percent of property insurers use credit scoring as a determining factor in their approval process and as a means to derive rates, we have an obligation to look at this matter carefully.
    A major problem with the use of these scores is the lack of consistency in how scores are established and unwillingness on the part of insurers to reveal publicly how they determine scores. Without a standard to fall back on and without insurance companies being required to reveal how they tabulate score, there is no way to make sure consumers are protected from discrimination.
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    We should look at, Mr. Chairman, just how it is we have credit scoring and insurance scoring, as one is tied to the other.
    I thank the chairman for the timeliness of the hearing and I look forward to the testimony today.
    Chairman BACHUS. I thank you.
    Go ahead, I am sorry.
    Mr. ISRAEL. Thank you, Mr. Chairman. I will be very brief.
    One of the principal concerns that I have had with FCRA is, in my view, the unfair and even unpatriotic practice of harassing families of deployed military personnel for late payments or scoring against someone who is sitting in a Humvee in Iraq a late payment.
    It seems fundamentally unfair to me that somebody who is willing to lay his or her life on the line for our freedoms today is going to be denied credit tomorrow because they could not make a payment or were late making a payment while being deployed in very dangerous parts of the world.
    I have been focusing on this issue with some of my colleagues. And I want to continue focusing on this issue and hope that during questions and answers we can address that critical and very important issue.
    And I look forward to working with you, Mr. Chairman, on a bipartisan basis to continue developing a response to what is a very significant problem for our activated military personnel.
    And I thank the chairman.
    Chairman BACHUS. Thank you, Mr. Israel.
    Ms. Hooley, and then Ms. Waters?
    Ms. HOOLEY. Thank you, Mr. Chairman.
    Very briefly, I am glad we are having these hearings. Of hearings, I think it is incredibly important. It is important to consumers, as well as to our credit system and our economy. I do think we have the best credit system in the world, and hopefully we will take positive steps to ensure the supremacy of our credit system, that it continues.
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    While I am happy having these hearings, I am becoming more and more concerned about the lack of movement from the administration. I know we had the undersecretary here earlier. We have been told that they would have something ready in June. I have now heard rumors, and I hope they are just rumors, that we won't be ready until mid-July.
    I hope we do not delay on this issue. I think, again, it is an issue that we need to deal with, not only for our economy, but for consumers. And I just think this attention deserves attention from the White House, as much as this subcommittee has provided for this issue.
    I am looking forward to the rest of our hearings. And, again, I would like to thank the ranking member and the chairman for having these hearings. I think they are incredibly important.
    Thank you.
    I yield back the remainder of my time.
    Chairman BACHUS. Thank you.
    Gentlelady from California?
    Ms. WATERS. Well, thank you very much, Mr. Chairman.
    I would like to thank both you and our ranking member, Congressman Sanders, for this hearing today.
    Today we have the opportunity to discuss one of the most important issues facing this subcommittee all year, the ability of consumers to have access to accurate credit information, maintain their privacy and be given the ability to safely conduct their business without having their identity stolen.
    The Fair Credit Reporting Act was originally enacted by Congress in 1970 to bring the consumer credit reporting industry under Federal regulation and create certain obligations and rights governing credit reporting transactions. The 1996 amendments to the Fair Credit Reporting Act were designed to address widespread problems experienced by consumers who were going to buy credit are being charged too much for inaccuracies in their credit reports.
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    We all understand the need to have easy access to credit information and to have a uniform national standard. It is equally important that the information be correct. According to the Consumer Federation of America and the National Credit Reporting Association, who conducted an exhaustive study of over 500,000 credit reports, they found that nearly eight out of 10 files, 78.4 percent, were missing a revolving account in good standing.
    In addition, one file out of three, 33.3 percent, was missing a mortgage account that had never been late. And two files out of three, 66.7 percent, were missing another type of installment account that had never been paid late. This includes mistaken identities, misapplied charges, uncorrected errors, misleading information and variation between information reported by the various credit repositories.
    Part of the solution to strengthening consumer accuracy and access to their credit report can be found in the State of California. Consumer reporting agencies must disclose the names and addresses of all sources of information used in the consumer's report. California also requires consumer reporting agencies to, with a reasonable degree of certainty, match at least three categories of identifying information within the consumer's file with the information provided by a retailer. The categories of identifying information may include the consumer's first and last name, month and date of birth, driver's license number, place of employment, current residence, previous residence or Social Security number. This effectively reduces a successful attempt at identity theft, and reduces the chance for mistaken identity.
    Also in the California law a consumer has a right to receive his or her credit score, the key factors and any related information. Under new provisions, a consumer would be able to have a security freeze placed on his or her credit report by making a request in writing by certified mail with the consumer credit reporting agency.
    A security freeze prohibits the consumer reporting agency from releasing the consumer's credit report, or any information from it, without the expressed authorization of the consumer. Effective July 1, 2003, upon receipt from a victim of identity theft of a police report or a valid investigative report, a consumer reporting agency must provide a victim of identity theft with up to 12 copies of their credit report for the consecutive 12 month period free of charge.
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    These examples create the opportunity for banks, credit card companies, department stores and auto financing and other furnishers who provide accurate information voluntarily to complete a report, the full scope of information, increasing the likelihood credit bureaus will not miss any negative information. With strong consumer protections, Federal preemption of States would not be necessary because Federal law would be the doer rather than the seller.
    I yield back the balance of my time.
    Chairman BACHUS. Are there any other opening statements?
    Let's first introduce this panel. We have a very, I think, esteemed group of panelists.
    John Courson is president and CEO of Central Pacific Mortgage Company, located in Folsom, California. Mr. Courson is also chairman of the Mortgage Bankers Association of America. Prior to that, he was the CEO of Westwood Mortgage Company and president and COO of Fundamental Mortgage Company.
    And I note one thing interesting about his resume is that he served as president of the California and the Michigan Mortgage Bankers Association, and as a director of the Texas Mortgage Bankers Association, so quite a few positions in different States.
    David Moskowitz is senior vice president, secretary and general counsel for Wells Fargo Home Mortgage. He has been in that position since 1994. Prior to that, he was with Prudential Home Mortgage Company, where he was associate general counsel, and Perpetual Mortgage Company in McLean, Virginia, prior to that as general counsel. Educated at Union College in Schenectady, New York, he has a law degree from Case Western, and admitted to several different State bar associations.
    A.W. Pickel III, is currently president and CEO of Leader Mortgage Company, a mortgage banker broker company headquartered in Lenexa, Kansas. He is president-elect of the National Association of Mortgage Brokers. He graduated from the University of Illinois, Urbana-Champaign, in accounting. And as I mentioned to him earlier, he then went to work for an international Christian organization known as the Navigators, where he worked with college students at major universities. And I can personally tell you that the Navigators have been very meaningful to me.
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    And I know several of folks who do the same thing you do, very dedicated people. I commend you for that work. A long list of different awards, too numerous, really, to mention. But we welcome you to our hearing today.
    Travis Plunkett, he serves as the Consumer Federation of America's chief liaison to members of Congress, to Federal regulators and to agency administrators. Consumer Federation of America is a non-profit association of over 300 organizations that advances the consumers' interests through advocacy and education, has a combined membership of 50 million Americans. Its primary focus is on credit reporting, bankruptcy, credit counseling, consumer privacy and insurance. Frequently interviewed by national and news media, written a number of consumer guides. He holds a Bachelor of Arts from the great University of Denver. I noted that you served in the U.S. Army intelligence and security commands. So Mr. Israel, some of his questions might also be something you could shed light on.
    Allen Fishbein, general counsel of the Center for Community Change, he specializes in the area of expanding the availability of responsible lending and banking services for the underserved. He testified before our committee before.
    And actually, Mr. Fishbein, we are going to have a hearing, I guess, later in the month on the underserved and how to better reach them with banking services, something that I am sure you could assist us with.
    Prior to joining the Center, he was senior adviser for government-sponsored enterprise oversight, Fannie Mae and Freddie Mac. He supervised the department rule-making process at HUD for new affordable housing goals for the two enterprises. He has written several books. Past member of the Federal Reserve Board's Consumer Advisory Council. And I close by saying that he has been honored by the District of Columbia Bar as Consumer Lawyer of the Year with a degree from Antioch School of Law, here in Washington, D.C.
    Mr. Gambill, present chief executive officer of TransUnion, joined TransUnion in 1985, rose, obviously, up through the ranks to the top position. Prior to joining TransUnion, Mr. Gambill was regional credit manager for Rhodes Furniture in Atlanta, Georgia, and also held management positions at Belth Department stores and Sears Roebuck.
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    So, you can obviously give us a good view, from your background both from a credit reporting agency and also from a furnisher of information to a Credit Bureau.
    He has a Bachelor of Science degree in Business Administration from Arkansas State, and also served in the U.S. Army for six years, and, as I was, he was an enlisted man who rose up through the ranks. That is why I have such fear of generals, even today.
    He became a staff sergeant, which is a very respected position.
    An Arkansas native, currently resides in Aurora, Illinois, with your wife, and you have two children.
    With that, we will start with Mr. Courson, chairman of the Mortgage Bankers Association, and go just in order.
    Thank you.
    Mr. COURSON. Good morning, Mr. Chairman, and members of the subcommittee.
    I want to thank you for inviting MBA to participate in this very important discussion. I am proud to testify this month, in June, which has been designated by the president as Homeownership Month. I applaud the subcommittee for holding these hearings and giving the mortgage finance industry an opportunity to share with you the great success that our nation and its homeowners have experienced as a result of having the American dream met, due in part, to the Fair Credit Reporting Act.
    Let me share with you, if I may for just a moment, some of that success. As you know, home ownership brings good things to our citizens and to our economy. In the last 2 years, over $100 billion has been put back into the economy from refinancing of real eState. The real eState sector employs 1.36 million, of which approximately about 500,000 come from our industry, the mortgage lending industry.
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    FCRA plays an integral role in this success by creating a structure that produces reliable consumer information used to lower the cost of home ownership, offers the dream of home ownership to underserved markets and produces innovative mortgage products.
    I am here today to strongly recommend that you reauthorize the preemptions contained in FCRA in their current form and maintain the national standards, uniformity and protections.
    Let me emphasize, Mr. Chairman, FCRA has national standards, uniformity and protections, all important for consumers and the mortgage industry because it gives rise to the following benefits.
    It enables Americans to move to new States and purchase homes with relative ease. It lowers the cost of credit to consumers, as lenders compete for customers on a national level. It speeds the consumer's access to credit, as mortgage lenders underwrite loans assisted by automated systems that provide a timely response to the consumer's mortgage application. And it permits lenders to evaluate risks more accurately through the analysis of consumer credit data, thereby enabling mortgage lenders to extend credit to Americans who, under traditional evaluation models, were considered too great of a risk.
    And it allows for greater innovation in mortgage products, as lenders take a successful product in one State and implement it in another State, allowing those consumers to also benefit.
    Seven important Federal preemptions included in FCRA's 1996 amendments provide standards of accuracy, consistency and uniformity among the users of consumer information: those who report consumer information and credit bureaus that collect and distribute information. The preemptions, which Congress included on an experimental basis, also provide for consumer protections, to prevent the misuse and inaccurate reporting of consumer information.
    The mortgage lending industry believes FCRA and the preemptions within it have proven to be a financial success for consumers and the economy, and should be extended and made permanent.
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    You know, the United States, Mr. Chairman, has the best mortgage finance system in the world. Should Congress decide to dismantle part of this well-operating structure, it will negatively affect the availability and cost of mortgage products in this country. The following are just a few examples.
    The cost of credit for consumers will increase as lenders who currently operate under national standards face higher costs to discover and comply with the myriad of State laws. Consumers will have fewer lenders among which to choose as varying non-uniform State laws give rise to regional barriers that will make it difficult to operate nationally.
    Innovation in mortgage products will slow, as non-uniform standards set forth in disparate State laws decrease the amount of available consumer information, which is necessary for advancements to better serve the needs of our borrowers. Further, consumers will face a patchwork of protections with inconsistent and fragmented State laws.
    The housing market is serving consumers, the mortgage lending industry and the economy well. It is important to note that housing has been a tremendous support to a weak economy in recent years. Failing to reauthorize the standards, uniformity and protections of FCRA would have severe adverse effects on serving our customers and your constituents.
    I thank you for inviting the Mortgage Bankers Association to testify, and look forward to answering your questions.
    [The prepared statement of John A. Courson can be found on page 79 in the appendix.]
    Chairman BACHUS. Thank you.
    Mr. Moskowitz?
    Mr. MOSKOWITZ. Thank you, Chairman Bachus, Ranking Member Sanders and members of the subcommittee.
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    My name is David Moskowitz, and I am general counsel for Wells Fargo Home Mortgage, headquartered in Des Moines, Iowa. Wells Fargo, our parent company, is a diversified financial services company offering mortgage, securities, insurance, real eState services, online banking, institutional and retail banking products under the Wells Fargo brand through a number of separately incorporated affiliates to 15 million customers nationwide. Wells Fargo's headquarters is in San Francisco. The company has 130,000 employees, has mortgage offices nationwide, has a retail banking presence in 23 States.
    I thank you for the invitation to testify today. I would like to share with you some of Wells Fargo Home Mortgage's experiences in providing products and services within the framework established by the Fair Credit Reporting Act.
    Wells Fargo Home Mortgage works in concert with its other Wells Fargo business affiliates in providing financial service products to its customers. Marketplace experience shows that consumers expect that the financial service companies they do business with to know about their accounts, to respond quickly to their questions and to advise them about products and services that will help them reach their financial goals.
    The service consumers expect requires that Wells Fargo have integrated information systems to give consumers what they want, when, where and how they want it. Subject to the Fair Credit Reporting Act, Wells Fargo shares customer information internally to meet these goals.
    Providing a new mortgage, refinancing an existing mortgage and meeting our contractual servicing requirements for investors and our customers requires information about their financial affairs. Applying inappropriate restrictions on transfers of information among affiliates would impede customer service.
    The 1996 amendments to the Fair Credit Reporting Act recognized the value to customers of the ability to transfer information among affiliates. This ability is wholly consistent with consumers' expectations that their questions will be answered and their needs will be met with a single call or a single e-mail message, whether their financial products are provided by a single company or several companies in the same affiliated group. To put it another way, customers do not care whether for technical, regulatory or management reasons, Wells Fargo chooses to organize itself into a particular series of affiliates of a holding company or subsidiaries of one bank.
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    What customers do care about is the seamless delivery of the products Wells Fargo offers, regardless of how we choose to distribute them.
    In Wells Fargo's view, it is consumer expectations and needs that should shape the public policy that regulates information use, not legal structure. Because of legal requirements that prohibited or restricted bank branching, Wells Fargo, at one time, owned numerous separately incorporated banks. The Riegle-Neal Act of 1994 allowed bank holding companies to consolidate banks into as few as a single charter. Today, for business reasons, rather than legal reasons, Wells Fargo owns 28 separately chartered banks, but the number of separate banks that a holding company chooses to have should not affect public policy relating to information use.
    If a bank holding company conducts its banking business in a single bank entity, that bank would have all the information about a customer who had deposits, a mortgage, a credit card, a home equity loan from that bank. As a single corporate entity, it could use this information without restriction to serve its customer.
    If, on the other hand, the bank holding company chooses to conduct its mortgage, credit card and home equity loan businesses in three separately incorporated banks, and the law restricted the sharing of information among affiliates, a customer who supplied the same information for the same products at three affiliated institutions, instead of a single institution, would not receive the same level of service from its financial services company.
    To use customer information to provide the same level of service that could be provided by a single entity with the same information about the same customer, a holding company like Wells Fargo that provides services through multiple banks and non-bank charters would have to consolidate its operation into as few charters as legally possible.
    Because of the uncertainties of the outcome of the FCRA debate, institutions like Wells Fargo will likely change their corporate structures to reduce the number of separate entities, rather than risk restrictions on information sharing among affiliates.
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    It is our view that corporate structure should not be a factor in setting public policy regarding information use. The touchstone, instead, should be consumer expectation. This is especially critical to our mortgage business.
    Since passage of the 1996 amendment to the Fair Credit Reporting Act, mortgage servicing has become more efficient. Wells Fargo customers have more channels through which they can apply for a mortgage and get assistance or conduct transactions related to a mortgage, as well as a complete array of financial products offered by Wells Fargo. With affiliate transfers and use of customer information, mortgage customers can make a mortgage payment at their local bank branch, obtain balances, get consolidated statements and get the support of 24-hour call centers that serve an entire affiliated enterprise.
    It is our goal to provide seamless service and product advice to customers no matter which member of the Wells Fargo family of companies provide the particular product or services.
    With the FCRA framework, companies can do a better job of evaluating credit and market risks. This translates into better and lower cost service to customers. Wells Fargo can offer a variety of mortgage service and products, such as quick turn-around on refinancing, discounts on closing costs for signing up with Wells Fargo's product line, referrals for new homeowners and alternative financing options for customers.
    Finally, Wells Fargo believes the current uniform national standard for information use, as provided by the 1996 amendments to the FCRA, is vital, and asks that this Congress provide clarity and stability by removing the sunset provisions that affect affiliate sharing and other segments of credit granting.
    Congress should also address identity theft and should grant authority to bank regulators to set new national standards for notices about information use to customers. The problem of identity theft and complicated notices about information use are frustrating to both customers and financial service providers. The availability of financial services, such as mortgages, for our customers and the flow of information required to make those services available, do not stop at State borders or corporate structures.
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    Thank you. And I would be happy to answer any questions that you, Chairman Bachus, or the subcommittee may have.
    [The prepared statement of David Moskowitz can be found on page 167 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Moskowitz.
    Mr. Pickel?
    Mr. PICKEL. Chairman Bachus, Congressman Sanders, and members of the committee, I am A.W. Pickel, president-elect of the National Association of Mortgage Brokers, and president of Leader Mortgage Company in Lenexa, Kansas.
    I appreciate the opportunity to present NAMB's views on the Fair Credit Reporting Act. NAMB is the nation's largest organization exclusively representing the interests of the mortgage brokerage industry, and has more than 14,000 members.
    Thank you, really. I appreciate it, for having us here.
    I want to commend this committee for holding a series of hearings on an issue that is vital to our economy and to consumers. FCRA, as amended, provides a carefully constructed balance, which creates uniform national standards that have increased the effectiveness of consumer report information.
    This national uniform standard impacts nearly every business sector that makes consumer credit-related decisions. It is also essential to the operation of our current mortgage industry. As it is estimated that mortgage brokers originate more than 60 percent of all the residential mortgages, NAMB is very concerned of the impact changes to FCRA may have on the mortgage marketplace and the economy, in general.
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    FCRA has facilitated the information that is provided by consumer reporting agencies, which is mandatory to make sound mortgage lending decisions and to help evaluate risk. This information is essential in order for the mortgage industry to provide consumers with access to credit and reasonably priced products. A carefully constructed balance in FCRA creates the ability to make quick decisions on offers of credit that is critical to both consumers and mortgage originators. It also creates competition, which helps to lower credit costs for consumers.
    NAMB believes the extension of the preemption provisions are necessary to preserve a national uniform standard, some of which I will address today. If Congress allows the preemption provisions in FCRA to expire, the outcome of such inaction will increase risks and costs for mortgage originators, and as such, will have a detrimental impact on a consumer's access to credit and availability of mortgage products.
    Applying for a mortgage was a very time-consuming process before the carefully constructed balance of FCRA was created. Processing a mortgage application required personal contacts with references, other creditors and contact with individuals who had knowledge of a consumer's personal finance history.
    Now, consumers can gain access to credit virtually instantaneously on a wide array of credit products.
    The information contained in a consumer report is an essential component to the mortgage process. It dictates the terms and rates for a consumer's mortgage. If States are allowed to enact inconsistent laws regarding what information can and cannot be contained in a consumer report, the ability for mortgage originators to determine a consumer's credit risk will be compromised.
    Accurate reports benefit not only the consumer, but also the mortgage broker and the lender, who are able to make more rapid and accurate credit decisions utilizing these scoring models when underwriting a mortgage loan. The lack of a national standard on the contents of a consumer report would add a level of uncertainty in the risk profile of the consumer's credit history. As a result, the price of credit will increase for all consumers, and access to credit will be reduced, which could result in a reduction in our country's historically high homeownership rate, something that NAMB is very proud of.
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    Uniform adverse action notices provide a consumer with consistent information regardless of their location. If this preemption provision expires, an adverse action notice may differ from State to State. This could result in confusion to consumers and a significant increase in operational costs to the industry, from which consumers will suffer the consequences.
    Mortgage brokers generally do not furnish information to consumer reporting agencies. However, the lenders with which mortgage brokers transact business and many other industry sectors do furnish information to consumer reporting agencies. If States are allowed to enact inconsistent laws regarding furnisher requirements, furnishers may decide that compliance with different State laws is too burdensome and may choose not to submit the information at all, making consumer reports both inaccurate and unreliable.
    Finally, we also think that the procedures for disputing inaccurate information need to maintain uniformity. Inconsistent investigation time restrictions would lead to a cursory and inaccurate investigation to the detriment of consumers. Mortgage brokers often work with consumers to help them to review and correctly dispute items on their credit report, when necessary to obtain the most rapid modifications necessary to obtain the best mortgage for them. Cursory and inaccurate investigations of credit disputes will frustrate this working relationship between a mortgage broker and their consumer.
    NAMB believes it is important that Congress maintain our current uniform credit system, which has provided the economy with strong benefits and protections and has enabled millions of consumers to obtain the dream of home ownership.
    Thank you very much for the opportunity to testify here today.
    [The prepared statement of A.W. Pickel can be found on page 174 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Pickel.
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    Mr. Plunkett, we welcome your testimony.
    Mr. PLUNKETT. Good morning, Chairman and Ranking Member Sanders.
    My name is Travis Plunkett. I am the legislative director of the Consumer Federation of America. Thank you very much for the opportunity to offer our comments on the important issue of the role of the Fair Credit Reporting Act in the granting of mortgage loans.
    I have three main points I will touch on today.
    First, accuracy and completeness of information about consumers' credit history is the very foundation on which the entire credit reporting system is built. And that foundation is shaky. We agree that there have been positive effects to the automation of credit reporting over the last 15 years, but broad and credible evidence demonstrates that the status quo has led to serious problems with credit reporting accuracy and completeness.
    Second point: The furnishers of credit reporting data—creditors, collection agencies and others—are responsible for many accuracy and completeness problems. Provisions of the Fair Credit Reporting Act to require furnisher accountability need to be improved.
    Third point, the dispute resolution process under the Fair Credit Reporting Act, which is supposed to help consumers resolve problems with credit reporting accuracy, is flawed and is becoming obsolete. It needs to be overhauled and modernized.
    Now, let me touch on each of these points briefly and tell you that there is a lot of detail and specific recommendations in my written testimony on each point.
    On accuracy, we agree with Howard Beals, the director of the Bureau of Consumer Protection at the Federal Trade Commission, in speaking about credit scoring and the trend towards credit scoring. He said, ''Even small differences in a consumer's credit score can influence the cost or other terms of the credit offer, or even make the difference between getting approved or denied. Accuracy of the information underlying the score calculation is paramount.''
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    A study released by the Consumer Federation of America and the National Credit Reporting Association has found dramatic and costly discrepancies in credit scores in underlying credit information among credit repositories. We looked at half a million actual mortgage consumers seeking mortgage credit. Researchers then closely examined the files of consumers with scores near the 620 cutoff; this is the commonly known dividing line between prime lower-cost mortgage credit and sub-prime higher-cost credit.
    The study found wide variations in credit scores for a given consumer among the three national credit repositories. The average discrepancy for all consumers was 41 points. The credit scores for nearly one in three consumers varied by 50 points or more. In credit scores for one in 25 varied by 100 points or more. This means that roughly 8 million consumers, one in five of those who are on this borderline, are likely to be misclassified as sub-prime upon applying for a mortgage.
    A similar number of consumers are likely to benefit from errors in their report. However, I don't think anybody in this room would argue that individual consumers benefit from system-wide averages like this. And I don't think anybody in the room would agree that consumers should have to cope with a credit reporting system that functions like a lottery.
    Falling below the cutoff score for prime mortgage can lead to a complete denial of credit or be extremely costly. We threw out an example in our written testimony. The upshot is we compare an A-loan, less than ideal credit, to an A loan. The consumer at A would pay $124,000 more in interest payments over the life of a 30-year fixed $150,000 mortgage. There is a detailed analysis in the testimony of this report.
    Let me add that the Federal Reserve has come to similar completions about one aspect of the problem that we highlight, and that is the completeness of reporting by creditors. The primary area of concern that they identify with data integrity was that of missing credit limits. This can have a major detrimental effect on consumers' credit score and on their credit rating overall.
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    The Controller of the Currency has also raised concerns about complete reporting, as has the Federal Financial Institutions Examination Counsel, which brings me to closing and to highlight the second and third issues that I mentioned at the top.
    If one of the major problems is inaccurate and incomplete reporting by the furnishers, then we need to go and look at many of the recommendations that have been thrown out by CFA and others to increase complete reporting by those furnishers. We suggest if they use the system, voluntary approach, if they use the credit reporting system, they need to report everything.
    Finally, we need to look at our dispute resolution process. It doesn't allow consumers access to their credit score in most cases. Most States don't allow it and FICRA doesn't allow it, and it doesn't allow consumers to get quick, timely access to their report to correct errors and get that good credit offer, that good mortgage loan or that other offer of credit that they would like to get. It is a serious problem, and we need to look at modernizing the dispute resolution process.
    Thank you.
    [The prepared statement of Travis B. Plunkett can be found on page 182 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Plunkett.
    Mr. Fishbein?
    Mr. FISHBEIN. Thank you, Mr. Chairman, and Mr. Sanders and members of the subcommittee.
    My name is Allen Fishbein, and I am general counsel of the Center for Community Change. I want to thank you for the opportunity to testify today and share my thoughts at this hearing on the role of FCRA and the credit-granting process.
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    My written testimony focuses on a series of issues pertaining to the impact of credit scoring and automated underwriting in providing fair access to mortgage credit, which we think bears on the issues that are the concern of this hearing.
    In 1969, during the debate on the original FCRA, Senator Proxmire spoke of the congressional intent behind the law, saying that the aim of FCRA is to see that the credit report system serves the consumer as well as the industry. ''The consumer has a right to information which is accurate. He has a right to correct inaccurate or misleading information,'' said Senator Proxmire. ''And he has the right to know when inaccurate information is entered into his file. The Fair Credit Reporting Act seeks to secure these rights.''
    Referring to this legislative intent, last year, William Lund with Maine's Office of Consumer Regulation Stated, ''Just as the FCRA demystified the storage and the use of credit information, credit scoring is now serving to re-mystify that process.'' And we share the regulator's concern.
    The rapid growth in the use of credit scoring and related technologies have worked to improve access to credit for many, particularly in mortgage lending. However, it also has added an additional veil of secrecy over the credit decision-making process. This veil has created uncertainty and suspicions among consumers about the role that these scoring technologies play as gatekeepers for obtaining credit. Lifting this veil, particularly for the mortgage lending arena, is long overdue, but is likely to require congressional action to achieve.
    Let me highlight the main points that are in my written testimony in the time I have this morning, let me say that there have been great changes in consumer credit reporting and consumer credit decisions since FCRA was originally enacted, and even since the 1996 amendments. Computerized credit scores are contained in huge national databases today. Credit scoring and application scoring technologies play significant roles in a vast majority of the credit-granting decisions that are made.
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    Perhaps no area has changed greater than in mortgage lending. In less than a decade, mortgage loaning has gone from a largely manual decision-making process to an automated one. Predictably, fans of credit scoring say that it represents an improvement over manual underwriting, because it is more objective, it has a greater predictive value for judging which than does manual underwriting. The efficiencies that scoring provides permits expanded underwriting and has contributed to increases to homeownership overall and for increases in homeownership for the underserved.
    They also say that scoring is fair and unbiased, but only the developers of these scoring systems know this for sure. Their confidence in the fairness of these systems must be accepted today as an article of faith, because these systems are very closely held and proprietary. Former President Reagan once said in another context, ''Trust, but verify.'' And that is our position about assessing the accuracy and fairness of the scoring models that are used today.
    Concerns about the fairness and accuracy have been raised almost since these new systems have gone into effect in the mortgage area, and the stakes are higher than ever before. No longer is it just about access to credit, meaning affecting people at the margins, but the advent of risk-based pricing, which is being used more and more in mortgage lending and other areas of consumer credit, means that scoring also affects how much credit costs and the terms and conditions that are extended. In other words, it affects virtually every consumer. Consumers that do not meet the minimum cutoffs that credit scoring assigns are relegated to the higher priced sub-prime market.
    The concerns about the scoring models in place are several fold. Research, as Travis and others have suggested, indicate significant inaccuracies and inconsistencies in the underlying credit reports. This represents a double-whammy, in effect. If the reports are inaccurate, then it is likely the credit scoring models are, as well. The CFA study indicate that one out of five of households are at risk of being misclassified, as a result of these inaccuracies, into the sub-prime market.
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    But regulators have also voiced concerns that certain creditors may be manipulating credit reporting systems in an effort to hang on to what they view as their most favorable customers by not reporting favorable information about their coustomers.
    There are also a host of methodological issues, including under representations of key demographic groups, such as low-income people and minorities, and important omitted variables from the credit scoring methodologies, such as non-traditional factors that may pertain to predictiveness: counting rent payments and utility payments, as examples.
    And when pressed, all the purveyors of credit score models will acknowledge that minorities, African-Americans and Hispanics, are disproportionately adversely affected by the methodologies today in place. In other words, on average, minorities fare worse under credit-scoring methodologies than do white households.
    This doesn't necessarily mean they are discriminatory. But given the legacy of lending discrimination and housing discrimination in this country, adverse impacts should be treated very seriously. And it should trigger very strict scrutiny, such as an effects test analysis, which would ensure that the factors and their weight are being used correctly in the models; second, that there is a business necessity for using these factors; and third, that less discriminatory approaches that would achieve the same ends are not available.
    But despite these legitimate concerns, independent review and analysis has not been conducted to ensure the validity and the fairness of the scoring systems that are in common usage today. We urge, therefore, the establishment of an effective and meaningful oversight process, which would evaluate and regularly monitor the statistical scoring models that are used.
    We think Federal agencies such as the FTC and HUD can be used for these purposes.
    In conclusion, let me say such steps we believe are necessary to lift the veil of secrecy that exists. These steps are entirely consistent with the objectives of FCRA to ensure accurate credit reporting and are necessary in order to achieve full consumer confidence in credit decisions that are being made today.
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    Thank you, Mr. Chairman.
    [The prepared statement of Allen Fishbein can be found on page 85 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Fishbein.
    Mr. Gambill, before you testify, I want to say this to all members.
    Mr. Gambill is CEO of one of the credit bureaus or credit reporting agencies.
    And I want to commend you for testifying. Often, no matter where the fault may lie, it is directed at the credit reporting agency. You sometimes find yourself the whipping boy, even though someone may have supplied you with bad information or because someone is receiving a credit score that they don't like. So I think most of the members of this panel are knowledgeable of that fact and will bear that in mind during the questioning.
    We welcome your testimony. And we also, I think that all the members of this panel realize the problems in the system, that we all work together. But I think we would all agree, including consumer groups, industry, et cetera, that credit reporting agencies are a valuable component of our lending and borrowing process and our economy, and perform a very fundamental role. So I thank you and welcome your testimony.
    Mr. GAMBILL. Thank you very much, Chairman Bachus.
    And thank you, Congressman Sanders, and members of the subcommittee for inviting me to be here today.
    As you know, TransUnion is one of the nation's largest consumer credit information companies. We are a facilitator of commerce that provides credit granters with information and analytic tools that enable them to better understand their customers and make more informed decisions. And we provide consumers with choice, access, reliability and the promise of a robust and more stable economy. All of this relies on Federal preemption. Federal preemption brings uniformity to the risk management process that is inherent in the granting of credit.
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    Uniformity allows lenders to make fast, reliable business decisions on a national basis. Uniformity means consumers are treated equally and presented with a constantly evolving array of financial products and services uniquely tailored to meet their personal lifestyles and qualifications. Uniformity allows regulators to assess risk and take appropriate measures to protect the interest of depositors and the American public.
    If Federal preemption were allowed to expire and each State, county or municipality are permitted to adopt their own laws, the credit reporting system will be severely fragmented, and the consequences to the consumer and our economy will be significant.
    We have seen this play out in other markets around the world. In many countries, consumers, regardless of their credit profiles, don't have access to long-term mortgages at all or must pay interest rates of more than 20 percent on the loans that they can get. This is the direct result of the lack of a comprehensive and uniform credit reporting system. Consumers in those countries really have few options. They are generally tied to one institution, their bank, for all of their financial needs.
    There has been a good deal of discussion before this subcommittee on identity theft and data accuracy issues. These concerns are not taken lightly by TransUnion, but should not override a law that, and I quote from legislative history, ''recognizes the fact that credit reporting and credit granting are, in many aspects, national in scope, and that a single set of Federal rules promotes operational efficiency for industry and competitive prices for consumers.''
    To address the concerns of identity theft and data accuracy, I believe we start with consumer education. Consumers are more engaged in the credit reporting process today than ever before. We believe the public and private sector must each take a role in ensuring consumers know their rights under the FCRA. And TransUnion has responded to the need for consumer education by making tools available that help individuals manage their financial help. We are committed to providing education to consumers through a multitude of channels, but our ability to do that, if we first have to find out their address, will be severely limited.
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    We make our living by accurately and efficiently processing 2 billion pieces of information into 192 million credit files every month, and we do it well. We recognize, however, that some consumers have questions and issues regarding the information in that file. And that is why we have recently made large investments in technological platforms to automate the re-verification of information. Fifty-two percent of our data providers now participate in the automated process of re-verification, and our goal is 100 percent participation.
    We believe this approach will seamlessly resolve most matters quickly and efficiently, but we face a significant challenge from credit repair clinics. If these credit repair clinics are allowed to continue to generate spurious volumes, and they are currently responsible for 35 percent of our total re-verification volume, our ability to deliver fast, accurate resolutions will be hamstrung.
    That will bring us to identity theft. We understand the personal nature of an individual's credit information, and have taken substantial steps to protect the integrity of our systems and our information. We are strongly committed to continue to be part of the identity theft solution.
    TransUnion led the industry with the creation of a fraud victim assistance center, which has been recognized by law enforcement, as well as the media, for its unprecedented service to identity theft and other credit fraud victims. Our fraud victim assistance experts work with consumers, law enforcement and credit granters to assist victims and aid in the apprehension of perpetrators.
    Earlier this year, TransUnion and our competitors announced that we now share information related to fraud identity theft victims. Consumers can now make one call to any of the three national bureaus and be confident that all of us will put the appropriate safeguards in place.
    U.S. lenders are purchasing millions of credit reports each day. These reports allow lenders to make decisions that allow consumers to enjoy same-day commitments on home loans, receive instant credit approval at the retail point of purchase and drive off a car lot with the vehicle of their choice in minutes. Lenders are making those decisions based primarily on the information contained in a credit report, because the credit report system works.
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    This system is critical to our economy. Our economy is driven two-thirds by consumer purchasing, and we believe our system must be maintained.
    Thank you again for the opportunity to be here. We at TransUnion are committed to assisting your committee in any way that we can with respect to this important matter.
    [The prepared statement of Harry Gambill can be found on page 94 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Gambill.
    At this time, we are going to have questions from the members of the committee, and I am actually going to waive my questions. I will say that I am sure that Mr. Sanders or someone else will ask, particularly Mr. Gambill, about free credit reports. That is something we are hearing a lot about.
    And if that question is asked, I would like you to detail the impact that will have, you know, on your company. I think if we discuss that, we need to know about the impact of it.
    Mr. Feeney has no questions.
    Mr. Hensarling?
    Mr. HENSARLING. Thank you, Mr. Chairman.
    There appear to be some accusations of huge inaccuracies within our credit reporting system. So I guess, Mr. Gambill, my first question would be for you. Can you quantify for me the number of credit records or reports you are responsible for and how often consumers have complained about inaccuracies? How often have records been changed because of inaccuracies in the report?
    Mr. GAMBILL. I will give you some of the information, and I would like to have my team be able to work with individually so I can really understand your question.
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    About 8 million consumers a year avail themselves of the opportunity to get a free credit report from TransUnion. That represents probably about 8 percent of the households in the United States. About half of the consumers that then get a copy of their credit file ask us to re-verify something on it, either because they don't understand it or they may disagree with the rating as provided by one of our data furnishers.
    So, the 8 million people, which represents about 2 percent of the files sold, on who we sell files ask us for copies of those in a free manner. Then, about half of those ask us to re-verify something on those files. The average file has about nine trades on it, so now I am getting into math. I had better stop trying to do and have the team work with you on it individual basis.
    But 2 percent of the people ask for a copy and then half of those ask us to reverify something.
    Mr. HENSARLING. Thank you, that is helpful to me. When I hear about accusations of huge inaccuracies within the system, I am a firm believer that the world works off of incentives. I am trying to figure out who might have an incentive to put inaccurate information into the system in the first place. I am somewhat curious.
    I guess my next question would be for Mr. Courson and Mr. Moskowitz, since you both are in the business of extending credit. I assume that to be profitable you would like to make more credit transactions instead of fewer. And to make more transactions, you need accurate information so that you can price the risk premium accordingly. And if that assumption is true, in your observation, who has an incentive to put inaccurate information into this system?
    Mr. MOSKOWITZ. I don't think any lender has an incentive to put inaccurate information into this system, including lenders that would like to retain their existing customers. Each lender has a vested interest in the performance of the loan and the success of the consumer who has the loan. And the integrity of that system and the quality of that information is the necessary foundation of that.
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    If we merely were interested in retaining our own customers, or a lender was merely interested in retaining its own customers, you could argue that. But a company like Wells Fargo has a much larger interest in expanding its customer base and relies on the integrity of the information in the system.
    Also, to protect itself from identity theft and from fraud, it relies on the information, corrects erroneous information promptly and would assume that all lenders in that position who have integrity would do the same thing.
    Mr. HENSARLING. Mr. Courson?
    Mr. COURSON. Our members, obviously, are primarily originating and selling loans, Congressman, into the secondary market, so we have another standard that we have to meet in terms of standing behind the information we have. And there is really, as Mr. Moskowitz says, no incentive for incurate consumer credit reporting.
    As a matter of fact, lenders are the ones that are standing behind the loan based on the accuracy of the information that we receive. Lenders are both users and furnishers of information provided through the CRAs as we make our credit decisions.
    Mr. HENSARLING. Given that my time is rapidly running out, I would like to ask each of you to just give the briefest of answer to this question. If we did not reauthorize the Fair Credit Reporting Act, would there be more credit offerings or fewer credit offerings to the American people? Would the credit be more expensive or less expensive? Just from left to right.
    Mr. COURSON. There clearly would be less credit offerings, particularly because you have to deal with a patchwork of 50 different sets of State laws. Clearly, we have a national mortgage market. The easy and fluid movement of capital across State lines exists because of the seamless ability of mortgage lenders to obtain credit information, make credit decisions and offer products. If Congress starts putting barriers up, and we have to deal with 50 different standards, obviously, some lenders will withdraw, some will not compete, there will be less markets available and, therefore, a higher cost to the consumer.
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    Mr. MOSKOWITZ. And I would follow up that comment by saying that the current national standard that we have allows lenders like Wells Fargo to make credit more available by innovating products that identify the needs of communities, low-to moderate-income communities, and that the failure to extend FCRA would limit those opportunities because of the impact on liquidity in the marketplace.
    Mr. PICKEL. Since we sell to both the companies that MBA represents and Wells Fargo and others like it, we feel like it would increase the cost quite substantially. As a further comment, we feel like it would increase the cost, especially in rural areas, where credit may not be extended as much as often where mortgage brokers really excel, and also when you have a city that is on a State line if the States enact different laws.
    Thank you.
    Mr. PLUNKETT. As we heard last week, we have a national mortgage and lending market created through joint State and Federal regulation. The Fair Credit Reporting Act is not expiring; some very limited provisions are expiring. If minimal baseline meaningful Federal standards were on the books, you would get a lot of uniformity. And States like Vermont could respond to localized problems and help their citizens after, then Congress would be able to respond.
    So I don't see, if that approach were taken, which is the approach we are recommending, I don't see a change in lending at all.
    Mr. FISHBEIN. I would agree with Travis on that. I think if we allow the States to be more active players in this process, that could very well improve the level and accuracy of reporting.
    Mr. GAMBILL. To try to directly answer your question, there would be more offers to apply for credit, because absent the prescreening preemption provisions of FCRA, lenders would still have to find new cardholders, but they couldn't target their mailings. So, they would have to broad scale mailings to people offering the opportunity for them to apply without having those mailings be pre-approved.
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    Consumers would then apply, and the turn down rates would go up, of course, because they will have gone to everybody, not only those people that already meet the eligibility standards. So, the ultimate result would be higher costs, probably same amount.
    Chairman BACHUS. Okay.
    Thank you, Mr. Hensarling.
    Mr. Sanders?
    Mr. SANDERS. Thank you, Mr. Chairman.
    Representatives of the industry have argued that they want to preempt States from passing strong consumer protection legislation. Just to set the record straight, because I hear a lot about concerns about consumer needs today, let's be clear that every major consumer organization in America, including the two that are represented at the panel right now, but U.S. PIRG, Consumer Federation of America, Consumers Union, National Consumers Law Center disagree with industry.
    And they believe, as I believe, and I think many, Americans believe, that what we want are high national standards to protect consumers, but we want to allow States to go even further so that they can address their own local needs and become laboratories for democracy.
    Second point that I want to make is that in a recent study, Consumers Federation of America examined over 500,000 credit bureau files. And they found, among other things, that 29 percent of the people whose reports that they examined had a range of 50 points or more between the highest and lowest scores. One in 25 of the people whose reports they examined had a range of 100 points or more between the highest and lowest scores.
    As everybody here understands, that makes all the difference in the world between whether somebody's going to get reasonable interest rates or very, very high interest rates.
    Now, given that reality, what I would like to ask is representatives of the industry, and perhaps everybody on the panel, but we will start with Mr. Gambill. Given that reality, do you think that these errors could be reduced by allowing consumers to receive free credit reports and free credit scores at least once a year?
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    In other words, wouldn't the consumer at least have a fighting chance to know why his or her interest rates are escalating, perhaps because of false information, if they, in fact, had a report in their hands?
    Why don't we start with Mr. Gambill?
    Chairman BACHUS. Without taking the gentleman's time, I mean, just extending your time, you said ''errors.'' You mean differences in scores?
    Mr. SANDERS. Well, I mean that when you have three separate companies coming up with three separate ratings, somebody is making a mistake. ''Errors'' is the word I would use.
    Mr. Gambill?
    Mr. GAMBILL. Yes, sir. I think I heard a question about free reports, Congressman, and also a question about accuracy.
    Mr. SANDERS. Free reports and free credit scores so consumers could know what is going on in their lives and why they may be paying higher interest rates than they should be paying.
    Mr. GAMBILL. Yes sir. Thank you.
    You know, when people ask me in my job, What keeps you up at night? one of the things that keeps me up at night is, how in the world will we do it? If Congress decides to pass a law that says that we need to give away credit reports to consumers with 200 million of them likely to ask, here in America, existing law provides free reports to people who have been declined for credit; who are unemployed; who are on welfare; who are or think they have been victims of fraud; or who are or are likely to be seeking employment.
    In our case at TransUnion, that represents about 8 percent of the households in America. But we know that that is a relatively consistent percentage of the volume of reports that we sell. And we know how to manage a business and manage our support functions to deal with those 8 million reports or so that we are going to provide on an annual basis.
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    I don't know how to build a business around the fact that there might be a front page article on USA Today tomorrow suggesting everybody that reads USA Today is now eligible for a free credit report, and they should call.
    Mr. SANDERS. Well, my time is limited, and I am gathering that you think that this is not a good idea?
    Mr. GAMBILL. Yes sir.
    Mr. SANDERS. Okay.
    Mr. Plunkett, what do you think? Do you think consumers should have a right to know how their interest rates are determined?
    Mr. PLUNKETT. We think it is the best and least expensive way. As Assistant Secretary of Treasury Abernathy said a few weeks ago, Imagine tens of millions of Americans having easy, free access to their credit reports. They can prevent these problems before they occur. It is the most cost effective way to do it.
    And in speaking about costs, we need to talk more about cost to consumers if we don't act, not just cost to business if we do act.
    Mr. SANDERS. Okay.
    Mr. Courson, do you want to give us a view on that?
    Mr. COURSON. Mr. Sanders, obviously mortgage lenders are also users of consumer information. I really feel that we are not the appropriate party, however, to respond. As to whether access to credit reports should be free.
    Mr. SANDERS. Mr. Moskowitz?
    Mr. MOSKOWITZ. As we said, we have a vested interest in the accuracy of the information. And an informed consumer who understands the ramifications of their credit and their performance and their life and how they manage their credit is a benefit to that consumer, and ultimately will increase the likelihood that they will become a homeowner.
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    Mr. SANDERS. So, do you support the right of consumers to get free——
    Mr. MOSKOWITZ. I can't comment on whether or not it should be free or not, but availability and knowledge of what is in your credit report is a good thing.
    Mr. SANDERS. Mr. Pickel?
    Mr. PICKEL. Well, like Mr. Moskowitz, I don't think I can comment on whether or not it should be free. But I do want the credit reports to be accurate. And I will tell you, sir, as a mortgage loan officer working with consumers, oftentimes it takes a lot of time to work with a consumer on a credit report. It is somewhat intimidating, it is hard to read, I am not sure if they just got it, it would help. But that is not for me; we want it to be accurate, and we want them to get home loans.
    Mr. SANDERS. Mr. Fishbein?
    Mr. FISHBEIN. I agree that the disclosure ought to be regular and be free for credit reports and scores. I think the industry should actually be promoting this as much as possible——
    Mr. SANDERS. Right.
    Mr. FISHBEIN.——in an effort to try to correct the complaints about inaccuracies and inconsistencies. The best way to do that is by providing people with more information.
    Mr. SANDERS. Who is going to know about their credit history better than the consumer himself?
    Mr. FISHBEIN. Correct.
    Mr. SANDERS. Okay.
    Thank you all very, very much.
    Thank you, Mr. Chairman.
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    Chairman BACHUS. Thank you.
    Mr. Fishbein?
    I will ask a question now.
    One of my staffers was recently burglarized. You know, they stole his TV and they stole a stereo system. And he went down to the D.C. police department and asked for an incident report on that, and he was charged $10 for it. Do you think he should have been given a free police report?
    Mr. FISHBEIN. Well, I don't know whether we want to use the standards of the D.C. police department for judging access to credit reports.
    Chairman BACHUS. I mean, do you think that was fair that they charged him for that report?
    Mr. FISHBEIN. We hear a lot of talk about new technologies and cheaper and faster. Technologies have a tremendous ability to provide people with information relatively inexpensively. And I think that ought to be pursued very carefully by the industry in an effort to get more——
    Chairman BACHUS. But you didn't answer my question. I mean, we are talking about free reports; do you think they should have given him a free report? I mean, he pays taxes, you know, he actually pays the city of D.C. Should he have been given free reports?
    Mr. FISHBEIN. Well, if the D.C. government had a way of providing this information inexpensively, then I think it could be done. Again, I think we don't want to use that measure. What we are talking about here is——
    Chairman BACHUS. But you understand what I am saying. They charge money for this report, and actually, he pays taxes to D.C. And actually, as taxpayers, we don't pay taxes to TransUnion.
    Mr. SANDERS. Mr. Chairman, I would agree with you. You are absolutely right. Perhaps he should have been given a free report, and maybe if they had Statehood and collect revenues, they would be able to do it. But——
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    Chairman BACHUS. Well, actually, I was charged $5 for somebody who ran into my car in Alabama. I was charged $5 for an accident report. I didn't demand any. I guess we could give everybody everything free, but who would pay for the cost of maintaining these systems. The cost would go up, wouldn't it, I mean, if they are giving away 20 million free reports?
    And I guess as a practical matter, I am just wondering if all of this was available and free and you could get it for free, why would anybody pay them for a report? How would they make any money? And wouldn't they just go out of business?
    Mr. PLUNKETT. Mr. Chairman?
    Chairman BACHUS. I mean, if you give away your product, how do you stay in business? I guess that might be my question. And I am asking the two consumer people. I mean, how do you get around that?
    Mr. PLUNKETT. Well, revenues for the credit reporting agencies has certainly increased in terms of their direct sales to consumers. But as the bulk of their revenue is generated through the users of the system, the furnishers and those who use the system for risk analysis and other purposes. However, we have seen a growth in premium services that are charging consumers for some items that we think are vital and should be free, like the credit score or——
    Chairman BACHUS. Well, now, you are——
    Mr. PLUNKETT.——credit reporting information.
    Chairman BACHUS. Aren't you charged for a lot of services that are vital today?
    Mr. PLUNKETT. I would agree with Representative Sanders that certain government documents are so important, such as a police report, such that they should endeavor to give you those documents as cheaply as possible. In this case, consumers are the subject of these documents. They have an absolute right to ensure that the information about them is accurate. And the best way to do that is to make access easy through free reports. Six States require this already.
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    Chairman BACHUS. Well, you know, I was just looking, I had a list of when you get a free credit report. Today, current law says that credit bureau has to give a free report to people on public assistance, people seeking employment, people denied credit, people denied insurance, people denied employment, people that think they may be the victim of identity theft. And everybody else pays $9. In other words, if you can afford it, you pay for it.
    And I am not talking about accuracy or anything else. I am talking about that it is at great expense that they maintain these systems. I mean, they are a for-profit corporation. And I don't think that there is anything wrong with that.
    Mr. SANDERS. Mr. Chairman, could I——
    Chairman BACHUS. And, you know, if we wanted to start a public agency to maintain records, or something, but I am just wondering even almost the constitutional implications of starting to tell people to give away their product. Does that bother you a little bit from a constitutional standpoint?
    Mr. PLUNKETT. I haven't heard, Mr. Chairman, of any constitutional issues being raised regarding the six States that require it now. Overall, it decreases cost in the system, and in many ways makes the system more effective for lenders. If the information is more accurate, they can predict risks more accurately. If consumers correct errors, the lenders have a better system, as well. Overall, I see it as a win-win.
    Chairman BACHUS. Okay. All right. Thanks.
    Mr. Gambill, do you want to respond?
    Mr. GAMBILL. Well, yes, sir. Thank you.
    At $9, providing reports to consumer that want it is not a moneymaker. Okay? If it was, you would see us advertising it a lot more heavily than we do now. Our companies aren't that big. The credit reporting companies in America in information services are well under $1 billion in sales. We spend, already, probably 10 percent-ish of our money dealing with this population of consumers, that we are happy to deal with and help, that are entitled to free credit reports.
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    So it represents a huge change if we are to go from disclosing 8 million reports a year to disclosing a 100 million, or 200 million.
    And as I said, I just don't know how we will do it. I am sure that we will, if we are somehow required to, but I don't know how we will plan for it. And I don't know how we will be able to continue to give the kind of service and automation investment in re-verification issues for consumers that are entitled to free disclosures if we have everybody that is responding to e-mails that may go out. There was a recent e-mail that had millions of people opt out unnecessarily. It cost us $2 million at TransUnion just to deal with that kind of thing. I don't know how to mange it.
    Chairman BACHUS. Let me say this, we have a vote on the floor. We are going to recess this hearing until the end of vote, and it probably will be at least 30 minutes.
    I do want to say this in closing, we have talked about the difference between the report at the credit bureaus, the difference in credit scores. And we have talked about that as an error. But, you know, conservative groups give us a score, you know, and liberal groups give us a score, and I may get a 95 from one conservative group and a 90 from another group. He may get a 2 from one conservative group. And a five from another. But that wouldn't be an error.
    I mean, that would be each group using a little different criteria. And I don't call these groups and say, You have made an error. This other group scored me at an 85, you scored me at a 10. There is a 75 percent discrepancy here. I mean, they are using different input. And, I mean, this is proprietary.
    This is the most popular thing that both sides of the people talking about free credit reports, I just think somebody has got to pay for it. If you ask these credit reporting agencies to pay for it, and it costs 50 percent of their revenues, that is a problem. I mean, that is almost confiscation of property.
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    We will recess this hearing at this time.
    Chairman BACHUS. The subcommittee will come to order.
    The gentleman from North Carolina, Mr. Watt, is recognized.
    Mr. WATT. Thank you, Mr. Chairman.
    It is a good way to slip back in and cut the line before everybody else gets back. So I am glad to be able to do that because I have to go to the floor and do something on this class action bill.
    This is the third set of hearings we have had on fair credit reporting. And I have been trying to get to as many of the panels as I can to see whether there was any kind of consensus starting to be built about some things that we might begin to coalesce around. And I wanted to try to see, maybe, whether some consensus is beginning to emerge on at least some principles that we could start to draft a bill around.
    Mr. Plunkett, your testimony may be interpreted by some to suggest that you are disenchanted with a Federal standard. But it seems to me that most of the things that you raised questions about would probably be worse off if we didn't have a Federal standard, at least in some areas of the country they would be worse off. In some areas of the country they might be better off.
    So I guess the question I want to ask you before I start to try to see whether there is any consensus is whether you are advocating for no Federal standards? I don't think that is what you are doing, but I want to clarify and be clear on what it is you are advocating for.
    Mr. PLUNKETT. We propose strong Federal baseline standards. We have also endorsed the notion that the existing eight preemptions should be allowed to expire and then where States deem it necessary, they could exceed, not conflict with, but exceed the strong Federal baseline standards.
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    Mr. WATT. So you are not advocating for expiration necessarily, maybe improvement of the existing standards with that being the base, rather than—and then States could go beyond that? Would that be a fair characterization of what you are——
    Mr. PLUNKETT. Absolutely, Congressman. And in that circumstance, it would be very rare and quite unlikely, especially initially, that States would choose.
    Mr. WATT. But, I mean, is it clear to you that the kinds of things that are covered in the eight standards that exist, whether they are the correct minimum Federal standards, but the kinds of things that are addressed in those eight standards should be the kinds of things that you would set a minimum Federal standard for?
    Mr. PLUNKETT. Absolutely.
    Mr. WATT. Okay.
    And now, Mr. Courson and Mr. Moskowitz, I take it, and Mr. Pickel, also, I guess, all of you agree that there needs to be Federal standards, I take it?
    Now I guess, ideally, if you had a Federal standard, and the standard was good enough nationwide, we wouldn't have to worry about States preempting or States passing something even more aggressive.
    How would you all react to the existing eight things being massaged and clarified in some way and maybe trying to get to some consensus on the things that I have heard really most people complain about? Those are errors and accuracy; credit scoring; dispute resolution; maybe free credit reports, if some consensus could emerge on that; discrimination or adverse impacts on minorities; and identity theft.
    Do you all think that those are the kinds of things that there ought to be some Federal standard for, I guess?
    And I am assuming you all were probably for the Federal standards whenever this thing was done 15 years ago. But now you have decided it is a good idea to have that Federal standard. Are those kinds of things the things that we also should have some minimum Federal standard on?
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    Mr. COURSON. Congressman, as you know, you are correct in saying the uniform national standard fo consumer credit information credit the free flow of capital across State lines. Mortgage lenders are very concerned that their ability to originate loans across State lines with consistent standards will be in jeopardy if the preemptions disappear. The preemptions were put in place in 1996, and as a result, mortgage lenders are doing increasing volumes of business, both purchase and refinance. The system is working. Mortgage lender flow enable credit to move back and forth, across State lines.
    My concern is that once Congress gives States the opportunity it will block the free flow of credit requirements among States. My fear is, as we have seen in other areas.
    Mr. WATT. I understand that, but would you accept the proposition that on the things that I have just described, the list of things, that there ought to be some Federal standard?
    Mr. COURSON. Well, I think you have to look at each of these areas on an individual basis. We are talking about the FCRA including the preemptions that target to some very specific areas. There are other issues that have been discussed today, and our concern is that we don't want to disadvantage the consumers by not maintaining the preemptions so that we can continue to have free flow of credit.
    There are other issues to discuss, but I think that we have to realize, too, that the FCRA basically deals with those specific seven items.
    Mr. WATT. You mean there is something on my list that should be discussed outside of fair credit reporting? I mean, it seems to me that all of those things are being impacted by fair credit reporting.
    Mr. COURSON. Some of them would affect our industry, and others on the panel, also.
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    Mr. WATT. I know I am over my time, but it would great if I could hear from Mr. Pickel and Mr. Moskowitz.
    Mr. MOSKOWITZ. I would echo what Mr. Courson said. The concept of uniform, understood Federal standards that ensure consistency in decision-making is obvious to us. And the ability of a myriad of State regulations overlying those standards would actually undermine the effectiveness of those standards and would ultimately impact liquidity and availability of credit, in general. So we would not be in support of that.
    Mr. PICKEL. NAMB has not taken a position on identity theft. But that said, we really want the credit reports to be as accurate as possible, and if it is a Federal standard on those issues that you brought up, it would seem like to me that would be better than individual standards by State on those issues, sir.
    Mr. WATT. Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you, Mr. Watt.
    The gentleman from Illinois, Mr. Gutierrez?
    Mr. GUTIERREZ. Thank you, Mr. Chairman.
    Mr. Gambill, what is the total profit of your corporation for the issuance of credit reports? That is, when private individuals ask you for a credit report, what is the extent of that? Is it 2 percent, 5 percent?
    Mr. GAMBILL. Well, we almost have no revenue from that particular source at this point, Congressman. And right now it is underwater. We were trying to build a business there. We acquired a company to help us do online disclosures in a more efficient way. But we are at below break-even at this point on the sale of reports directly to consumers. I would like to see that ultimately become something in the 15——
    Mr. GUTIERREZ. Why are you losing money on that particular part of your business?
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    Mr. GAMBILL. Well, I am just trying to build my sales. I am trying to build the consumer base that uses the products and services that we have available. And we have a level of cost right now that is greater than our sales. Our sales are about $30 million in that space, and so are our costs.
    Mr. GUTIERREZ. So where do you derive most of your profits, then?
    Mr. GAMBILL. From the sale of credit reports to lenders.
    Mr. GUTIERREZ. To lenders?
    Mr. GAMBILL. Yes, sir.
    Mr. GUTIERREZ. I was just curious about where you derived most of your profits from, because I know that everyone else, kind of, was speaking about issuance of credit reports and their availability to the public. And I guess it is the nature of your relationship with the public that I think is different. And that is that you gather information on me and everyone else in this room. You don't ask me if you can use that information, but yet you sell, you barter and you use that information to say, as you say, that makes the majority of your profit in your corporation.
    So I think it is different than when I go down and, I don't know, get a birth certificate from someone, and say I need a birth certificate because I had to enroll my daughter in school, and I need a birth certificate to get that, in that you are in the business of gathering my information, selling my information. And I think you have a responsibility with me and everyone else whose information you are using in order to generate profit for your corporation. So I think in that sense it is a very different relationship than other kinds of relationships that have been expressed here today.
    So I would just like to see how this committee could take that very special relationship that not only Mr. Gambill who is here and was kind enough to come before this committee, not expecting to get a very pleasant reception here today. He knew he was going to have to answer some hard questions today about how it is you do it.
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    But, yes, they should make a profit. And I think government has to protect the right of the people that send us here, the consumers, and what the relationship between Mr. Gambill's corporation or any of the other two major corporations that issue credit information that is garnered for the public to make sure that it is the best information available, and they can correct that information. Because, as Mr. Gambill has testified, he makes most of his profit, because he loses money on the other part, from one area, and that is selling the information.
    So when I walk into a department store and they say, you know, we will give you 20 percent off if you take this credit card, he makes some money. Because they call and say, Mr. Gutierrez would like this credit card, get his 20 percent off. And that is where he makes his money. And I want to make sure that I don't have any problems. I get my credit card, I get my 20 percent off.
    And that is really not a very, very serious issue, whether I am going to get 20 percent off on a tie or a shirt or something I might purchase that maybe I really don't need. But when it comes to my home.
    And I think, Mr. Chairman, that we have found, and I think this could be proven in one study after the other, that there are problems, problems that range from 10 to 20 to 25 percent of errors that exist on these credit reports that the credit agencies have taken from the public to make a profit from.
    So I think they have a responsibility with the public. I am sure they don't want to shirk that responsibility with the public. And I think we have a responsibility. We regulate how much I pay for my telephone bill, how much I pay for my gas. As a matter of fact, the price of my milk has a relationship with actions in the Congress of the United States, even when I buy my Snickers bar, since we subsidize peanuts, or sugar and everything else in this Congress.
    So the Congress has taken action in order to avail the public of the best possible avenue. And since we do have Freddie Mac and Fannie Mae, and we take on issues, and we have a huge institutional responsibility to guarantee that people, and we have mortgage insurance for those, I mean, we are in the business of helping people in homeownership. And it seems to me that if we just look at it, not so much vis-a-vis the corporations and what their profit—they should make a profit, I agree with that—what is our responsibility to, kind of, blend in all the other actions we are taking to guarantee homeownership, which we know is a key critical point of our economy, that we do that?
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    And lastly, Mr. Chairman, I hope that at some point, since it has now been it is a fact, that insurance and what I pay for insurance, which makes up part of my monthly payment when I go to a bank and they say, Oh, Mr. Gutierrez, you are going to pay PMI, and you are going to pay this for taxes and you are going pay this for insurance, since insurance is also now being driven by what is on a credit report, although I don't understand if I made a late payment what that has to do with lightning striking my house——
    ——but seriously, that does happen. It is a fact that we also look and expand as the insurance corporations now have gotten into using the credit bureau in terms of determining what a person will pay for insurance, because that could mean a lot of difference in someone's home ownership.
    Thank you, Mr. Chairman.
    And I want to thank all of the panelists for coming here today. They have been very, very informative.
    Chairman BACHUS. I appreciate it, Mr. Gutierrez,
    I would just, if you will yield for an additional minute, I would simply say that I don't disagree with what you are saying.
    I think that I would point out that the information the credit reporting agencies are getting is not actually by going through our records, it is people that are furnishing those records. We do business with someone and that party supplies to them our record of payment or our credit relationship with the people that they are in association with. And then they actually share it, not with the general public, but they share it with people who we go to, like you say, where we go to someone and ask for, How about, you know, a $10,000 loan or a $200,000 mortgage? Then they share it with that person. They are not putting it out in the public domain.
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    But I think that you are asking and thinking, I mean, we are all asking these questions, and that is the way we get a decision-making.
    The gentlemen from Ohio?
    Mr. TIBERI. Thank you, Mr. Chairman.
    Chairman BACHUS. Mr. Tiberi?
    Mr. TIBERI. Mr. Gambill, let me direct a question to you, at least, let me give you my bias up front. I believe we should extend, permanently, FCRA and I have introduced a bill with Representative Lucas. Not only to do that, but also to create a uniform standard with respect to privacy. And I have seen, as a realtor, before I came to Congress, the incredible result that the amendments to FCRA had with respect to consumer credit in Ohio, in central Ohio, where I was a realtor.
    Now, put on your prognosticator hat, if you can, and tell me what you think would happen if my State legislature, and I was a State legislator, in the chairman's State legislature. And the ranking members State legislature, in Vermont, created three different types of standards that could happen if we don't extend FCRA, the amendments to FCRA. What would happen in terms of your role as a person who is obviously very much in the middle of the whole credit scoring issue?
    Mr. GAMBILL. Congressman, we would have to invest in and develop significant new technologies to ensure that we complied with whatever the rules were relative to a consumer who was either seeking credit in Ohio, but had lived in Vermont, or was seeking credit in Vermont, but had lived in Ohio, or was seeking credit in Vermont or Ohio, but the credit grantor was in Delaware or South Dakota, to be sure that we understood how all of those rules interacted together.
    Mr. TIBERI. And that would cost how much?
    Mr. GAMBILL. Oh, a couple of million dollars per time.
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    Mr. TIBERI. And that would come from the Federal government, you assume?
    Mr. GAMBILL. No, sir, I am assuming that I would try to extract that from my customers——
    Mr. TIBERI. Okay. And your customers——
    Mr. GAMBILL.——who use the information, who then are going to try to extract that from their customers.
    Mr. TIBERI. So someone is ultimately going to pay for it?
    Mr. GAMBILL. Yes.
    Mr. TIBERI. And what may end happening is that that first-time homebuyer may actually end up not being able to qualify for a first home because of increased cost to their mortgage.
    Mr. GAMBILL. Right. If a lender's costs go up, they either have to lend to less risky people, or charge more to the people they lend to.
    Mr. TIBERI. Mr. Courson. Did I say that right?
    Mr. COURSON. Correct.
    Mr. TIBERI. Can you comment on that, as far as the lending industry?
    Mr. COURSON. Sure. Well, unfortunately, I have been around this business long enough; I have seen how it works without this. The issue of trying to get a borrower's credit history who has lived in other areas is a nightmare. It is slow, it is debilitating and very costly.
    And the gentleman's correct that, in fact, the cost of trying to put this together, somebody is going to ultimately pay, and it is going to be the consumer.
    Mr. TIBERI. Thank you.
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    Mr. Moskowitz? Your testimony was very good. Let me ask you to expand on it, if you would, from a Wells Fargo perspective. And that is, and you may not be familiar with my legislation with Mr. Lucas, but taking the FCRA point one step further, how would a national standard on privacy impact Wells Fargo, and then ultimately, the person who has a loan with Wells Fargo, if we go ahead and take that step and do it?
    Mr. MOSKOWITZ. Obviously, we believe that in a multi-jurisdictional company like ours, the ability to have a national standard, one which provides clarity to consumers, consistency and understanding of what the treatment of their information will be, is something that we think is advantageous.
    With respect to the issues raised about various jurisdictions creating their own separate myriad of local, county and State-level requirements, we operate in multiple States. We have customers who have accounts in one State and live in a different State. Conflicting requirements would severely impact the liquidity of the marketplaces that we do business in.
    So for example, mortgages that have to comply with various standards would be more difficult to securitize, would impact the interest rate scenarios that are available now, and would ultimately impact consumers' ability to get credit.
    Mr. TIBERI. This is the final thought, Mr. Chairman. So correct me if I am wrong: Whether it is with respect to credit, whether it is with respect to privacy, to a multi-jurisdictional company like Wells Fargo or any other company that may be in more than one State, ultimately it is going to cost you more money to deal with those different State requirements, and that will eventually be passed on to your customer. Is that correct?
    Mr. MOSKOWITZ. That is right. The current system is a model of efficiency in that it allows, in particular, an operating subsidiary of a national bank the ability to efficiently drive down costs, serve customers, have consistency and clarity in a way that we have never seen before.
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    Mr. TIBERI. Thank you.
    Chairman BACHUS. Thank you.
    The gentlelady from New York, Miss Maloney?
    Mrs. MALONEY. I thank the chairman very much for yielding.
    And I would just like to State that despite the controversies of this week, I think we have to remember that the U.S. mortgage market is the best in the world, and the fact that home ownership is at 68 percent in this country is truly an incredible success. A major contributor to the high percentage is the ease with which consumers can now get approval for mortgages, because of advances in technology, including automated underwriting that relies on the FCRA.
    Mortgage decisions are now made at speeds that would have astonished people trying to buy a home just a year or two ago. The ease with which people can be approved for a mortgage is one of the major factors that has kept the economic slowdown of the last 3 years from getting any worse.
    As we all know, in the current low interest rate environment, mortgages are being refinanced at record rates, and this would be impossible without automation and readily available credit histories. And, Alan Greenspan has testified before this committee several times that it has truly been the mortgage market, the refinancing, that has helped our economic situation in this country.
    The Washington Post detailed the impact that the ability to refinance so easily is having on the economy last Sunday in an article that I would request unanimous consent to place into the record. But to summarize——
    [The following information can be found on page 215 in the appendix.]
    Chairman BACHUS. Without objection.
    Mrs. MALONEY. Thank you, Mr. Chairman.
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    To summarize it, it said that since 2001, banks will have processed more than 27 million mortgage refinances by the end of the year. Out of those, homeowners will have converted more than $270 billion of home equity into cash, either to spend or convert high interest debt into very low interest loans, at least another $20 billion that is freed up in lower monthly mortgage payments. And in total since 2001, refinancing will have delivered about $300 billion directly to consumers who will have more money to spend and pump up the economy.
    That is in comparison to the $263 billion that the Bush tax cuts of 2001 and 2003 will have put back into the economy by year's end, which have less direct impact on spurring consumer spending, because they have gone not only to individuals, but also to businesses and in some cases, State and local governments.
    So I do believe that there is a significant argument for the importance of FCRA and the health of the macro-economy in our nation.
    At the same time, the reliance on automated underwriting magnifies mistakes in credit reports. This can be especially dramatic for individuals who are close to the line of being approved or denied a mortgage.
    So my first question is to Mr. Plunkett.
    The credit reporting agencies are in the business of selling reliable information to their clients. If their data is wrong, as your studies indicate, why does the lending industry continue to rely on them? And wouldn't incorrect data lead to losses for lenders and motivate them to find another means of monitoring and predicting whether people will default on loans?
    Mr. Plunkett?
    Mr. PLUNKETT. Well, the research shows, Congresswoman, that there are mistakes of omissions and mistakes of co-mission, omission being incomplete reporting. And the Controller of the Currency has commented on that issue. It is a good question. Why would furnishers shoot themselves in the foot, so to speak, by not submitting complete information?
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    And what the Controller said was that he thinks that some sub-prime lenders in particular are gaming the system by not including positive information about their borrowers, because they don't want their borrowers to be solicited by another lender, and they don't want to lose them, because their borrowers may find a better deal and go elsewhere. So that might explain a part of the incomplete problem.
    Regarding the mistakes of co-mission, which we detail in our report, I don't think there is intent there to do harm: I think there is sloppiness. I think we have sloppy procedures, and we have a dispute system for consumers that doesn't work very well. So once a mistake is made, corrections are not made easily.
    Mrs. MALONEY. Okay. Well, thank you.
    Mr. Gambill, how do you respond to the findings of the Consumer Federation that credit reports contain widespread errors?
    Mr. GAMBILL. Congresswoman, accuracy is how we make our living at TransUnion. We compete on the basis of the ability to have the freshest, most accurate, most complete file that is available to the lending community, so they can make the best, most useful decision about whether to lend money or develop a financial relationship, how much to charge for that and how to manage the overall relationship with the consumer.
    There are going to be differences in files because we compete. There are going to be lenders who provide information to TransUnion and don't provide information to Equifax and vice versa, or there are going to be lenders who provide information to Experian and not to TransUnion, either because I haven't persuaded them to do so, haven't found out about them or there is something else going on between us and that particular lender that keeps one of us from putting their information in the file.
    So certainly, our products do differ in the marketplace. If they weren't, if they were all alike, you wouldn't need but one of us.
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    Mrs. MALONEY. Could I briefly ask Mr. Courson and Mr. Pickel, in following up on this line of questioning, in your experience as a mortgage banker and broker, at your place in the loan process, do bankers ever question the information in credit reports? Do they question it, or do they just accept it?
    Mr. COURSON. The credit information that we receive is really one part of a total underwriting. We are looking at the entire set of circumstances. And frankly, most of that information that we garner initially, as you know, Congresswoman, is from the applicant. So when we get that information from the applicant, what are their debts, where do they have credit, where have they had credit, we are able, then, to compare that to the records that we receive from third parties.
    And if there is a discrepancy, it is really up to lenders, because we are the one making the loan, to reconcile those. And, in fact, we do resolve some of the disputes, if you will, or some of the questions as part of the process, because we need to know what is accurate before we put our credit and funds on the line.
    Mrs. MALONEY. But so do the bankers work off the decisions that come from the automated underwriting process? Or is that just one part of a whole that they look at?
    Mr. COURSON. Automated underwriting, which has as part of it, credit, and other factors are used for automated underwriting. It is utilized, in our case, at the outset of the process. If, in fact, the loan is approved, and gets an accept from and automated underwriting system, that loan is one that, in our office, and I think most offices, would go on to be made.
    Sometimes, however, they are not. They will have a decision that is called a refer. In that case, what we do now is we go outside the system, we have to look at hard data and do further investigation to determine why, and then make a judgment, our underwriters make a judgment whether to make that loan or not.
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    Mrs. MALONEY. Okay. Thank you.
    Chairman BACHUS. Thank you.
    Mr. Sanders?
    Mr. Sanders can take one minute.
    And then, Ms. Hooley, you can have your full five minutes, or three minutes, or whatever.
    Mr. SANDERS. Thank you very much, Mr. Chairman, and I will be brief and I appreciate you giving me the time.
    Just a few basic points, number one, the name of our country is the United States—S-T-A-T-E-S—of America. And it is based on some brilliant work done by the founding fathers of this country, who created, if I may quote some of the panelists, a patchwork.
    They said we should have a Federal government with certain rights, a State government with certain rights, local governments with certain rights.
    Some of us, and I get disturbed with my conservative friends who seem to change their tune every other day whether they like the big, bad Federal government usurping the powers of the folks back home, or whether they don't, depending the issue in front of us.
    I happen, as a former mayor of a city, to think that everything being equal, give the people backup, give the governance, give the State legislators the right to address the local problems if they can. That exists in a dozen different areas, and the word ''patchwork'' here is a misnomer. That is what America is about.
    If we want to do away with States, we can have one nation, call it ''America'' and resolve the 50 State legislatures.
    So I think States should have the right to protect consumers and not be preempted from doing that.
    The second point that I want to make, the issue came up a moment ago about costs. My goodness, if Vermont or California does something that is going to raise up the costs, how are we going to pay for that? And Mr. Gambill suggests, well, it is going to be passed on to the poor old consumer.
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    Let me make another suggestion. According to Standard & Poor's, the top four executives of MBNA, who are the largest credit card dispensers in America, make close to $300 million a year. The top guy, the chairman and CEO, Mr. Lerner, makes $195 million.
    Now, maybe they could pay for some of this consumer protection by lowering the outrageously high compensation packages that their top executive makes.
    Third point that I would ask Mr. Gambill, a question. We have heard, unofficially, so I have to tell you its unofficial—I haven't seen it in print—that it costs, when you supply information to a large consumer of yours, a bank for example, it costs you 37 cents, or they pay you 37 cents for the consumer report and score. Is that roughly accurate?
    Mr. GAMBILL. For a large issuer, Congressman?
    Mr. SANDERS. Yes.
    Mr. GAMBILL. Yes, sir.
    Mr. SANDERS. All right. So when we are talking about making that available for millions and millions of Americans with Citibank, or these other big ones are paying, are 37 cents, approximately. I think the American people deserve the respect that providing these reports would bring them, and I don't think 37 cents is too much cost to provide that information.
    Thank you.
    Chairman BACHUS. Do you think maybe those top three CEO's ought to get a free report?
    Mr. TIBERI. Mr. Chairman? Mr. Chairman? Mr. Chairman?
    I just want to make note that one of those CEO's, Mr. Chairman and ranking member, passed away last year, Mr. Lerner. Just for the record.
    Mr. SANDERS. I appreciate that.
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    Chairman BACHUS. Yes.
    Ms. Hooley?
    Mr. Meeks, Ms. Hooley, we yielded to Mr. Sanders, instead of Ms. Hooley, so if it is all right with both of you, Ms. Hooley, and then Mr. Meeks.
    Ms. HOOLEY. Thank you, Mr. Chair.
    There are so many questions, I don't know where to start. But I am going to start with Mr. Gambill.
    And one of the things you said was if there was a free credit report, 200 million would likely ask for a free credit report. My question is where do you get the number? And isn't it true that in the six States where it is currently free there have been no increase in the requests? Can you help me verify that or not verify that?
    Mr. GAMBILL. In the six States where it is currently free, there has been an increase in the requests.
    Ms. HOOLEY. How much of an increase? Do you know?
    Mr. GAMBILL. No, I could get my people back to your——
    Ms. HOOLEY. Okay.
    Mr. GAMBILL.——office with that data——
    Ms. HOOLEY. Okay. I would like that.
    Mr. GAMBILL.——and the very specific information because there are differences across each State as to what they need to do and why that works.
    It is something more than doubled. And in using my ''200 million,'' I just mentioned that there are 200 million adults, roughly, 195 million on whom we maintain files. And if there were big publicity spread across large pieces of news media, I don't know how many of them are going to request copies of their file. I don't know how to build an organization that could respond to the sudden influx of 1 million more, 10 million more or 7 million more that could result from a big e-mail campaign or a big piece of news publicity.
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    Ms. HOOLEY. Let me ask you a couple of questions. One of the things that I have been very interested in is identity theft and what that has cost all of us from the increase in cost for that.
    We are looking at a way to do a couple of things. One is to make sure that individuals take some responsibility of what is on their credit report. And the second issue is, I mean, and it is been brought up several times today, it is how do we make sure those reports are accurate? I mean, I would hate to have somebody not be able to buy a house because the report was inaccurate or not be able to get a job. And I understand that before somebody is going to look at their credit report for employment purposes, that they have to tell them they are going to do that.
    But if, you know, all of a sudden you see that report and there are some things on there that are not accurate that make your report look bad, I am guessing that an employer may say, Well, you know, it is going to take too long to clear this up, or provide some doubt.
    So how do we do a better job in making sure that we have accurate reports? And then, and I just got my own; now, there is something on there that is inaccurate. I don't think it probably affects my score. But I made a point of every year getting mine because I have been involved in this. But how do you make sure that they are more accurate? And again, how do you make sure that people have the ability to take some responsibility for themselves on this? Many people have no idea where to get their credit report or what their credit report is even all about.
    Mr. GAMBILL. Well, Congresswoman, the accuracy issue is an issue around which, as I said, we compete. There are probably 5 million credit reports a day, more or less, being purchased from either TransUnion or one of its two competitors in the United States today, and lending decisions are being made 5 million times a day based on those credit reports. Consumers that are adversely affected by the information in the file, so that they get either no loan or a loan at a higher rate than they had applied for, are notified where the report came from, they are notified what the principle factors were in the score that, if there was a score, that caused them not to get the loan and they are notified how to get their report for free from the supplier of that report.
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    We then, within the Fair Credit Reporting Act, upon receiving a request from them, are obligated to fulfill that request within a specified, regulated time frame, which we report to our regulating bodies on that, that we have accomplished.
    Upon receipt of re-verification request, we now have automated systems in place so that we can, in fact, deliver to our issuers and lenders information that suggests consumers have asked us to re-verify a piece of information that is in their file. They can respond to us in an automated manner thus, decelerating the process dramatically and however they respond, we report back to the consumer what the results of that re-investigation were.
    The consumer is also welcome to get a copy of a score. Scores are snapshots, they change constantly as the file changes and as information on the application that the consumer may have provided, changed.
    Ms. HOOLEY. How do they get a score?
    Mr. GAMBILL. When they get a disclosure, they are asked if they would like to have a score as well. They will get a score, as of that moment.
    Ms. HOOLEY. You think there are some ways, for example, when they go to refinance their home or their automobile, or whatever they are refinancing, they are going for a loan the first time, do you think it would be an appropriate thing at the time to, when you are giving the information to the lender, that you provide a free credit report to the person that is asking for the loan? Does that seem reasonable?
    Mr. GAMBILL. I don't know how doable it is. I would be glad to get a team to look at it under those circumstances and work with the committee on those kinds of ideas.
    Ms. HOOLEY. Okay. I would like any ideas that you may have that, again, trying to make sure that individuals have some responsibility, and then trying to deal with the accuracies, are huge issues for me.
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    I have a question for Mr. Moskowitz. You mentioned in your testimony that there needs to be better notices and that should be part of the debate. Do you want to elaborate a little bit on what you mean by that?
    Mr. MOSKOWITZ. Well, in our view, an informed consumer, a consumer who understands their credit file, the reasons for an adverse action is more likely, in the future to solve their credit problems and become a candidate to become a customer of ours.
    On the side of privacy, a desire for consistency in disclosure is nationwide and adds to that same debate, so we have long advocated national standards for clear and consistent, understandable disclosures on both of those topics.
    Ms. HOOLEY. What do we need to do to make those clear and understandable?
    Mr. MOSKOWITZ. I think Congress needs to review and analyze the effectiveness of the disclosures that exist now, make improvements as necessary so that the information that is provided to consumers is understandable to them and is usable by them. And so for an example, in the context of adverse action, the reasons actually fit the reality and that the consumers then are armed with the information necessary to address any issues that they may have.
    Mr. PLUNKETT. Congresswoman, we have a substantive suggestion on that if I——
    Ms. HOOLEY. Okay. I am ready.
    Mr. PLUNKETT. We have found in our research that we would agree here, that the reasons that are provided are very vague and don't go to the specific problem, the specific trade line, as it is called, that is creating the problem or trade line. When you get explanations as vague as, serious delinquency or derogatory public record or collection filed, that is too vague. We need more specific information on exactly which account is the problem, so that you can then act and see if there is an error.
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    Ms. HOOLEY. Do any of the credit reports come out—any of you can answer this—do any of the credit reports come out, have their score on it, what that score means? Do you know, any of you?
    Mr. MOSKOWITZ. Well, I can comment on our ability to comply with California requirements that obligates Wells Fargo to describe or conclude in an adverse action notice, the requirements for basic drivers of a FICO score, and we provide that information. We have no evidence that that has actually added any value to consumers in addition to the value that is provided into generic action reason codes, or that consumers actually understand what that means.
    We are strong advocates of informed consumers, educated consumers and consumers who can take information that they know of themselves to increase their likelihood to obtain credit.
    Mr. PLUNKETT. I would respond by saying that if the information we are getting is that, yes, most people don't understand their credit score yet. But the first step is to provide them with the score and with an explanation of the major factors that are used in determining the score. And that is how you start the education process.
    So the California law is something that we would like to see nationally. This is an absolutely essential piece of information that consumers need to have, that then provokes them to ask questions about not just what the factors are, but how they are weighted: What is more important, a collection or a delinquency? And they start asking questions about the underlying data. Is there a problem? Has one a creditor made a mistake in listing a delinquency that is not a delinquency? How do I correct it? This is all information the consumer should have.
    Mr. MOSKOWITZ. And I would add one last comment to that, which is that, no credit score and no FICO score has ever been, in our company, the reason for a loan being rejected. It is a reason for a loan to be approved. If those issues or factors arise in the context of evaluating a consumer, we delve more deeply, analyze the reasons, look at the other factors in the broader underwriting spectrum that need to be examined.
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    Ms. HOOLEY. So I would assume——
    Chairman BACHUS. We are actually over——
    Ms. HOOLEY. Okay.
    Chairman BACHUS. Had a little over 10 minutes.
    Ms. HOOLEY. Sorry.
    Chairman BACHUS. But I mean you have been a leader on this issue, so I want to give you some leeway.
    Ms. HOOLEY. Well, maybe some of these questions I can write them up and have them answer them afterwards. I am really looking for, how do we do this in a way that makes sense for the consumer? How do we make sense, so that again, we can try to prevent identity theft, and again get through the process and make sure that we have accurate reports so that people are not turned down for inaccurate reports? And how do we educate the public on the issue?
    Thank you, Mr. Chair, for your tolerance.
    Chairman BACHUS. Thank you. Thank you, Ms. Hooley.
    One thing that I would say that we talked about sometime, the vagueness of the response, like delinquency or serious delinquency. I think that part of that is civility. We don't want to say, you don't pay your bills or you don't pay on time or the other thing is liability. You know, if you get specific in a report, say that someone doesn't do this or that; I am just wondering if that may not be some of the reasons.
    Mr. Meeks?
    Mr. MEEKS. Thank you, Mr. Chairman.
    Let me ask, Mr. Gambill, first question is how much money does it cost anyway? How much money did it cost to send out a report?
    Mr. GAMBILL. We send out 8 million reports a year to consumers, and I said earlier, we have 4 million of them that ask us to re-verify issues or questions that they may have on those reports. We spend $60 million on that process.
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    Mr. MEEKS. And have you ever explored on, would it save money if you sent out some notification et cetera, electronically?
    Mr. GAMBILL. We send out as many as we can, electronically, Congressman. The issue becomes the rigor with which we need to authenticate somewhat electronically, but be sure that they are who they say they are. We don't want people to get credit reports that aren't theirs. So we have to be fairly rigorous in the questions that we will ask before we deliver the report electronically.
    We are now up to a point, where about 70 percent of the people that try to get their report electronically are successful at it. That will ultimately, I think, drive our price and cost down. But currently, that is——
    Mr. MEEKS. As you move along and you begin to perfect it, that should help some cost down because, like my colleague from Oregon, I am concerned about identity theft, and I agree with also, Congressman Ackerman, who talked about when a person receives a negative credit information, it was hitting them, if the individual knows that a report is going to hit them immediately, number one, they can correct it, so that we don't have the of debt that was indicated by Ms. Hooley, where someone goes in for mortgage closing, or they go in for a job and they have a negative credit report, and then all of the sudden, they are hit with something they had no idea was there. And it takes time.
    But if they had a notification at the time it had hit the report that they had a negative report, then that would help them and prevent identity theft, saving billions of dollars, I'm sure, because I know from the credit card company, that is one of the major problems that they talk about, they are loosing all kinds of money. Is there anything that you can conceive or come up with that would make it logistically possible to have something where there is a hit and a consumer knows about it?
    Mr. GAMBILL. Those kinds of things are certainly possible if they are electronic. And we offer those kind of services to consumers on a subscription basis that can go through the rigor of being authenticated electronically so that we can, via e-mail, give them some electronic notices as to when things change about their credit files.
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    To wholesale mail, that kind of information out, I believe, would increase our exposure to fraud as a country, not decrease it, because I am sending information to some address about some individual, about some trade line, that hit some credit file, I have no real idea whether I have sent that to the right individual or not.
    Mr. MEEKS. I just want to check, because someone told me that at a speech somewhere is it correct, that you said .6 percent of your revenue would gain from selling the report to the public. Is that correct?
    Mr. GAMBILL. Well, your math is better than mine; it is about $30 million. I mean I will calculate that percentage if you would like.
    Mr. MEEKS. Okay. Let me ask a quick question of Mr. Moskowitz.
    I asked that because Wells Fargo gets my money every month.
    Mr. MEEKS. Might as well make you——
    Mr. MOSKOWITZ. Mine too.
    Mr. MEEKS. There is this huge concern about the crafting of privacy notices and legislation on privacy by various States. We have heard the testimony here. What would be your recommendations for a uniform national privacy law that would simplify the issues for customers without completely opening—and now is the big question—Gramm-Leach-Bliley? Is there any recommendation, you think? It took us such a long time to get there, you don't want to open the whole thing up. But do you have any recommendations?
    Mr. MOSKOWITZ. Well, we agree that the possibility of inconsistent State privacy disclosures will confuse people, and we believe that regulators should be asked by Congress to improve existing annual notices and establish uniform disclosure requirements that make it clear how information is used by a company.
    We are strong supporters, though, as you know, of the ability of a company, like a bank, with its operating subs, to organize itself in the way that it wishes to and to be able to freely share information internally to accommodate the needs of customers without restriction, except that as provided by existing FCRA law.
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    Mr. PLUNKETT. Congressman, I might just add—Congressman, this is Travis Plunkett.
    I might just add that, the privacy notices are already regulated nationally through the Gramm-Leach-Bliley Act. So we are not going to see that change. We think the notices need to be improved, but that is a national regulation right now.
    The folks who want to extend the affiliate sharing preemption, one of the eight preemptions under the Fair Credit Reporting Act, your question was how do we do this without messing with Gramm-Leach-Bliley. And unfortunately, the proponents of extension of the affiliate sharing preemption have brought Gramm-Leach-Bliley into play already because they have claimed that the prohibition on States passing affiliate sharing restrictions for credit reporting purposes extends beyond that and actually affects the Gramm-Leach-Bliley Act and doesn't allow the explicit provision in Gramm-Leach-Bliley that allows States to go further with privacy loss. It doesn't allow those States to deal with affiliate sharing.
    So we already have a linkage that folks who want to extend this affiliate sharing preemption have made the Gramm-Leach-Bliley, so it is hard to deal with the affiliate-sharing problem, and we think it is a problem, without bringing Gramm-Leach-Bliley into play.
    Mr. MOSKOWITZ. And we don't think there is an affiliate-sharing problem at all. We believe that the ability to share information for appropriate purposes within a company that has chosen to organize itself in separately organized corporations, which could be organized that way for both expertise reasons, for regulatory purposes and liability purposes, is a primary driver of the efficiency of the market that has lowered interest rates for consumers.
    It has allowed companies like Wells Fargo to develop innovative products that have allowed us to become the primary lender, the number one lender to low-to moderate-income groups and in low-to moderate-income communities, and to ethnic minorities. And those efficiencies are undermined by our inability to share information internally in a way that addresses those communities' needs.
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    Mr. PLUNKETT. And we have said we would simply like consumers to have the option to stop sharing of that information. And if they see an economic advantage, they will certainly allow it.
    Mr. MOSKOWITZ. And consumers have the ability to opt out——
    Mr. PLUNKETT. Not on affiliate sharing.
    Mr. MOSKOWITZ. Yes, they do.
    Mr. MEEKS. This is my last question, gentlemen, on affiliate sharing. Should the same be true of major corporations that provide completely different services, for example, commercial banking and investing banking?
    Mr. MOSKOWITZ. The ability of a company that has unrelated business?
    Mr. MEEKS. Yes.
    Mr. MOSKOWITZ. Well, we believe that the most efficient way for a company with multiple businesses is to organize itself as the way it chooses to do so and to provide services to consumers in a way that is consistent with that organization, and not be forced to reorganize in a way that could accommodate that sharing and that is inconsistent with its own internal business model.
    Mr. PLUNKETT. See, I don't think many consumers know about the affiliates of their bank, for instance. Many banks now have lots of affiliates. So the bank is also has an affiliate in the insurance business or the security business, I think, polls show again and again, consumers want the choice. They will consider the cost and the benefits, but they want choice to stop the sharing of that information between the bank affiliate, the insurance affiliate and the security affiliate.
    Mr. MOSKOWITZ. And that choice could impact the ability of a company to control fraud, to manage its servicing portfolio and could be able to deliver its products to Wall Street in a way that reduces inefficiencies and increases cost.
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    Mr. MEEKS. Thank you. I yield back.
    Chairman BACHUS. Thank you. I think that concludes our testimony of the first panel. I appreciate your testimony and commend you on your answers, and it has been very valuable to us as we consider this important matter.
    First panel is discharged, and we will go right to our second panel at this time.
    We want to welcome our second panel, from my left to right.
    First panelist, Mike Vadala, president and CEO of Summit Federal Credit Union, located in Rochester, New York. Summit has $275 million in assets, 42,000 members from over 500 companies. Probably more importantly, he is the secretary of NAFCU. More importantly, I see you are active on the alumni board and the management advisory council of Syracuse University. I commend you on your NCAA basketball win, except for your victory over Auburn, which you got very lucky there.
    Chairman BACHUS. But other than that, you probably deserved to win every game. And very active in various charities in the Rochester area. I welcome you back before the committee. I think you have testified, actually, in 1997 on credit cards and other different issues.
    Our next panelist is Rusty Cloutier. He serves as a director of the New Orleans branch of the Federal Reserve Bank in Atlanta. President, CEO of MidSouth Bank, Lafayette, Louisiana, a bank of $365 million asset bank. Earned a Bachelor's in Science from Nichols State. Is that where Billy Tauzin went?
    All right, so we know that is a very good institution.
    He also served as a member of Fannie Mae's National Advisory Committee. Again, director of Our Lady of Lords Regional Medical Center, Chamber of Commerce and chairman of the Community Bank, Bankers of Louisiana. I welcome you to this hearing.
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    George Loban, co-chairman of FSF Financial Corporation and First Federal FSB, $560 million stock institution in Hutchinson, Minnesota.
    Where is Hutchinson, Minnesota?
    Mr. LOBAN. Hutchinson is just west of the Twin Cities, about 40 miles——
    Chairman BACHUS. I see.
    Mr. CLOUTIER.——40 or 50 miles, Minneapolis, St. Paul.
    Chairman BACHUS. Then, a member of the board of directors of America Community Banks since 1998, serves on various committees for them. A chairman of the board of the Minnesota League of Savings and Community Banks, and served two terms as chairman and two terms as the member of the board of the Federal Home Loan Bank in Des Moines. So, welcome you and quite an experienced background.
    Robert Manning is a Caroline Gannett Professor of Humanities, Rochester Institution of Technology, Rochester, New York. That is the same town that our first panelist is from, so we have two from Rochester. Professor Manning recently wrote Credit Card Nation, which has gotten a lot of publicity. He has testified extensively before the Senate and the House on lending issues, credit issues, and sub-prime and predatory lending issues.
    We welcome you back. I think this committee's well aware of your experience.
    Dr. Manning is a past Fulbright lecturer to Mexico, Ph.D. from John Hopkins, Northern Illinois University, M.A. and B.A. from Duke University.
    Our next panelist is Evan Hendricks, editor and publisher of Privacy Times, a Washington-based newsletter specializing in privacy acts and what else?
    Mr. HENDRICKS. Fair Credit Reporting Act, medical records, employment records.
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    Chairman BACHUS. Privacy issues and various policy issues. He served as consultant on privacy and business issues for major corporations, including Ericsson, a Swedish-based wireless company. And since August 1998, served on the Social Security Administration's panel of experts. He was a paid consultant for CNN, Multi-State Tax Commission and various other commissions. He is quoted regularly in major and small newspapers including The Washington Post and The New York Times and ABC Nightline and is a familiar face on the nightly news. So we welcome you.
    At this time, to introduce the general counsel for global consumer group for Citigroup, I am going to yield to the gentlelady from New York.
    Mrs. MALONEY. I thank you for giving me the honor of welcoming one of my constituents from the great State of New York and the great city of New York. And I would like to introduce Mr. Martin Wong, and he is from Citigroup, one of our important financial institutions and he is general counsel of Citigroup's Global Consumer Group, and he has worked in various positions at City since 1987. He earned his B.A. in public administration from Loyola and J.D. from the University of Baltimore.
    And we welcome him and thank him for taking the time to be with us. Thank you.
    Chairman BACHUS. And our last panelist, Mr. Scott Hildebrand. He is vice-president, Direct Marketing Services for Capital One. He has had various responsibilities there, but direct marketing probably describes most of them. Prior to joining Capital One, Scott was vice-president at Epsilon, a leading database, marketing firm, formerly owned by American Express.
    While there, he advanced customer relationship marketing, had a number of Fortune 500 companies improving customer retention, cross-sell and profitability. In addition, he served as a consultant for 80 little PepsiCo's Frito Lay and Kentucky Fried Chicken business units and the Marriott Corporation. He attended Georgetown University, B.A. degree.
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    And then he received his MBA, in marketing and finance, from the Kellogg School of Management at Northwestern University.
    So all-in-all, a very competent panel. We look forward to your testimony.
    And at this time, we will just go right to testimony.
    Mr. SANDERS. I will be just very brief.
    Chairman BACHUS. Well, actually, Mr. Sanders.
    Mr. SANDERS. Thank you very much, Mr. Chairman.
    This is a very important panel dealing with a very, very important issue. The reality is that right now, in my view, among other problems with the industry, a major scam is being perpetrated on large numbers of Americans. And that scam, as I mentioned earlier, Mr. Chairman, and one of the underlying points that we have to reiterate, Mr. Chairman, is that not every American is all that sophisticated in all aspects of financial transactions. Bottom line is that companies promise people, or at least indicate that they are promising people, credit at a certain interest rate. And if I say to you, Mr. Bachus, I am going to charge you six percent for a year, your expectation is that if you pay your bills to me on time, that is going to be six percent.
    That is usually the way we do business in America. And yet, increasingly, what we are finding is that those interest rates are zooming up despite the fact that the consumer is paying his or her bill to the credit card company on time.
    But I can understand if I am late in paying the bill, you say, Hey Mr. Sanders, there is a penalty, they will raise your interest rates. If I pay the bill to you every month, on time, I have a right to believe that my interests are going to remain the same. And with the growth of sophisticated information acquisition, what credit card companies are learning, is that maybe 3 years ago, I was late in paying an auto loan. Or even more egregious, there was an illness in my home. I pay my bills on time. There was an illness and I have to borrow money to provide to pay the medical bills. And because I borrow more money, because I borrow more money, not because I am late in any of my payments, credit card companies say, well he is now a greater credit risk. He is more in debt. But maybe I pay my bills on time.
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    And arbitrarily and often, in fact, without the knowledge of the consumer, interest rates go way, way up: 25 percent, 30 percent, usurious rates, which are leading to bankruptcy and terrible situations for large numbers of the American people.
    Mr. Chairman, I hope that we can work together on addressing this rip-off. Large multi-billion dollar companies should not be involved in a scam like that. They should be embarrassed. And I hope that we can discuss this today and vote in a bipartisan way, tripartisan way, in addressing this issue.
    Mr. Chairman, thank you very much.
    Chairman BACHUS. I thank the gentleman.
    Mike, Mr. Vadala, you will lead off.
    Mr. VADALA. Thank you, Mr. Chairman.
    Ranking member, Sanders, members of the committee.
    I think I am glad we lost to Auburn in football this year, and I wanted to remind you of that so that we——
    Chairman BACHUS. I had forgot about that.
    Mr. VADALA. My name is Mike Vadala, and I am here today on behalf of the National Association of Federal Credit Unions to express our views on the Fair Credit Reporting Act. I am president and CEO of the Summit Federal Credit Union, headquartered in Rochester, New York. The Summit currently serves over 42,000 members in all 50 States. Due to the complexity of the different laws that exist on a State by State basis, the Summit does not offer real eState loans outside the State of New York, but we do offer credit for all other consumer purposes to our members. If the FCRA preemptions are not extended, it is likely that the Summit will not make any loans outside of New York.
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    The foundation of America's National Consumer Credit system is FCRA, enacted by Congress in 1970 to streamline credit reporting and to provide consumers with protection from inaccurate and inappropriate disclosure of the personal information by consumer reporting agencies. In 1996, the FCRA was amended and now contains seven specific Federal preemptions to ensure that the National Consumer Credit System remains viable and can continue to deliver affordable and accessible credit and financial services to consumers.
    NAFCU agrees with Federal Reserve Board Chairman Alan Greenspan that Congress should permanently reauthorize the preemption provisions of the FCRA. Doing this, will give credit unions the ability to continue to offer their members credit in a timely manner and at a fair market price. It would also codify the ability of credit unions to share certain member information with our affiliates, thus making credit union members aware of the opportunity to obtain additional financial services.
    Failure to reauthorize these preemptions could drastically change the way a credit union conducts business. A credit union such as ours could be forced to incur additional costs necessary to comply with several new and changing State laws.
    As you may know, credit unions, on average, are small financial institutions and may not have the resources necessary to comply with differing laws across the States. They would, therefore, be forced to forgo lending in many States in which they have members. This could result in the potential of millions of consumers loosing a viable lending option and may make smaller credit unions even less competitive.
    Credit scoring and credit reports are two important factors in evaluating the creditworthiness of borrowers. Combined with our loan office experience in judgment, credit scores and credit reports have contributed to a very successful lending program at the Summit. We acknowledge that at times there are errors in credit reports, but we are pleased with the improvement that we have seen in recent years as a result of National Standards and improved technology.
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    We have also found that many times, well-trained credit officers can find these errors. Errors aside, credit reports are very valuable in verifying that a member has listed all of his or her debts on a loan application. These reports also provide details as to the payment history on those debts. With more members opening credit lines in multiple States, it would be unquestionable or unreasonable for the requirements reporting to vary from State to State.
    A consistent method of credit reporting allows us to get the information that is necessary to extend credit responsibly to our members.
    Credit scores are also an important part in the extension of credit. At the Summit, we have found that the credit scoring modules are statistically valid, and that the accuracy of credit reporting and credit scores are much improved over what they were prior to 1996. We use credit scores to offer automatic approval on loans and to determine loan rates on several loan products. We find those with lowest credit scores have the highest delinquency rates.
    There are many factors that contribute to credit scores including, repayment history, amount of credit owed, credit history, new debt and credit mix.
    In general, people know that when they don't manage their debts properly, it will show up on their credit report and hurt their credit rating. But even so, more needs to be done to educate consumers about credit. As an institution owned by our members, the Summit's vision is to educate our members so that they understand their credit scores. Today, we are doing so on a case-by-case basis, if members ask for explanations.
    Mr. Chairman, in conclusion, growth in the credit union community is strong and the safely and soundness of credit union is second to none. We are providing credit to more Americans in more locations than ever before. We urge the subcommittee to reauthorize the preemptions included in the FCRA so that we can continue our unique role in serving America's consumers, while strengthening our economy.
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    NAFCU thanks the subcommittee for the opportunity to appear before you today and comments the House Financial Services Committee for examining this important issue. Thank you.
    [The prepared statement of Michael Vadala can be found on page 197 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Vadala.
    And at this time we will hear from Mr. Cloutier.
    Mr. CLOUTIER. Mr. Chairman, I had the honor, a week ago, to be with the Community Bankers of Alabama, and they talked a lot more about football between Auburn and Alabama than we did about banking, but it is my pleasure to be here today and I appreciate the invitation from you and ranking member, Sanders and the members of the committee.
    My name is Rusty Cloutier. I am chairman of the Independent Community Bankers of America and president of MidSouth Bank National Association, a $400 million community bank located in Lafayette, Louisiana. I am glad to be here today on behalf of the Independent Community Bankers of America, representing over 46,000 small community banks across America that want their voice heard.
    ICBA supports the FCRA uniform national standard that will expire on January 1, 2004, and we strongly urge the committee to make these provisions permanent. Within the text of FCRA, Federal preemption is essential to ensuring constant uniform standards. FCRA is an important tool in promoting economic growth and uniform credit reporting standard also insure the availability of credit, especially to the low and moderate-income borrowers that are so important in my State of Louisiana.
    If Congress fails to renew the uniform standards, the current system will be undercut by the enactment of a myriad of State laws with potential conflict standards. This will result in increasing costs to the industry and a significant impact on a bank's ability to evaluate the creditworthiness of its customers.
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    We live in a highly mobile society. Customers often move frequently and live in several different cities and States. Some community banks serve customers in neighborhood States and allow customers to apply for credit over the Internet.
    Certainly, a bank does not have to consider a customer's State or States of residence when reviewing his or her credit report in order to understand what, where and when and how the information was reported. The information reported in my credit report is based on the same Federal standard as the information in yours. Without uniform national standards, how and when information, such as loan delinquency, payment history is reported, would detrimental, would be determined by each State.
    A borrower from Louisiana would then have a credit report with different standards and containing different information from that of a borrower from the State of Alabama or the State of Mississippi. And if that borrower had lived in each of the States, his credit report would contain the information reported, based on the standards of each of these States. This would be overwhelming for both the bank and the consumer to understand. Community Banks want clear and consistent policies and standards.
    The history in the success of community banking in this country is predicated on the extension of credit. Our current system is fair and effective. Consumers have grown accustomed to the availability of quick low-cost credit. Stricter consumer protections on a State-by-State basis will ultimately be detrimental to the consumer who may experience delays in credit decisions and banks may lose the opportunity to extend credit. Reauthorization of FCRA uniform provisions will benefit both consumers and community banks.
    Let me turn for a moment to a very important issue of identity theft. It is the nation's fastest growing crime and resulted in at least $1 billion dollars in losses to banks last year, including mine. FCRA plays a major role in this fight. Therefore, it is essential that the current national system of credit reporting is maintained. ICBA strongly supports measures to thwart identity theft.
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    We would also support measures to allow customers to obtain a copy of their credit report free of charge annually. The benefit to community banking and having a customer who has been able review his credit report outweighs the cost of lost opportunities to extend credit to that customer due to inadequate or incorrect credit file information that may take several months to correct. Our customers should not have to be faced with denial of credit before they are able to receive a free credit report.
    Information sharing is also an important topic in this debate. ICBA strongly urges the committee to maintain an appropriate balance between the critical protection of a consumer, financing privacy and the community banks' legitimate information sharing needs, that insures our customers have the essential products and services they need. The use of outsourcing in joint agreement with trusted long-term partners is vital to our ability to compete.
    The joint agreement business model that we use is the same as the affiliate model for large banks and should be treated the same. Treating these business models differently would be unfairly discriminated against community banks in small communities that they serve, because of their regular size and corporate structure.
    Please remember that it was not the community banks who started the discussion on privacy by selling their information.
    A consumer opt-in requirement would be detrimental to the community banks and to their customers. Thus far, only 5 percent have opted out of having the information shared with affiliate third-party, so it is likely that opt-in rates would be similarly as low.
    In conclusion, FCRA and the nation's credit reporting system, helps ensure that customers can easily access complete competitively priced products. The reliability of credit information, in maintaining, by the credit bureaus is critical to this goal.
    ICBA strongly urges the committee to support the permanent reauthorization of the uniform national standards that will sunset on January 1, 2004.
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    Thank you for the opportunity to testify today and I will be glad to answer any questions at the appropriate time.
    [The prepared statement of C.R. Cloutier can be found on page 73 in the appendix.]
    Chairman BACHUS. I appreciate that, Mr. Cloutier.
    And Mr. Loban, if you will testify?
    Mr. LOBAN. Thank you, Chairman Bachus, Ranking Member Sanders and members of the committee.
    My name is George Loban. I am the co-chairman and president of FSF Financial Corporation and First Federal Bank. We are a $560-million stock institution based in Hutchinson, Minnesota. I am testifying today on behalf of America's Community Bankers, where I serve on the board of directors and as chairman of the Privacy Issues Subcommittee.
    I appreciate this opportunity to testify on the role of the Fair Credit Reporting Act and the credit granting process. The FCRA aids uniform national standards allow community banks and others to make prudent credit decisions quickly and inexpensively wherever a customer may reside. They insure that credit reporting information is consistent from State to State, facilitating a national market for credit and risk management. This, however, is scheduled to change if Congress does not, by the end of this year, reauthorize the FCRA's uniform national standards.
    Failing to act could result in a patchwork of conflicting State laws and substantially erode the quality and integrity of our credit reporting system.
    More importantly, a lapse in reauthorization could drastically impact a wide variety of players in our economy.
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    For example, my institution serves consumer mortgage customers in over 40 States. Yet, we are by no means, a large business. If we were forced to comply with 40 different State laws, we would be forced to either to hire a team of compliance specialists, or else we would have to turn away out of State customers. The FCRA's uniform national standards allow First Federal to service mortgage customers effectively nationwide, and at a lower cost.
    Our story is just one real life example of why Congress must reauthorize this year's FCRA's uniform standards on a permanent basis.
    We also urge that laws regulating information sharing practices not discriminate against financial institutions based on size or corporate structure. Community banks often work with third parties affiliated and nonaffiliated to offer our customers new financial products. Where no affiliation exists, there is a contract dictating how and what information may be shared.
    The disclosure and opt-out requirements of the Gramm-Leach-Bliley Act treat certain disclosures of information between financial institutions and a third-party identically. Regardless of whether the two institutions are affiliated, ACB urges that any prospective laws follow suit.
    Our system of credit, however, is not without it glitches. The rising number of identity theft cases is creating enormous hardships on victims and community banks. This disturbing trend indicates that something more needs to be done to safeguard information from perspective identity thieves.
    ACB urges Congress to pass legislation to increase sentences for identity thief crimes and make it easier for prosecutors to prove identity theft. We also look forward to working with the subcommittee on additional legislation to help combat identity theft.
    Finally, improvements should be made to the credit reporting system itself to help protect consumers. During debate on the regulatory release bill, representative Gary Ackerman sponsored an amendment requiring Federally insured depository institutions to notify a customer every time it furnishes negative information to a consumer reporting agency.
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    This amendment would result in billions of new notices sent to consumers monthly. This would greatly increase cost and paperwork burden of financial institutions and their customers.
    ACB and others opposed a similar amendment last year. But while we disagree with Representative Ackerman's proposed solution, we recognize that he may have identified a problem.
    The continued integrity of the Federal Credit Reporting System demands that credit reports be as accurate as possible. ACB supports empowering consumers by providing them access to a free annual credit report, and enhancing their ability to correct errors on their credit reports, especially those resulting from incidence of identity theft. While we recognize that these tools do not come without some cost to the industry, we believe these costs can be balance against the benefits provided to consumers.
    Again, thank you for this opportunity to testify. I look forward to any questions you may have.
    [The prepared statement of George B. Loban can be found on page 132 in the appendix.]
    Chairman BACHUS. I appreciate that, Mr. Loban.
    Our next panelist, Dr. Robert Manning—Dr. Manning?
    Mr. MANNING. Thank you, Chairman Bachus for providing the opportunity to share my views with the committee on this increasingly important topic of credit card industry policies and the protection of consumer rights under the Fair Credit Reporting Act.
    Also like to commend Ranking Member Bernie Sanders for his efforts in protecting consumers from deceptive marketing and contract disclosure practices of the credit card industry.
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    These twin issues of rising consumer debt and shockingly low levels of financial literacy, which includes, a lack of understanding of consumer rights which have grave implications that the continued well-being of the nation, especially as Americans cope with these increasingly perilous economic times.
    Today, I would like to direct my focus on the impact of Federal deregulation on banking as it affects consumer lending, specifically, revolving credit. How the enormous profitability of the industry has created institutional pressures to increase its client base, consumer debt levels and especially escalating penalty fees. And then, conclude by examining specific abuses that are facilitated by the FCRA and its implications of statutory reform.
    I think what is critical to our understanding is that we have gone from a system of community banks to one of national and global conglomerates where the demand for crossmarketing with affiliates through such merges as Travelers and Citibanks have lead to increasing strain on consumer privacy and the availability of consumer financial information.
    In this period of the last 20 years, the best client has been transformed from installment lending contracts with people who had low debt levels, to today, the best client is someone who will never repay their loan, specifically through unsecured or revolving credit.
    Credit cards have played a pivotal role in the transforming of the structure of the financial services conglomerates, and I show you in chart one, it gives a lot of the empirical background for my presentation, but the key is, since 1977, we have gone from 50 banks controlling about half of the market to today, 10 banks control 80 percent of the credit card market.
    And this, I believe, is critical as we look at the rise of the nationally chartered banks that through their process of consolidation it has severely reduced the role that local and State level legislation plays, and that this lack of regulatory control over issues such as, State usury laws, fee caps, mandatory arbitration, meaningful notice of disclosure has really shifted the emphasis now about Federal preemption, and its role now moves increasing to Congress, especially to this committee.
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    We all know the enormous profitability of the credit card industry today, even during this recession, even though we have heard many complaints that the industry is suffering. In fact, and over the last 10 years, the credit card industry's profitability has more than doubled, and the banking industry as a whole. And recently, we can look at it terms of the sale of credit card debt, from 18.4 percent premium paid last year, actually risen to 19 percent today.
    In terms of FCRA, I think what is critical here is that the institutional pressure to recruit new people, and particularly people with the least knowledge of their rights under FCRA, and especially in terms of the terms of their contracts, has lead to a dramatic increase of fee revenue, from $1.7 billion in 1996 to $7.3 billion in 2002.
    Who are some of these people that we see now that with some of the amendments of the 1996 FCRA, that are being increasingly solicited? What we have seen is, a tremendous increase in the working-poor, households with less than $10,000; senior citizens and college students. And I refer to the charts that show the dramatic increase in working-poor households where average debt of a recent survey of the University of Michigan's Consumer Finance Survey shows that the biggest increase in credit card debt is among those households with less than $10,000, from less than $600 in 1989 to over $24,000 in 1998.
    And in my comments, I included a case to show the abusive contracts that have been offered in this process, where a $400.00 credit limit includes $371.00 in fees. We looked at seniors who, for the first time, are now being aggressively solicited, 65-year-olds, we are seeing that their average credit card debt is more than doubled in this period of time.
    And I refer to my most recent survey of college students, which shows now, the shifting of the marketing permitted now. With under the 1996 amendment, that we seen a dramatic shift, not from upper classmen, but to freshmen and even high school students, where the supposed ability of students to pay for their loans neglects the debt component where you will see from the data that more increasingly, three-fourths of college students with student loans are using them to their credit cards. Sixty percent of freshmen are actually using, have maxed out on their credit cards and using one credit card to pay for another.
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    So I want to conclude with three specific cases that I think are particularly germane to today's discussion. One is the issue of prescreening that enables banks to look at a client's accounts with other banks. When is a fixed loan really a fixed loan over the term of the contract? And I refer to cases where people specifically have had their interest rates raised from 0 percent to 25 percent because of outstanding debt balances on other accounts.
    I would like to emphasize also, with my participation in some FCRA litigation, that there needs to be an extension of the period of time for filing litigation. Many consumers clearly do believe that banks and the credit reporting agencies will respond to their requests, and for those who fall through the cracks, we really need to accommodate their special circumstances.
    And I want to conclude with a final case that I feel is particularly important to those both that link both issues of credit cards and housing. And that refers to the case of Household Finance versus ACORN, where the screening process was specifically to seek two criterion, people with high credit card debts and people who own homes. And the point of this marketing program was to upsell, that is to consolidate credit card debt into the home mortgages, and through this process of consolidation, these higher interest rates meant that there could not be a possible home refinance nor could the home be sold, because it had negative equity.
    So for these and other reasons, I hope that the committee will carefully examine the impact of FCRA reauthorization, not only for process of fairly granting, but also fairly administering consumer credit accounts.
    Thank you.
    [The prepared statement of Robert Manning can be found on page 138 in the appendix.]
    Chairman BACHUS. Thank you, Dr. Manning.
    At this time, I have to go out and make a statement. So I am going to switch chairs with the gentleman from Ohio, Mr. Tiberi who will chair the hearing.
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    And Mr. Hendricks, we will start with your testimony.
    Mr. HENDRICKS. Thank you, Mr. Chairman and Congressman Tiberi.
    My name is Evan Hendricks, editor and publisher of Privacy Times.
    I come today prepared to discuss solutions to some of the problems.
    And yes, we have what may be the best credit reporting system in the world, but the great thing about this country is we never stop trying to improve it. I think, more importantly, there is substantial evidence of potentially deep flaws in the system that are harming consumers, and also new evidence that marketing of credit services might be facilitating identity theft. I intend to explore those.
    With the advent of the national credit reporting system, we realized we needed a Fair Credit Reporting Act. We enacted one in 1970.
    In 1990, problems with inaccuracies in credit reports was the leading cause of complaints to the Federal Trade Commission, so it took 6 years to upgrade the law. It should be no surprise right now that we need to continue to advance consumer protection in this area, and we need a strong national floor, and that the States play a very important role in consumer protection.
    The main purpose of the 1996 amendments was to make the correction of mistakes in the credit report, a routine process and to articulate a higher standard of care, to make it so you don't have file a lawsuit to get your credit report corrected.
    Unfortunately, that goal has not yet been achieved, as I have seen in too many instances how, that the only way a consumer could get a credit report corrected was by going to court. That is clearly not the policy we want running this country, and when we are trying to cut down on litigation. Yet the practices of some furnishers and some credit reporting agencies actually encourage litigation for those that really care about protecting their good name.
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    Another reason behind the 1996 amendments was inaccuracy. Clearly the CFA study, along with the Federal Reserve Board study, documents serious problems with inaccuracy. And I think Chairman Greenspan and his staff should read their own report, before they address this issue again.
    The dispute numbers at the CRAs, Credit Reporting Agencies are running, typically, 7,000 to 10,000 disputes per day, and this allows, with the number of staff they have and the number of disputed items per report, sometimes they really only have two minutes or so to deal with every dispute.
    Credit grantors, like Capital One, are seeing their disputes go up from 1,000 a day about 18 months ago, to now, 4,000 disputes a day. They deal with this by having an automated dispute problem.
    One of the things that can cause inaccuracies in credit reports is the use of partial matches, and I have seen this over and over again, where a credit bureau will say, if your Social Security number's not the same, if there is one digit difference, sometimes they will assume that if there is enough common letters in the first name, then they will assume it is the same person, and they will merge that information together. And so, it is this use of partial matches of both partial name matches and partial Social Security numbers, which causes great deal of inaccuracy. And I have detailed this in my statement.
    They deal with the high volume of disputes by using an automated system to have basically this exchange of messages between the credit grantor and the credit bureau, in which the credit bureau asks, after a dispute, Did you say this? And the credit grantor comes back and says, Yes, that is what we reported. But they don't really try and investigate in a true sense of the word to get to find out what the truth is.
    In my statement, we have talked about a lot of the damages that come to consumers in this area. I have also urged this committee to try and hold hearings, at least spend a morning or so, listening to the victims of mixed files and identity theft, so you can get a full range of the damages that people have to undergo when they are pitted with problems in the system. Not only can inaccurate data lead to credit denials, but it also can lead to price-hikes in the age of risk-based pricing, and cause the emotional distress of trying to correct a credit report mistake that was not of your making. The damages are extensive.
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    In three of the seven areas, where there is preemption, one of the areas is prescreening. I have just begun an investigation into this area, and with two phone calls, I have found that there are major criminal gangs across the country that are hitting mailboxes, trying to get any personal information they can get, including pre-approved credit card offers, also convenience checks, bank statements, so that they can take this personal information and use it to facilitate identity theft.
    There is quite a range of sophistication among these groups. Some try and use the pre-approved credit cards or convenience checks to get money instantly. Others take the personal information and sell it to fences that are more sophisticated in counterfeiting and identity theft.
    I think in this area I think that we need a stronger national standard, because if you look at your prescreened offers, you will see that even though the law says the notices are supposed to be clear and conspicuous, they are neither clear nor conspicuous, and that we need to go beyond that and to have basically a national opt-out registry for credit offers through the mail, just as we have a registry to stop junk phone calls.
    The duty on furnishers, is also a preempted area. But this is a very weak standard that basically sets up too many hoops the consumers must jump through in order to facilitate simple correction of their errors. I detailed in my statement some of those hoops they have to jump through and why a stronger standard is necessary. If Congress is unable to enact the stronger standard, then we need to let the States feel free to move forward and protect consumers in this area.
    The final area is affiliate sharing, and despite all the talk of the need for a national standard, the FCRA sets no standard for affiliate sharing. It just says that the States will not enact anything in this area. So basically, it favors a national standard in an area where there is no national standard.
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    Now, Gramm-Leach-Bliley has some national standards to the sharing of financial data, which is simply a very weak and watered-down opt-out for sharing with third parties. Yet it too does not set a standard for affiliate sharing.
    And so, the FCRA provisions are being invoked by Wells Fargo and Bank of America in litigation against localities and ordinances to try and stop those places from protecting their citizens with stronger privacy protection.
    In closing, I would like to say that this is an extreme importance to the American consumers. The top complaint back in the 1990s was about credit reports; now it is about identity theft. It leads the complaint list about all sorts of other issues that involve out-of-pocket losses.
    I think it is very important to the people of America to protect their good name. I think that is a major item that this law is all about and that is why there is a grave responsibility to this Congress to enhance consumer protection.
    Thank you.
    [The prepared statement of Evan Hendricks can be found on page 109 in the appendix.]
    Mr. TIBERI. [Presiding.] Thank you, Mr. Hendricks.
    Mr. Wong?
    Mr. WONG. Good afternoon, Chairman Bachus, Congressman Tiberi, Ranking Member Sanders and members of the subcommittee. Citigroup thanks Chairman Bachus and Chairman Oxley for their leadership and holding these hearings.
    Today, I want to emphasize the importance that Citigroup attributes to reauthorizing the national standards contained in the Fair Credit Reporting Act. FCRA provides a national framework for the credit reporting system, which has been shown to work well and to provide substantial economic benefits to consumers. These benefits include affordable credit, wide credit availability and protection against fraud and ID theft.
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    FCRA appropriately balances a wide range of consumer protections, with the crucial need for creditors to have access to a uniform national database on which to make credit decisions. It is essential, therefore, that Congress act to preserve the national framework that is scheduled to expire at the end of this year. While maintaining national standards for all seven of the key provisions is crucial, I want to highlight a few areas that are especially important to Citigroup and explain why they affect our ability to continue to serve our customers well.
    First, affiliate sharing. Citigroup shares information among our affiliates for many important reasons, such as control and credit risk, credit monitoring and fraud control. It also is important in identifying products and opportunities that may be beneficial to customers. Sharing information among affiliates greatly assists in the prevention and detection of ID theft. It helps to detect unusual spending patterns and habits that are used to identify fraud and allows us to promptly notify the customer.
    The ability to share information among affiliates also conforms to customer expectations. For example, a Citibank customer expects to be recognized and demands a certain level of service and accountability whenever visiting a Washington, D.C., Citibank branch of our Federal thrift, or a New York Citibank branch of our national bank. The legal distinction between the two affiliated Citibanks is not relevant to the customer, and it should not affect his or her ability to obtain products and services.
    In 1996, Congress struck the appropriate balance between the consumer protection and business needs by allowing customers to opt-out of having certain information shared among affiliate entities. If different States were allowed to pass laws governing the exchange of information among affiliates, it would significantly disrupt out seamless nationwide system of serving our customers. Complying with a patchwork of State and local laws would be extremely burdensome and costly for lenders, and ultimately for consumers.
    Second, and I want to talk about prescreening. Prescreening is essential for targeted marketing. Credit card issuers and other lenders use prescreening to substantially reduce the cost and increase the efficiency of identifying potential customers.
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    For consumers, targeted marketing is vastly preferable to the most likely alternative, blanket marketing. Most new entrants and major competitive initiatives in the credit card industry in the last 20 years were based on prescreening. These competitive initiatives have provided consumers with lower interest rates, cards without annual fees and an array of new discount and bonus features. Prescreening allows institutions to control their risk by targeting those individuals that meet certain credit standards.
    Accounts obtained through prescreening have lower loss rates and less fraud than other forms of account acquisition. The prescreening provisions appropriately balance the need for consumer protection by providing consumers with the ability to opt out for a single toll-free call. If States were allowed to adopt different rules for prescreening or prohibit prescreening, consumers would not be able to enjoy the same benefits derived from robust national competition that they receive today.
    Finally, I want to talk about the provisions dealing with the content of credit reports. Uniform national guidelines for credit report information allow creditors to price risk more accurately, which results in lower cost for all consumers and more credit availability.
    If the FCRA provisions that dictate the content of credit reports were allowed to sunset, an individual State could pass a law prohibiting creditors from reporting to credit bureaus until borrow payments were at least 90 or even 180 days past due.
    For credit grantors, the result could be disastrous. It would grant credit to consumers who appear to have unblemished credit, but in fact, would have a very high risk of default. The universal response of lenders to increase credit losses is to raise interest rates and to reduce credit availability. This is not a desirable result for our credit society.
    Thank you again, for the opportunity to appear before the subcommittee.
    [The prepared statement of Martin Wong can be found on page 207 in the appendix.]
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    Mr. TIBERI. Thank you for finishing before your time even expired.
    Mr. Hildebrand?
    Mr. HILDEBRAND. Thank you, Chairman Bachus, Ranking Member Sanders, Congressman Tiberi and members of the subcommittee.
    My name is Scott Hildebrand. I am appearing here today on behalf of Capital One Financial Corporation, where I serve as the vice president for Direct Marketing Services. On behalf of Capital One, let me express my thanks to you, Mr. Chairman, and Chairman Oxley for the leadership that you have shown on this important issue.
    At Capital One, we believe that permanent extension of the national standards contained in the FCRA is essential to the continued health of our nation's economy. Capital One's one of the top 10 largest credit card issuers in the nation and a diversified financial services company with over 48 million customer accounts and $68 billion in managed loans, outstanding.
    In many ways, Capital One is a creation of the competitive environment established by the uniformity provisions of the FCRA itself. This competitive environment commenced 30 years ago with the passage of the FCRA and accelerated greatly with the amendments to the Act in 1996. We would not have seen today's level of competition in the balkanized, localized credit card markets of 30 years ago. Even as late as 1987, the credit card market was mired in a one-size-fits-all approach, characterized by across the board rates of 19.8 percent and annual fees of $20.00.
    That market was ripe for innovation, and companies like Capital One saw an opportunity to utilize the information provided by the national credit reporting system to customize product offerings to customers based on particular needs, interests and risk profiles.
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    Our founders realized that a one-size-fits-all approach made little sense in an environment where each consumer possessed vastly different needs and characteristics. While some consumers are risky, many more were not.
    Either way, consumers suffered. The less risky customers were simply paying too much and for the rest, credit was hard to come by, if available at all.
    Capital One was able to utilize information within the legal framework provided by the FCRA to make significant advances in underwriting, better distinguishing the risk characteristics of our customer base. Capital One and other companies were also able to utilize information to create profound innovations in the marketing and product design of credit cards. Our company, for instance, lead the charge with new product ideas, like balance transfers.
    By 2003, the moribund competition, the flat pricing structure of old, was no more. In its place, came fierce competition with fixed rates as low as 6.9 percent and no annual fees commonplace. According to Robert Turner, in his testimony last week, this price competition produced $30 billion in annual savings for consumers across the country.
    Capital One has been able to take this market-leading approach in reinventing other lending businesses as well, including auto finance. We have pioneered innovations, such as a unique auto refinance product, that allow consumers to take advantage of lower rates like they do when mortgage rates decline.
    With regard to specifics of FCRA, two major provisions warrant further explanation. Data credit consistency and permitted uses of credit data. The credit data consistency provisions strike a sensible balance that enables companies like Capital One to construct highly accurate credit models on a nationwide basis. Based on the voluntary nature of the system, it is a frustrating argument for those of us who use the data as part of credit granting process that, the argument being, that we do not have a significant stake in the accuracy of that information provided on consumers. Put most simply, at Capital One, our models do not work if the information contained in the bureau reports is not accurate.
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    The permissible use provisions enable companies like Capital One to use information to reach potential customers and to make prudent credit decisions. Prescreening reduces risk. Losses from customers obtained through prescreened offers of credit are significantly lower than losses of customers obtained through other non-prescreened channels. This provides a vital tool in ensuring the continued safety and soundness of consumer lending institutions.
    Prescreening fosters competition by allowing financial services firms to identify the credit characteristics of individuals and offer them credit products with tailored terms and conditions specifically designed to beat the competition. Prescreening fosters innovation. Extraordinary ancillary benefits, such as airline miles and cash rebates attached to modern credit card products are largely a function of prescreening.
    Prescreening is transforming other businesses as well. Our highly successful auto refinance product, which can save consumers up to 4 percent on their loans, is made possible through prescreening.
    Prescreening reduces identity theft. Our data demonstrates that rates of fraud are 5 to 15 percent times lower for credit granted through prescreening than from credit generated through other channels.
    Our credit system is the envy of the world. Consistent national credit data is the foundation of this system, ensuring that Americans have more access to credit at lower prices than our counterparts around the globe.
    Our best credit card customers today enjoy a fixed rate as low as 6.9 percent, with no annual fee. The variety of programs and rewards available simply boggle the mind. These tremendous innovations have saved borrowers billions of dollars.
    The FCRA is a vital instrument, preserving the vitality of our credit granting system and equally, a vital instrument in preserving the vitality of our modern economy.
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    We urge you to reauthorize these provisions and to extend permanently, our national uniform system of credit reporting.
    Mr. Chairman, Mr. Congressman, members of the subcommittee, thank you very much for the opportunity to testify before you. I will be happy to answer any questions you have at this time.
    [The prepared statement of Scott Hildebrand can be found on page 122 in the appendix.]
    Mr. TIBERI. Thank you. I don't think I have seen two panelists in the same panel ever complete their testimony under time. I congratulate both of you.
    Let me just begin asking a question relating to something you just said with respect to prescreening, that prescreening lowers the fraud rate. Can you explain why you believe that is or why Capital One believes it is?
    Mr. HILDEBRAND. And it is a great question, Congressman. It is true, it is about five to 15 times lower fraud in prescreening, depending on the segment of the population. Primary reason being that this is a known individual. That is that we have a peek into their credit records through prescreening, we offer it out to them, the application comes back to us. In a non-pre-approved environment, we do not have all the checks and balances that prescreening affords us. So it is another data point on the consumer.
    Also, there are fraud tools that are available that, when an application comes in, there are certain indications on an application that it may or may not be fraudulent. After looking at millions and millions of applications through prescreening, we have been able to model these, and so when applications come through that look a little bit out of the ordinary, our models squeeze those out and we flag those for fraud. We then proceed to make a verifying phone call to the true name person, to verify that, indeed, they did apply for credit.
    Mr. TIBERI. I have heard a little bit more about the use of prescreening being critical of the underwriting and the use of prescreening as a risk management tool. What is your sense of that?
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    Mr. HILDEBRAND. Oh, it clearly is. Prescreening is indeed an underwriting tool. In effect, what we were doing is we are ensuring that the folks, the consumers that we are going to offer credit to, are credit worthy.
    The last thing that we want in our industry is to have people get overburdened, get in trouble, because we have to foot the bill for that. So prescreening affords us the opportunity to pre-select those customers who we think are most creditworthy and offer them products tailored to their situation.
    Mr. TIBERI. And those who would criticize prescreening, as Mr. Hendricks did, your response to that would be?
    Mr. HILDEBRAND. Prescreening is much, much more than a marketing tool. It is indeed an underwriting tool.
    Mr. TIBERI. And if we didn't have prescreening today, what would be the outcome to Capital One customers, in your judgment?
    Mr. HILDEBRAND. Well to our existing customers, no impact. To prospects, I hearken back to Mr. Gambill's testimony earlier today. I believe there would be much, much more mail on America, because we are still going to try to acquire new customers. I believe that—I can't speak for Capital One, because we have not modeled this behavior—the general consensus in the industry is that there would be less credit available. That it would probably be more expensive, because marketing costs would go up dramatically, based on the fact we are trying to reach many more people, not understanding the credit risk behind those folks, as prescreening affords us.
    Mr. TIBERI. Thank you.
    Mr. Wong, you mentioned affiliate sharing from Citicorp's point of view. Can you give some specific examples how affiliate sharing proactively and positively impacts me as a customer?
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    Mr. WONG. Absolutely, Congressman. Congressman, if you walk down the street into one of our Citibank branches, you may be interested in a variety of financial products. He may be interested in a deposit account, such as a checking account. He may be interested in a credit card, mortgage or even, perhaps, an investment account to purchase a bond. Each of these products are being offered by different affiliates of Citigroup, and if we did not have information sharing, as you open each of these accounts or purchase one of these products, you would have to go to an elaborate opening account process because we couldn't share the information.
    Mr. TIBERI. How would you categorize the ability of affiliate sharing to help crack down on identity theft within Citicorp?
    Mr. WONG. Very simple example: You, in your pocket, may have two credit cards issued by Citigroup. You may have an American Airlines Citibank credit card, or you may have a Shell card for your gasoline purchases. Those are two different affiliates within Citigroup. If we were to detect a fraud on one of your accounts, unusual spending habits, for example, and it confirmed that it could be a fraud with you, we would then alert all the other affiliates within the Citigroup and could place a fraud alert.
    Mr. TIBERI. If we restrict or eliminate the use of affiliate sharing, what impact would that be to a customer?
    Mr. WONG. Tremendous. I think the customer, for one, would not have the ability, in the case of product innovation, to get the benefits that Mr. Hildebrand described in his statement. Annual fees, doing away with annual fees and credit cards mileage programs, all of those things are innovations as a result of affiliate sharing looking at what customers want from a broad spectrum of customers. The seamlessness of conducting business with a customer would go away. It would be painful for a customer to buy more than one product within the Citigroup family of companies.
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    Mr. TIBERI. Thank you. My time has expired. I will yield time to Mr. Davis.
    Mr. DAVIS. [Presiding.] Thank you, Mr. Tiberi.
    Let me welcome all of you this afternoon. There are three of us who were here that here listening to you. So I apologize for not having a larger crowd than that.
    Let me follow up, Dr. Manning, on something that you talked about earlier, and that is the problem, or perhaps it is not a problem from everyone's perspective on the panel, but the issue of college students and then the secondary issue of very low income people being singled out for a lot of the prescreenings, for a lot of the solicitations.
    And I will ask you all to educate me a little bit as a matter of economics on this issue. To a lot of us, I think that it is somewhat counterintuitive that two of the groups of people who are singled out are those who are probably least likely in some ways to be durable credit card customers, or if they somehow become durable credit card customers, they are among the most likely people to have default issues or to have difficulties paying their accounts off.
    Dr. Manning, some of your data really caught my attention. You said that roughly 60 percent of students who get credit cards, the overwhelming majority of those, I assume get them after some kind of prescreening solicitations, max out during the freshman year. A significant number of those who don't max out are having to use allowance from Mom and Dad or some other source to provide payments, and that, in effect, the first significant debt that a lot of young people incur now is not their student loans, frankly, it is the credit card bills.
    Any one of you, I suppose, but in particular Mr. Wong and Mr. Hildebrand, tell me why economically it becomes so beneficial for the credit card companies to solicit people who, on their face, appear to be very high-risk customers, particularly with respect to college students?
    Mr. WONG. May I?
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    Mr. DAVIS. Yes.
    Mr. WONG. We believe that the credit card is a important payment tool in society today. Credit cards are needed for a variety of things from getting a reservation in a hotel room to acquiring a ticket online, an airline ticket.
    College students, we do lend to college students. Our experience of college students do not suggest at all that this is a population of borrowers that are a greater credit risk to themselves or to us.
    Mr. DAVIS. What is their default rate?
    Mr. WONG. The default rate of credit of college students, and I don't have precise numbers, but I will be happy to share that with you.
    Mr. DAVIS. Do you know that, Mr. Manning? Do any of you know the default rate for college students?
    Mr. MANNING. I would love to. That is information the industry doesn't share with me.
    Mr. WONG. But we can tell you that the default rate of college students is no greater than the general population of credit card holders in our customer base. And we obviously tailor the product to college customers to make sure that they are within their affordability in lines of credit. So obviously, it gives them great consideration.
    Mr. DAVIS. Dr. Manning, what is your perspective? Obviously, we have the industry's perspective, I assume. That they are tapping a relatively untapped market. What is your perspective on this? Obviously, you have identified it as something you view as something of a social problem that a class of people are being targeted who are assuming a fairly large debt burden as they move into society.
    How big a problem is this, in empirical terms?
    And number two, what is the practical solution? I mean, presumably no one advocates it. I don't see a vehicle to prevent these companies from prescreening college kids, but they certainly have rights. They are legal adults. But what, from a policy standpoint, would you have this institution do if it wanted to address this matter?
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    Mr. MANNING. Well, first, there are a couple of issues.
    Number one, the very fact that you are a college student is the prescreen, and that the industry puts on its head the underwriting criteria. If you have an 18-year-old that makes $5,000 and is not in college, most likely he or she will get rejected for a credit card. But if you are in college, you are going to get access to multiple thousands of dollars of credit cards during your collegiate career. So point number one is we need consistency for the industry.
    Number two, of course, the Citibank now is very active in the student loan market. And in terms of affiliate sharing, we have some very serious issues here, that one affiliate knows that the other affiliate can get paid through this borrowed money.
    I want to make it clear I am a very strong supporter of credit cards. I would like to see every student get a credit card with a $500 credit limit, if their parent will not cosign for them. But that limit could not be raised at the end of the year unless there has been prudent use of that credit card.
    So I am not trying to discourage use of credit cards. I am trying to promote its effective use.
    But I think the data here is unambiguous about the seriousness of the problem. We are no longer talking about marketing seniors who have some degree of economic background or real life experience. As you can see from this representative sample of a major public institution in Virginia, the marketing of college students has shifted from seniors and juniors now to freshman, to even high school students.
    I have received quite a few complaints from a Wells Fargo campaign in California, where representatives——
    Mr. DAVIS. Let me cut you off for one second, if the Chair will yield me an additional 30 seconds or so.
    What is wrong with that? Just from a policy standpoint, in terms of following your analysis, I suspect that the gentlemen on this end, Mr. Wong and Mr. Hildebrand, have the perspective that, well, there is some discrimination in the sense that one class of people are favored over another. But it is not really invidious discrimination. It is discrimination based on favoring people who are likely to be long-term market participants versus those who are not.
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    I mean, to say that seniors are not targeted, they are obviously not going to be long-term customers. To say that people who aren't in college who are young aren't targeted isn't such a major proposition, I suppose. You are targeting people who are likely to be high-income earners versus people who aren't. I am sure that is the rationale of Mr. Wong and Mr. Hildebrand.
    So what is wrong with that? I mean why should we expect this particular market to operate in a more evenhanded way than most markets do in this country?
    Mr. MANNING. Well, I think anybody who has found themselves unexpectedly unemployed in this recession would certainly question the expectations of the industry in offering credit to an 18-year-old that their risk assessment model would predict that most of them will get a certain income when they are freshmen, when there is a robust 5 percent unemployment rate, and when they graduate there is an 8 percent unemployment rate, and they are suddenly saddled with $15,000 in credit card debt and $20,000 in student loan debt, with the expectation that they would get a $48,000 job.
    Students and people in general assume levels of debt based on their expectations of the future. And students at 18 years old who do not have real life experience, have not had a full time job and have not managed a budget, are making expectations based on a 5 year future, that they don't necessarily have realistic expectations.
    Mr. DAVIS. I think my time is expired, Mr. Chairman. Thank you.
    Chairman BACHUS. [Presiding.] Thank you.
    Mr. Manning, I was reading different things here, but one thing that you said that you might want to propose is to have parents sign off before a college student can have a credit card?
    Mr. MANNING. No, what I said was that every student, I think, should have a credit card with a $500 credit limit, unless their parents were willing to cosign for a higher limit, if they were unemployed.
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    Chairman BACHUS. You know, what strikes me is that it would be a pretty big dose of big government, wouldn't it, telling a large segment of our population that they couldn't have credit above $500?
    Mr. MANNING. That is only if they don't have an income. If you look at the credit authorization of college students in the late 1980s, the industry standard was that parents cosigned unless the applicant had a certain income level. I am suggesting that for students that have no income that we should, at least, assure them of a learning curve of a credit card with no more than $500.
    Chairman BACHUS. You say parents, unless their parents sign on. You know, some parents refuse to help their children at all while others finance their children's education. So you basically would be taking maybe, let us say you had a young man or woman whose parents either were unwilling to sign on, or weren't willing to help them at all. They might actually benefit from, let's say, $1,000 or $1,500 credit card.
    Mr. MANNING. Well, my proposal was one that would increase $500 per year. I was referring to freshmen when they first started college, where by the time they graduated they would have $2,000 in a credit line.
    Also, that would not preclude their options for a Federal and private student loan.
    Chairman BACHUS. In your book, you are talking about the wide use of credit cards. I notice the Federal Reserve estimates that 50 percent or more of all transactions in the U.S. involve cash. Checks are the second most popular form. And it says that checks total 72 percent of non-cash transactions in the United States. Now this was in 1997, credit cards were 18 percent of non-cash transactions.
    Is there any statistical evidence from the Federal Reserve, the FDIC, that youth are having a greater default level today than, say, other than anecdotal, than say 5 or 10 years ago?
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    Mr. MANNING. Well, that is obviously proprietary information from the industry, and I would be happy to examine it.
    Chairman BACHUS. Well, maybe I would ask the industry. Are we having larger default rates this year than we were 5 years ago? And has there been an increase in lending to college students?
    Mr. HILDEBRAND. Mr. Chairman, I do not know if we have a higher default rate than we did a few years ago.
    I do, however, want to take the opportunity to correct something that Mr. Hendricks said. He implied that most of the marketing to college students was prescreened. As a matter of fact, the only marketing that we do to college students is through prescreening. The only way that a college student can be on a prescreened file from the bureau is if they have already established a credit record.
    So these people have, in some way or another, entered the commerce system of America already when we go out to offer them credit.
    There are other forms of marketing to college students, tabling, T-shirts, things like that. Capital One does not partake in those. We treat college students and our underwriting of college students the way we treat the general population of America.
    Chairman BACHUS. All right.
    Mr. HENDRICKS. Just for the record, that is Mr. Manning, and I am Mr. Hendricks.
    Mr. HILDEBRAND. I am sorry. I apologize.
    Mr. HENDRICKS. We have a mis-merge here.
    Mr. HILDEBRAND. I apologize.
    Mr. MANNING. I don't think I used the term that most college students are prescreened. I said that there is a policy within which there is a preference given to people of a certain age if they are a college student versus not being a college student.
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    Chairman BACHUS. Let me ask you this. The FDIC recently said this in their spring 2000 report, that the credit card is one of the best innovations of the 20th Century. Do you all generally agree with that statement?
    Mr. MANNING. I would certainly say that the transactional superiority of credit cards in general from a convenience level certainly in the average everyday life has been a great advantage. The problem, of course, is that the cost of using a credit card has increased dramatically, especially for those who can least afford it.
    Chairman BACHUS. You are talking about the cost, but here is another: Dr. Thomas Durkin, Federal Reserve Board, Division of Research and Statistics, this is in a study issued in 2000: ''Although one can usually find anecdotes to illustrate a point, consumers who are unaware of the cost of credit cards, for instance, or consumers who overspend because of the wide availability of credit, such examples can never lead to a definitive understanding of issues having broad social and economic impact.''
    You know anecdotal evidence. Do any of you have statistics one way or the other that we are——
    Mr. MANNING. My understanding of that survey was that there were a lot of very critical comments that consumers reported in the use of credit and the cost of credit and the resolution of conflicts, and that there was a real concern about whether that survey instrument was accurately measuring the true criticism the average American has on credit cards, or whether we need a better measurement instrument.
    Chairman BACHUS. Well, I guess that is my point. Or are the default rates going up? I think we all agree that there is more credit availability, which is what FCRA has really brought, is availability of credit to a larger number of consumers, easily available credit.
    I saw another statistic where loans in low-income areas have gone up 50, 60, 70 percent, to low-income Americans. Lending to borrowers in low-income neighborhoods has gone up significantly since 1993, when we adopted these changes.
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    Particularly the two gentlemen I think that are representing consumers, do you have any statistical evidence, not anecdotal evidence, but statistical, that we are seeing soaring default rates?
    Mr. MANNING. Well, certainly we can look at——
    Chairman BACHUS. The interest rates, are they much above what they were, say, 5 years ago?
    Mr. MANNING. Well, if you look very clearly at the spread between the cost of borrowing money from the banking industry and the cost that they are loaning out to consumers, that fair share of reduction in costs hasn't been adequately shared with consumers in that benefit.
    Chairman BACHUS. Has been shared?
    Mr. MANNING. If you look at table four, which is industry data, we see very clearly that the cost of funds went down 28 percent over $7.5 billion between 2000 and 2001, and yet the interest that was charged went down less than 1 percent, even though that the total portfolio only went up 8 percent.
    Mr. HENDRICKS. Mr. Chairman?
    Chairman BACHUS. Yes?
    Mr. HENDRICKS. I didn't come prepared for that, and that is not my area of expertise.
    I did try to provide statistics in my statement about what appears to be a dramatic rise in consumer disputes arising from inaccuracies in their credit reports, and some of those are credit report related.
    Chairman BACHUS. I apologize. I think, to a certain extent, this is kind of off the issue. There are less than five minutes left on the vote on the House floor.
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    Mr. TIBERI. Mr. Chairman, can I just make one statement in response to Mr. Manning's comments, the last comments you made, with respect to the credit card industry. I wish my father were here. My father is an immigrant with no formal education of America, sixth-grade Italian education. He has got a credit card that he pays no annual fee on that he uses all the time now. He pays it off every month, and the end of the year he gets money back. He thinks this is a great country because of that.
    So it is just bizarre to me that you can kind of paint this stroke about an industry and people who have a lack of education, because my father would tell you he has no education, and he has figured it out, and he is probably a loss leader for the credit card industry.
    Mr. MANNING. There are a lot smarter people than me working on marketing campaigns that I can't understand, so I am assuming that most Americans when they read their contracts are at least as uncertain about the consequences as I am.
    Mr. TIBERI. Well, Mr. Chairman, with that——
    Chairman BACHUS. Thank you.
    At this time, we will discharge the second panel.
    I very much appreciate your testimony. Your written statements, which we had yesterday, have been very helpful to us. Thank you.
    [Whereupon, at 2:20 p.m., the subcommittee was adjourned.]