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Wednesday, July 9, 2003
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
    The Committee met, pursuant to call, at 10:14 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael Oxley [Chairman of the Committee] presiding.
    Present: Representatives Oxley, Leach, Bachus, Royce, Lucas of Oklahoma, Kelly, Gillmor, Ryun, Ose, Biggert, Shays, Miller of California, Hart, Capito, Tiberi, Kennedy, Hensarling, Murphy, Barrett, Harris, Renzi, Frank, Waters, Sanders, Maloney, Velazquez, Ackerman, Hooley, Carson, Sherman, Lee, Inslee, Moore, Capuano, Hinojosa, Lucas of Kentucky, Clay, Israel, McCarthy, Baca, Matheson, Miller of North Carolina, Emanuel, Scott and Davis.
    The CHAIRMAN. [Presiding.] The Committee will come to order.
    The Committee meets today for a legislative hearing on H.R. 2622, the Fair and Accurate Credit Transactions Act of 2003, the FACT Act, comprehensive legislation to reauthorize certain key provisions of the Fair Credit Reporting Act and make other needed reforms to our national credit reporting system.
    The bill was introduced just prior to the 4th of July recess by a bipartisan coalition of 32 members of this Committee, 18 Republicans and 14 Democrats, led by the Chairman of the Financial Institution Subcommittee, the hardworking Mr. Bachus, Ms. Hooley, Mrs. Biggert and Mr. Moore.
    The FACT Act grew out of an exhaustive series of hearings that Chairman Bachus's subcommittee has held on the FCRA over the past several months. Those hearings, which featured testimony from some 75 witnesses, representing every conceivable perspective on the FCRA, has laid the groundwork for this Committee to act, hopefully later this month, to preserve the benefits of the national credit reporting system and give consumers important new rights in the process.
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    I commend Chairman Bachus and all of the members of the Financial Institutions Subcommittee for their diligent and very thorough approach to this complex issue. The legislation that the Committee considers today is a testament to their months of hard work.
    The subcommittee's hearings have, in my view, established a compelling case for reauthorizing the FCRA's uniform national standards. As one of our distinguished witnesses at today's hearing, FTC Chairman Muris, has stated, the ''miracle of instant credit created by our national credit reporting system has given American consumers a level of access to financial services and products that is unrivaled anywhere in the world.''
    According to the Federal Reserve Board, since FCRA's enactment, the overall share of families with general purpose credit cards increased from 16 to 73 percent, with low income families achieving the greatest increase.
    American families' ability to buy a home has also increased, with ownership levels growing significantly from 60 to 68 percent, again with the largest gains achieved by lower income and minority groups.
    These improvements in the credit and mortgage systems have saved consumers nearly $100 billion annually, according to some estimates. The FACT Act is, first and foremost, an attempt to make sure that the considerable benefits of that system to consumers and to the U.S. economy do not go up in smoke at the end of this year when the FCRA's uniform national standards are set to expire.
    Let me highlight just a few of the provisions that I was particularly pleased to see included in this important jobs and economic growth bill.
    The FACT Act incorporates a number of provisions drawn largely from legislation introduced earlier this year by Ms. Hooley and Mr. LaTourette that aimed to reduce the incidence of identify theft and protect those who are victimized by this increasingly common form of criminal activity.
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    The bill prohibits the printing of complete account numbers and expiration dates on credit and debit card receipts and requires verification of certain address changes so that consumers are less likely to have their accounts stolen.
    It helps consumers who fear they have been victimized by identify theft to place fraud alerts on their credit reports to ensure that criminals can't access their accounts.
    And it allows identity theft victims filing police reports to block any fraudulent information from appearing on their credit reports to protect their credit reputations from being destroyed.
    With these targeted reforms, the FACT Act will strike a serious blow against the identity theft criminals who have succeeded in victimizing millions of innocent Americans over the years.
    The FACT Act also contains a number of provisions strengthening consumers' ability to dispute the accuracy of incorrect or incomplete information that appears on their credit report.
    For example, perhaps the most fundamental protection the bill gives consumers is the right to a free annual credit report accompanied by an explanation of their individual credit score and what steps they can take to improve it. This will not only help consumers guard against identity theft, but will empower consumers to ensure they will not be unfairly denied access to credit or other financial products before the need arises.
    Let me again thank Chairman Bachus and the original co-sponsors of this legislation for their leadership and exemplary work.
    Let me also indicate to members that I fully expect this bipartisan consumer protection legislation to continue to be perfected as it moves through the markup process.
    The ranking minority member, Mr. Frank, has stated that one of his priorities will be to ensure that the legislation includes heightened safeguards for consumers' health-related information. We have been working hard on that issue and I am committed to continuing to work with him in the same bipartisan spirit that has characterized the Committee's review of FCRA thus far.
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    Other members on both sides of the aisle have thoughtful proposals addressing various aspects of the FCRA that also warrant the Committee's careful consideration.
    In closing, I want to welcome Secretary Snow and Chairman Muris before the Committee and thank them for their constructive role in this process. Just last week, Secretary Snow unveiled the Bush administration's proposal for reauthorizing FCRA's uniform national standards, which included sweeping new protections for the security of America's personal financial information.
    And under Chairman Muris's leadership, the FTC has recently begun implementing its national ''do not call'' registry—bless your heart—something that I and many members of Congress have long supported to limit unwarranted telemarketing phone calls. Judging from the millions of Americans who have signed up for it thus far—and I understand it is 20 million and counting—this Bush administration effort appears well on its way to becoming one of the most popular consumer protection initiatives of all time.
    The Chair would add that pursuant to the Chair's prior announcement, he will limit recognition for opening statements to the Chair and ranking minority member of the full Committee, the Chair and ranking minority member of the Subcommittee on Financial Institutions and Consumer Credit, or their respective designees, to a period not to exceed 16 minutes evenly divided between the majority and minority. The prepared statements of all members will be included in the record.
    The Chair now recognizes the ranking member, Mr. Frank, for an opening statement.
    [The prepared statement of Hon. Michael G. Oxley can be found on page 94 in the appendix.]
    Mr. FRANK. Thank you, Mr. Chairman. I appreciate the cooperative spirit in which we have been able to work so far.
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    I think it is very clear from a wide range of conversations I have had that the votes exist, both on the Committee and in the House, to continue the existing FCRA, including the seven preemptions. I can't name them all. I think I can get more of them than of the seven dwarfs, but I am not sure, but I know them when I see them.
    So that outcome is not in question. There are, I should say, within the responsible consumer community, on our side of the aisle here, some people who oppose that. And what I am giving now is not my personal preference, but my statement of a fact. It is clear to me that there is majority support for extending the preemptions. The question is, in what form?
    Now, we should accept reality. It is very clear that if the majority party in this House decides to pass something, it will pass. A lot of time may pass before it passes, as we learned a week ago, but it will pass.
    Things are obviously different in the Senate, and that is what is relevant here.
    Just briefly, our deliberations will decide, I believe, whether or not a bill passes the House extending the preemptions with 240 or 250 votes or 380 to 390 or maybe even 400 votes. I think it would be better if it were the latter.
    One, I think it would be in the interests of the country and of the economy for us to pass a bill that extended the preemptions with increased consumer protections.
    And I should note that there is, I think, a very high degree of agreement among all of the members of the Committee, about the consumer protections. There is a very high degree of conceptual agreement, areas such as identity theft, medical information, better information for consumers about what is in fact happening to them. I am impressed with the degree of consensus.
    We have had a very good set of hearings and I congratulate the Chairman of the subcommittee and the ranking member of the subcommittee. I read the hearing opening statements over the break. I don't often read opening statements for hearings unless there is no other soporific available. But in this case I really found them cumulatively quite useful.
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    So the question then is, can we translate this conceptual agreement on a lot of things into enough agreement so that we get a large vote? And the reason for a large vote is very important. Obviously, the United States Senate is going to be getting this bill, and there is a deadline of the end of December, so the bill will be one of the things being acted on along with appropriations bill at the end of the session.
    And as I said, I acknowledge that in the House the majority will be able to pass it. In the Senate, obviously, things are very different. I mean, I have explained to people that if a dog dies in the wrong place it can keep the United States Senate from acting. If a dog dies in the House it gets a rule and gets passed.
    So, I mean, that essential difference between the two bodies ought to be kept in mind.
    The more we can achieve a consensus and a large vote in the House, the likelier we are to get a bill that can be signed into law in a way that won't be disruptive by the end of the year.
    Now, there is one particular issue. As I said, I am struck by the degree we have had a lot of agreement on more transparency, on identity theft, which is a problem both for the consumer and for the financial institutions. The consumer bears a great deal of the anguish and stress of this; the financial institutions bear a great deal of the burden.
    I think it makes sense to focus on the Fair Credit Reporting Act and not on Gramm-Leach-Bliley. There are issues to be addressed there. I think opening them up would be—I do not see how the United States House and the United States Senate can complete action on this between now and December 31 with all the other business pending if we broaden this beyond the Fair Credit Reporting Act.
    There are a couple of areas that are particularly important to me. Our colleague from New York, Mr. Ackerman, has been raising the question of giving consumers notice when there is inaccurate information, they think, about them. We are all in agreement that people should be able to correct inaccurate information about themselves, but if you don't know it has been put there, then by definition you can't do anything about it. And waiting until you have been penalized for inaccurate information obviously imposes costs on the consumer that I think are unacceptable.
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    In addition, there is one flaw in the system that I have seen. I do believe the consumer credit system works well. I think it works well on the whole. It obviously supports a considerable part of our economy. We have increased the extent to which people get credit. All those are good things.
    I think there is a problem in the extent to which individuals who are the victims of identity theft or simple error or whatever are able to get some redress. That is, I do believe that the existing procedures whereby a consumer who has been the victim of inaccurate information tries to get that corrected are not very good.
    I was told by one of the groups, ''Well, if you have information about you that is inaccurate we will include in the statement that we send out your statement that what we say isn't true.''
    So if I want to get some credit people will get a statement about how bad I am and a corresponding statement from me saying, That is not true, I am really a nice person.
    I think that is the equivalent of the newspaper that having printed an inaccurate obituary corrects that by printing a birth notice. Sending out information that is both accurate and inaccurate I think is unacceptable.
    I think we can do a better job of mandating that the credit furnishers and the credit reporting agencies take care of those cases where there is injustice.
    And I want to address specifically the argument that, well, there are people who think the system works very well and there are people who think it doesn't work well.
    I think it works well with the major exception that—and it is a relatively small number of individuals who are victimized by inaccurate credit, but I don't think it is acceptable to say to them that in the interest of the system as a whole they are going to have to bear that particular burden. I think we can do a better job of cleaning up their accuracy.
    So from that standpoint I hope that we will be able to proceed, as the Chairman has said, to take a basically reasonable approach and make it stronger, and I look forward to our being able to work together, and I hope that with that kind of approach we will be able to get a very large majority ultimately for a bill that extends the preemptions and protects consumers.
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    The CHAIRMAN. The gentleman from Alabama?
    Mr. BACHUS. I thank the Chairman.
    What we are dealing with here is a national delivery system, and that is our national credit reporting system. And like our national interstate highway system, like our national power grid, like our national communications system, they deliver an incredible amount of value and are very important to the economy.
    Consumers today are able to move from state to state, they are able to finance loans, get mortgages at low rates. And part of the reason is what they never see, and that is the national uniform credit reporting system.
    As much as anything, and I think Secretary Snow pointed this out in a press conference last week, we have seen the democratization of credit, where low and middle income families enjoy incredible access to credit today at unparalleled levels.
    And I think that no one on this Committee wants to jeopardize that. At the same time, Chairman Oxley earlier this year recognized that many of the uniform standards were expiring, that that was a threat to this national uniform system, and he made it the top priority of this Committee not only to reauthorize those national standards, but to also improve upon the system. And we can improve upon it, and that is what this legislation is all about.
    The ranking member, Mr. Frank, pointed out identity theft. That is the fastest growing white collar crime in America. Hundreds of thousands of victims. People used to rob banks, and then they found that it was easier to rob railroad or trains, because they weren't protected like the banks were.
    Well, the last thing that thieves have discovered is easy to rob is people's credit, because people's credit has a great deal of value to them, and people are now stealing people's identity and using that identity and the credit that goes with that identity to steal millions of dollars every day here in America.
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    This legislation is the result of a bipartisan group of members—Ms. Hooley, Mr. Moore, Mr. Frank, even Mr. Sanders has had input and his stamp is on this bill, Chairman Oxley, Ms. Biggert. Really, you have got 14 co-sponsors on each side of this Committee, and every one of them has had a role to play in this legislation.
    This is a work in progress, as any legislation. We are at the beginning of the legislative process, we are at the end of the hearing process where we had 75 witnesses. We will continue to work with the members to refine this. We are aware of Mr. Ackerman's concerns. We are aware of concerns of other members.
    And what we will do as we address all these concerns, we will try to determine what is in the best interest of the American consumer, the public, and we will try to balance the concern with the benefit of the system as it now exists.
    And if we can tweak that system, if we can make refinements to that system without erecting barriers to our uniform national credit reporting system, we will do that, and where justice dictates, we will do that.
    Now, I want to end, Mr. Chairman, by saying that, as much as anything, this bill demonstrates that when the Administration works with the Congress what a benefit that is.
    The Treasury Department and the FTC have worked very closely with us. Witnesses on our first panel have been very helpful to us, and their agencies.
    But as much as anything else, this is a bill where bipartisan cooperation has come together, and we have all put aside some of our personal differences to come up with the legislation that is a starting point for renewing the uniform credit system. Thank you.
    The CHAIRMAN. I thank the gentleman.
    The gentleman from Vermont.
    Mr. SANDERS. Thank you, Mr. Chairman. And I want to thank you and Ranking Member Frank for holding this important hearing on H.R. 2622, introduced by Subcommittee Chairman Bachus, and I want to thank Spencer Bachus for his openness in this entire process, and for his willingness to work in a non-partisan way. We appreciate that, and we look forward to continue working with him.
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    And I also want to thank Secretary Snow for being with us today, as well as our other witnesses.
    And, Mr. Secretary, you and I will be meeting later on today to deal with another crisis, and that is the collapse of our pension system, which is affecting millions of American workers, and we look forward to that meeting, as well.
    Mr. Chairman, while this bill does include some modest consumer protections, H.R. 2622, as currently drafted, does not include a number of reforms that are needed to increase the accuracy of credit reports, reduce identity theft, and protect the medical privacy of consumers.
    Most importantly, H.R. 2622 contains a major anti-consumer provision that would permanently bar the States from passing stronger bad credit reporting laws designed to protect their citizens against any number of problems, including identity theft and the ability to protect consumers' access to credit by ensuring that the notoriously flawed credit reporting system is cleared up, and in my mind just that is not acceptable.
    Mr. Chairman, this issue is extremely important to consumers, which is why the National Association of Attorneys General, representing all 50 of our states, unanimously passed a resolution opposing this preemptive language.
    They, the Attorney Generals throughout this country, who are closest to the problem, know that to protect consumers in this country, they have got to have the ability, whether it is in Alabama or Ohio or Massachusetts or Vermont, the ability to respond quickly and effectively to the particular consumer problems of people in their own State. And we should not deny them that right.
    Mr. Chairman, this preemption provision is also opposed. We hear the word consumer very often, but we should be clear that this preemption provision is also opposed by every major consumer organization in this country, including the Consumer Federation of America, or ACORN, the Center for Community Change, Consumers' Union, Consumer Action, U.S. Public Interest Research Group, and the lower-income clients of the National Consumer Law Center.
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    I look forward to working with Subcommittee Chairman Bachus, Ranking Member Frank, and Chairman Oxley, on improving this legislation before it reaches the floor.
    Let me also mention a few other concerns that I have. While HR 2622 does allow consumers to receive free credit reports annually, and that is a very important step forward, it is not clear that it does allow consumers to receive free credit scores, the most important information consumers need to find out if they qualify for credit.
    The language here is vague, and I look forward to working with the Chairman to improve that language, to make it clear, abundantly clear, that consumers who receive free credit will receive free credit scores along with their free credit report, including the key factors adversely affect the consumer's credit score.
    Further, Mr. Chairman, we must address the crisis in the credit card bait-and-switch scam, as recently reported by The New York Times, the Washington Post, ABC News and other media outlets.
    Credit card companies are penalizing customers who have always paid their credit card bills on time by, in some cases, tripling their interest rates due to information contained in the consumer's credit reports that were linked to other loans.
    In other words, people pay their bills on time, month after month, and because they may have borrowed money for a personal crisis, or for another reason, credit card companies around this country are doubling or tripling their interest rates, and that is not acceptable and we have got to address that issue.
    Lastly, Mr. Chairman, I also support the visions that would protect Social Security numbers from identity thieves, protect the medical privacy of consumers, protect the credit of persons in combat or activated to military service, provide notification to consumers when negative information is put on their credit reports, protect consumers by disclosing insurance clause, reduce the time frame available for credit bureaus to investigate and correct consumer reports, increase the penalties for companies that repeatedly report inaccurate information to credit bureaus, and prohibit credit and insurance clause for bringing reduced space on the number of credit inquiries.
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    Finally, Mr. Chairman, credit is more important than ever in our society. Consumers need to know that both the Federal and State governments are working hard to protect their access to credit. We need a strong federal law with flexibility by the States to react to local problems.
    I thank the Chairman, and I look forward to working with him and Mr. Bachus to improve this bill.
    Thank you.
    The CHAIRMAN. The gentleman's time has expired.
    And the Chair would reiterate that all members' opening statements be made part of the record. Without objection, so ordered.
    We now turn to our distinguished panel, beginning with the Secretary of the Treasury, Mr. John Snow.
    And, Secretary Snow, it is good to have you back again before the Committee.
    And also to Chairman Muris from the Federal Trade Commission.
    We thank both of you.
    And, Mr. Secretary, whenever you wish, you may begin.
    Secretary SNOW. Thank you very much, Mr. Chairman, Chairman Bachus, Ranking Member Frank, Member Sanders. It is a pleasure to be back here with you.
    In listening to your opening statements, for the most part I would say, as lawyers often say in proceedings, I stipulate to what you said and want to identify myself with it and adopt it as my own, because you have really hit on the high points of what this is all about, and there is hardly any reason for me to go through a lengthy statement.
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    I have submitted a statement for the record, and I would ask that it be adopted——
    The CHAIRMAN. Without objection.
    Secretary SNOW.——and included in the record.
    As Chairman Bachus said, the FCRA is the invisible infrastructure of the credit markets of the United States, and that invisible infrastructure makes possible the most extensive and widely available credit at the best rates anywhere in the world. And it simply wouldn't be possible without that broad sharing of information. And that is why it is so important, so important, critically important, that you take the steps to make those standards permanent.
    Consumers have two vitally important interests here. First is access to credit and other financial services. They also, though, have a vital interest in the accuracy and the security of their financial information. Good legislation is going to serve both interests, and any proposals, it seems to me, should be judged by those two standards: Does the proposal advance the availability of credit, and does it make the information more secure and more accurate?
    It is important to recognize, I think, as we think about the extension of the FCRA, how important it has been for lower income people and how many people at the lower portions of the income scales in the United States have credit today because of the FCRA and the information pooling that it makes possible.
    It is also important to recognize just how many people generally benefit from the national uniformed standards.
    The Council of Economic Advisers has done some studies in this regard that I have detailed in my submitted testimony. They estimate that without the national standards, 280,000 home mortgage applications that are now approved each year would be denied. And that is roughly $22 billion of new mortgage money made available, made available because of these standards.
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    And as I say, this democratization of credit has especially benefited minority and lower-income families. And if you look at the credit numbers, you will see that credit extension, credit card extension, mortgages and so on have even grown even faster among minorities and lower-income people over the last decades than among the populace generally.
    Good as it is, it can be improved. And significant improvements are suggested by the Administration and are included in the legislation that is pending before you today. A critically important area where improvements can be made is in this area of identify theft that needs to be addressed. It is a terrible national problem. In my written testimony I have offered some examples illustrating the lengths that these identify thieves go to rob people of their financial identity, illustrating how clever they are, how adaptable they are, how heartless they are as they perpetrate these horrors on innocent victims. And one of the worst aspects of the identity theft is how quickly one's good reputation can be destroyed, and in turn how long it takes to get it back.
    Our proposals and your legislation addresses that issue. And it is important to recognize how important these national standards for sharing information can be in both reducing the prospects for identity theft and in correcting it once the crime has occurred. And I have detailed in my testimony the various ways we would suggest that be done.
    In closing, I want to congratulate the sponsors of this important legislation, the Bachus-Hooley-Biggert-Moore bill, all of whom I think I see here on the podium. This is legislation that is very much akin to the proposals that the Administration thinks makes good sense and the very proposals I talked about last week. And we are in very broad agreement, I want you to know, with what you were proposing in that legislation.
    We look forward to working with the members of the Committee, and the sponsors particularly, to move a strong package of reforms forward to ensure that the Fair Credit Reporting Act becomes an even more effective tool for meeting the financial needs of American consumers. I am confident that the legislation that is being proposed does that, and we want to see it become law.
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    And I thank you for the opportunity to testify before you this morning.
    [The prepared statement of Hon. John W. Snow can be found on page 243 in the appendix.]
    The CHAIRMAN. Thank you, Mr. Secretary. And again, it is always good to have you here before the Committee. And thank you for your good work in this area.
    We now turn to Chairman Muris from the Federal Trade Commission. Mr. Chairman, welcome.
    Mr. MURIS. Thank you. Thank you very much, Mr. Chairman, and members of the Committee.
    I am certainly pleased to appear here today to discuss the FTC's legislative recommendations with respect to the Fair Credit Reporting Act. The FCRA has been a remarkably effective law and serves as a model for our efforts to protect consumer privacy.
    As the Chairman mentioned, the FCRA makes possible what I call the miracle of instant credit. This miracle occurs all over American every day. For example, if a consumer has good credit he or she can borrow $10,000 or more from a complete stranger and within an hour drive away in a new car. Now, I am told that you need a higher authority than a credit manager to bestow miracles, but it is a remarkable event when you focus on it.
    The flexibility of our credit markets is one of our great strengths as a nation.
    It is one reason why we are so large, strong, and prosperous.
    Since the FCRA was enacted, over 30 years ago, consumer credit has expanded exponentially and today accounts for two-thirds of our nation's GDP.
    Since 1970, access to credit has greatly expanded as well. Thirty years ago, less than 10 percent of the least affluent Americans had credit cards. Today, more than half do.
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    The FCRA has facilitated this growth while at the same time protecting consumers' sensitive financial data.
    Our recommendations for legislation will help fight identity theft and improve credit report accuracy. At the same time, they will preserve the benefits to consumers of the national credit reporting system.
    To begin, the Commission recommends that Congress renew the existing preemptions of Section 624 of the FCRA. The national character of our credit markets is a powerful argument for retaining these provisions. The current system functions well, and we believe there is no compelling justification for fundamental changes.
    This is not to say that the FCRA is perfect, and we have other proposals that we believe would improve the act.
    These proposals focus on getting credit reports more easily to consumers who want them, streamlining the dispute process and easing the burden on identity theft victims.
    I want to finish by highlighting our proposal to expand adverse action notices to consumers.
    In its basic operation, the FCRA is an extraordinarily insightful statute. Without the consent or choice of consumers, an enormous amount of information is collected, information that allows our national credit markets to function.
    Use of this information is strictly limited, however, to permissible purposes as defined under the statute.
    With all of the information, some inaccuracy is inevitable. Here to, the FCRA solution is ingenious. The FCRA requires that when credit is denied based even in part on a consumer report, the creditor must notify the consumer of one, the identity of the credit bureau from which the creditor obtained the report, two, the right to obtain a free copy of the report, and three, the right to dispute the accuracy of information in the report.
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    Now, the self-help mechanism embodied in the FCRA scheme of adverse action notices and the right to dispute is critical to maximize the accuracy of consumer reports.
    It puts credit reports in consumers' hands when they are the most motivated to inspect the report for inaccuracies. That is, after they have been denied credit, employment, insurance, or another benefit based on the report.
    Moreover, adverse action notices help fight identity theft. An adverse action notice can alert a consumer that he may have bad marks on his credit that he doesn't know about.
    The subsequent free credit report helps consumers discover these accounts that an impostor may have opened.
    Enforcing the FCRA's adverse action provisions is at the heart of FTC action, but we believe there is room for improvement.
    Today, the FCRA requires an adverse action notice only when a consumer is denied credit based on his credit report. The consumer who is offered credit on less advantageous terms and accepts the offer gets no adverse notice.
    Ten years ago, consumers simply were denied credit based on their credit report. Today, however, with the prevalence of risk-based pricing, it is more likely that consumers are charged a higher rate rather than rejected outright.
    For this reason, we recommend that Congress give the FTC rule-making power to expand the circumstances under which consumers will get adverse action notice in these credit transactions.
    We make several other specific recommendations, which I will be happy to discuss in response to the Committee's questions.
    It is a pleasure to be here, and particularly to be here with Secretary Snow, and we support his proposals as well.
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    Thank you very much.
    [The prepared statement of Hon. Timothy J. Muris can be found on page 207 in the appendix.]
    The CHAIRMAN. Thank you, Mr. Chairman.
    And let me begin with a couple of questions for Secretary Snow.
    Mr. Secretary, you testified that the Council of Economic Advisers estimates that if Congress doesn't reauthorize the uniformity under FCRA and the States pass significantly different laws, that as many as 280,000 mortgage applications per year could be denied, especially for first-time home buyers.
    Doesn't that make the legislation that is before us, the FACT Act, the top priority for our country and, indeed, guarantee our economic viability?
    Secretary SNOW. Absolutely, Mr. Chairman.
    I couldn't agree more strongly. These national standards are essential to the way credit gets made available in this country. They have made for much more robust credit markets. Those robust credit markets lie at the heart of the success of the American economy. They are integral to the success of the American economy.
    As Chairman Muris said, consumers represent some 70 percent of all the activity in the American economy. And that depends on credit. And we have the best credit markets and the most available credit and the lowest cost credit in the world. And that is, in large part, due to these standards.
    So I would see the legislation pending here, making these standards permanent, an essential condition for the continued success of the American economy.
    The CHAIRMAN. Mr. Secretary, I was struck by some testimony, when Chairman Bachus had his series of hearings, as to how mobile our society really is, almost clearly the most mobile society in the world. Fourteen percent of Americans move every year.
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    We indeed do have a national credit system that is, I suspect, the envy of most countries. And despite that, there are those who—including the gentleman from Vermont—who mentioned the attorneys general not wishing to have a uniform national standard.
    It just seems to me that based on this incredible infrastructure of credit that we have developed in a national marketplace and given the mobility that our people have that it is almost incumbent upon us to maintain that national system. Would you agree and expound on that?
    Secretary SNOW. I would indeed. In some ways, credit is as American as apple pie. We lead our lives because credit is so readily available. And so many Americans are in the system because of widespread credit availability.
    Those numbers on mobility. I have seen that study. It is an astonishing thing. Americans move, on average, every 6 years. That is about 17 percent of the U.S. population in a given year. It is an astonishing number.
    There is no other country that has that sort of mobility. And that sort of mobility is central to keeping this economy fluid and flexible with people moving to where the jobs are.
    It is at the very heart of having flexible labor markets. And you can't have those flexible labor markets unless people have the credit to be able to buy the home in the new location, unless they can open checking accounts, unless they can shop.
    And these standards allow one to take your good credit reputation with you wherever you go. And that facilitates labor mobility and is a critical part of what defines the success of the American economy.
    So I agree entirely.
    The CHAIRMAN. It just seems that we have such a mobile society. They move because that is where the jobs are, which is exactly what you want in a vibrant economy. But it is one thing to move from Ohio to Arizona and get a job and then have problems getting credit, which really defeats the purpose behind the move in the first place.
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    We appreciate the comments.
    Chairman Muris, how does our current system of credit reporting help to ensure that people who should not get credit, who are not qualified to get credit, do not get credit?
    Mr. MURIS. Well, the system works, as I mentioned, not at the choice of consumers. Consumers who have bad credit can't hide that fact, and that is a very important part of why the system functions so well.
    In many parts of the world, so-called negative information is not allowed to be reported. We allow that to be reported, and that is of tremendous benefit to the people who have good credit records, that the absence of that negative information when it is reported.
    The CHAIRMAN. My time has expired.
    The gentleman from Massachusetts.
    Mr. FRANK. I appreciate the testimony, and particularly, in both cases, I think, the witnesses represent what we need to do, which is to let us now start to get specific about improvements.
    Mr. Muris, I am particularly pleased to see a couple of things for that. As I said, my sense of this is that the one weakness that I believe most critical to address is that a very small minority of consumers about whom inaccurate information gets kind of locked in, and I think they are inadequately protected, and I think it is within our capacity in this large system to improve the protections for these individual consumers without burdening the system.
    I mean, people say it is going to cost more. Yes, we are socializing the cost a little bit, but when we are talking about the hundreds of billions of dollars that are supported here, I don't think we are out of the ball park. I am also, I have to say, joining the Chairman congratulating you on implementing the do-not-call list.
    When I read some of the concerns about some of the industry groups about some of the consumer protections we are talking about, they predict danger to the economy, damage to the economy, like the people who are in the call business predict from the do-not-call lists.
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    And I don't think they were right there, and I don't think they are right here. That is, the gloom and doom we heard about the do-not-call list, I think, will soon be shown to be that I don't think the American economy has really been that dependent on bothering people's dinner.
    And I don't think that perpetuating inaccurate information in files is necessary to the consumer credit situation.
    You had a couple of very important specific suggestions, which I am going to be asking the people on my staff to be working on. One, on page 15, you recommend that the FCRA be amended to provide that disputes raised with furnishers receive the same treatment as disputes filed with a credit reporting agency.
    That is very important. To some extent, it is almost like sort of 18th century England: If you are the consumer, you must go through all the right forms, and if you don't go through all the right forms, you are penalized.
    In my conversations, I too often heard with some of the people who are in the business of furnishing credit or other credit reporting entities the argument, well, if the consumer does it all right then this or that can happen.
    With identity theft, or whatever, if you filed the police report, well, not everybody knows they are supposed to file a police report or can find it easy to file a police report, or in a lot of communities when they are having to lay-off cops you are going find a policeman to report it to, because he is busy out there trying to catch a bad guy who is trying to whack some guy.
    So, here the notion that you would not have a substantive right to get your reinvestigation because you didn't go to the FCRA, I think that is very, very important, and I appreciate it.
    I also was pleased in pages 10 and 11, with your specific endorsement of making it statutorily clear the resellers have the same responsibility as other people.
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    I mean, I think we ought to be very clear. You have a right to complain, you have a right to a substantive reinvestigation, and you have that right with anybody who might be perpetuating the, or sending along the misinformation.
    And one of the things that strikes me here, and, well, I know we will probably wind up preempting going forward, the advantages of not having preempted prematurely seem to me to come forward.
    My own State of Massachusetts, and I was not previously familiar with this, it wasn't an area I had specialized in, is grandfathered in a piece of legislation which gives the furnishers and others a somewhat higher standard, and I am struck by that because apparently Massachusetts has been able to sell things.
    The existing of the higher standard in Massachusetts has not had the negative consequences that some of the furnishers predict. And so I am going to be looking at that, I think, in that we have some happy experience here in those three States that were grandfathered, and I look forward to working with your staff.
    As I said, I am going to be trying to translate these two into statutory language, we will look forward to you working together on that, and I appreciate your coming forward with that.
    So I thank you.
    Mr. MURIS. Thank you.
    Mr. FRANK. Mr. Snow, I also appreciate your testimony. I really want to talk to you about capital controls in Argentina, but we will do that some other time. Thank you, Mr. Chairman.
    The CHAIRMAN. Gentleman yields back.
    The gentlelady from New York, Ms. Kelly.
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    Mrs. KELLY. Thank you, Mr. Chairman. Secretary Snow, and Chairman Muris, I would like to thank you both for appearing before the Committee and voicing your strong support for H.R. 2622.
    As you know, this legislation's been drafted after careful consideration by this Committee that included a multitude of views from many diverse witnesses. We actually began the process by investigating the issue of identity theft in several oversight subcommittee hearings, including a joint hearing that I chaired with Chairman Bachus in the beginning of April, and I am pleased that this legislation specifically addresses some of the problems we discovered in these hearings and hits at the heart of identity theft.
    In the past few months, in my subcommittee, we have also investigated another important security issue, the blocking of terrorist financing under the USA PATRIOT Act. I believe this legislation will further help law enforcement combat financial fraud and track down criminals and terrorists.
    However, there are some concerns about the privacy under this act. And as we move forward with consideration of the FCRA reauthorization, I believe we must also be concerned about the sanctity of privacy for the American people in this act.
    As we will hear from several witnesses today, medical information is readily available and easily identifiable on credit reports. I am currently exploring language that will protect medical information of individuals without disrupting the access to low cost credit and the security of information. In fact, I believe it enhances the security of personal information.
    To that end, I would like to ask a couple of questions.
    Chairman Muris, is it the intent of a credit report to specify information outside the realm of the credit-granting process? Would you support coding medical information in a way that would allow financial transactions to appear on a credit report, but not the actual names of the institutions or the entities that have provided those transactions?
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    Mr. MURIS. This is a problem or an issue that has recently been brought to my attention. First of all, I am not sure the extent to which there is a problem. We are looking, and we will be glad to work with you and the other members and your staffs, to see what the impact of that would be.
    I do know under the FCRA there are separate standards and separate procedures for getting medical information. And if you want to get a life insurance policy, for example, you will need to consent to the insurance company for the right to receive medical information about you. That is regulated to a certain extent by the FCRA.
    But the specific issue that you mention is one that has just been recently brought to my attention, and we would be glad to work with you on it.
    Mrs. KELLY. Let me just give you an example of what I am concerned about. In New York City we have a wonderful cancer-treating institution called Memorial Sloan-Kettering. If I am being treated and I have a bill dispute with Memorial Sloan-Kettering, the assumption would be that I am being treated for cancer and the assumption is in many people's mind still that cancer is almost inevitably problematic to the extent that it deeply affects your ability to work or can result and does result in death.
    My concern is if that name, like Memorial Sloan-Kettering, appears on a credit report, there may be an assumption made by someone who is looking at that credit report that I have a difficulty without understanding that I am there because I am actually going back in for a checkup and there was a discussion about that bill.
    I want to make sure that we work out a method so that the financial end of that could be presented, but the entity providing that service is not listed. That is my intent, that is the legislation that I am working on, and I am glad to think that you would be working with me on that. I would hope that you would support that.
    Mr. MURIS. Well, yes, we would certainly be glad to work with you on it, and it may be easy to do that. I don't know what the ramifications are.
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    I do know that in the situation that you are talking about, if someone currently, under the current law, is denied a benefit because someone drew an inference they didn't like in their credit report, the person has to be told that they were denied the benefit because of the credit report.
    The person has to be told that they were denied the benefit because of the credit report.
    So some protection already exists. And I would be glad to work with you on the additional issue.
    Mrs. KELLY. Recognizing that that protection does exist, my problem is that it is one more step that we simply, I don't believe, need to have people get involved in if we can stop it before it happens.
    Secretary Snow, in your testimony you discuss the integrity of information and note that one of your most important assets is your reputation. Do you believe that there needs to be specific medical information on an actual credit report? Or do you think it makes sense to consider coding the information in some way, as I have described?
    Secretary SNOW. You raise a good issue, an important issue. And I don't have a fixed answer to it. I want to think about it, though, against the criteria that we set forth—I set forth in my statement, and that is how would a given proposal such as that, affect the accuracy and security of information to protect the individual, and how would it affect access to the credit?
    And I think your proposal is something to be looked at, but against those criteria. Today, of course, there is some sharing of medical information that grows out of so-called experiential, but not otherwise.
    And getting that line right, I think, is something that deserves attention. And like the Chairman, we would be pleased to work with you to try and get that balance right. But it is a critically important issue and a very sensitive issue.
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    The CHAIRMAN. The gentlelady's time has expired.
    Mrs. KELLY. Thank you very much.
    The CHAIRMAN. The gentleman from Vermont, Mr. Sanders.
    Mr. SANDERS. Thank you, Mr. Chairman.
    Gentlemen, the legislation that we are discussing today allows consumers to receive free credit reports annually, and that is something that some of us have fought for and we think is a real step forward. Unfortunately, the language in the bill is vague when it comes to providing free credit numerical scores along with a free credit report, including the key factors that adversely affect the consumer's credit score.
    So my first question to both of you is does the Administration support the right of consumers in this country not only to get free credit reports, but to get the scores and the explanation about adverse numbers that might impact the consumer? Mr. Snow?
    Secretary SNOW. We would support, as we have said in the testimony, access to the credit bureaus of the data. We would also require that with the data go some help in understanding how the data is used, so that the individual consumer would be in a better position to understand what they might be able to do to improve their credit standing.
    The score I am more dubious on, and I will tell you why, Congressman. The score itself is a proprietary product. It comes from not the credit bureaus, of course you know, but from these private entities, who have invested a good deal of intellectual capital developing their algorithms and so on.
    Mr. SANDERS. Mr. Secretary, you used the word ''proprietary''; that is my information, that is my life that that information is about. And to suggest that it is an intellectual property right for somebody else when it is information about what the heart of what my life is about, I would suggest it is my information.
    Secretary SNOW. But it is your information, but it is there methodology and their intellectual property.
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    Mr. SANDERS. But don't I have a right to know if three different credit companies, agencies, provide three different scores, don't I have a right to know how that came about?
    Secretary SNOW. You will have the data under our proposal that they use; you will know what the records are. And you will be given assistance and help in trying to understand how that data would be applied. The scores comes from a different source.
    Mr. SANDERS. Frankly, that is not good enough for me, and I think we have got to go further than that. And I look forward to working with you and with the majority to clarify that issue. I think consumers are entitled to more.
    Second issue, what I call bait-and-switch. As you know, right now if I have a credit and I responded to one of the 5 billion applications that people get in this country at 3 percent and then I take out a loan because my wife is ill, suddenly it can go up to 25 percent.
    I think that is an outrage. I think that is a ripoff of consumers in this country.
    Is the Bush administration going to be strong in protecting consumers against this ripoff and help us include strong language, strong language, in this bill?
    Secretary SNOW. This is an area that the Chairman can speak to.
    Mr. SANDERS. Thank you.
    Mr. MURIS. It certainly is under our jurisdiction. To the extent it involves banks and credit cards, it is not. But to the extent it is under our jurisdiction and for a lot of lenders, it is.
    There are circumstances under which, I think, this raises a problem. We are looking at this issue specifically and, in general, the issue about unilateral modifications to standard form contracts. As an old contracts law professor, there are many circumstances in which those modifications should not be allowed.
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    Mr. SANDERS. Just a question. In English.
    I sign up with your credit card company at 3 percent. You are giving me this 1 year at 3 percent. Every month, I pay my bills on time. Suddenly, I am now paying, instead of three percent, five months later I am paying 25 percent although I have paid what I owe you every month promptly.
    Is that appropriate? Is that right? Or should we make sure that credit card companies cannot do that.
    Mr. MURIS. I think, again, you would have to look at the circumstances. But if someone on their own, which is what unilaterally means, not bilaterally with the consent of the consumer, changes the terms in a one-sided fashion, that can easily be a problem.
    Mr. SANDERS. Well, I look forward to working again with you and the majority on that issue. Lastly, I want to make a philosophical statement and let you respond.
    Your Administration is, admittedly, in a conservative administration, in my view, one of the most conservative administrations in the history of this country.
    Day after day, I hear on the television, hear on the radio, how the big, bad federal government should not be taking over the powers that folks closest to the people have, that we have got to protect States' rights, and so forth and so on. And yet, what I am hearing from you is that despite what the Attorney Generals of the United States want, despite what every consumer organization wants, you think that the federal government should crush the ability of state governments to protect consumers and fight and pass standards that are higher than the federal government.
    Why would a conservative administration that tells us how bad the big, bad federal government is want to crush States' rights in protecting consumers' needs.
    The CHAIRMAN. The gentleman's time has expired. The gentleman will respond.
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    Secretary SNOW. Congressman, I think you know we are not alone in this view that these uniform standards should be applied in the preemptive way that has been suggested.
    It has come to my attention that the Conference of State Bank Supervisors, that is all the state bank supervisors themselves, support the legislation that is pending here and the Administration proposal. And they do so because they recognize the greater good that comes from the existence of these——
    Mr. SANDERS. Then, answer my question why a conservative administration——
    Secretary SNOW. Well, because of the greater good.
    The CHAIRMAN. Gentleman's time has expired.
    Mr. MURIS. Mr. Chairman, could I say something about that.
    The Federal Trade Commission has four Clinton appointees and one Bush appointee. And the recommendation to support these proposals is unanimous.
    Mr. FRANK. Well, that would explain their disregard for States' rights.
    Mr. MURIS. Well, I would be glad to respond to that. It was a two-part question. One is how the conservatives—I don't think the four Clinton administration appointees—but could I respond to——
    Mr. FRANK. That is my point. Sure.
    Mr. MURIS. Just as one of the most important things that happened in our country was in 1787, when they formed the Constitution. One of the main purposes of that was because the States were preempting a national economy. The states had individual tariffs. They had individual standards.
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    National credit standards, although not as important as prohibiting states from imposing tariffs, I think national credit standards are extraordinarily important. And it is that uniformity which provides enormous benefits for consumers.
    If we need more consumer protection, and I think we do, it should come as part of national standards.
    Mr. FRANK. Just for 10 seconds. If you could, maybe, send me the reference in Bailyn's Debates on the Constitution to credit reporting, I would appreciate that.
    The CHAIRMAN. Gentleman's time has expired.
    The gentleman from Connecticut, Mr. Shays.
    Mr. SHAYS. Thank you. I thank both of you for your good work to our country and the sacrifices you make in serving our country.
    I just would like you to respond as clearly as you can to the consequence of not taking action.
    Secretary SNOW. Well, I think, Congressman, that the consequences of not taking action would be to, in a far-reaching way, undermine the performance of the American economy. I think these national standards are integral to the enormous success of the American economy, because they underpin credit, and we are a credit-based economy. They underpin, as we talked about earlier, labor mobility, and labor mobility is a hallmark of the success of this economy.
    The uniform standards make credit available to lots of people who otherwise wouldn't have it, which means they can get into the mainstream of economic activity in this country. And I don't have the econometric studies' results in my mind, but it is pretty far reaching, something like 3 percent reduction in the total credit availability in the country and something on the order of a 50-basis-point increase in the cost of credit. Fifty-basis-point increase in the cost of credit on a $7 trillion credit economy, we are talking gigantic numbers and far-reaching negative impacts on the economy if these national standards aren't maintained.
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    Mr. SHAYS. Yes, sir?
    Mr. MURIS. Just to make a brief amplification, the economy compared to the rest of the world, our economy has a few simple reasons why it is so much better than many other economies, and two of those reasons are our labor markets are so flexible, and another is our credit markets are so flexible. And I think that flexibility crucially hinges on having national standards in the credit markets.
    Mr. SHAYS. I have had 13 years in the Statehouse, and I know the argument for states being allowed to pass its own laws and supersede what the federal government, and now I have had 16 years in the federal level. But it seems to me this issue is so crucial that we can get into the ideology of States' rights versus federal, and in the process we risk, frankly, putting our economy in danger.
    I, Secretary Snow, want to just voice a concern about a lack of clarity on the Department of Treasury as it relates to Jesse's. And I want to understand what your position is as it relates to why we would allow Freddie Mac and Fannie Mae to not have the same kind of disclosures as any other Fortune 500 company. And I would like to know when this lack of clarity will be clearer.
    Secretary SNOW. Congressman, that is an issue that we are reviewing right now, and in the context of the recent disclosures that have made the news at Freddie Mac. We have always articulated the need for disclosure, and have been in the forefront of pushing for the disclosure under the 34 act. And I am pleased that Fannie Mae has now done that and is submitting the 34 act information. And once you go into 34 you don't come back out.
    Mr. SHAYS. Right.
    Secretary SNOW. So they are permanently under 34.
    Mr. SHAYS. But what confuses me is you have Alan Greenspan making it very clear he sees no reason why they also shouldn't be under the 33 act. And I am just wondering why there would be any argument that they shouldn't be under it.
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    Secretary SNOW. Well, there doesn't seem to be any current difficulty with their issuances.
    But clearly, there needs to be transparency, disclosure and good transparency, and effective regulation.
    Mr. SHAYS. Well, I thank you all for looking at it.
    Secretary SNOW. And that whole subject is, of course, being looked at by the Committee.
    Mr. SHAYS. Thank you. Thank you, Mr. Chairman.
    The CHAIRMAN. The gentleman's time has expired.
    The gentlelady from Indiana is recognized. Ms. Carson? No questions?
    The gentlelady from California, Ms. Lee.
    Ms. LEE. Thank you very much, Mr. Chairman. And let me say I, too, am very happy to be able to listen to this testimony today and have many of the same concerns that many members, of course, on our side have raised.
    One is I would like to ask Secretary Snow a little bit more with regard to the issue raised in terms of credit scoring, the proprietary information, and I think what Mr. Sanders indicated with regard to the fact that this is personal information, private information, that is now being packaged, really, and being sold.
    One is do consumers really know that this information is now a commodity and that their entire private information is actually a product, and that this product is being sold? Is that information we know?
    Secretary SNOW. You know, I don't know what percentage of the general public knows that. I would distinguish between the credit report, the data that is in the file that the credit bureaus have, which you should have access to, and which under the proposed proposal you would have access to, free access to. All you have to do is request it.
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    But I would distinguish that, and this is clearly something people can argue about, that and the score. Your information is your information, it is your records, but the score, which really comes from somebody else, is their application of their methodology, it is their undertaking, it is what they have done to evaluate those records.
    Now, we think people ought to understand more about how that is done, and how scores are set.
    Ms. LEE. Sure, but Mr. Secretary, what I am asking is do consumers have a right to know that this, whatever this methodology is is a methodology that is being packaged as a product to be sold to make money?
    Secretary SNOW. Yes, they absolutely should have the right to know that their records are, and they should have access to those records.
    Ms. LEE. Access to the records is one thing, Mr. Secretary, but I am asking with regard to the right to know how this scoring information is being used in terms of the sale of it. Should they have a right to know that, and if they don't, then just, they don't.
    Secretary SNOW. Well, they certainly have a right to know that people are putting scores on them.
    Ms. LEE. But that the scores are being sold?
    Secretary SNOW. And there is a market in these scores.
    Ms. LEE. Sure.
    Secretary SNOW. I mean, there are, these companies are selling these scores, and they will sell them to you, as an individual.
    Ms. LEE. Sure, but do consumers know that? All I am asking is should, and does the Administration and under the bill——
    Secretary SNOW. You mean, should there be a disclosure?
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    Ms. LEE. Should there be a disclosure that this scoring——
    Secretary SNOW. That there are scores, that scoring goes on?
    Ms. LEE. That there are scores, and that the scores are proprietary information——
    Secretary SNOW. I have no objection.
    Ms. LEE.——and that this proprietary information is being sold?
    Secretary SNOW. Well, I think if you read the newspapers, that is daily fare in the newspapers.
    Ms. LEE. Well, Mr. Secretary, I really want to just know, do you think we should work on this a bit in this bill, and maybe tighten it up and make some——
    Secretary SNOW. Well, I don't, I would not recommend mandating making the scores available for free. I would recommend, as we have, making available on request the records.
    Ms. LEE. But making available the information that the scores are being sold to make a profit, should consumers just know that as they apply for credit? They may choose not to apply.
    Secretary SNOW. Well, I think sure. I don't see anything fundamentally wrong at all with disclosure: The data goes into the compilation of scores.
    Ms. LEE. Then we would like to work with you on an amendment, on a disclosure amendment.
    And let me just ask Mr. Muris one thing with regard to adverse actions. With regard to multiple credit inquiries, oftentimes consumers attempt to find the best deal, the best rate, the best terms. I know for a fact many individuals have called and indicated to me that as they do this they are notified that there is an adverse action now because they are attempting to find the best loan. Why is it that multiple credit inquiries become ultimately a negative on your credit report when really you are trying to find the best product? And what can we do to correct for that in this bill?
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    Mr. MURIS. Well, my understanding is this is an issue that only comes up—the credit's only concerned about if you are doing it a lot in a short period of time.
    And I can understand their concern if that is true. If you are applying with several people or making inquiries with several people at once, that is something that creditors would want to be aware of.
    Ms. LEE. So why would it be a negative when the consumer's attempting to find the best interest rate and the best terms?
    The CHAIRMAN. The gentlelady's time has expired. The gentleman may respond.
    Secretary SNOW. Mr. Chairman, can I clarify one——
    The CHAIRMAN. Of course, sure.
    Secretary SNOW. As I think we are in agreement on at least making available the scoring process. I mean, we support making available knowledge of the scoring process. So if you are asking do we want people to know they are getting scored, the data is being used to make scores, yes, we do. The only place that we may have a difference here is making the score itself available——
    Ms. LEE. But also making available the information that that is being sold——
    Secretary SNOW. Well, sure. Because what we are proposing to do is to make a free report available along with the knowledge of how the scoring process works, so you will be informed that there is a scoring process with respect to these records.
    Ms. LEE. And that it is being sold.
    Secretary SNOW. Well, sure, these people are in business.
    The CHAIRMAN. The gentlelady's time has expired.
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    Mr. MURIS. If I could respond?
    The CHAIRMAN. The gentleman may respond.
    Mr. MURIS. Because I think I—right before Secretary Snow responded—I think I misunderstood your question. I was thinking of multiple applications. If it is multiple inquiries, I think you are correct. And I think the practice now is to treat multiple inquiries in a short period of time as one inquiry. If people are treating it otherwise, I think there is a problem——
    Ms. LEE. I would like to work with you on that, Mr. Muris.
    Mr. MURIS. Sure, and I agree with you.
    The CHAIRMAN. The gentleman from Texas, Mr. Hensarling.
    Mr. HENSARLING. Thank you, Mr. Chairman.
    Mr. Secretary, we have heard lots of evidence at the subcommittee level about the fact that as Americans we enjoy the greatest access and the lowest cost of credit available. I am not really sure that anyone cares to debate that proposition today.
    I have a specific question. Now, as a member of the subcommittee, I actually attended what I believed the Chairman described as the exhaustive six hearings, and actually learned something by attending these hearings. I heard evidence from the Hispanic Chamber of Commerce that 7 out of 10 small business in America are capitalized with less than $20,000, and that 45 percent of them use credit cards as a major source of financing for their capital formation or their capital for expansion. And so the question I have is, has Treasury seen similar data? And if so, do you have an opinion on the possible adverse impact on employment should we fail to reauthorize FCRA?
    Secretary SNOW. Well, I am generally aware that credit cards play a critical role in the financing of small business.
    And the virtue of these uniform standards is that they allow the pooling of information, which reduces the uncertainty of the credit furnisher. And that particularly helps those who have the most difficult time getting credit. Some small businesses would certainly tend to fall into that category.
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    So I think the failure to extend these standards and I would hope make them permanent, the failure to do that, extend the standards, I think would have a differentially adverse effect upon small business, certainly, and Hispanic small business would probably fall into that category particularly, yes.
    Mr. HENSARLING. Chairman Muris, a lot of folks on the Committee obviously have a concern about identification theft, as do many of our constituents. I am actually one of the members of this Committee who has been victimized by identification theft. Frankly, I was one of the lucky ones in being able to recover the losses and to ensure that my credit rating was not adversely impacted.
    And although we have heard a lot of testimony, I think it really comes down to a critical question, and that is when it comes to the subject of ID theft are we better off with or without the reauthorization of FCRA? I am curious of your opinion and why you hold the opinion.
    Mr. MURIS. Well, I certainly think in terms of the national standards we are better off. We are certainly better off with the ability of businesses to share within affiliates, for example, information freely. I think that helps in terms of identity theft.
    I do think there are some provisions where we can strengthen the law within the context of the national uniform standards, and we and Secretary Snow have proposed several. I think they would help on identity theft.
    There are things outside this bill or outside—criminal, increased criminal penalties, for example—we have supported, and I think that would help on identity theft as well.
    It is a very serious problem. We are charged by the Congress with providing assistance to consumers. We have taken a lot of steps.
    As a minor example, we publish a booklet that we can't keep in stock, because there are just so many people who request it: How to Deal with Identity Theft, How to Protect Your Good Name. We have recently just started publishing it in the last year or so in Spanish. And the consumer education is a very important part of what we do, but also the legislative proposals we have here, I think, will help on identity theft.
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    Mr. HENSARLING. Although I am a veteran of six of these subcommittee hearings, I still find it a little challenging to get my arms around the number of inaccuracies that may be appearing in a consumer's credit report. I am curious about what data you may have, because there have been some accusations that a huge number of reports contain inaccuracies.
    I am curious, Mr. Chairman, about what information you have on this matter. To the extent that these inaccuracies exist, is it mainly in the nature of a wrong telephone number or an address due to a fairly mobile society? What portion of the information may actually be used in an adverse action against a consumer?
    Mr. MURIS. Well, I think the implication of your question is the materiality of inaccuracies is extremely important, and let me focus on that.
    But first there have been some recent studies, and although I generally get along and am supportive of and supported by my many friends in the consumer groups, this is an area where I disagree with some of the recent studies.
    What you have here are different companies with different standards, and if you pull a credit report on different individuals the information may be reported differently, there may be somewhat different information.
    The key to the Fair Credit Reporting Act we think is in the adverse action notice, which is why we support increased use for new techniques of adverse action notices, because what I call the self-help feature is extraordinarily important.
    The consumer needs to know when they are denied a benefit based on what is in their credit report, because then they are put on notice that if there is something wrong, you know, they say, well, there is nothing wrong with my credit, then they know that they should look at that report and dispute it.
    That is the heart, I think, of the very ingenious system that Senator Proxmire set up over 30 years ago. But I think because of changes in credit, we need to expand the use of adverse action notices, and we have made that proposal.
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    The CHAIRMAN. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Emanuel.
    Mr. EMANUEL. Thank you, Mr. Chairman. Thank you for holding this hearing.
    My colleague from New York, Congresswoman Kelly, talked about health information. I actually have an amendment that when we get to marking up the Chairman's mark and offering it. It is a bipartisan amendment that deals with, in fact, health information, which I think we need in the area of health information to provide consumers, I think, this safe harbor. And it gets beyond the issue of the opt-in and opt-out, but creates what I call a blackout as it relates to health information, particularly when it is in the credit granting process or in the selling of relevant financial information or services. Obviously, if it is relevant to life insurance, that is one thing, but it is not relevant—there should be a blackout on health information.
    I think that is essential to giving some consumers in a changing environment that we have and the technology's that advancing, that safe harbor that that information that is relevant, that their health information not be used against them in the credit process.
    And I know it wasn't in the Administration's bill of recommendations, but your openness to that, I think, is essential. We have a bipartisan amendment. I think it is based on common principles that your health information should not be used against you in this process.
    Secretary SNOW. Congressman, I think I indicated in response to Congresswoman Kelly that we would be open to talking to you about that and working with you on that score.
    But it should be looked at in terms of those criteria that I laid out. What does it do for the security and accuracy of information? What does it do for general credit availability?
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    Mr. EMANUEL. To that standard is what does it do to help our consumers? Because my view is if you can't give the consumers in this changing world some sense of a safe harbor, it also has an impact.
    This bill has been developed in a bipartisan fashion, we continue that effort here. It is one of the things that Ranking Member Frank and also Chairman Oxley have talked about the importance here. I think this amendment would go a long way toward doing that and meeting the standards that you have set out.
    Secretary SNOW. We would look forward to working with you on that.
    Mr. EMANUEL. Okay. The other matter is I also want to compliment you, although unrelated to this subject, is working with you on the Earned Income Tax Credit and the ability to deal with making it simpler so we get more people involved, reduce fraud, and simplicity. And want to compliment you and your agency and the people involved for working with you on that very important matter.
    Secretary SNOW. That is another area where we want to continue to work with you.
    Mr. EMANUEL. If this continues we are going to start singing Kumbaya at some point.
    So with that, I have no other questions.
    The CHAIRMAN. Don't push your luck.
    Mr. EMANUEL. You know the words?
    Do you think he knows the words, though? We give you a little cheat sheet on that.
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    The CHAIRMAN. The distinguished Chairman of the subcommittee, Mr. Bachus.
    Mr. BACHUS. Thank you, Mr. Chairman.
    One of the ways to combat identity theft that we are using in this legislation—in fact, the Administration and the agencies have also talked about—the use of so-called red flags to detect or inhibit identity theft. And there has been a debate on this Committee as to how we best institute the use of these red flags.
    We have seen cases where when we have too rigidly proscribed what the financial institutions will do that it actually inhibits their efforts to combat identity theft, because they don't have flexibility. You know, they have a lot of knowledge. They have a lot of experience in how to identify these things themselves.
    And I notice that, Secretary Snow, many of your proposals rely on best practices approach or an approach that allows the regulators to come up with the use of red flags. But although it gives specific direction to the financial institutions, it provides them with flexibility to achieve the desired result.
    What are the dangers of prescribing a rigid approach, as opposed to leaving flexibility in dealing with the financial institutions in exactly what they do?
    Could it actually hurt our efforts if we are too rigid, or we prescribe too much?
    Secretary SNOW. Well, that would be our view, Mr. Chairman. Because we need to be continually creative and find new and better solutions to deal with the creative people who are out there on the other side trying to engage in criminal behavior.
    They are determined, they are smart, they are capable and they are ruthless, and the red flag idea should be embraced by the banking community, but improved upon.
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    I mean, it seems to me they are the experts on the use of internal financial information and how best to use it to accomplish the objective they have in mind, and their consumers have in mind.
    If somebody is likely to be a victim of this, spread the information quickly, raise the red flags, get it out there. And I think the banking institutions themselves are probably better at evolving the best way to deal with that.
    That has been a rule that was written at a point in time that can't by its very nature evolve. That would be our basic thinking.
    Mr. BACHUS. Right. In fact, yes, I have heard from talking to some of the financial institutions, and actually some of the law enforcement community, that sometimes the law, if it is too structured, it is 20 years behind the criminals, or that they actually use the definition of, you know, if it is too carefully prescribed, and they know what that definition is, to get around it.
    And I would hope that the Committee would give flexibilities to the regulators, and that you, in turn, would give flexibility to the financial institutions.
    Secretary SNOW. That is very much where the Administration is coming from.
    Mr. BACHUS. Thank you.
    Chairman Muris, some have suggested that this 30-day time frame for investigating consumer disputes about accuracy of information contained in their credit reports is too long and should be shortened to 15 days.
    Does the FTC have a position on such proposals? Are there any negative consequences to the uniform credit reporting system that might flow from truncating this reinvestigation process down from 30 days?
    Mr. MURIS. Well, we have not taken a position on shortening. We are supporting the law as it is. My personal view is that there could be serious consequences from reducing the time, particularly by that dramatic of a reduction.
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    First of all, this is a voluntary system.
    And a second problem is that we see something called credit repair scams, and one of the things that these people tell you to do is to dispute everything in the hope that the clock will run out. And if we shortened the system that much, I think that might facilitate that sort of tactic, which doesn't do, you know, the majority of consumers who pay their bills any good at all.
    Mr. BACHUS. I thank the panel.
    I would like to say to the members, and to the panel, that the legislation as drafted, and I have discussed with Mr. Moore and Mr. Davis, as far as credit scores, it was the intention in drafting this legislation, that is the credit reporting agencies had credit scores that that would be revealed. Not only would the credit report go to the consumer, but also the credit scores. So there is some concern that has been expressed here earlier that the legislation may not do that.
    It is an intent, and we will continue to work, because if the consumer is not given the credit score along with the credit report, much of the philosophy behind allowing consumers to be able to have, to be educated and improve their credit scores. If they don't know what their score is, it is pretty impossible to improve that score.
    So it is our intention that they do receive their credit scores, and I will work with members on both sides to see that that is done.
    The CHAIRMAN. Thank you. The gentleman's time has expired. The gentleman from Georgia, Mr. Scott.
    Mr. SCOTT. Thank you very much, Mr. Chairman.
    Secretary Snow, I would like to ask you a couple of questions on two of the points that I think have been sort of points of contention here, one, the scoring, and the other, the free credit report.
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    First of all, we are all aware, and I think you mentioned in your remarks, the need for consumers to be educated about their credit scores. Chairman Bachus has just indicated the willingness to work on this issue a little more.
    But I would like to call your attention to the fact that too often consumers are not even aware that they have a credit score until that credit has been denied.
    What efforts specifically can the Administration take to educate consumers and raise awareness about their credit scores before that credit is denied?
    Secretary SNOW. Well, the proposal that we have very similar to what Chairman Bachus talked about, would give consumers the opportunity to review their credit reports for accuracy and for completeness. They would also be given more information about their credit scores and would be informed on what they can do to improve those scores, improve effectively their credit profiles. I am not sure where the differences are, if any, between where the Committee bill is the Administration on that, but I will look at that. I don't think we are very far apart at all on that.
    We want people to know their credit reports. We want them to know that this information is being used to create scores. We want them to have a sense of how the scores are being created. We want them to have a sense of what they can do to improve their credit profiles. And it seems to me, you go to the identity theft issue, it is very important they have these records so they can correct them if they are wrong, and wrong information doesn't continue to be circulated in the credit system.
    Mr. SCOTT. Let me ask you another question, because my time is slipping, and we have to go vote. But I want to ask you something about the expanded use of giving free credit reports, which is very important, we support.
    But there is another side to this. There is some concerns. In my district we have Equifax. You are familiar with Equifax as a company, very reputable company in my district and a leader in this whole credit reporting industry. They have raised concerns with me, and I would hope that they have with you and, if not, I am sure that they will, but, I hope, we need to address that, about the potential cost of complying with the requirements as they are now drafted and written into the law, that there has not been an adequate benefit cost-analysis being given to that. And in order for this very important tool of accessing a free credit report, I think it has to be done within a way that the industry that is in this business can do it in a successful way.
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    It appears to me right now that the regulations, or the way it is written, are rather loose, that not only would it make it somewhat difficult and problematic for those businesses that are in this business and make their business giving credit reports, put this requirement on them, but not do the job that we needed to be done, to do what needs to be done if the industry that has to give these free reports is not done in a way in which they can maintain their business as well.
    And I would like for you to address that in terms of how the benefits might outweigh the costs, and specifically if you could address Equifax's concerns.
    Secretary SNOW. Well, Equifax is one, as I understand it, one of these three major credit bureaus that do such a good job of collecting this information and then making it available to credit issuers. And they play a very important part in all of this.
    Today, under a variety of circumstances, free reports are available. We are expanding some upon requests. How many requests will be made? I don't know. Certainly, if you have been turned down for credit, you can get it free today. Or if you failed to get a job because of a financial credit report on you, you can get it free today. We would propose expanding it. The Bachus bill would propose expanding it as well.
    I don't think on a cost-benefit basis, Congressman, this will fail to be advantageous to the credit bureaus, because they have such a stake in accurate information.
    And what the free reports will do is give anybody who has got a question about his credit report a chance to go back and look at it, understand how it was created and then try and get it corrected. I know there is some concern among the reporting agencies that this will be unduly costly. I would hope they would look at the benefits they would get, because they have the biggest stake of anybody, next to the consumer himself, in making sure these reports accurate.
    The CHAIRMAN. Gentleman's time has expired.
    The Chair would announce there are two votes on the House floor. It would be my intention to recognize two more members for this panel, then dismiss this panel and reconvene at 1:00.
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    So we will now recognize the gentleman from California, Mr. Royce——
    Mr. ROYCE. Thank you, Mr. Chairman.
    The CHAIRMAN.——for four minutes, hopefully.
    Mr. ROYCE. Appreciate that.
    Welcome Secretary Snow. And I wanted to ask you specifically, I know from public statements that you and your team are studying the issue of government-sponsored enterprise regulatory reform.
    Secretary SNOW. We are.
    Mr. ROYCE. And with that in mind, I am not trying to get you to comment specifically on the topic before you all complete your study; however, I would like to know, in your view, what are the attributes of an effective world-class regulator in respect to GSE oversight.
    Secretary SNOW. Well, Congressman, I think the attributes would be the ability to understand the risks in the enterprise, the ability to understand the business, a command of the facts of a business, a command of the facts with respect to the risks that the capital structure of a business poses, the ability to get at the information you would need to have to know that.
    So transparency, disclosure, and as with all regulators, the ability to hold the attention of the regulatee, to bring sanctions for conduct that poses risks to the system, to the financial system. So ability to lay in credit standards, risk standards, capital standards, and then sanctions to see that the standards are observed.
    Mr. ROYCE. The other question I was going to ask of you, I was pleased that the SEC recently approved the New York Stock Exchange and Nasdaq rules that require companies that are listed on those exchanges to obtain shareholder approval for stock compensation plans, for management or for their employees.
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    Do you see the need for additional compensation reform, or do you believe that the new corporate governance rules are sufficient to protect shareholders from potential excess in the system?
    Secretary SNOW. Congressman, you are now speaking generally, corporate America, right?
    Mr. ROYCE. About corporate America in general.
    Secretary SNOW. Yes. I think the issue of corporate compensation ultimately has to be a critical priority for boards, and particularly compensation Committees, because ultimately they have to make these decisions on how to retain, how to attract and how to motivate senior management.
    So I would not be in favor of highly prescriptive set of rules, but I would hold boards of directors, and particularly compensation Committees, to very high standards of conduct.
    The CHAIRMAN. Gentleman's time has expired.
    The gentleman from Kansas, Mr. Moore.
    Mr. MOORE. Thank you, Mr. Chairman.
    Very quickly, Secretary Snow, the Administration proposal includes a direction to the FTC and bank regulators to make opt-out notices for pre-screened credit officers simpler and easier to understand. And I really appreciate the Administration's position on that.
    Several of my colleagues, and I recently wrote a letter to the regulators asking them to create a simple, understandable privacy notice. Would you agree that it might be—can you agree that it might make sense to have both of these in simple English that consumers could understand and have an understandable right to opt out in both areas?
    Secretary SNOW. Congressman, I am all for plain English.
    Mr. MOORE. And I am a lawyer. So am I.
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    Secretary SNOW. And we get too little of it, I think. So that people understand the rights and privileges that are being made available to them.
    And I would be happy to look at what you have in mind, and give you my comments on it.
    Mr. MOORE. Very good. We will do that. Thank you, Mr. Secretary.
    The CHAIRMAN. I Thank the gentleman. The gentleman's time has expired.
    Gentlemen, we most appreciate Mr. Secretary and Mr. Chairman for an excellent presentation, and the Committee stands in recess until 1:00 p.m., at which time we will take up the second panel.
    Mr. BACHUS. [Presiding.] I want to welcome you all back from the noon break.
    At this time we are going to call the second panel. The Committee is meeting today, the Financial Services Committee, to hear testimony on H.R. 2622, which was introduced by Representative Hooley, Representative Biggert, Representative Moore and myself, and has 28 co-sponsors on the Committee: 14 Democrats and I think now 17 Republicans, so a balanced group.
    I very much look forward to the testimony of our second panel. From left to right I want to identify the panelists. We have Mr. Mallory Duncan, Senior Vice President and General Counsel for the National Retail Federation; Mr. Michael F. McEneney, partner, Sidley Austin Brown & Wood. And you are testifying on behalf of the U.S. Chamber Of Commerce—we welcome you—Dr. William Spriggs, Executive Director of the National Urban League Institute for Opportunity and Equality; Mr. Stephen Brobeck, Executive Director, Consumer Federation of America; Mr. John C. Dugan, a partner in Covington & Burling, on behalf of the Financial Services Coordinating Council; and Mr. Stuart K. Pratt, President, Consumer Data Industry Association.
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    I want to welcome all of you gentlemen. We have no ladies on our second panel. So I want to welcome each of you all.
    And at this time, Mr. Duncan, we will start with your testimony.
    Mr. DUNCAN. Thank you, Mr. Chairman.
    My name is Mallory Duncan. And I am testifying today on behalf of the National Retail Federation, where I serve as Senior Vice President and General Counsel. NRF is the world's largest retail trade association. We greatly appreciate the opportunity to present our views on H.R. 2622, the FACT Act of 2003.
    I would like to preface my discussion with a brief illustration of the credit underwriting process. The seven preemptions currently contained in the FCRA are the underpinnings of the modern credit granting system. If we have a clear understanding of the underwriting process, it is much easier to analyze the vital role of the policies contained in the FCRA.
    For example, attached to my written testimony there are two simple revolving loan portfolio examples, each containing 100 loans of $1,000 a piece and each paid off within a year. One has an interest rate of 5 percent, the other a rate of 18 percent. If one loan in the 5 percent portfolio were to immediately default, whether because of identify theft, consumer bankruptcy or poor judgment on the part of the lender, it would take the interest payments from approximately 41 performing loans to compensate for that default. The credit granter can, if it has enough capital to make 41 new loans, and hope that they all perform, or the credit granter can live with a much lower rate of return.
    If as few as three borrowers default, the credit granter is completely under water and will lose money even before facing the expense of maintaining those 97 other loans.
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    If one loan in the 18 percent portfolio defaults, it takes the interest from 12-plus performing loans to compensate for that one default. Even if that credit granter gets it exactly right 92 percent of the time, no matter how well those 92 other consumers pay their bills, the credit granter is in serious trouble. That is why retailers expend so much effort to get it right.
    Now, the complicated part in my example occurs when trying to fit the maximum number of borrowers in that continue of rate between 5 and 18 percent while keeping defaults to a minimum. Anything that enhances this process is obvious consumer benefit. Since 1996, the seven preemptions of the FCRA has enabled retailers and other lenders at a national level to take advantage of the technological advances to serve their customers while greatly refining their ability to fit the borrower to the right rate.
    Mr. Chairman, as you indicated, in effect, the FCRA and the 1996 amendment have created an interstate credit superhighway that has done an outstanding job of delivering unprecedented volume of credit more cheaply and more quickly to more people at all income levels.
    Is the system perfect? No. There are bumps, potholes and accidents along the highway, but very few overall, and especially so given the magnitude of the system and the speed at which it operates.
    It seems to us that the policy question today is how much do we want to impede credit traffic flow and increase costs for highway users in hopes of further reducing the number of accidents and bumps? We have reviewed the provisions of H.R. 2622 with this in mind, along with the criteria suggested by the Department of Treasury. And I would like to just briefly make a few comments there.
    The NRF applauds the inclusions in H.R. 2622 of the critically important amendment that makes permanent the national uniform standards under FCRA. The bill also includes a number of provisions to address specific scenarios that involve identity theft. For example, the bill imposes new obligations in connection with certain address changes, fraud alert and address discrepancies. The NRF supports efforts to address these issues and looks forward to working with the Committee to functionally strengthen these proposals.
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    A common theme of our recommendations to these provisions centers on maintaining flexibility to address these potential identity theft scenarios. In particular, we are concerned, as you mentioned, that if the methods for addressing identity theft are rigidly specified in the bill, credit granters will be forced to devote resources to complying with those methods, even if they become ineffective or if more efficient alternatives become available.
    Therefore, we recommend that the bill maintain its approach of specifying a particular method for addressing each potential identify theft problem, but also include new provisions that would enable credit granters to develop reasonable alternatives with guidance from the federal agencies. This is the approach taken in the USA PATRIOT Act, Section 326, designed to combat terrorism, at least as important a problem.
    In short, we need to maintain the flexibility to change our method as rapidly as the criminals change their scheme.
    Now, some examples where the bill would benefit from this approach include the provisions for investigation of change of addresses and those governing conflicts where consumer fraud is present. Retailers are particularly concerned if the bill's provisions do not inadvertently frustrate consumer's ability to use their existing accounts or open up the opportunity for unscrupulous credit people to manipulate the system, to the detriment of millions of honest consumers. We submitted suggestions to the Committee and look forward to working with them on this very important issue.
    In closing, I would like to emphasize the retail industry's strong support for permanent reauthorization of the seven areas of preemption contained in Section 624. Without the extension of nearly uniform national standards, it would be harder to judge with any confidence the credit worthiness of each individual. It would slow the credit process and lending rates would rise. Consumers have come to expect instant access to credit when purchasing everything from automobiles to consumer goods, such as furniture, appliances and apparel.
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    In the final analysis, we in the retail industry have a real concern that a more fragmented approval process for credit underwriting would negatively impact consumers and, as a consequence, retail sales, ultimately costing jobs and hurting the economy as a whole.
    Thank you again for this opportunity. Be happy to answer any questions.
    [The prepared statement of Mallory Duncan can be found on page 148 in the appendix.]
    Mr. BACHUS. Thank you, Mr. Duncan; and Mr. McEneney?
    Mr. MCENENEY. Thank you, Mr. Chairman and members of the Committee.
    My name is Mike McEneney, and I am a Partner at the law firm of Sidley, Austin Brown & Wood.
    I am pleased to have the opportunity to appear before you today on behalf of the U.S. Chamber of Commerce. I would like to commend the members of the Committee for their efforts to protect the security of consumers' personal information and ensure access to credit at low cost. I would like to commend the sponsors of H.R. 2622 for their leadership in crafting an important foundation for addressing identity theft and FCRA issues.
    The FCRA and its national uniform standards have provided a robust framework for the most advanced consumer credit and insurance markets in the world. Indeed, the benefits of the FCRA were highlighted in a recent information policy institute study, which found that the national uniform standards established by the FCRA have contributed significantly to the consumer benefits of the current credit marketplace.
    The study concluded that the loss of the existing framework of uniformity would threaten the current consumer benefits and that Congressional action is necessary to ensure the continuity of our national standards.
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    We applaud the sponsors of H.R. 2622 for taking such action. The national standards established by the FCRA are also an important component of protecting the security of consumers' personal information. For example, the national uniform provision under the FCRA ensure that financial institutions can have access to reliable credit report information for identity verification and other identity-theft prevention measures.
    Although renewal of the FCRA national standards is an important step, we agree with the Committee that more can be done. The proposal legislation includes provisions to address a number of potential scenarios involving identity theft. The Chamber strongly supports efforts to address these important issues and appreciates the opportunity to provide comments on the legislation.
    In general, we believe that there is a common theme that may be helpful in guiding consideration of provisions to combat identity theft. In particular, as Secretary Snow mentioned earlier, the methods used to address potential identity-theft scenarios should be flexible, allowing companies to utilize the most efficient means to thwart identity thieves.
    We believe that this goal is embodied in several provisions in the bill. For example, the legislation includes a provision requiring federal banking agencies to develop so-called red flags for use in detecting identity theft. This provision relies inherently on recognition that a one-size-fits-all approach may not work.
    The red flags presented by identity thieves will invariably change over time, and the tools used to combat the thieves should change as well. The legislation takes important steps in the direction of providing this flexibility, and we hope that this theme can be further explored.
    The bill also addresses the important issue of a consumer's ability to access his or her credit report. The Chamber welcomes consideration of how to make credit reports more available to consumers.
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    We believe, however, that this issue requires careful study before next steps are taken. In particular, there should be a full examination of the cost associated with a free report in order to ensure that there are no unintended consequences, particularly for consumers.
    Moreover, the frequency and volume of demand for free reports will be difficult, if not impossible, to predict since a widely circulated press report or e-mail could drive extremely high volumes in short periods of time. Given the inherent unpredictability, it is unclear how credit report companies would be in a position to adequately manage this problem. For example, even the most basic issues, like establishing adequate staffing levels, are difficult to address when you cannot predict the volume of the demand.
    The Chamber is pleased that the bill includes the provision that would make it clear that companies can conduct investigations of wrongdoing in the workplace without the inappropriate application of the FCRA. Because of the difficulties in conducting an investigation while complying with the FCRA's requirement, the FTC interpretation on this issue deters employers from using experienced and objective outside organizations to investigate workplace misconduct.
    While the FTC's interpretation affects all businesses, it is particularly damaging to small and medium businesses that do not have in-house resources to conduct these investigations themselves.
    Once again, I would like to commend the Committee for its efforts to maintain the consumer benefits of our current financial marketplace, while also protecting the security of consumers' personal information.
    The Chamber looks forward to working with the members of the Committee as the legislation moves forward, and I thank you again for the opportunity to appear before you today. I would be happy to answer any question you may have.
    [The prepared statement of Michael F. McEneney can be found on page 195 in the appendix.]
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    Mr. BACHUS. Thank you, McEneney. And Dr. Spriggs, we welcome your testimony.
    Mr. SPRIGGS. Thank you, Mr. Chairman. My name is William Spriggs. I am the Executive Director for the National Urban League's Institute for Opportunity and Equality.
    The National Urban League is the nation's oldest and largest community-based organization dedicated to moving African-Americans to the economic mainstream.
    We are very encouraged by the language in H.R. 2622 that seeks to ensure that consumers can get a summary of their credit score and information on how it was derived so that the score can be approved.
    We applaud the Committee for that step. And I was very encouraged by your comments earlier in the first panel that you also meant the credit score to be available along with the credit report.
    We would like to see the Committee go one step further, however. Credit scores have now dominated the way in which home mortgages are made. Home mortgage is, of course, important to home ownership, and home ownership is at a record level in the United States.
    While 75 percent of white non-Hispanic households are home owners, for African-Americans that is only 47.7 percent, and for Hispanics it is 46.7 percent.
    Part of that differential seems to be a persistent gap in access to home mortgage, and the loan denial ratio unfortunately has stayed constant for African-Americans, at around 2 to 1, and for Hispanics at 1.5 to 1, compared to whites, this despite the fact that in 1995 there was a mushrooming of the use of credit scores.
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    Many people believe that credit denial took the form of differential treatment using credit scores everyone is now convinced has not just been for differential treatment, but we must remain on guard for differential impact.
    So it is not just access to the scores; it is access for the Committee and for the FTC and for the American citizens, and to understanding the accuracy—not just the tendency, not just the averages, but the accuracy of the scores themselves.
    We need to have transparency of the score creation in the same way that we have transparency with HMDA data. This has allowed us to look behind the veil at how home mortgages are done. We need to be able to look behind the veil of the credit scores, as well.
    Now, the credit scores is a statistical thing, and it is subject to all sorts of statistical problems. I just want to mention a few of them. They really aren't race-specific, they really deal with consumers.
    You have had a series of reports presented to you on levels of accuracy. All statistical models assume that the data is accurate. It is very difficult to deal with statistical models when you start with data that has measurement error in it.
    It is important for outside researchers, it is important for Congress, it is important for the FTC to understand how the scoring industry treats this measure and error, because how that gets treated is very important as to whether there would be an introduction of bias into the system.
    Missing data. You have also heard information presented to you at other hearings that for a number of reasons, either credit card information, or sub-prime loans in the mortgage industry, don't get reported to the credit bureau.
    So how does the industry handle missing data? Again, there can be a great introduction of bias when it comes to what is the way in which missing data is handled.
    Finally, there are omitted variables, variables that you would imagine ought to be in the model, things like employment, things like even regional variations in terms of the economy's performance.
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    But they aren't in the model. And it is not possible for us to understand, for instance, if there is a slow-down in manufacturing in Illinois, as an example.
    Are those workers' credit records really the same if they fall behind as an employed worker living in northern Virginia, where the unemployment rate is 0.1 percent, who falls behind?
    Do they really present the same credit risk if we are looking forward? Probably not. But the way that the scores get treated if we don't understand the model means that we could have unexpected differences in credit scoring across the country that are unintended. But we need to be able to have access to that information.
    Now, what is the importance here, as people would say that the credit scores now allow people to get credit? But it is credit at different prices. So accuracy matters. Just yesterday, when I was preparing, I looked at the Fair Isaac Web page. The difference between a 699 score, which is a decent credit score, not great, and 720 would be 0.66 points on your mortgage. That is enough everybody here would rush out and refinance their mortgage over 0.66. That is just 21 points different in your credit score.
    So it is really important that the FTC, that Congress, that government have access, bring some sunshine to these models, and then provide us with a report card so that consumers, so that regulators have a better understanding of what has been going on.
    In that respect, we have a series of things we would like to see the FTC report in this report card. We want to make sure that there isn't a disparate impact of the credit scores, and we have not liked the information that has been provided so far on that.
    The issue isn't average tendencies, it is not just that, yes, the models will predict equally well the average tendency for default rates, it is the mean prediction error. Is it the same for all subgroups? And if it is not, why models have been considered, which ones ended up on the cutting room floor, which ones ended up being the models that were used? And if we look at the mean prediction error of those models by subgroup, is it possible that some of the scoring methods that aren't used were better for some subgroups? We need to have that information.
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    We need to have information on how errors were handled. We need information on the relative performance of the models that were rejected but not accepted. All of that needs to be in place so that we can understand what is going on.
    The day has now changed. Getting your credit report doesn't tell you anything anymore. This credit explosion is really the result of the ability to use credit scores. And the credit information industry has in many ways now moved beyond the legislation. So giving information to consumers on what is on your credit report doesn't give them what they need. They need the credit score, and then we need the information on the accuracy of those credit score models.
    And I will be happy to answer any questions.
    [The prepared statement of William E. Spriggs can be found on page 248 in the appendix.]
    Mr. BACHUS. Thank you.
    Mr. Brobeck?
    Mr. BROBECK. Thank you, Mr. Chairman.
    Mr. name is Stephen Brobeck. I am Executive Director of the Consumer Federation of America. And my testimony today is on behalf of my own organization and Acorn, Center for Community Change, Consumer Action, Consumers Union, U.S. PIRG, and the low-income clients of the National Consumer Law Center.
    At the outset, we want to commend the Committee for holding the comprehensive series of hearings on the Fair Credit Reporting Act. These hearings have established the huge and growing influence of credit reporting in the lives of Americans related to consumer access to affordable credit, insurance, rental housing, utilities and even to employment; to consumer vulnerability to socially unacceptable invasions of privacy involving medical information, as well as financial information; and to consumer vulnerability to the horrific experience of identity fraud.
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    The extent, frequency and severity of problems in these areas, well documented in your hearings, must never be forgotten in seeking solutions that are considered by financial services providers to be inconvenient or even somewhat disruptive.
    At the outset we also want to commend you and other sponsors of H.R. 2622 for including in your legislation important new consumer protections. For example, there is no question that measures designed to curb identity theft would reduce its incidence. While we believe these measures need to be strengthened, they would require credit bureaus and lenders to make more serious efforts to reduce this theft.
    Similarly, the requirement that bureaus make available a free credit report annually would increase the ability of consumers to detect and correct errors.
    While we believe more adequate government regulation of bureaus and lenders is also needed, the greater involvement of consumers in what is largely a self-regulated system would ensure a more accurate, fairer system that would benefit lenders in the long run, as well as consumers.
    We also believe, however, that these protections could be improved in ways outlined in our written testimony that would further reduce abuses against consumers while not imposing unreasonable burdens on credit bureaus and lenders.
    Let me give just two examples. It is not enough to give adversely impacted consumers free access to their credit reports and scores through credit bureaus. It would not only greatly increase consumer access to the actual reports used by lenders, but would actually ease the burden on credit bureaus if lenders were required to provide to adversely impacted credit applicants the merged files and scores that served as the basis for their decisions.
    Typically in the purchase of mortgage and installment loans, this would require nothing more than a loan officer handing to the applicant a copy of the file. In most cases, they would probably also help explain this file, urge the applicant to check for errors, explain how to correct any errors and perhaps even assist in this correction. After all, lenders would prefer to make, not deny, loans.
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    Second, consumer remedies against inaccuracies and abuse need to be more effective. Certainly, regulators need to be given more responsibility and authority for addressing credit reporting abuses against consumers, but they cannot conceivably resolve more than a small fraction of individual problems. It is also essential to empower consumers to resolve their won legitimate grievances. That could be largely accomplished by giving them the ability to seek first, minimum statutory penalties of, say, $100 to $1,000 per violation and, second, injunctive relief to stop reporting agencies from spreading false information.
    In our opinion, however, the greatest weakness of H.R. 2622 is its permanent limiting of the ability of states to pass needed protections. The states need this ability to address regional concerns, to respond quickly to new credit reporting problems, and to experiment with protections not contained in federal law. Any increase in efficiency, whose claims we believe to be wildly exaggerated by credit bureaus and lenders, is a small price to pay for the many benefits of the ability of states to remedy abuses. And we do not understand why the legislation would also make preemption permanent when it directs agencies to undertake studies that are intended to examine problems and remedies.
    At the very least, the preemption should be sun-setted shortly after the completion of these studies. Principally for this reason, we cannot endorse H.R. 2622 despite its many merits, but we would urge its sponsors, as well as all members of this Committee, to reconsider this provision as well as the others that were the subject of our written testimony.
    In conclusion, because both industry and consumer groups basically support the passage of legislation, Congress has an historic opportunity to reduce serious and growing abuses in the credit reporting system. It may not have this chance for many years to come.
    Thank you for the opportunity to provide this testimony.
    [The prepared statement of Stephen Brobeck can be found on page 119 in the appendix.]
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    Mr. BACHUS. Thank you, Mr. Brobeck.
    Mr. Dugan?
    Mr. DUGAN. Thank you, Mr. Chairman.
    My name is John Dugan. I am a Partner with the law firm of Covington and Burling. I am testifying today on behalf of the Financial Services Coordinating Council, the FSCC, whose members are the American Bankers Association, the American Council of Life Insurers, the American Insurance Association, and the Securities Industry Association. These organizations represent thousands of large and small banks, insurance companies and securities firms that, taken together, provide financial services to virtually every household in America.
    The FSCC strongly support H.R. 2622, which renews and strengthens the Fair Credit Reporting Act. We believe its core provisions strike the right balance in preserving the FCRA's uniformed national standards in adding strong new provisions to deter and remedy identity theft. Our member trade associations pledge to work hard for the enactment of this critical yet measured approach to FCRA reauthorization.
    While the FSCC recognizes that the legislation is still a work in progress, we believe it is imperative that it retains this balanced approach throughout the legislative process.
    For example, we would strongly oppose addition of the types of restrictions, however well intended, that would substantially increase consumer costs without commensurate consumer benefits, or ones that would deter financial institutions from making the type of full and voluntary information submissions to credit bureaus that they do now. At the same time the bill's provision should preserve adequate flexibility for the industry to address legitimate concerns in the most efficient manner possible.
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    In addition, our members have technical concerns with some of the bill's provisions that we hope can be addressed. Let me now provide detail about each of these points.
    Title 1 of H.R. 2622 makes permanent the uniform national standards that underpin the FCRA. These standards make our extraordinary credit insurance markets truly national, which, in turn, have brought unprecedented benefits to Americans throughout the country. By virtually any measure, the 7-year experiment with uniform national standards has been a resounding success, stirring strong industry competition that has resulted in, among other things, more and cheaper consumer credit and insurance, a wider variety of consumer products and, most fundamentally, economic growth.
    By improving the performance of the entire market, as described in more detail in my written statement, FCRA's uniform national standards have lowered the cost of credit and increased the numbers of Americans who qualify for credit.
    Accordingly, the lynch pin of the FSCC's strong support of H.R. 2622 is the permanent extension of all of the FCRA's core uniform national standards.
    Let me now turn to identity-theft provisions and other key provisions in the bill.
    Stopping identity theft before it occurs and resolving those unfortunate cases that do occur is of utmost importance to the financial services industry. As technology and the Internet have made more information readily available, financial institutions have redoubled efforts to help educate consumers about how to prevent and resolve cases of identity theft.
    That said, the financial services industry has no illusions about the enormity of this problem. The FSCC fully appreciates why the Committee is now considering the identity-theft provisions in this bill, which are woven through the fabric of most of the title.
    In addition, several of the bill's provisions provide consumers with greater access to credit report information and address related consumer protection provisions.
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    Before commenting on these provisions that affect our financial institution members most directly, let me note that many of the bill's other provisions impose new responsibilities on consumer reporting agencies. While the indirect effect of these credit bureau provisions could result in significant new costs for our members, we believe the credit bureaus themselves, who are also testifying here today, are in the best position to address practical issues or concerns that are raised by such provision. We do implore the Committee, however, to recognize that none of these provisions, however beneficial to particular consumers, comes without cost. And these new costs must ultimately be borne by consumers.
    The FSCC believes that, before taking action on any of these credit bureau provisions, the Committee should weigh carefully the expected all-end cost to consumers as well as expected benefits because, in some cases, the ultimate consumer cost may, in fact, be quite substantial.
    Section 201 includes specific statutory procedures that require a credit card issue or that receives a request for an additional credit card within 30 days after receiving a notice of a change in address to notify the cardholder of the request. While FSCC supports the intent of this provision, one possible improvement would be to delegate greater authority to the Federal Reserve to craft regulations to address the problem, which could be adapted to changing circumstances over times much more easily than could specific standards codified in statute.
    Section 202 addresses fraud alerts, which the FSCC agrees are a critical tool for containing the magnitude of losses caused by identity theft. We believe the provision should be clarified, however, so that once a fraud alert is placed in a file, it does not require separate authorization each and every time a consumer uses a credit card, which we think would be unworkable.
    Instead the provision should apply to the making of a new loan or a new credit account. Further clarification would also be useful regarding the duration of the fraud alert.
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    The FSCC also supports Sections 203, requiring truncation of credit and debit card numbers, and 206 requiring regulators to issue red flag guidelines to identify possible identity theft.
    In connection with the guidelines, however, the provision should be modified so as not to duplicate the account opening requirements imposed by the banking regulators under the USA PATRIOT Act.
    The FSCC also supports Section 301, regarding coordination of consumer complaint mechanisms, and Section 303, which requires a study of investigations of disputed consumer information.
    In both cases, we would urge more direct coordination and cooperation between the Federal Trade Commission and the federal banking regulators, and with respect to the study, we believe the financial services industry should be provided the opportunity to provide input before it is finalized.
    Finally, Section 402 would prevent furnishers from providing information to a credit bureau where the furnisher knows or has reason to believe that the information resulted from fraudulent activity.
    The FSCC remains concerned that the reason-to-believe standard, while seemingly sensible, would in fact be triggered too easily in some circumstances where a financial institution was truly acting in good faith.
    We believe that is not the Committee's intent, and we hope to work with you and your staff in the coming week to see if there is an appropriate way to address this concern.
    Indeed, since our credit reporting system depends on voluntary submissions of information to credit bureaus, it would be counterproductive to impose restrictions on furnishers that would make them more reluctant to provide information in the first instance.
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    As described at the outset, our hope is to provide additional comments on provisions in the bill as it proceeds to its first markup. Again, the thrust of our comments will be to preserve adequate flexibility for provisions to adapt over time to changing circumstances, to weigh carefully potential costs, as well as potential benefits, and to preserve the incentives for information furnishers to voluntarily provide full information to credit bureaus.
    And with that, thank you very much.
    [The prepared statement of John C. Dugan can be found on page 135 in the appendix.]
    Mr. BACHUS. Thank you. At this time, Mr. Pratt, actually as our witness representing the credit bureaus, and I hate to segment that testimony, but Mr. Pratt, you all have sort of been singled out for a lot of——
    A lot of the burden of this legislation is going to fall on the credit bureaus. And, in fact, I think we are pretty far, pretty close to the line, if we are not over the line, on you being able to handle that burden.
    But we do have votes on the floor, we have about three and a half minutes left, so we are going to dismiss the hearing at this time. we will come back and we will hear your testimony, and then we will have questions.
    So at this time we are recessed, hopefully for about, let us just say until 2:15 p.m. Thank you.
    Mr. BACHUS. We welcome the second panel back.
    And at this time we will hear the testimony from Mr. Stuart Pratt, who is the President of the Consumer Data Industry Association; to most people that means the credit bureaus. And as I said before the break, many of the burdens and requirements are going to fall quite heavily on the credit bureaus, and I know that there is quite a bit of concern there. So we recognize you for your testimony, Mr. Pratt.
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    Mr. PRATT. Mr. Chairman, Ranking Member Frank and members of the Committee, thank you for this opportunity to testify before you today on the subject of H.R. 2622, the Fair and Accurate Credit Transactions Act of 2003.
    For the record, I am Stuart Pratt, and I am President and CEO of the Consumer Data Industry Association. And Mr. Chairman, as you indicated, we do our represent what are sometimes called the big three consumer credit reporting systems in this country. We represent all of the major check acceptance system, all of the major mortgage reporting systems in this country as well. So a lot of different companies involved in this consumer credit marketplace, providing the information that has been in large part the subject of the many hearings that you held over the course of June. That was quite a marathon.
    We join with everyone else who has applauded you and the Committee at large and those who have sponsored the bill for the introduction of H.R. 2622, and in particular for Title 1, Section 101, which does reauthorize and make permanent the national uniformed standards which are so essential to the continued success of our nation's economy.
    Reauthorizing and making permanent these standards under FCRA ensures that consumers can continue to enjoy $30 billion in additional disposable income per year, due to increased competition and due to the availability of credit that we see today in the marketplace.
    Your bill also looks at and takes a serious look at the question of identity theft. And we agree with many other panelists that identity theft is a serious problem. It is one that requires serious solutions. And we applaud a number of the ideas that are provided for in the FACT Act, including the idea that fraud alerts can be an excellent deterrence. We agree with that. Our members do administer fraud alerts, and we see value in that being codified on a go-forward basis.
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    We do believe, like others, that the fraud alerts should be time limited on the file, because they should operate more like a red flag. They should operate during a period of time when there is a heightened sense of urgency, of concern. If they stay on the file in perpetuity, we begin to have a cry-wolf kind of effect, where they stay on forever and eventually a lender has to try to pull apart the wheat and the chaff, and that becomes progressively more difficult. So we suggest that there is a time limitation for fraud alerts if they are to remain on the file.
    You suggest a summary of rights for consumers relating to, candidly, some of the changes you are making in this act and also relating to the Fair Credit Reporting Act and other acts as well. Consumer reporting agencies are always willing to deliver the right notices to consumers that explain their rights under, particularly the FCRA.
    Some of the other statutes that were cited simply are not statutes that regulate us. If consumers were to receive a notice from us about those laws, our consumer relations folks just wouldn't know how to answer questions about those.
    I think some of that may be covered under the FTC ID theft clearinghouse and the fact that they, too, provide a great deal of information. That might be a better solution for how some of the notices are delivered.
    Blocking information with police reports, I think, is a good idea. It is one that we can effectuate for the national credit reporting systems in our marketplace. It is an idea that works well for that type of consumer reporting system. You will find throughout our testimony and throughout our work with the Committee, there are times where consumer reporting agencies of various types don't fit as well with one duty or another duty. And that these duties will have to be custom fit to the type of consumer reporting agency that we really want to focus on.
    Coordination of consumer complaint investigations in Section 301, again, makes sense for nationwide consumer reporting agencies. It allows us to allow a consumer to make a single phone call and to have fraud alert information, if you will, transferred between other nationwide agencies.
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    Your bill does have some proposals in it. The bill does suggest some things that we want to visit with you about here today in the time I have remaining. In particular, two items under Section 5, Sections 501 and 501, propose free reports for consumers and a score disclosure requirement of sorts for consumers, as well. And I think there has been some discussion today of the intentions of that provision relative to scores. And let me just share a few thoughts on each one.
    Free reports are provided widely today. In fact, 16 million free file disclosures are given every year in this country. The 1996 amendments to FCRA did address free file disclosures for a wide range of consumers who had particular need. And we think that that was the balance that was necessary then, and we think that is roughly the balance that is necessary now.
    That law, in our mind, is working very well because, again, 16 million consumers every year are getting their files for free. The vast majority get it free of charge. Very few consumers seem to be harmed or impaired by the way the act is operating in that area.
    Score disclosure concerns us because in fact, we don't own many of the scores that I guess consumers think we have or that others think we have. And in fact, in many cases, we would have to purchase scores from others if score disclosure was to take place. And that is one of the points of confusion.
    That, plus in our testimony we do offer some context for how the marketplace seems to be providing consumers quite frequently to scores, access to advice, access to how scores are analyzed, credit history information and so on and so forth.
    So you will find us looking forward to continue to work with you on the file disclosure issues, the score disclosure issues. And we applaud the fact that this bill does, again, make permanent and reauthorize those national standards under the FCRA. And we thank you for the opportunity to testify here today.
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    [The prepared statement of Stuart K. Pratt can be found on page 224 in the appendix.]
    Mr. BACHUS. Why, thank you.
    With that, we will go to questioning. And I think my first question will be actually to you, Mr. Pratt. What I think Title 5 of the bill says is that if you have those credit scores, you disclose them. So, you know, if you have them, you would be required to disclose them. Obviously, I don't think we can require you to disclose something you don't have. That would be my interpretation.
    We have heard from your members about their concerns about the cost of providing the free credit reports.
    And I think, as you have said, the present law requires a broad range of free credit reports: people that have been denied credit, been denied a job, several other exceptions. Do you have any idea how much it would cost to supply these reports? And what if they were done online? What are some provisions?
    Mr. PRATT. Two questions: Let me break that down, if I may, Mr. Chairman. We are still trying to run the numbers based on a whole range of factors that we tried to outline here in our testimony, but let me go through some of those. Some of the factors are simply the fact that if free is free for everyone, National Media could create spikes of activity. By parallel example, today even with the opt-out number we use for prescreened offers of credit, an e-mail circulates every year. During any given year, the opt-rate spikes by as much as fourfold from what it is today.
    We estimate that we might have as much as a fourfold increase in files disclosed for a range of reasons. Security breeches, which we have discussed in a hearing that, in fact, you co-chaired earlier this year. We talked about the fact that a single security breech cost our members each respectively about $1.5 million. I think we are approaching numbers that are a quarter of a billion dollars in incremental cost increase for the cost of file disclosures.
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    Mr. BACHUS. How much?
    Mr. PRATT. A quarter of a billion.
    Mr. BACHUS. A quarter of a billion? Okay.
    Mr. PRATT. And that is based on the information I have. I have been visiting with the CEOs of the major systems. And this is based on what we know are the unit costs for disclosure and the estimated number of disputes that would follow and the servicing and the requirements of law that we know that we must comply with today. And it doesn't entirely allow us—even that doesn't really tell us whether we are going to be successful.
    If, for example, we have a rush of consumers who decide to make a phone call, and you can look at the parallel of the numbers of folks who have been trying to us the new FTC Do Not Call List——
    Mr. BACHUS. Of course, that was a one-time——
    Mr. PRATT. It was. And candidly, I guess, the question is, how often will we have that sort of one-time event to occur over and over again?
    Mr. BACHUS. But maybe we could build something into the legislation to——
    Mr. PRATT. Maybe so. Those are the kinds of issues I think our members—we are not trying to be arbitrarily against access. We are all for access of files.
    Mr. BACHUS. You have been very cooperative. Your industry has been very cooperative in working with us on this legislation.
    Mr. PRATT. To your other question, certainly delivery online is going to be vastly less expensive than the production of paper.
    Mr. BACHUS. But would that hurt you competitively? For instance, if you could get that information online, some of the people that you now sell reports to, institutions, could they not go online and get those reports? Is there a danger of that?
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    Mr. PRATT. You know, that is a good question. I don't know. I suppose large institutions tend to have very high-tech hookups between the national systems that are highly secured and encrypted. And I don't know that would happen.
    Absolutely, some smaller institutions would probably think that maybe pulling a free file disclosure would be the way to go, and that would be perfectly fine for their credit lending purpose. And so, yes, that could poach on traditional business. That kind of idea would poach on the current, direct to consumer marketplace, and some companies estimate tens of millions of dollars in lawsuits from that as well.
    Mr. BACHUS. Right.
    Mr. Dugan, I think, you and Mr. McEneney have both mentioned idea of not too rigid of standards, flexibility built into the system. And I believe that is going to be a key to being able to modernize and keep up with the criminals in ID theft cases. I think if we adopt too rigid of standards, we really put our law enforcement efforts and our efforts to identify these people in a straight jacket.
    And as you know, we have just addressed check truncation in this Congress, this session, even though the marketplace has probably been there for 20 years. So it is sometimes not encouraging how long it might get around to us if we put something in concrete, it might actually inhibit efforts.
    Mr. DUGAN. Well, that is exactly our concern, Mr. Chairman.
    And we know that in the provision that does the red flag guidelines, that does have quite a bit of flexibility and vision that you are not trying to proscribe those things at once. It will have to evolve, and you have given authority to the regulators to do that. That is the kind of thing in some places that we think is a useful way to look at things.
    Mr. BACHUS. Your testimony, I think, has been very helpful in identifying areas that we need to address.
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    You all have followed the hearing and where we are going on this, and we do get suggestions for provisions on almost a daily basis.
    It might help one consumer in a particular circumstance, but when we run that down and we balance it, we find that the end result of that would be shutting down our national uniform credit reporting system as we know it now today.
    And that would have a detriment on literally millions of consumers each day. In an earlier panel, and I think someone that needs bearing in mind, is that today in America you can walk in and you can get a car loan in an hour, or thirty minutes.
    You can get credit extended in a matter of 30 seconds. In countries, in Europe particularly, where they have much more stringent requirements, credit availability, particularly to low-and middle-income citizens, is simply not there like it is here.
    If it is there, it is at a much greater cost, and they may be able to get credit, but the result may be at a 1 or 2 additional percentage differences.
    So we certainly want to establish some meaningful standards, but give the regulators, the financial institutions and even the credit bureaus flexibility to address these issues. One thing that I think we have seen from these hearings is the you all are very motivated to address these issues because they affect you, too.
    Even when we have had our two identity theft witnesses, both said they had lost over $40,000. Now, when they said that actually a credit card company in both cases took 90 percent of the actually that $40,000 of bad charges, the credit card companies took those hits.
    Now, they did have quite a considerable expense. It was a nightmare situation for them. But everybody took a hit. I mean, the institutions took a hit, the credit card companies took a hit, and they took a hit, so there is quite a bit of identity of interest there.
    So I think that as we go forward you can help us to refine this approach, and then I would hope that we would maintain flexibility.
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    At this time, we recognize Mr. Frank.
    Mr. FRANK. Thank you.
    Mr. BACHUS. I was hoping to recognize you before you were prepared to go home.
    Mr. FRANK. That is okay. I was going to defer, I was going to be outside, but I will be quickly here. To Mr. Brobeck, and I apologize for not being able hear all the testimony, but I have made a point of reading it.
    You address, what seems to me to be the biggest current weakness of the system now, which I believe generally works well. But there does seem to be this weakness.
    You talk about the failure to guarantee the accuracy of credit reports. Now, the knowledge I have gotten from both from reading and talking is that people acknowledge that there are situations where you the consumer learn that there is inaccurate information about you. And one of the good things about the bill, and there is a great agreement that we should give the consumer more information, so as a result the consumer is likely to be able to discover that there was inaccurate information.
    The problem then comes is, okay, well, what can you do about it? And I am beginning to think in some of these cases from the peace of mind of the consumer she might be better off not knowing, because in some cases she just can't do anything about it.
    And I am told that there are situations in which you the consumer learn, and I am working with the gentleman from New York and others, make the going even more quickly, that there is some inaccurate information about you, but that there are really no adequate means for you to combat that in every case.
    That is, you can contest it, as I understand it, you contest it to the consumer reporting agency, and you can submit a lot of documentation, and the consumer reporting agency individual may have literally only a few minutes to review your information, then sends a two-letter code to, in some cases, the furnisher of the information. I must say, as I thought about that, various combinations of two letters came to mind to describe what was happening, but, then the credit furnisher, in effect, checks his or her own arithmetic and spelling.
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    And if the credit furnisher determines that, yes, I did tell the credit reporting agency that, that is considered to be the reinvestigation, and that is where we stand.
    Now, and I am told that in many cases the credit reporting agency will then accommodate the consumer by accompanying the negative information with the consumer saying, it ain't so.
    Am I correct that there is not now in the system a way for you to document the inaccuracy and to show that even though they may have correctly reported what they had reported, that the underlying data was incorrect? And if that is true, what can we do? What is a way to break out of that?
    As I said, I think it probably occurs in a fairly small percentage of the cases. But I would say to those on the industry side, the smaller the number of cases, the less you have to worry about it. The less the burden ought to be. But it just is unacceptable to say that the few individuals—of course, a few when you cover the whole country is tens of thousands, hundreds of thousands—won't have to pay that burden.
    So, Mr. Brobeck, am I accurate in the facts? And what do we do about it?
    Mr. BROBECK. Certainly, there are inaccuracies that are detected in a small minority of cases. We would argue that there are a number of inaccuracies that adversely affect consumers, who purchase sub-prime mortgages, other sub-prime loans, or are denied credit, who are not aware of these inaccuracies. And that that number is far larger than the number——
    Mr. FRANK. Right. We now understand. With credit, it is not just either-or, but more-or-less, and that it has been a conceptual view that credit was an either-or situation, but we are now into a more-or-less situation.
    Mr. BROBECK. So there is no question there is a minority, but we think it is a larger minority than most people assume currently. And it is true that even the minority have trouble getting redress. So how do we fix the problem?
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    Well, there is no magic bullet. One way is a combination to give everybody the ability to access their credit report for free and if they find, in fact, that there are a large number of errors, that will basically create a pressure group for the industry to fix the problem. And if they don't, we will be back here in 7 years.
    It comes down to, they have to make a sufficient commitment. That is to say, you have got to require them to do certain things, including spending enough money to correct any inaccuracies. We have heard estimates of what seems to me to be far too large an expenditure, but even that $250 million suffers in comparison with the tens of billions of dollars——
    Mr. FRANK. What is his number, $250 million?
    Mr. BROBECK. It is $250 million to basically provide everybody with a free credit report. I can't believe that——
    Mr. FRANK. In the context of all the great good that this does for the country, after all, the economy in the United States is, apparently, from what I read, substantially dependent on this. What was the gross domestic product? What percentage of the gross domestic product is $250 million? It seems to me we are talking about rounding errors.
    Mr. BROBECK. Some mountain track will be socialized throughout the systems, and all lenders will pay a little bit. And then, consumers will end up paying a little bit. And nobody will really feel the difference.
    So even if it is high, it is $250 million, always keep in mind the cost of tens of billions that consumers——
    Mr. FRANK. I understand, but I really want to focus.
    Are there things we can do in this bill that would mandate a better performance in the collection process?
    Mr. BROBECK. Yes. Consumers need better, stronger individual remedies. And we would recommend a couple here.
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    They need the ability to obtain injunctive relief. And instead of having to prove that there are damages, there should be statutory violations of relatively small amounts, $100 to $1,000, that would act as an important deterrent to the repositories and the lenders.
    Mr. FRANK. Let me ask you. This would have to be in federal court. Right? Because this is a totally federal operation.
    Mr. BROBECK. I am not certain.
    Mr. FRANK. Part of the problem is that we don't have jurisdiction over the remedies. I almost wish we could create sort of a small claims court to deal with this. Because this is really what we are talking about. And that may frustrate us to some extent because the Committee on Judiciary would have jurisdiction over some of the remedies.
    But I would be interested, from you or anyone else, and that includes people in the industry. Remember, I want suggestions for how to fix this. If the suggestions for how to fix it only come from the consumer groups, then the industry is going to say they are too harsh. So the way to deal with that is to send me your solution.
    But I will fight very hard against allowing this bill to go forward if we don't do something to improve the ability of consumers to deal with this. We are doing a lot in the bill, I believe, and will do a lot better to inform consumers about the inaccuracies. And I don't think the inaccuracies are rife, but I do think that we need to tell people.
    We give incentives. You give incentives for people to get the data a little bit right in the first place.
    So I agree with you. This is the cost which when socialized throughout the entire economy, is bearable. And I would be welcoming of any specifics about how we improve the process by which corrections are made.
    I don't know of any other place where I have been involved as a public official where I have been told, well, you have to tell people that the answer is ''tough,'' that in the interest of the old system, there may be some inaccuracy about them, and there really isn't any way that they are going to be able to prove that it is an inaccuracy. But we will manage to tell people that they think it is inaccurate.
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    I would not be content for it to rest that way.
    Thank you, Mr. Chairman.
    Mr. DUNCAN. Congressman, may I take a quick stab at that?
    Mr. FRANK. Yes, sir.
    Mr. DUNCAN. And that is if you look at the bill, there are really three things going on, the current and the FACT Act.
    The first of those, of course, is that there is this dispute process you mentioned. The consumer can avail themselves of that, and many, many disputes are resolved in the consumer's favor.
    The second thing is that as a retailer, we have multiple reasons to want to have someone shop in our stores. You do not want a situation——
    Mr. FRANK. Multiple reasons?
    Mr. DUNCAN. Multiple reasons. I mean——
    Mr. FRANK. I was thinking of one, but it is a pretty big one: money.
    You like their company? You are lonesome? You are there to make money. That is a good thing. Don't apologize.
    Mr. DUNCAN. But the bottom line is that is you have someone as a credit customer, you also have them as a retail customer. And if that customer complains that there was something and they file a dispute, most retailers will put a thumb on the scale in favor of that customer because they want to keep that customer as a shopper in their store. So it is more often than not, it is going to be resolved in the customer's favor.
    And then the third thing is this unusual ''he said, she said'' situation, which occurs very seldom as you mentioned. It is often the result of identity theft. One of the advantages of 2622 is that there is now a provision that would allow someone to follow the port and have that trade line blocked so that no one would get what they claimed to be that false information.
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    So we think there really is a remedy right here.
    Mr. FRANK. Well, I agree. But the fact that it is sometimes as a result of identity theft strengthens my view that we have to be very protective of the consumer.
    Mr. PRATT. My only addition was that the bill does require a study of the re-investigation process to make sure that it is working well.
    Mr. FRANK. I have great faith in a variety of studies around here, but that is still not nearly as reassuring to me, as it apparently is to you.
    Mr. PRATT. Well, I don't know if it is reassuring to us either, but I think the most important part of this that re-investigations can be complex, particularly in the situation that Mr. Duncan described. We think a study is the best place to try to look at that issue to try to pull it apart and understand the——
    Mr. FRANK. The effect of a study is status quo.
    Let me say. I might be willing to go along with a study if the extension of the preemptions was co-terminus with the period of the study. But if you get a permanent extension of the preemptions, then the study becomes less attractive because the leverage to enact the results of the study is attenuated.
    So if you wanted to have a short-term extension of the preemption while we study this and decide what to do, okay. But a permanent extension of the preemption attenuates the value of a study because given the way this works—you know, people talk about, well, money is the most important thing in the legislative process, politics is the most important thing in the legislative process.
    We don't talk about that inertia is the most important thing in the legislative process. And once these preemptions are made permanent, that is the end of the ball game. So the study doesn't do me any good at that point.
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    Mr. BACHUS. I thank the gentleman.
    One thing that, as Chairman, and I know Chairman Oxley is committed to continuing to work with you and with Mr. Ackerman and Mr. Sanders and others to try to come up with wording on improving—I think we can probably do that. I appreciate that. I think we will do that.
    Our problem, I think Mr. Brobeck, you know, we have not been able to come up with that magic solution or the wording at the present time that doesn't impact the delivery of credit reporting, of reports and the free flow of information. So we are still searching for the solution.
    Gentlelady from Illinois, Ms. Biggert.
    Mrs. BIGGERT. Thank you, Mr. Chairman.
    One of the questions that I had wanted to ask Secretary Snow when we had to adjourn, in a recent appearance he had said that ''Another goal of the uniformed standards of the Fair Credit Reporting Act is to help consumers learn how to manage their credit to obtain the best outcomes for their personal finances. In the modern American economy, smart credit management is an elementary lesson in financial literacy.''
    And I would like to ask you if you think that the FACT Act does adequately address this issue? For anyone that would like to respond. Dr. Spriggs?
    Mr. SPRIGGS. If I may, Congresswoman? That is my concern where the legislation doesn't go far enough in looking at credit scoring. Because the reality is that with consumers today, their score is so much more important than just the report. And as you heard just a moment ago, you are directing the credit bureaus, but they don't own the credit scores.
    And earlier questions got to the issue of who owns the credit score, they get to sell them, et cetera. This is a portion of the industry that is not being adequately covered here.
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    And for a consumer to make a difference in their home mortgage, as an example, the example I gave when I talked earlier, it means a 21 point difference in your credit score means a lot of money to a consumer. And so, I think we have to bring the credit scoring industry in the same way that we are very concerned about what the credit bureaus do.
    And we have asked them to be accurate, but we have no data or measurement made public about the accuracy of the credit scoring mechanism. Some of the concerns about inaccuracy within the credit bureau data get magnified in ways we don't know within the scoring, because we don't know what the weights exactly are.
    So I think if we want to educate consumers, we have to have a far more transparent scoring system so that consumer groups or that the government, so that others can talk about: What are the indicators? What are the real ways that you can clean up that score? Because the score has now become so much more important than the report itself.
    The Consumer Federation of America's report points out—and I think some you have experienced this when you go to refinance your home—you can get three or four different credit scores on yourself and they are all over the place. So you know, different scoring companies will score you differently.
    And without having the transparency, without the overlay so that you can talk about what do those differences mean. It is very hard for consumers to get that education to manage that.
    Mrs. BIGGERT. Well, in the legislation then, how would you propose putting that in? Is that just elementary financial literacy for consumers? Or is there something that needs to make sure that an agency doesn't have to report a score or explain a score when they really don't have the proprietary rights over that?
    Mr. MCENENEY. Congresswoman, could I——
    Mrs. BIGGERT. Mr. McEneney?
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    Mr. MCENENEY. Yes, if I could just make a comment here. This hearing is obviously to focus on the Fair Credit Reporting Act. But there is another statute here that I think is relevant, and that is the Equal Credit Opportunity Act, which prohibits discrimination in any aspect of a credit transaction.
    And also has that same effect in the context of the use of credit scores. Any credit scoring model has to be developed in a way so that includes only factors that are neutral, don't include race or any other prohibited basis.
    The banks that use those credit scores are examined for compliance with those standards. So the agencies are looking at these issues.
    Also, you mentioned that it might be helpful to have a mechanism for consumers to understand how these scores affect them. Well, the Equal Credit Opportunity Act does that as well. One of the things it provides is that if a consumer is denied credit, that consumer is entitled to receive the principal reasons for the denial.
    Now, if a credit score was involved in that denial, what that consumer must have access to under the ECOA are the principal reasons that went into that score that created the denial for the consumer. And the idea behind that is to focus the consumer in on the most important information, which are the principal factors that are holding back the consumer score.
    Mr. BROBECK. Congresswoman?
    Mrs. BIGGERT. Mr. Brobeck.
    Mr. BROBECK. In terms of educating consumers, making available a free copy of a credit report will do more than just about anything that I can think of for two reasons. First of all, it would generate an enormous amount of media coverage, which people will have difficulty avoiding. It will also stimulate a great deal of consumer demand for information about the data in the credit report and scores. And if that is properly explained by the repositories, that will represent a very useful educating mechanism.
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    And then we would also, as I indicated in our testimony, recommend that those consumers who are adversely impacted by a credit decision be given the file that is used by the lender and the score used by the lender. And in most cases, because lenders are interested in lending money, not denying credit applications, they will probably help the applicant to understand their credit file and perhaps even advise the applicant about how to improve the accuracy of that file.
    Mr. PRATT. If I could just respond to the—we continue to talk about the file disclosure. And we have always agreed as the industry that access to files is important for consumers. It is part of how I learn about all the different—in fact, sometimes consumer discover they have more open lines of credit than they may have remembered just because some are less active and maybe not in their wallet as frequently.
    We are still struggling with why the current approach that the law has in it is not working. We are giving away 16 million files a year to consumers. That is a good number of files for consumers. They are educating a lot of consumers. We think the educable moment is quite often, and Mr. McEneney referenced this to one extent, is the point I want to look at my file when something has happened, when there is a question that I have about what my record looks like.
    What we seem to be losing track of is the literally tens of millions of transactions that go through successfully every year in this country. And the system does work well. And of course, all of us have a right of access to our file. And the fee is capped and determined by the Federal Trade Commission under the current FCRA.
    There is a lot of free file disclosures that are available today. We are just still struggling with why free seems to be the panacea solution for all the ills that we seem to be suffering when it comes to financial literacy. We don't think that is the case because consumers certainly can have access to files and certainly can, in many cases, free and in some cases not.
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    Mrs. BIGGERT. Still the question that you had was the proprietary that is not right.
    Mr. PRATT. That is more difficult, that is true. We can't disclose another company's score. And that is so important for the Committee to know that. Our members do develop scores ourselves. We compete in that marketplace. But we can't disclose another company's score, their intellectual property.
    It is just the way the law works. I think and generally that is probably the right way for the law to work.
    Mr. SPRIGGS. Excuse me, Congresswoman.
    And again, that reiterates my point that that is the industry that is not brought to the table here and why the credit score access for consumers needs to be there. But if the FTC could issue a report card—it is not enough—unfortunately, the Equal Credit Opportunity Act doesn't get enforced properly on this issue of the credit score because of the issue of disparate impact.
    A consumer who gets denied who may think that there was some racial bias on the score gets their report and is told maybe this is the key ingredient. But they don't get a report card that says if I look at the Fair Isaac model, if I look at somebody else's model and I see three different credit scores for myself, I don't get the objective view of someone like the FTC might be able to provide and say, look, if you look at how well this one predicts and how well this model predicts and these are the key elements and this is how they handle errors and this is how they handle missing data. That gives me a lot of clues as a consumer, and to you as policy makers, about well what do we think is wrong here and what can we improve.
    Currently, because we don't have that on the table, we can't even really talk about some of those elements. So I think the first thing is that we need that report card from the FTC evaluating the score, the different score companies. And then if they sell my score in the same way that we stick it to the credit bureaus and say if someone looked at my report, they have to give me the report, then the scorers need to give me my score.
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    And that—and if I get that score with the FTC report attached to it, that is going to give me a lot of clues as a consumer about how my credit rating really works. Because, again, if I get that credit report and I haven't used five lines of credit in the last 10 years, I maybe got a credit card when I was in college and I left it open, I don't know about it. That hurts my credit score.
    Now, as a consumer and I look at that and I say, well, I am not even using it. It has got a zero balance. What is the problem here? I don't see why I am being denied credit. Okay, I have got 10 lines of credit out there, but I am not using any credit cards.
    As a consumer, I am not really being made intelligent enough about it until I see a credit score that says, boom, that is bad. You are being a bad boy. You don't need 10 lines of credit.
    And so, that is why, again, you need to bring the credit score in, regulate them like you regulate the bureaus, if someone gets that information or uses the credit score, then they have to be as accountable as the credit bureaus and say, okay, you got denied because of the score, here is your score, here is the FTC report card with all the different scoring mechanisms, here is how these models work, here is how they predict, and that will inform the consumer.
    Mr. HENSARLING. [Presiding.] The gentlelady's time has expired. The Chair now recognizes Mr. Sanders.
    Mr. SANDERS. Thank you, Mr. Chairman. Let me ask, to start off, Mr. Brobeck, over the weeks we have been hearing an enormous amount of testimony from the industry, and today from the Secretary of Treasury, that Western civilization would collapse as we know it if states were given the full power to protect consumers in this area.
    Do you think civilization would collapse, or do you think maybe consumers might get some benefit if we had attorneys general throughout this country, and legislatures and governors, who wanted to stand up and pass a stronger consumer protection law than Congress is apt to protect? Can you comment on that, please?
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    Mr. BROBECK. Mr. Congressman, I don't even think a small part of civilization would collapse. After all, before 1996 a number of states passed some very strong measures that were grandfathered into the 1996 law, and the sky did not fall, the industry adapted. In fact, they ought to be better able to adapt now because of technological improvements.
    In the area of provision of social services, because of computers, we have dramatically lowered cost. I can't imagine that those cost savings are not available to the industry, as well.
    And there is going to be a small cost here, some inefficiency, but I would urge this Committee to ask the industry whenever they allege that the sky is going to fall on them that they document carefully the cost of interventions by the States that they have already taken, that are enforced right now, and that they then compare those costs with the benefits that have accrued to consumers as a result of those interventions.
    Mr. SANDERS. Now, what am I missing, Mr. Brobeck, when I think that if there are particular problems in a state, whether it is Alabama or Vermont or California that the legislatures and the Attorney Generals of those states might be able to respond more effectively and quicker at the statewide level than waiting for the United States Congress to move? What am I missing in terms of the needs of consumers?
    Mr. BROBECK. We don't think you are missing anything. In fact, our federal system is wonderful because it gives the States an ability to respond more quickly, which they often do, because there are 50 of them, rather than just one U.S. Congress, to problems that arise.
    Sometimes those problems are local or regional, so there is more interest in that state in responding to a problem than there is, say, in Washington.
    But, I mean, where is the harm? We have, we have seen the macro-economic analysis that ascribes the growth in our economy in the 1990s to the credit reporting system.
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    I would argue that there are many other far more important factors. One could even perversely argue that the credit reporting system is somehow related to the rise in consumer bankruptcies, because, after all, if consumers' scores are inaccurately high, then they are more likely to take on credit that will lead to default.
    If they are inaccurately low, the creditors will turn around and charge them higher rates. In both cases, that will tend to drive borrowers into insolvency.
    Mr. SANDERS. Let me take that statement and lead to a second question, and Mr. Spriggs, Dr. Spriggs, or anyone else can comment on it, but let me address it to Mr. Brobeck again.
    I have been concerned about a scam which I call switch and bait, bait and switch, by which companies, credit card companies say, we are going to give you, Mr. Brobeck, 3 percent for a year.
    You pay every month faithfully what you owe the credit card company, and lo and behold, after four months of paying on time, suddenly your interest rates have gone from the 3 percent they promised to 25 percent.
    And the reason that they will explain to you is that you borrowed more money because your wife was ill, and so forth and so on. What do you think about that type of action, and what should Congress do to address it?
    Mr. BROBECK. Well, we think that is unfair. What is driving that is that in a certain sense credit card markets have become more competitive, and the so-called traditional rates, they are basically tiered rates, the promotional rates being under 5 percent, typically, traditional rates, traditionally were 18 percent, but now they are as low as 10 or 11 percent.
    And then you have the penalty rates. Well, competition in middle markets and upper markets basically drove the traditional rates down. That squeezed the margins of the creditors, so they looked for other income opportunities, and what they did is they raised the fees and they created this penalty rate category, and now what they are doing is figuring out clever ways to move people from the traditional rates into the penalty rates.
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    And unfortunately, they are using credit scores as an excuse to do that, or other material in credit records.
    Mr. SANDERS. Right. Dr. Spriggs, do you want to comment on that?
    Mr. SPRIGGS. Well, I did, because it gets right back to the issue of the credit scores, because that drives the market so much more than just what comes out of the credit bureau.
    And that intermediary effect is what gets you out of that, allows them their out, because probably in that fine print that you didn't observe.
    It is not as unilateral as it may appear is something to deal with your credit standing. And the moment that extra loan came, your score changed. So they may not be making as unilateral a switch as it at first appears.
    That issue is important because we don't know what is in the models. We don't know—maybe after you looked at the models, you might say I see their point, it looks valid. But you may also look at their models and say, well, if you modeled it different, and here is a different scoring company that models it differently, they wouldn't have scored me that way. Why does this model say that that is bad?
    We could have that exchange. But we can't have that now, and so we need to get them out of that loophole by making this more transparent.
    Mr. SANDERS. Does anybody have an idea—I am kind of curious, that when—we understand that about 5 billion applications, credit card applications, are sent out a year, which is an astronomical number. I would be curious to know if we have some figures on what percentage of people who sigh up for one promotion or another end up paying higher rates than was on the original promotional application. Does anybody have a guess on what percentage? I mean, if they come to me and they say, Mr. Sanders, you can have 3 percent for a year and they raise me to 20 percent, what percentage of the American people are in that box?
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    Mr. MCENENEY. You know, Congressman, I don't know. But I just want to mention that I think there is a law on the books today that squarely addresses the issue that you raise in the context of the potentially bait and switch scenario. The Truth in Lending Act requires, pursuant to a recent Federal Reserve Board amendment to Regulation Z, that any credit card account that offers an introductory rate, that introductory rate has to be disclosed on those Schumer box disclosures and the penalty rate has to be disclosed as well.
    Under those—and the circumstances under which the penalty rate may be imposed must be disclosed also.
    Mr. SANDERS. Excuse me, let me just ask you for clarification. Is the penalty—if I borrow money from another source, is that considered now a penalty?
    Mr. MCENENEY. Well, actually I think what you are referring to is risk-based pricing.
    Mr. SANDERS. Yes.
    Mr. MCENENEY. And what can happen in a risk-based pricing scenario is a creditor obviously has one view of a particular consumer's experience with that creditor. What it will do, in some circumstances, is go out to a consumer report to see if there is a more complete picture that gives a better understanding of that consumer's risk.
    In some cases they may find that the consumer has defaulted on several other loans, therefore presents higher risk. And the creditor at that point has a couple of choices. It can either allow the other consumers in the portfolio to pay for that consumer's risk or can price that consumer's product, so that that consumer pays for the risk that consumer presents.
    Mr. SANDERS. Bottom line, let me ask you this, and then I will give back the mike here. Is that if I signed up with your credit card company and I faithfully pay you every month what I owe you, do you believe you have the right to double or triple my interest rates even though I have never missed a payment with your company?
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    Mr. MCENENEY. Well, I can't get into the doubling or tripling.
    Mr. SANDERS. That is what happens.
    Mr. MCENENEY. But I am aware that what will happen is that when that introductory offer is made, what will be disclosed to the consumer is the fact that this rate, this introductory rate, may go away under certain circumstances. And under the Truth in Lending Act, the creditor has got to describe those circumstances before the consumer even applies for the account.
    Mr. SANDERS. But sometimes those—that language is written in very, very tiny writing, is it not?
    Mr. MCENENEY. Well, actually, these disclosures, under that recent Federal Reserve Board amendment I mentioned, have to be in a certain type size.
    Mr. SANDERS. Thank you, Mr. Chairman.
    Mr. PRATT. Mr. Sanders, if I could just respond to one comment that was made about the credit reporting industry as though it was somehow responsible for bankruptcies in this country. And I just can't leave the record void on that.
    That literally 2 billion consumer reports are sold every year in this country. Sixteen million consumers look at their files every year in this country. Less than half those consumers ever even call the credit bureau back, although they have toll free numbers and access to live personnel. And for us to be left with the impression here on this hearing record that somehow whole cloth credit reporting systems are vastly inaccurate and somehow contributing to bankruptcy is just a falsehood.
    Mr. SANDERS. Well, I think Mr. Brobeck was attempting to do what some in industry have done and suggest that if we give the States the right to protect consumers, somehow this will be causing devastation. He was being a bit hyperbolic, I guess, is the word, right.
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    Mr. BROBECK. I was trying to analyze the last 7 or 8 years and suggesting that was one plausible explanation for the rise in consumer bankruptcies. One of many.
    Mr. SANDERS. Okay. Thank you very much.
    Mr. GILLMOR. [Presiding.] We will go to Mrs. Kelly.
    Mrs. KELLY. Thank you, Mr. Chairman.
    Gentlemen, I, in my subcommittee, held two hearings on this. This is now the sixth hearing that we have held on this topic in this subcommittee. The problem—it is obvious that this is a pretty sticky wicket. And I would like to address something that was just said.
    One of the problems is that the public does have access to a lot of information right now. The problem we, I believe, have is that we have a financially illiterate population in the United States of America. I think we need to also ask you all to go back and do everything you can to teach people to protect themselves with regard to some of these issues.
    This is a very sticky wicket with people who want to have credit. They want to get life insurance. They want to get mortgages. And to do that, they are going to have to give up some information.
    But one of the interesting things here that Mr. Sanders was just talking about was the fact that we need more transparency. We need it in A, B, C. We need it so that people can read it, understand it and grab hold of that information and use it in the way it should be used.
    My concern here goes to the other part and that is the blocking of a certain amount of information. I believe that when you order a credit report, there ought to be a way that we can block certain specific things. One of them is the medical information.
    And I would like to ask you, Mr. Pratt, because I am concerned about that, if, for example, if an employee okays the information being delivered.
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    And that employee's investigation goes on into the credit history by the employer. I would like to know what you think about the trade lines for the health care providers that were showing up, like a cancer center, or a substance abuse clinic, don't you think that could create a possibility of discriminatory treatment here?
    And don't you think it would be possible for us to encode things like that, so that, on the trade line report, so that it gets the information that is necessary with regard to financial information, gets there, but we are able to encode on the trade line report the names that get provided to the users other than the consumer?
    Mr. PRATT. I think we share your concern about making sure that information like that doesn't end up easily displayed on a credit file today.
    Very few health care providers are reporting any kind of regular information to credit bureaus. The majority of data that might have some medical information on it, I suppose, would be through debt collection.
    Even there, we provide advice to all data furnishers in the marketplace about how to make sure that they do not give us information that would otherwise be an indicia of some sort of treatment that consumers, you and I both individually, would prefer not to have on a credit report.
    We also have tables of key words that are used to scan incoming data to strip out data like that, so, for example, psychiatric, cancer, and those sorts of tables are used today to strip data out of the credit reports, which I think tells you that we, in essence, share your concern about trying to make sure that a credit report is for the decision at hand, but that the medical aspect of it is not relevant, in our opinion, either.
    It would be up to lenders to decide how else they might need to use medical information, but that would not be found on a credit report, the way our credit reports operate today.
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    Mrs. KELLY. Having once in my very far distant past started out programming on computers, it seems to me that there are possibilities, we can do things with that type of information as it is transferred around to help get the amount of information to the people who need it without indicating certain things about people that they would rather not have known.
    And I would like to work with you, if possible, on some wording that I think might very well solve this problem. I think that words are a nice thing, but I think there may be a way that my concern also attends to the liability of who is doing the reporting, and I want to make sure that we have very clear indications of that liability, as well.
    So perhaps you would be willing to work with me on some language. We have some, and perhaps you would review it for this.
    Mr. PRATT. We would be happy to work with you to see——
    Mrs. KELLY. I thank you very much. I really appreciate this panel being here. Your testimony has been very interesting. It is, as I said, a sticky wicket. I hope we can get there. I think we have a pretty good bill here, it perhaps needs a little more tweaking and this is one area where I would like to do that.
    Thank you. I yield back the balance of my time.
    Mr. GILLMOR. The gentlelady yields back. The gentleman from New York, Mr. Ackerman.
    Mr. ACKERMAN. Thank you very much, Mr. Chairman. I have a quick question, I think, for Mr. Pratt. Under the Fair Credit Reporting Act, the credit bureaus are required to remove inaccurate information from a consumer's credit report, the word is in the law, promptly.
    Mr. PRATT. That is right, sir.
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    Mr. ACKERMAN. Is there a definition for promptly?
    Mr. PRATT. Not that I am aware of. In other words, case law might give you some indication of promptly, if there was case law in that area. I just don't have that information at my fingertips to be able to give you a more, a finer point, if you will, on what that means.
    But promptly means promptly. You need to get it into the file, obviously, in order to ensure that the consumer's file is brought back to a correct standing.
    Mr. ACKERMAN. And you would be amenable to putting some kind of reasonable definition in the law on what promptly might mean?
    Mr. PRATT. We would be happy to have that discussion with you in order to understand how that would work.
    Mr. ACKERMAN. If promptly meant taking it out as promptly as the average for putting in negative information, you would be in favor of that?
    Mr. PRATT. Promptly for us means taking inaccurate information out of the file in a timely manner in order to ensure that the consumer's file is brought back to accuracy.
    Mr. ACKERMAN. If somebody reports negative information and that gets reported to the credit bureau and is made public through the agency within a matter of two weeks or 60 days or 30 days, and that was the average, it is pretty prompt to get it in there, would it be fair to say that we should be taking it out if it is inaccurate——
    Mr. PRATT. Well, I think the law——
    Mr. ACKERMAN.——within that same time frame?
    Mr. PRATT. Well, I think the law sets the outer limit. We have got to get this done in 30 days. That was something that was done in 1996, because prior to that——
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    Mr. ACKERMAN. So you would be in favor, if 30 days was not the outer limits for promptly, you would be in favor of 30 days, at least?
    Mr. PRATT. I think it is the wrong place for me to be negotiating the details of an amendment, but if you are saying, are you interested in looking at the issue of promptly, and is there something better than the word promptly, we are happy to have that discussion. But I can't start negotiating an amendment here.
    Mr. ACKERMAN. We will schedule it promptly, then. On the FICO and other related scores, this is for the whole panel, I don't know if anybody here can help me, I don't know if anybody wants to, but it is still very perplexing as to what goes into this, and why people are interested in it from other agencies, such as the Transportation Security Administration.
    I am in the process of refinancing some properties, and was told that my FICO score was in the, let me just say, the high-700s, and my wife's was in the mid-700s.
    I don't know what went into my score that is different than her score, because basically everything is, but this has caused a lot of family tension, and she thinks I am holding out on her.
    And I don't know what is in her report that is not in my report, but everything is joint, and all that kind of stuff. And if it is the same formula by the same company, it gets confusing to a lot of people, and to make her a better consumer she would like to know what she would have to do to, because she is very competitive, to at least have the same score that I have, and nobody can tell me; although you can tell me the ingredients, you can't tell me the exact recipe.
    The use of the FICO and other scores like that by the transportation people to make determinations as to who are better risk to put on the transportation system is baffling.
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    I don't recall any question of it being asked when I applied for a credit card or a mortgage or a car loan or anything like that that would give away whether or not I ever hijacked a plane or derailed a train or committed an act of piracy on the high seas. I don't know that you put down that I was late in paying for my latest shipment of nerve gas or something. I could understand that being a clue to those people.
    But what is it in your reports, or the reports? Is it just that people who are not as economically or financially dependable are greater risks for terrorists? What is in—to be terrorists? And if my score was so high, can I get upgraded to first class? I mean, you know, what is their interest in this?
    Mr. SPRIGGS. If I can, Congressman, I mean, what people have done with the scores is the scores, in many instances, have replaced the credit report. It is viewed as an objective way of summarizing the information and taking away the discretion that some people felt, maybe even me, was discriminatory in the way that people might have evaluated that information. In that sense, they may be putting a lot more into the score than what deserves to be in the score.
    The fact that it is proprietary, to me, again, if not excuse enough, we need to have transparency. We need to have the FTC scoring the scoring cards. Maybe if they understood it over at TSA, they would rather have the credit report and not have the credit score, because again, the credit score is going to include judgments about whether in the future you would default on the loan, which may be different than the type of reliability, responsibility that was implicit in——
    Mr. ACKERMAN. We are in total agreement. I just don't know what people think is in there, and I don't know what is in there because nobody is really telling me, that would indicate that a person might be a greater risk to be a terrorist if he missed a payment on his car loan.
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    Mr. SPRIGGS. And the score may not be telling that at all.
    Mr. ACKERMAN. Darn, I missed that—they repossessed my car, I think I will go blow up a boat.
    Mr. SPRIGGS. But again, the score may not be even telling you that you missed a payment. Your score can be lowered for a number of factors dealing with how that model predicts your total outstanding liabilities to your income whether you access that credit line or not.
    Mr. ACKERMAN. You cited before the Equal Credit Opportunity Act and that prohibits discrimination. Now, why can—if that is the case, why can the federal air transportation security people discriminate against somebody with a low FICO score?
    Mr. SPRIGGS. Well, again——
    Mr. ACKERMAN. Is somebody going to, you know, make me take my shoes off again because I missed a mortgage payment this week or something?
    Mr. SPRIGGS. The problem is I don't think that—given we don't ask the right information of these credit scorers, I don't think that we know whether they comply with the Equal Credit Opportunity Act. Because the issue isn't just do they on average not discriminate and have an average disparate impact, to measure whether they have a real disparate impact, you would have to know the mean prediction error by each subgroup that is protected under the Equal Credit Opportunity Act.
    And we don't have that kind of information. We don't have information on how they use missing data. Many credit cards, many mortgages aren't being reported.
    Mr. ACKERMAN. Well, you and I are on the same wavelength. There is a complete lack of transparency. But the people who are looking into terrorism and, you know, blowing up planes and things like that seem to think that there is a message in that score for them. And I don't know that they just think that poorer people or people with less credit or people who can't meet their financial obligations as quickly are more predisposed to be terrorists. I have not seen that study.
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    And you know, maybe those people who know what is in the report here can tell us what the indication is that they are looking for. What is it that helps them?
    Mr. DUNCAN. Congressman, I cannot speak on the use of the scores by the TSA. And it is quite possible that they are misusing scores. But the broader issue is what is a score? And I think Ms. Kelly was on the right track when she said we need broader information and broader education for consumers.
    Now, one way that might be accomplished is similar to methods used in California, is to come up with a composite score and explain how that composite score is developed so consumers can get a sense of what the factors are they should be looking at in seeing those scores develop and how your wife, for example, might drop one of the credit lines that is in her name and not in yours, and that might change your score.
    But we don't need to have the specifics of each and every score that is developed in order to provide general information any more than we need to have each college that admits people go into great detail about the factors they use in making a decision as to whether to weight your grade point average versus your SAT versus your outside academic activities.
    So a general education is needed, but not this great specificity.
    Mr. ACKERMAN. Without beating this issue to death, it would seem to me you are absolutely right. And we are not getting a lot of help from the industry as to how one might improve that score, as far as educating the public. I would like to know, and I think this information that can be provided by some of the people here, how many files of scores have been actually requested and turned over to the Transportation Security Administration?
    You probably don't know that, anybody, off the top of your head. But could I ask those of you who have access to that information to provide it to the Committee? Not just FICO, but any of the like kinds of scores.
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    Mr. MCENENEY. I can say that we would absolutely be willing to follow up. I am not aware that TSA has access to any of these scores, but be happy to follow up and see what we can learn on that and get back to you.
    They have interpreted the PATRIOT Act as allowing them not just to access banking financial information, which was the intent, but to go to any agency that does any kind of record-keeping. And the Transportation Committee staff has been briefed. And unless their member was on both that Committee and this, they are much more in the dark about FICO scores. They didn't even know what it meant.
    But the answer to your presumed question is yes, they say they have the authority under the law. They have found that loophole. And being that the briefing took place, it is presumed by us that they have made the request.
    And my request to each and every one of the panelists is to go back, find out what has been requested. We don't need the names or any of the specific details, but how many files actually were turned over.
    I know that we can buy that list. If I wanted to get everybody that was 65 or over, you probably will sell it to me, with the names and addresses.
    Mr. GILLMOR. The gentleman's time has expired.
    The Chair will recognize himself for some questions.
    I want to deal with one area. And that is something which surprised me and, I think, a lot of other people when I learned it. That your score is lowered if somebody makes an inquiry about your credit.
    I guess to me, I see no relationship between somebody making an inquiry about credit and the likelihood of repaying. Could somebody explain to me or justify or condemn, as appropriate in their view, why that happens and what is the justification?
    Mr. MCENENEY. I would be happy to respond.
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    There are, I think, questions about the circumstances under which an inquiry will result in an impact on a credit score. And there are variations in terms of how scoring models look at those developments. But let me give you one example of how this can be relevant to someone's credit history.
    If a creditor has a relationship with a consumer, obtains a consumer report on that consumer, and learns that the consumer is applying for a variety of different credit accounts in fairly rapid fashion in a short period of time, that may indicate that the consumer is overextending himself or herself and thereby presenting a risk to the creditors.
    That is one situation where that can occur. Now in the past, there have been concerns about issues that might occur with somebody shopping for a home mortgage, for example. In a home mortgage context, I may go to three or four or five different lenders in a short period of time. And those lenders may make inquiries to the bureau, separate inquiries to the bureau.
    What is happening today, as I understand it, is that creditors are identifying those multiple inquiries of the type I just described, that happened quickly, and treating them as one, recognizing them for what they are, somebody shopping around for the best deal, treating them as one and not creating that adverse, potential impact on somebody's credit score that might happen in other situations where the multiple high velocity of inquiries suggests a risk.
    Mr. SPRIGGS. Again, Congressman, because the models are not transparent, neither you nor I can say with certainty what they are really doing. And that is the problem.
    If we saw their model and saw the explanation, then we might agree with the explanation we just heard, that this is a risk factor because this is someone who is trying to extend their credit.
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    We might look at their model and go, You are kidding me?
    But without the data to analyze the model and see whether the introduction to that variable adds anything measurable or not and what is the bias of that? Does it affect all subgroups in the same way? Does it affect first-time home buyers as folks who already have mortgages who are out refinancing?
    We need that transparency. We need the FTC to have the specific scores. It is not enough for consumers to get a general process. I think most consumers can get the general process quickly. But because of the type of question you just asked, a lot of consumers will do some things like that because they don't know specifically what is in the model. And you may look at your credit score and go, I pay my bills on time. How did this happen?
    Because maybe it took you five months to look for a house, and so it didn't clump. Maybe you had three inquiries here and three there and three there, and suddenly you found your score lowered.
    Without the transparency, we can't have that kind of debate. It would be the same as if the credit bureaus were being asked, just to say, we got a report on you, and it was blank. That would be the equivalent.
    Well, the answer to the question was that it would only apply if those inquiries were bringing out evidence of other things, which is multiple application for credit. But we don't have any assurance that that is true. It may be just somebody inquired, or that different people inquired.
    Do you want to respond to that?
    Mr. MCENENEY. There are different types of inquiries. One inquiry, for example, occurs when a consumer's file is accessed for pre-screening. Another inquiry is an inquiry is registered when an existing creditor, for example, obtains a consumer report on the individual, not at the consumer's initiation, but because the creditor wants to assess risk with respect to the consumer.
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    Those two types of inquiries are set aside. The consumer has access to those. But other creditors or other users of the consumer report don't. So they do not impact in any way the consumer's credit score or credit history. But obviously, the consumer is entitled to see who is looking at the account.
    So that leaves, in large part, the types of inquiries that I talked about where the consumer initiates some contact with someone is seeking to obtain some financial product or service. And that organization, after being contacted by the consumer makes an inquiry on the consumer.
    Mr. GILLMOR. But you cannot ensure me that in arriving at these scores that nobody is just taking an innocent inquiry and lowering the score, can you?
    Mr. MCENENEY. If I understand the question correctly, is it possible that there are some out there who have scoring models that when I go and visit one consumer, one creditor, rather, and that creditor pulls a single report? If what you are asking me is might it be the case that another creditor looking at that single inquiry might have a scoring model that treats that single inquiry as risky, I can't assure you that that doesn't happen. I am not aware of it happening. I would be happy to look into it and see if we can't find whether that is the case.
    Mr. GILLMOR. Well, suppose somebody wanted to—didn't like you or somebody else and the orchestrated multiple inquiries just to drive your credit down? You can't assure me that wouldn't be successful, can you?
    Mr. MCENENEY. Well, actually, I think the existing law provides strong assurances that that doesn't happen. Under the FCRA, a person is entitled to obtain a consumer report only for limited permissible purposes. And the example you described clearly would not be a permissible purpose. That would be someone obtaining access to a consumer report without permission and there are significant penalties under the FCRA for doing so.
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    Mr. SPRIGGS. But again, Congressman, your question is no point. If I am searching for a job and my employer, as we heard about TSA, requires a credit report on me and it is not clear whether the modeler is being fine tuned enough to say, you know, here is a company making a credit request on this person. They got five out there because I am looking at five different potential employers. We don't know whether the modeler is discerning those credit inquiries differently than they would any other credit check on me.
    So again, we have to have the transparency. We don't let the credit bureaus give us blank reports, and we can't really let the scoring companies give us the blank reports that they give us. We have to have an understanding of is that what you did? Is that in your model?
    And then we could get into an agreement or a disagreement with as to whether enough added reduction in error from adding that variable was present so we could feel comfortable that maybe we could live with the one or two times that might happen. Maybe we might look at their model and say for the increased accuracy of adding that, we think there are so many more costs that we don't agree with why that is in your model. That is why we have to have the transparency.
    Mr. GILLMOR. My time—over my time. I will just follow up with one thing. Just very briefly, how would you assure that transparency which you describe?
    Mr. SPRIGGS. I think to give some respect to the proprietary nature of the data, that the FTC was required to run their model, was required to give us a report card and let us know which variables were in, how those variables were treated, what they do with missing values, what do they do with discrepancies, if they get a report that says that the delinquency was being disputed.
    If we could get a report card so that we would have enough information on the various models that are out there, how they were making their decision, then we could be able to have a better discussion about what would need to be regulated about that industry.
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    Mr. GILLMOR. Yes, I think nobody has any problem with really relevant information. But when you have a bad score partly dependent on irrelevant information, it is a real injustice.
    The gentlelady from Texas.
    Ms. LEE. Thank you, Mr. Chairman.
    And I would like to follow up with that line of questioning. I don't want to be redundant, but I want to continue to pursue this whole issue with regard to credit scoring, and I guess it also could speak to financial literacy in terms of the public, one, knowing up front that credit scoring is proprietary information and that in fact this is a product for sale.
    Now, those who are financially literate may know that. But I think that it is very important that somehow as we move forward that those disclosures are somewhere on credit applications so that a consumer who may or may not know this may or may not want to apply for credit.
    I mean, I would like to get, I guess from Mr. Pratt, your feedback on that because certainly this is a business. Some of us know this, many don't. And when you have such personal, private information that is packaged for sale, certainly minimally the consumer, I think, should know that it will be sold.
    Mr. PRATT. Well, I think we are going to probably revisit some of the ground we have covered previously, but only because I want to make sure I am answering the question properly along the way.
    The credit file that you and I have in the credit reporting systems has all the information about how I pay my bills and I suppose, how I don't pay my bills if I happen to be somebody who chose to do that. And the scoring model is this mathematical algorithm over here. And Dr. Spriggs has talked quite a bit about how he would like to see or understand more about that model.
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    And so when a lender orders a credit report and a score, or orders a score, the score—the credit file data—is run through the scoring model and a score then pops out on the other side, if you will. That is sort of the layman's version of it, which is good enough for me.
    So the score itself doesn't contain personal information about you. It just looks at your credit report and looks at risk factors, statistically validated risk factors, and says this is the level of risk we think you have with this consumer based on the credit report.
    Ms. LEE. But it is a formula that provides that information.
    Mr. PRATT. Well, the formula doesn't—the information that is in your credit file, so in that sense, you have transparency. You can look at your file, you have the right to. We know that, we have it under law today. You can access your file and you can see it and you can look at it and dispute it and correct it and so on.
    If you wanted to look at them, the mathematical model is just that, it is just a formula on a page, or on pages and pages, depending on how complicated it is.
    It wouldn't tell you, you may be a mathematician, it wouldn't tell me a lot, because it is just a mathematical formula which is used to then analyze the data.
    Ms. LEE. Yes, I understand that. All I am saying is that we need to go one step farther, and at least provide information to consumers that, in fact, this score is being sold. It is a product.
    Mr. PRATT. Or being used. Is your interest in the use of it, meaning a lender using a score, or——
    Ms. LEE. Well, how does the lender get the score? It gets the score, it pays for it, right?
    Mr. PRATT. Well, lenders may have scores on their own technology platforms that they built themselves, lenders may buy what might be called a credit bureau score, a credit score from a bureau.
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    The bureau actually doesn't own that score in all cases, sometimes that is a score developed by Fair Isaac.
    Ms. LEE. Who owns the score?
    Mr. PRATT. Fair Isaac, for example, would build a score, and the credit bureau would, it would be built based on credit history data, but FICO, the common term for the company, owns the intellectual property, which is this mathematical formula.
    And so, every time the bureau a file is ordered, the credit bureau, in order to use that score, actually pays a royalty to Fair Isaac.
    Ms. LEE. All I am saying is don't we have a right to know that? Don't consumers have the right to know that? Or shouldn't they know that?
    Mr. PRATT. I think the idea of making sure consumers understand scores are used in the marketplace seems like a good——
    Ms. LEE. Yes, that is all I am saying.
    Mr. PRATT. I don't, you know, we are working hard at this to get there, but——
    Ms. LEE. Yes, that is all I am asking. I would think that people——
    Mr. PRATT. Using scores are very common, and having consumers understand that scores are used is very common. In fact, there is a whole marketplace of Web-based, you know, scoring systems where I can go and I can learn about a score and I can——
    Ms. LEE. So a notation saying that your credit score will be, could possibly be, sold is very sensible.
    Mr. PRATT. I don't——
    Ms. LEE. Okay. What prevents the sale of credit reports that are really faulty? I mean, how——
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    Mr. PRATT. Well, the Fair Credit Reporting Act does two things. I mean, the FCRA has always said that a consumer reporting agency must employ reasonable procedures to assure the maximum possible accuracy of the report.
    And that would be the liability, if you will. That is the duty, and hence the liability for the credit bureau. In 1996, the Congress enacted a new section of law which said that the data furnisher, the company that provides data to the credit bureau, and this would be the basis for your credit report, those companies, too, have a liability for the accuracy of the information.
    Ms. LEE. So can a consumer seek injunctive relief now? Can they go to court?
    Mr. PRATT. Well, they do have private rights of action under the FCRA for willful and negligent standards, and states attorneys generals all have enforcement rights under the federal FCRA, as well. And the FTC has enforcement.
    Ms. LEE. Mr. Brobeck, let me ask you, what is your response to that in terms of consumers seeking injunctive relief through the court system for the——
    Mr. BROBECK. My understanding is that they have to prove damages, and that is very difficult to do in many cases. And so it doesn't happen. And as a result, there are massive amounts of inaccurate information that is distributed, despite the best efforts of the repositories.
    Ms. LEE. Okay, and finally, Mr. Chairman, let me just close with regard to going back to the multiple applications, or multiple inquiries. I know there is a difference between multiple applications and multiple inquiries.
    But in terms of adverse actions, again, Mr. Spriggs, I understand what you are saying in terms of transparency, and I certainly think we need to get there, but I also think we need to know sooner or later, I mean, before, because this is going to take a while, but I think very soon, and maybe with this bill we should at least provide the consumer the ability to understand the fact that if they do apply three or four times within two weeks they are going to get an adverse action on their credit report. Or how do we make sure that people know that they will get dinged if, in fact, they are trying to find the best interest rate, the best terms, if, in fact, they do apply to Visa, Discovery, MasterCard, to see which credit card company has the best terms?
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    I mean, that is a reasonable way to live. You are, I mean, right now, it is assumed that the consumer, it is on the negative, they are overextending themselves, they may be a risk, without giving them the benefit of the doubt.
    I mean, this gives the credit card company, or the financial institution, the benefit of the doubt. And so I am trying to figure out how we can make sure that in this bill we change that.
    Mr. SPRIGGS. The language currently asks for a credit score with the waits and the explanation of how you might improve the score. And if the language gets, I don't think you want the language to get too specific, because these models do change.
    The Fair Isaac model today isn't the Fair Isaac model 5 years ago, so I don't know that I want to have you get too specific. But you may want to get a little more specific as to what you mean by waits and what the consumer could do to improve their credit score.
    Now, the other problem you have, though, is that, as Mr. Pratt pointed out, they don't, the credit bureaus, don't always own the score. They don't own the FICO score.
    And so I think you may want to look for a provision that said, if a negative action was taken because of the score, and you have to get creditors to, try to get lenders, to be more honest about whether they were looking at the credit bureau report or whether, as many of them are doing now, getting much more mechanistic and looking at the score, if a negative effect was taken on the score then you got to give me the score——
    Ms. LEE. But I am not talking about——
    Mr. SPRIGGS.——and tell me what were the waits and what do I need to do. Because if they did that, then when I get my report I would see these are negative factors, applying too many times for credit, having too many balances, even if they are zero balances, even if you pay them all on time you have too many balances out there.
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    I mean, those types of things should be with that score to the consumer, so I just don't know how specific I would want you to get in that language.
    Ms. LEE. But that is after the fact, after a consumer has been denied. What I am saying is, on the front end, Madam X wants to apply for a mortgage from financial institution A, B, C and D, to see which financial institution provides the best rate and terms.
    By the time Madam X gets the to financial institution four, financial institution five that she is getting ready to apply to says, Oh, you have already, you know, put in four applications, and so you are a credit risk.
    And at that point I would have to——
    Mr. SPRIGGS. If the FTC gives us that report card sooner rather than later, we can have that information out there.
    Mr. MCENENEY. Congresswoman, I actually think the level of detail that Dr. Spriggs is talking about could, if you give it to the consumer, be counterproductive, but I hear exactly what you are saying, and I think the key is educating consumers.
    Now, there are a variety of ways to do that, but if you look at the protections that exist under the FCRA, the consumers actually are empowered today to do almost everything you are talking about.
    They can go and whenever they want gain access to the information the credit bureaus have on them, and it is that information that forms the basis for the credit scores.
    So they can look at that. There are products out there that help educate consumers on what a score means. Today, and I know this is after the fact, but today if a consumer gets denied credit, and it is based on a score, the creditor has to make available to that consumer the principal reasons that went into the score, so that the consumer can do two things, one, figure out whether there is any discriminatory issue that resulted in the decline, but two, in this context focus on those aspects of their credit history that are causing the score to decline.
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    And just to use your example, if one of the reasons that the score failed to enable the consumer to get credit was too many inquiries, the consumer would have to be told that.
    Ms. LEE. That is after the fact. They have been denied.
    Mr. MCENENEY. Absolutely, so then I think the key is——
    Ms. LEE. The purchase of a home would be put on hold.
    Mr. MCENENEY. I agree with you, Congresswoman. The key is educating consumers on what tools they have under the FCRA today, because I think it gets them pretty much where you want them to go on this under existing law.
    Mr. GILLMOR. The gentlelady's time has expired.
    Mr. BROBECK. Could I——
    Mr. GILLMOR. Very briefly.
    Mr. BROBECK. I am going to address your question, as well, Congressman.
    There is a fundamental issue here, and that is the actuaries are really interested in establishing strong correlations, not causal relationships. And though it may be beyond the scope of the legislation, and we have had this debate in the insurance area for decades—we need to establish the principle. That there needs to be causation before a factor is considered to be a risk factor that affects pricing.
    Ms. LEE. Thank you.
    Mr. GILLMOR. Thank you.
    The gentleman from Texas?
    Mr. HENSARLING. Thank you, Mr. Chairman.
    As a veteran of the subcommittee, I have sat through six different hearings and this full committee hearing will be my seventh. I have heard a wide range of testimony as we consider the reauthorization of FCRA. Obviously the Committee is focused on a number of consumer protections.
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    Paramount to me is the consumer protection of having a competitive market place for the extension of credit. I think the testimony has been overwhelming that we do enjoy the greatest access to credit at the least cost of any nation in the world.
    That one principally seems to be off the table.
    Another concern we have obviously is identification theft. I have said before that I am a member of this Committee who has actually been victimized by this. It is something I take very seriously.
    But at least at the subcommittee level we have heard testimony from a number of different law enforcement officials, as well as the Federal Trade Commission, all who seem to be of the unanimous opinion that we are better off with the reauthorization of FCRA as a tool to combat identity theft. Perhaps there is still some debate on that.
    That really leaves us to the questions of accuracy and privacy. I would like to focus, Mr. Pratt, as representing the credit reporting industry, on one of the questions I asked at the subcommittee level. I am still grappling with this somewhat, but you hear a variety of opinions on the extent of inaccurate information contained in these credit reports.
    And so from the credit reporting industry standpoint, what measurement do you have?
    Mr. PRATT. We actually recently have looked at a couple of different measurements. Let me share those with you. And if you would like me to provide more information in writing, we can do that for the record or in some way that you might like.
    We recently asked one of our resellers or several of our resellers who are in the mortgage reporting area to look at credit reports as they went through their systems, because they are in fact in this situation where there is greater involvement with the mortgage broker, the realtor, the loan officer. It is more labor intensive. It is a different system, although maybe more mechanistic than it has been historically.
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    And we had—we asked the reseller to do two things. One was to say, How often are you dealing with the file because something is accurate that needs to be updated, versus, how often is it really wrong because it was just reported wrong in the first place? The account never should have been on the file or the balance was never right, or I never missed a payment, according to the consumer?
    Out of the 500 and some odd files that were reviewed, about 32 percent of the time there was an update of information that the reseller was engaged. And I think that speaks well for our reseller members in our association, who provide a valuable service of making sure in the mortgage lending process data is as updated as possible.
    But it also—in only 1 percent of the cases was there an actual identified inaccuracy.
    We then went back and looked at several populations of consumers, because similarly the consumer groups have often said, Well, let us sit down with consumers and have consumers look at reports and see how those reports look. And let us try to identify what is right or wrong with those. And in this case, we picked out several sets of data, gathered one over a 24-month period of time. And these were consumers who, at the rate of 100,000 a month were in fact ordering credit files, their file disclosures, because they were concerned about fraud. And we asked the question, How many ever contacted us afterwards?
    In other words, these are consumers who really looked at their files. That is a good measure. And only 10 percent of the consumers ever called us back, even called us back, not necessarily disputed something, but called us back to ask a question.
    We looked at another population of consumers, 180,000 consumers. And we asked the same questions and we said how—they got their files. They literally ordered them. They were not adverse action oriented. In other words, these aren't consumers who got a negative notice saying that, You are getting this file because of adverse action.
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    And again, we asked the question, How many of you called us back? The rate was 5 percent.
    Now we drill down and look at the rate of disputes and then you can—there is a lot of other data. And I don't now how far you want me to go into this. We aggregated those several sets of data to begin to get a better sense of what accuracy really means. And we did it from a market perspective with mortgage reporting. We did it from a consumer's perspective, using populations of consumers who literally order their files, exercise their rights under FCRA and looked at their file.
    They had access to toll-free numbers. They had access to live personnel. It was not a complicated process for them to have disputed information. And again, the percentage response rates were quite small in these two populations.
    Mr. HENSARLING. Mr. Duncan, you represent the National Retail Federation, which I assume has countless, countless members across the nation. My assumption would be that those who use credit reporting services, have an interest in those reports being accurate. Do you perceive that there is has been competition among the players in the marketplace, in the credit reporting services?
    In other words, would a company that consistently produced inaccurate information to your membership, would they be punished by the marketplace?
    Mr. DUNCAN. There is actually quite a bit of competition in the marketplace for accuracy of scores. And you are absolutely correct, the major bureaus come to our members all of the time arguing that their reports are slightly more accurate than the next guys report, or much more accurate than the next guys report.
    And there is quite a bit of competition. And our members in fact will sometimes pull two or three and compare them and run models themselves to determine which might be more accurate. And they may find that that varies slightly from area to area within the country.
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    Mr. HENSARLING. So the people who are using these reports, like your membership, have an interest in accurate information as well as the people who produce the report, assuming they are logical profit-making ventures.
    And assuming the consumer wants to receive the credit that he feels he is due, he has an interest in seeing that there is accurate information in the system. I guess I am trying to figure out who has the incentive to put a lot of inaccurate information in the system?
    I see that my time is just about to run out. Let me ask one more question.
    And that is to you, Mr. Pratt. The issue of offering free credit reports has arisen. And I believe you gave testimony that, if I heard you correctly, the vast majority of credit reports that are issued today already are free. Did I hear you correctly?
    Mr. PRATT. Yes, sir. About 95 percent of the 16 million files that are given to consumers each year are given free of charge.
    Mr. HENSARLING. Well, I certainly have an open mind on the issue, but I am just curious, if that is indeed accurate data, if this is maybe a remedy in search of a problem, considering we already have 95 percent of the credit reports being issued for free, in the first place. Obviously, identity theft is a very serious matter, but increasing the cost in the system that would raise the cost of our credit or make it less accessible is still an open question in my mind whether this is a good method by which to attack that problem.
    And with that, I will yield back the balance of my time, Mr. Chairman.
    Mr. GILLMOR. The gentleman yields back.
    The gentleman from Washington.
    Mr. INSLEE. Thank you.
    Just following up on what Mr. Ackerman brought up a while back about access to credit reports for use by the Transportation Safety Administration for deciding who gets on airplanes, I just want to tell you at least one member has a real concern about that because the whole TSA system is broken. And we are keeping people off airplanes right now because of the failures in our system?
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    We had a city administrator and a police chief from a little town, Bothell, Washington, where I am from, couldn't get on a airplane because the computer system is so fouled up with the TSA and the airlines cannot guarantee the correct identity of the decision whether to let you on an airplane or not. And if you happen to have the name of somebody who is under suspicion, you have had an identity theft and a sort of travel theft by the U.S. government.
    So I want to tell you there is real sensitivity about this. And we are—at least I am going to try to work to make sure that we don't allow this system to get out of hand as it is right now preventing people from getting on airplanes.
    But I want to ask you a deeper question and that is whether the fair credit reporting system is really just going to become a nullity, give the consolidation in the industry? And the reason I ask you that question is that we have substantial rights for consumers that are guaranteed by this act as long as there are not affiliates involved in interpreting or scoring their credit or providing their services.
    But where we have—and which I believe we will now have very significant consolidation in the industry where we have affiliates both involved in lending and selling insurance and providing securities and a whole host of other services, we don't have that same level of protection, or any of those protections for consumers, either from the sharing of transactional experience amongst affiliates, which consumers can't stop even if they wanted to, under federal law. And the situation where they are going to get opt out notices that nobody can read or understand.
    And basically, all of the protections that all of the 60 members of this Committee that are assiduously trying to protect aren't going to exist for a significant number of our consumers once they become customers of a consolidated industry.
    Essentially, basically, what we have told consumers is you don't have these rights vis-a-vis any credit authorizing or granting organization that has affiliates as to transactional experience. And as to all of your other experience, unless you are smart enough to read a five page disclosure opt-out statement to opt out of that, you won't have any rights in that regard.
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    So we are really going to a two-tier system of consumers in this country. Those who deal with non-affiliated credit authorizing and issuing organizations, they have certain rights under the statute. But those who deal with other consolidated parts of the industry do not in real life.
    Now, is that a valid concern? And if it is not, why not? And if it is a concern, how do we move to a situation where the general thrust of the whole credit reporting protecting system will include those consumers who deal with what I believe are efficient systems of consolidating these multiple organizations?
    It is a big question. I will just throw it open to the panel.
    Mr. MCENENEY. Congressman, if I may provide some feedback on that.
    First of all, I don't see a situation where affiliated entities would ever be in a position to forego the information that is provided by credit bureaus. And the reason I say that is even the largest affiliated entities only have limited contact with their customers. They need, for risk assessment purposes, including identity theft and credit control purposes, to access the other portions of a consumer's record which they don't have. And the source of that information is the credit bureaus.
    So I don't see it being at risk for consolidation where those with affiliated entities can forego the products that are subject to the protections of the FCRA.
    In the context of affiliate sharing, though, it is clear that in 1996 Congress set up a mechanism where affiliates could share information amongst themselves about individuals so long as they gave those individuals certain rights, namely the notice and opt out right that you mentioned.
    Now, the FCRA notice and opt out right is a simple one. I understand that there have been some complications as a result of other disclosure requirements that perhaps have reduced that simplicity. But in at least one respect, consumers in an affiliate sharing context have a more powerful tool than exists for them with respect to more traditional FCRA situations. And that is the tool to opt out, to say, affiliated entities, you may not share these types of information at all with your affiliated entities. It is a very powerful consumer protection tool.
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    The other thing I would point out is that the whole reason for affiliate sharing is to try and enhance and expand customer relationships. And so these affiliated entities have very powerful incentives to make sure that the way they use this information meets those goals. And I think that is a significant impediment to the sorts of problems arising that might arise in other contexts like where you have a credit bureau that doesn't have customer relationship with the individual.
    Mr. INSLEE. Let me—since you volunteered for this duty, let me just ask you a follow-up question. What do we tell consumers—I have just read some testimony in the Senate Banking Committee by a particular financial group, I won't name them here. And it says that ''It is able to use the credit information and transaction history that we collect from affiliates to create internal credit scores and models that help determine a customer's eligibility for credit.''
    Now, I understand what they are saying is that they are able, if I understand the testimony, they are able to create internal credit scores and models that determine credit worthiness and whether or not to issue certain products, whether to actually make a solicitation for a product, without being subject to the protections to consumers that are outlined in this act.
    And I suspect that that will increase over time with the further consolidation in the industry. If that is true, shouldn't we be concerned to somehow expand these protections to this increasing, what I understand to be, internalization of this credit worthiness in the recording system?
    Mr. MCENENEY. Well, I am familiar with the testimony of which you speak. And my understanding of how that works is as follows.
    Yes, it is possible to use this information, shared among affiliates, to develop models, for example, to decide who you may want to market to. Now, the decision of whether or not to solicit somebody for a product typically is not viewed as adverse action. In fact, there are some consumers out there who may view not being solicited as a positive thing.
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    I am also aware that what typically happens in the affiliate sharing context is once the solicitation goes out, there has been information that may be shared amongst affiliates. And a consumer responds. Typically, what happens is a credit report will be pulled from the credit bureau to make a fresh assessment as to whether or not the consumer meets the risk profile based on the consumer's entire credit history, not just what was had by the affiliates up front.
    And of course, under those circumstances, all of that information in the credit report is subject to full protections under the FCRA. And if that credit report results in adverse action, the consumer receives an adverse action notice indicating that the report was used for the adverse action and tells the consumer the consumer's got the right to a free report by going to the credit bureau that furnished the report.
    Mr. GILLMOR. The gentleman's time has expired.
    Mr. BROBECK. There is a risk that among these large financial institutions that they will try to identify sub-prime borrowers, and they will use their own credit scores that may not be accurate as a basis for targeting customers to try to sell them high-priced loans. And then, if they do not utilize the credit scores and the information in the repositories, the consumers will not have the right to that information that is in the repositories and they will not know that, perhaps, the reason that they were only offered a sub-prime loan, is because of inaccurate information within that large financial institution.
    Mr. GILLMOR. Mr. Dugan.
    Mr. DUGAN. The premise of the question is that it is somehow a bad thing to share information from one affiliate to another to offer another product to the consumer. And I think that is the thing that our industry would take issue with.
    Mr. INSLEE. I am not saying that.
    Mr. DUGAN. Well, I guess the kind of thing that we see is someone has a loan with a bank, for example, and realizes that if they share that information with their mortgage lending affiliate, based on the information that they know about their consumer, they could put them into a loan, a home equity loan, say, at a lower interest rate that is tax-deductible, that is in the consumer's interest. And that is exactly the kind of thing that affiliate sharing allows. It is a good thing.
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    And the distinction between the bank and its affiliated mortgage bank is not one that we think the consumer is aware of, thinks is a meaningful distinction, treats it all as one entity, and is appropriate. That is the reason why diversified companies are able to offer those sorts of products. And we think it is a good thing, not a bad thing.
    Mr. DUNCAN. If I may amplify on just one point that Mr. McEneney made. And that is typically retailers use affiliate sharing to extend their reach to the customer, to expand on the services offered.
    I am aware of one retail creditor, a traditional retailer who has credit in the back operation. They have an affiliated catalogue operation. What they will do is that if a consumer who doesn't quite have a high enough score to qualify for a credit card with them, they will look at their affiliated entity, in this case the catalogue operation, and say, This is someone who has been shopping with us regularly through the catalogue. This is someone we would like to have a long-term relationship.
    And they will give them a few extra points so that they will qualify, thus bringing more people into the credit market and more people into the system.
    The goal in affiliate sharing is to become closer to your customer, certainly for retailers and I know it is true for others in the business as well.
    Mr. INSLEE. Sir, can I make one brief comment.
    I respect all you said about the benefits of affiliate sharing and the marketing incentive that folks have. I just think there is a valid concern here while the combination of greater use of transactional information together with what I consider sort of a defective process of opting out will not assure the consumer that the correct information is used in credit, life insurance and other decisions. And I just think there is some fat process we need to go into to assure that.
    Thank you.
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    Mr. GILLMOR. I thank the gentleman. The gentleman's time has expired. All time for this panel has expired.
    And I want to thank all of our panelists for your very helpful testimony. And we will proceed to the third panel.
    I would like to welcome panel three. And without objection, all of your written statements will be a part of the record. And you will be recognized for five minutes to summarize your testimony.
    Mr. Joe Belew?
    Mr. BELEW. Thank you, Mr. Chairman.
    In the interest of time, I am going to drastically shorten my testimony.
    Mr. GILLMOR. All will be very grateful and appreciative.
    Mr. BELEW. My name is Joe Belew.
    Mr. GILLMOR. And give your testimony much more weight because——
    Mr. BELEW. I thought it might be taken more seriously.
    My name is Joe Belew. I am President of the Consumer Bankers Association here in Washington. Our members include most of the nation's largest bank holding companies, as well as regional and super-community banks. Those members collectively deliver about two-thirds of all bank-issued consumer credit in the United States.
    Thank you very much for the opportunity to testify on the importance of extending and improving the Fair Credit Reporting Act. This is one of CBA's top priorities, if not the top priority this year.
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    We do have numerous suggestions for improvements in the bill to refine it. But the authors and co-sponsors really are to be congratulated for the incredible amount of time and effort that has gone into this so far. They are also to be congratulated for trying to move this piece of legislation which is so critical because of the sunset provisions.
    The two most important items for us are that the bill recognizes the need for an efficient, nationally uniform credit reporting system, and it also provides new tools to fight identity theft. We also are pleased that the bill addresses the ways that disputed credit information is handled, the accuracy of credit files and the issue of credit scores. We should note that we have also written a letter to Speaker Hastert asking that he be on the ready to provide floor time in a speedy fashion when the Committee has, with all due process, considered the legislation and hopefully passed it out.
    Let me talk for a moment just about national uniformity and rules governing credit information and procedures, because they truly are essential. They ensure that lenders have consistent information about consumers throughout the country that can be used to make fair and equitable credit decisions on highly competitive prices and terms. Without preemption, the States could establish different rules for the reporting of late payments, defaults or other information in a well-intentioned, but mis-directed, effort to protect their consumers.
    Lenders today can rely on the accuracy of reports, and that is why we have record rates of home ownership and greater access to credit by all sectors of society. This is especially true for low and moderate income borrowers.
    I do want to go on the record as pointing out that far from being a ''grab of power'' by the federal government, there is no new preemption. We are simply extending the status quo. There are no new restrictions on the States.
    Secondly, thank you very much for addressing the issue of identity theft. CBA and its members have been actively working with the Treasury Department, the banking agencies and other industry groups on this critical subject. We would remind the members that we have financial concerns, as well as altruistic ones, since our members must absorb the losses from these frauds. We also want to spare our customers the serious problems that follow ID theft. And regrettably, we also must make sure that the solutions we end up with don't actually aid the fraud artists.
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    The bill's formalized system for fraud alerts on credit reports is an important part of any solution. They will warn financial institutions and other lenders of past identity theft and we endorse this concept.
    Again, however, there is a cautionary note. Consumers must be forewarned that fraud alerts are serious and they should only be used where it appears that ID theft has actually occurred. These alerts will likely impede the consumer's ability to get the fast credit that they have become accustomed to. Still, we support the concept.
    The bill helps consumers keep fraudulent information from being placed in their file, which is good, through Section 205. Again here, CBA members have one caution. We also must acknowledge the existence of unscrupulous so-called credit repair clinics that try to delete accurate but unfavorable information in credit files. This area may need still more scrutiny.
    We support and encourage the development of best practices and especially enhanced efforts for consumer education. CBA in particular has been in the forefront of tracking and encouraging financial literacy efforts by financial institutions. And in this regard, the Federal Reserve Board should also be recognized, along with the FTC, for their good work to date.
    Third and last, we would ask that particular attention be given to coordinating this bill with existing law and with the banking regulators' roles. For example, one section directs the federal banking agencies to establish procedures for banks to spot possible identity theft. We really need, as has been mentioned earlier today, to coordinate that with Section 326 of the PATRIOT Act.
    And I will offer one other example: in Title 3, banking regulators, and not just the FTC, should be charged with developing model procedures for consumers to contact creditors and agencies regarding fraudulent information in their files.
    Mr. Chairman, as you know, we have a great number of other comments. They are in the written record. But we congratulate you and the Committee and will certainly take questions when it is appropriate.
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    Thank you.
    [The prepared statement of Joe Belew can be found on page 102 in the appendix.]
    Mr. GILLMOR. Thank you.
    Ms. Kayce Bell?
    Ms. BELL. Thank you, Chairman Gillmor.
    Good afternoon. And as did Mr. Belew, I will strive for brevity.
    It is an honor to be here to present testimony for you today on the Fair and Accurate Credit Transactions Act of 2003. I am Kayce Bell, the chief operating officer of Alabama Credit Union in Tuscaloosa, Alabama. I am here on behalf of the Credit Union National Association, which represents more than 90 percent of the nation's 10,000 credit unions and their 84 million members.
    My written statement submitted earlier addresses most of the provisions of this important legislation in full detail. But because of time constraints, I would like to address only certain portions of the bill.
    CUNA and America's credit unions wholeheartedly support Title I of H.R. 2622, which makes permanent the reauthorization of the expiring uniform national standards of the Fair Credit Reporting Act. If the broad set of preemptions that apply to the seven key provisions of FCRA are not reauthorized, consumers will be subject to a confusing and overwhelming patchwork of requirements.
    Consumer's personal information would be less accurate and secure in a Balkanized, patchwork national system. And there could be proportionately greater harm by lack of access to credit for those of low to moderate incomes and for small business owners.
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    CUNA therefore applauds the Committee's efforts to make the uniform national standards permanent. We also commend the sponsors of this legislation for addressing the very serious problem of identity theft. We support the identity theft provisions of H.R. 2622 in general and think that they will significantly reduce the occurrence of identity theft. With regard to some of the specific provisions, the Section 201 investigation of changes of address will be a sound identity security practice. However, we will need some time to change our systems and would recommend 1 year before this provision would become effective.
    Section 202 requires the consumer reporting agencies to include a fraud alert in the consumers file, when requested, and to notify all users of the existence of that fraud alert. We support this provision because it provides protection to consumers.
    However, we would like to draw your attention to the fact that Section 202 does not address under what circumstances and procedures the fraud alert would be removed and the users would no longer be subject to Subsection 3.
    Section 203 calls for the truncation of credit card and debit card account numbers, and we feel this is another sound security practice.
    Section 205 calls for the blocking of information by the consumer reporting agencies resulting from identity theft. We support the provision, but we are concerned that some consumers may file bogus police reports to either remove or correct derogatory information on their credit report to obtain credit.
    We recommend that the consumer reporting agency also be required to notify the furnisher of information when the agency declines or rescinds the block under this section.
    Section 206 requires the establishment of procedures for depository institutions to identify possible instances of identity theft, i.e. red flag guidelines.
    The red flag guidelines will be a very useful tool, but we request that there be a good-faith standard in any compliance requirement imposed on depository institutions to protect against unwarranted liability.
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    Section 301 requires the FTC to prescribe rules for the coordination of consumer complaint investigations. We think this idea is an excellent one, particularly if it results in a system whereby the victim need only report the identity theft to a single entity.
    We support Title IV, as well, pertaining to accuracy of consumer records in general. Section 402 provides that furnishers may not report information to CRAs if the furnisher knows or has reason to believe it resulted from fraudulent activity, including identity theft.
    While we certainly understand the intent, we are concerned that the reason-to-believe language is problematic and may well result in an interpretation that leads to more lawsuits and/or enforcement actions.
    We support Title V in general, too, and commend its sponsors for providing consumers, upon request, with a credit report and credit scores, including a summary of how the scores were derived and how the consumer can improve the scores at no charge and on an annual basis.
    We fully recognize that providing consumers upon request with the aforementioned information will result in indirect costs. We believe, however, that such costs will be significantly outweighed by the benefits to our members in terms of a better understanding of their credit status.
    In conclusion, CUNA strongly supports the permanent extension of the preemptive provisions of the Fair Credit Reporting Act. In that regard, we also welcome the Administration's support of this important goal, as well as several of their ID theft suggestions.
    Although the consumer groups do not support preemption, their testimony does include several suggestions worth serious consideration. But making these national standards permanent is a critical claim in assuring that our nation's consumers have easy access to credit, and to ensure that they receive fair and appropriate protections of their financial information, is extremely important to us.
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    And nearly as important are the provisions to provide greater protection to our consumers against identity theft. Our economy depends on it, and our citizens deserve it.
    Thank you, and I will be happy to answer any question of the Committee.
    [The prepared statement of Kayce Bell can be found on page 111 in the appendix.]
    Mr. TIBERI. [Presiding.] Thank you. Mr. Hilary Shelton, thank you.
    Mr. SHELTON. Thank you. Thank you for inviting me here today, Chairman Oxley, ranking Member Frank, ladies and gentlemen of the Committee. As you mentioned, my name is Hilary Shelton, director of the NAACP's Washington bureau.
    The NAACP is our nation's oldest and largest and most widely recognized civil rights organization in our country. Over 2,200 membership units across our country, 500,000 card-carrying members and branches in each of the 50 states in our nation.
    Credit and the ability to obtain credit is crucial to our nation today. Thus, I was especially pleased to be invited by the Committee to talk to you about the unique problems faced by racial and ethnic minority Americans in obtaining and maintaining a solid credit rating.
    Despite years of civil rights progress, laws and education, racial bias and discrimination are still crucial problems in the United States today.
    It is in our nation's financial arena that this is especially true. Race, national origin and gender continues to control the type and terms of credit availability to any individual.
    Unfortunately, there seems to be a quiet acknowledgment and acceptance on the part of credit report providers that credit scorers, the lenders and the regulators that racial and ethnic minorities on average have significantly worse credit reports and lower credit scores than their Caucasian counterparts.
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    This, in turn, means that lenders today disproportionately reject racial and ethnic minority applicants, or on the whole racial and ethnic minority Americans end up paying more for credit.
    In the spring 2000 edition of the Federal Reserve of Boston's newsletter, Peter McCorkell, the executive vice President and General Counsel of Fair Isaac and Company, was asked if credit scoring resulting in higher rejection rates for certain racial and ethnic minorities than whites.
    His response was, yes. He then went on to justify this response by stating that, unfortunately, income, property, education and employment are not equally distributed by race or national origin in the United States.
    Since all of these factors influence a borrower's ability to meet financial obligations, it is unreasonable to expect an objective assessment of credit risk to result in equal acceptance and rejection rates across socio-economic or race, national, origin lines.
    This assumption, that low-income and racial and ethnic minority Americans are less likely to meet their financial obligations, is simply wrong.
    Studies have shown that the majority of low-income people pay their bills on time, and that, in fact, low-income Americans have lower default rates on their loan and credit card bills than their wealthier counterparts.
    This acceptance of the existing racial bias furthermore also failed to recognize the fact that many middle-and upper-class income Americans are subject to predatory lending at a higher rate than low-income white Americans.
    When racial and ethnic minority Americans are blocked out of receiving loans or are charged more in interest, they have less to invest and their wealth-building capacities are diminished.
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    Thus, not only is the current system blatantly unfair to racial and ethnic minorities, but it is self-perpetuating, as well.
    In my written testimony, I have provided just a few of the many reasons that we can identify that are behind the racial and ethnic disparities that exist in credit reporting and credit scoring.
    For the sake of time, I will not repeat them here. But I hope that all of the members of this Committee will take the time to review my written submission.
    In summary, let me just say that disparities in credit reporting and credit scoring is becoming more and more problematic as credit reports and credit scoring are being used increasingly for more than mortgages. They are also being used now to determine if homeowners or automobile insurance will be underwritten and at what rate, for car loans, house or apartment rentals, utilities and in some cases, even hiring decisions.
    Lastly, while I was invited here today to primarily discuss the impact of credit reporting and credit scoring on racial and ethnic minority Americans, as well as some of the reasons behind the unfairness, the NAACP would also like to make a recommendation for improving the process.
    It has long been the contention of the NAACP that openness, transparency and sunlight help us understand what we are up against. It also intends for companies to be more sensitive to the needs of racial and ethnic minority communities.
    The NAACP would love to see the process behind credit reporting and credit scoring more open, better regulated and better understood by the American public, the people being rated and scored.
    Specifically, the NAACP joins other groups such as the Center for Community Change in recommending that the Congress establish an effective federal oversight process of all statistical scoring systems. Such oversight should be conducted on a regular basis, and should focus on fairness and the validity of all systems. We also support any and all initiatives that create credit reports making them more available to individuals on a consistent basis.
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    If we are a nation—if we as a nation are going to meet our full potential, we need to ensure that the opportunities are made available to all Americans regardless of their race, national original, gender or age.
    Ensuring that they have access to credit would be a big start.
    I would like to again thank the Committee for the opportunity to be here with you today and to discuss the impact that credit reports and credit scoring has on racial and ethnic minorities.
    I join with the leadership, the staff and the general membership of the NAACP in offering my assistance to develop national policy that will help all Americans regardless of their race, age, gender, ethnic background or other to obtain a solid credit rating.
    I also thank you for the opportunity to be here today, and welcome the opportunity for questions.
    [The prepared statement of Hilary O. Shelton can be found on page 238 in the appendix.]
    Mr. TIBERI. Thank you, Mr. Shelton, for your testimony.
    Mr. Taylor?
    Mr. TAYLOR. Yes, good afternoon. Thank you, Mr. Chairman. And thank you to the Committee.
    My name is D. Russell Taylor. I am the President and CEO of a state-charted mutual savings bank located in New Jersey, a $431 million state-charted mutual savings bank located in Rahway, New Jersey, and have the privilege today of testifying on behalf of America's Community Bankers, serving this year as its chair.
    I would like to thank you for the opportunity to testify today on H.R. 2622, the Fair and Accurate Credit Transactions Act of 2003. ACB wholeheartedly endorses H.R. 2622 and urges Congress to pass this legislation expeditiously.
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    First and foremost, ACB supports Title I's permanent reauthorization or the FCRA's uniform national consumer protection standards. The preservation of these uniform national standards is imperative to maintain the efficiency of consumer credit markets and the competitiveness of the economy as a whole.
    FCRA is too often evaluated in the context of large financial institutions. This does not paint the whole picture. For example, the Rahway savings family of companies includes both the bank and an insurance agency. We are by no means a large financial institution. Yet FCRA's uniform national standards helps small and medium-sized companies like mine better serve our communities.
    As both a bank executive and also a victim of identity theft, I also appreciate the tools provided in Title II for banks and consumers to address the growing problem of identify theft. We are concerned, however, about the new legal liabilities Section 202 would place on the users of credit reports.
    Credit reports currently include an alert facility allowing consumers to indicate they have been victims of identity theft and to caution lenders that credit applications could be fraudulent.
    Because their alerts have a variable degree of accuracy or completeness, lenders should not be bound by specific instructions found in the fraud alert.
    Instead, lenders should be permitted to use whatever reasonable and practical measures are appropriate to verify the identify of the person, rather than blindly adhering to specific instructions found in the fraud alert, which may or may not be complete.
    Section 202 should also be clarified such as the new penalties apply only to credit fraud, and not to legitimate credit applications.
    ACB understands that the accuracy of credit report information is the foundation upon which our national credit reporting system is built.
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    It is in the best interest of all parties that information be as accurate as possible, errors be corrected quickly and consumers identified theft claims be handled in an efficient and timely manner.
    We believe that title four will help improve the accuracy of credit information.
    The continued integrity of the national credit reporting system demands that credit reports be as accurate as possible. In our June 12 testimony, ACR supported empowering consumers to proactively manage their credit information by providing them access to free annual credit reports. Such access is already available in six States, including my home State of New Jersey.
    We are pleased that this bill will offer this to all Americans as well as provide consumers with information on how a credit score is derived, and how their credit score may be improved.
    ACB also believes that H.R. 2622 should include a general effective date of 1 year following the bill's enactment. For provisions of the bill requiring the issuance of regulation, the effective date should be 1 year after the regulations are issued. The removal of the sunset provisions in Title I of the bill should take effect immediately.
    Given that the FCRA's uniform national standards for consumer protections are scheduled to expire by the end of the year, we sincerely hope that consideration of other issues will not slow down or threaten the passage of this legislation.
    One subject the Committee will likely consider is an issue previously raised by Congressman Gary Ackerman. ACB and others in the industry have significant concerns about the impact this amendment would have on paperwork burden, operational costs, and the continuing commitment of furnishers to provide accurate credit report information.
    We continue to work with members of the Committee to resolve the concerns on both sides.
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    ACB believes that provisions in the bill, such as access to free annual credit reports and the threat of stronger penalties on both users of credit reports and furnishers of credit report data, will help address the concerns raised by Representative Ackerman.
    In conclusion, ACB believes that H.R. 2622 strikes the appropriate balance of protecting consumers and properly regulating information sharing practices. We commend the authors of this legislation for crafting a fair, balanced and effective bill to improve FCRA and our nation's credit system.
    ACB strongly endorses H.R. 2622, and urges the Committee in the 108th Congress to pass this measure as expeditiously as possible.
    Again, we thank you for the opportunity on behalf of ACB to be able to testify today, and we look forward to your questions.
    Thank you.
    [The prepared statement of Hon. D. Russell Taylor can be found on page 253 in the appendix.]
    Mr. TIBERI. Thank you. You get bonus points for finishing for under five minutes.
    Thank you very much.
    Mr. Hoofnagle?
    Mr. HOOFNAGLE. Thank you, Mr. Chairman, for extending us the opportunity to testify today on H.R. 2622, the FACT Act of 2003.
    My name is Chris Hoofnagle, and I am deputy counsel with the Electronic Privacy Information Center. We are a Washington-based research group that was founded in 1994 that concentrates on privacy and civil liberties.
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    Our written statement for the record today has been endorsed by the Privacy Rights Clearinghouse, Junkbusters Corporation, Computer Professionals for Social Responsibility, Privacy Times, Consumer Action, Privacy Activism, the Electronic Frontier Foundation and the National Consumers League.
    We are unified today in stating that the FACT Act does not go far enough to address the problems identified in the House and Senate hearing records. The record shows that there is a widespread public concern about the relationship between information sharing and identity theft, that there is a desire amongst the public for real protections for privacy, and that there is a renewed concern that credit scores undermine the openness principles of the FCRA.
    We believe that the Congress can address these problems and urge the Committee to go farther, to create more protections in 2622.
    First, we recommend that Congress should not tie up state legislators by preempting State law. We strongly believe that the case has not been made for permanent preemption. As was pointed out by previous witnesses this year in the hearing record, the 1996 amendments themselves create an uneven State landscape. The 1996 amendments specifically exempt three States from some requirements. And they also allow the settlements of the attorneys general to stand.
    There is not a nationwide standard for credit reporting. We should not pretend that it exists. Nor should we pretend that creating a nationwide standard promotes consumer protection principles.
    We have heard a lot of talk about this issue today, but I would point out that there are seven separate provisions that are going to be preempted if this bill passes. And there hasn't been an analysis of all these seven provisions and whether or not all of them are appropriate for preemption.
    Take the example of pre-screening, it would be very easy to comply with an uneven landscape, where different states made an opt-in standard for pre-screening. However, representatives of the industry have made it sound like compliance with an opt-in system would be impossible. And that is simply not the case.
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    We have also heard that the industry would like flexibility and that they don't want a one-size-fits-all solution for identity theft. But at the same time, they are asking consumers to accept a one-size-fits-all standard for affiliate sharing and for other preempted provisions.
    They get flexibility whereas consumer protections are cut off on their procrustean bed. Eliminating States' ability to develop additional safeguards for privacy is a dangerous precedent, and it has only occurred in a few privacy statutes.
    By and large, federal privacy laws operate and allow states, the laboratories of democracy, to develop innovative safeguards as required. Accordingly, we strongly recommend the Committee remove Section 101 from the bill in its entirety.
    Second, substantive privacy protection should be added to the FCRA to protect individuals against identity theft. H.R. 2622 does not include these protections. Let me suggest some just briefly.
    If credit grantors were required to spend just a little bit more time before granting credit, evaluating accuracy of the application, a lot of identity theft would be prevented. Beth Givens of the Privacy Rights Clearinghouse estimates that, perhaps, the majority of identity theft could be prevented if credit grantors were simply required to inspect credit applications more carefully and make sure that there are not inconsistencies with information on the CRA file.
    We also strongly recommend that consumers receive notice whenever suspicious activity occurs on their report. Suspicious activity includes multiple inquiries in a short period of time or when negative information is furnished to the CRA. Giving notice to the consumer will allow the consumer to take proactive steps to protect privacy.
    Our third recommendation is to make substantive improvements to the credit reporting systems to minimize inaccuracies. Documents obtained by EPIC under the Freedom of Information Act indicate that the number of consumer complaints to the Federal Trade Commission regarding the credit reporting agencies is increasing dramatically.
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    In 2001, the FTC received over 8,000 complaints. Last year, it received over 14,000. We received these documents just a few days ago, and we request they be placed in the hearing record.
    In our written statement, we detailed the frustration that consumers face when dealing with the consumer reporting agencies. In sworn statements before courts that we have included in the record, former employees of the CRAs claim that they were required to handle 100 consumer files a day. That means that they only had four minutes to dispose of each consumer's case file.
    Clearly, investigation and reinvestigation cannot be done in four minutes. We think that there is an opportunity in the FACT Act to improve reinvestigation duties.
    As I am running out of time here, let me conclude by urging the Committee to carefully reconsider the record based on this debate. We think that the FACT Act fails to even mention many of the problems raised by the public interest community. It simply tends to require studies, rather than the creation of new rights and responsibilities. Consumers deserve and need more to protect themselves from identity theft, to protect their privacy and to ensure accuracy and fairness in the credit reporting system.
    [The prepared statement of Chris Jay Hoofnagle can be found on page 175 in the appendix.]
    Mr. TIBERI. Thank you.
    Mr. Fischer.
    Mr. FISCHER. Good afternoon. The last panelist in the last panel.
    My name is Rick Fischer. I am a Partner in the law firm of Morrison and Foerster. I am pleased to be here on behalf of Visa.
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    Visa is the largest consumer payment system in the world. There are more than 1 billion Visa branded cards in use. And at the present time, Visa transaction volume now exceeds $1 trillion annually.
    I have submitted a very detailed statement, so that I am not going to repeat it here. What I am going to do is focus on two or three points and then comment on some of the things that I have heard in this panel and other panels very briefly.
    First of all, Visa supports the Committee's important work on H.R. 2622, particularly Title 1, which we think is essential, the reauthorization of the uniformity provisions of the FCRA, for the many reasons stated earlier, which I won't repeat.
    Also, Title II establishing workable identity theft prevention measures is critical. Visa has long been active in protecting consumers from ID theft. You will see that set forth in the statement and the attachment. And obviously, Visa applauds the Committee strongly for its efforts in this area.
    The fraud alerts, in particular, I think can be very helpful in this regard. But I do want to post one warning in that respect, because of the expectation that credit grantors will not grant new credit if a flag is posted without first talking with the consumer about it, or contacting the consumer in some way.
    I think that that is perfectly appropriate with respect to new loans and new accounts. But with respect to existing accounts, it really is impractical.
    For example, currently, Visa handles as many as 4,000 transactions a second, every second of every day. And while Visa successfully employs sophisticated neural networks to detect fraud, and in fact, many of you probably received calls at merchants or thereafter checking on fraud, it is simply not possible to check fraud alerts and to contact consumers in some separate fashion, certainly not 4,000 times a second.
    Finally, in this respect, it is very important that the rules established under Title II be uniform across the country. It is simply not possible to have multiple rules dealing with fraud alerts, customer notices, locking of accounts. If we really want ID theft to be effective, then there has to be one set of rules.
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    Now, in terms of comments by others, I want to actually reemphasize a point that Mr. Hoofnagle raised just a second ago when he said that the FCRA is not uniform nationwide. And I applaud him, frankly, for saying that. That is absolutely right.
    The point here, though, is that there are seven key areas of uniformity. Those are the ones up for reauthorization. I think it is critically important that they be reauthorized. And there still is plenty of room for the States to act in other areas, enforcement, score disclosures, additional notices beyond the seven areas. So there really is much room for the States left by the federal government.
    Now, also, Mr. Shelton mentioned a Pete McCorkell study. I am familiar with that study. It is actually a statement that was made by Mr. McCorkell that was published on the Web site of the Federal Reserve Board—Federal Reserve Bank of Boston, I should say. I think it is very important that the Committee consider that report in its entirety.
    The principal focus of the report was whether credit scoring is accurate even for minorities. And went into great detail to establish the fact that it is. And that, I think, is the critical factor here.
    What is also important is what we heard earlier from Secretary Snow, and that there has been on the increase in the availability of credit for minorities. You have heard that repeated. There are also studies by HUD and the Federal Reserve Board that go to this point directly, which I think are very important.
    But Mr. Shelton said one point that is very important. And that is we have not done enough. And that frankly, I believe is true. He focused on predatory lending. And I would like to correlate predatory lending with ID theft, because they both get to the same point.
    You both have wrongdoers. The predatory lender, the ID thief, they both hurt consumers. They both impact on consumer's credit bureau files. And therefore, they both impact adversely on credit scores. But I think the goal here really should be to get to the evil: the predatory lenders and the ID thieves and not really to focus on credit scoring as a wrong in this context, because, in fact, it is accurate.
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    Until we get at that, we won't get scores, that are equally appropriate for all. In this context, for example—and there have been questions that have been raised about who is looking at the credit scores in this particular context—I think the primary answer to that are the regulators. That the banking regulators, at least for financial institutions, will look at them regularly.
    Thank you.
    [The prepared statement of L. Richard Fischer can be found on page 157 in the appendix.]
    Mr. TIBERI. Thank you for your testimony, last but not least.
    Mr. Fischer, expand on something that you have in your written testimony. And you say that, in your written testimony, that banks have ''an adequate incentive to prevent identity theft.'' Don't banks just internalize the cost of identity theft? Can you expand upon that?
    Mr. FISCHER. I would be happy to.
    Without any question, if a bank suffers a loss, then it must absorb that loss. So in that sense, they are going to internalize the loss. And for example, Visa has a zero liability rule. If there is fraud on credit cards or debit cards, zero liability. And that was mentioned earlier today. So banks are going to suffer those as well.
    But to suggest that ID theft and fraud losses are acceptable because they are a cost of doing business, I think is not correct. And that is one of the reasons, for example, Visa strongly supports Title II. There are two victims. In fact, Chairman Bachus mentioned this, as did Chairman Oxley, the banks and the consumers. In this case, the banks need Title II as much as the consumers do.
    Mr. TIBERI. I apologize for coming late to this hearing. Mr. Fischer, just one more question for you.
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    Past hearings we have heard from witnesses somewhat—and this is about the evils of affiliate sharing—can you comment on your perspective of affiliate sharing? How it might be evil and how it might be harmful if we eliminate the ability to affiliate share?
    Mr. FISCHER. I would be pleased to.
    First of all, I will give you just a couple of examples. Obviously, given the industry that I represent, it is not surprising that I support affiliate sharing, and, in fact, support it strongly.
    The example that I will give you is a client, of course that I will not name, that came to me many years ago with the ultimate program that they had set up for a single unit within the holding company that would service customers from all of the companies and then could cross market at the same time.
    Consumers called in and one unit could handle it on behalf of all.
    And of course to do that they would need information from all of the organizations. And I said, Well, I am sorry, but it doesn't work. This was in 1992. It doesn't work—this was before the 1996 amendments—because either you are going to take all of this information and use it only for permissible purposes under the FCRA, and therefore you can't use it for marketing, or you can't have the information at all.
    And I think one of the wonderful things, the benefits of the 1996 amendments, is the customer management, relationship management systems that exist today that could not exist otherwise.
    In terms of possible evils, I think most of those were addressed in the 1996 legislation itself. There was a concern that people would not be told if decisions were made, adverse decisions, based on information from an affiliate. And that was corrected in the legislation. There is a notice requirement in that respect.
    And the concern that perhaps information in those files might become stale over time—and I think that that was addressed in part in the last panel by the fact that financial institutions know that—to the extent that they have this information, they can make initial decisions about someone's possible qualification. But they really can't make decisions at all until they go back, get a new credit report or credit score, to make that decision.
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    And so I think the combination of possible evils, if you will, or problems that might develop have been addressed.
    Mr. TIBERI. Thank you.
    Mr. Belew, I am sorry I missed your testimony. Can you kind of, expand upon the issue of your companies—your member companies interest in fighting identity theft?
    Mr. BELEW. On what?
    Mr. TIBERI. Identity theft, fighting identity theft.
    Mr. BELEW. Identity theft, indeed.
    To amplify what Mr. Fischer just said, it goes beyond just the cost of doing business. Our members oftentimes are in the position of trying to help their customers, their good customers, get through this. We have been very interested in finding additional expedited procedures, both through our member banks using the credit bureaus and the entire system.
    I have here something I would be happy to give you for the record. We did a little survey, certainly not statistically accurate, but a summary of some of the major banks' efforts. They have undertaken work in three areas: prevention, serving the customer needs and monitoring inside the bank.
    In prevention, they are looking at all of their authentication practices and looking at record destruction. For the customers, they are doing ID theft awareness kits and remedial and preventative advice. And then they are also even doing what they call footprinting, which is fencing off employees on a need-to-know basis, almost like the Central Intelligence Agency.
    There is a lot going on out there. We take it very, very seriously.
    Mr. TIBERI. Thank you.
    Final question for Ms. Bell. We have credit unions throughout the Hill complex here. If a member of a credit union today, if I went to apply for a car loan, my understanding, and I haven't done that here, my understanding is I could get it pretty quickly done if my credit was okay.
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    What happens for a typical credit union member if we don't extend the preemptions past the end of this year? If they expire and I go in and get a car loan, or try to get a car loan? Can you talk me through the process?
    Ms. BELL. Unfortunately, it will delay that process.
    Mr. TIBERI. By how long?
    Ms. BELL. For example, just as you maintain a permanent residence in another state, so do many of our other members. The credit union then would have to have a relationship with credit reporting agencies, that could be up to three credit reporting agencies in that state, plus any other states where you may have conducted business. Unless you disclose those states to us, it may suppress important information that we need to use to make a credit decision, or credit pricing decisions.
    So although the loan would still be obtainable, it could slow down your opportunity to buy the car that you just saw that you would really like to have for the weekend, or to take advantage of a cruise that you would like to give to your spouse for an anniversary gift. It slows the process down. It could be extensive.
    Mr. TIBERI. How long does it take for an average credit union member to get a car loan today?
    Ms. BELL. They can occur instantaneously. Our Internet lending site, for example, returns a response in as few as 15 seconds.
    Mr. TIBERI. That is pretty quick.
    Ms. BELL. We strive to be fast. Our members ask us to make credit available to them quickly and inexpensively.
    Mr. TIBERI. Thank you.
    I had more questions. I ran out of time and I am going to yield five minutes to the gentleman from New York.
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    Mr. ACKERMAN. Thank you very much, Mr. Chairman.
    I have a question for Mr. Taylor, actually, who referenced the likelihood of an amendment that I would be offering to the bill next week, and the likelihood is very good that I will be doing that.
    And I am sorry I missed your presentation, but I did read your testimony. Could you be specific as to what the concerns are that you have that you can——
    Mr. TAYLOR. Certainly, Congressman.
    To begin with, let me say we think that you have identified an issue. So it is not to suggest that the issue doesn't exist. It is a concern that is raised about how we might deal with the issue.
    To begin with, for example, within the FCRA, there is the provision that consumers would have access to their credit reports. We are seeing that happen in New Jersey over the last few years. And we recognize that that has worked quite well. We feel it has worked quite well in New Jersey. When consumers have the ability to look at that credit report and judge whether or not anything——
    Mr. ACKERMAN. We are on the same track there. But specifically, what are the problems in——
    Mr. TAYLOR. Okay, specifically on that would be that there are certain operational issues within different institutions which may not allow that easy implementation. For example, I may have some loan products that I do not send out a monthly statement on, so I may not be able to provide that without additional costs or additional operational setup.
    I may have another mechanism. Example, in my institution, not meant to be representative of the industry, but I would send out a late notice, perhaps, which I do, in letter form. In that letter I can certainly advise the consumer, and I already do, that what they are doing with their loan by not paying it on time could adversely affect their credit.
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    So it may be the mechanism or the manner in which consumers get that information that we just would like to deal with you and your staff on and talk a little bit more about it.
    Mr. ACKERMAN. Let me in return say that you have identified, as well as others in the industry, some concerns that we did not anticipate in the drafting of the amendment. And we greatly appreciate the cooperation we have been having from various parts of the industry that have been sitting down and meeting with us. And as a matter of fact, Mr. Davis of your organization has been a part of that ongoing discussion, Bob Davis, and expressing what those concerns are.
    And I think we have basically come to a point—and it is good that we are in the same room at the same time today because maybe we can come to a better understanding of where we are on this—the point you raise in your written testimony is the paperwork burden, the operational costs.
    And I think those are the two.
    Mr. TAYLOR. Yes, those are the main issues. Just that——
    Mr. ACKERMAN. Let me just tell what we have done on that and where we are. And we are just waiting for a sign-off from you and a couple of others on specific language that would be suggested to be reported.
    We have obviated the necessity of any costs of mailing other than the mailings that are currently done. And we have basically said in the legislation as contemplated, the amendment as contemplated, that in the statement prior to notifying the credit bureaus or even within 30 days after the credit bureaus have been notified, if I were on the business end of this, on your end, or on Mr. Fischer's end, and he was sending out a statement to somebody he wasn't getting paid from, that last statement, then I would even put it under the last three statements, leading up to the final time that I am about to report you to the, you know—if we don't get payment, and if you are not in compliance by such and such a date, we will report you to the credit agency.
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    I look at this not as punitive, but as a businessman. I used to be on that side of the table. But as businessman, you have got to be bottom line focused, and not say, The son of a B didn't pay me and I am going to get him somehow.
    But the object is to get my money. And if you put in a statement in there that I am about to turn you over, people get into compliance a lot quicker knowing that there is a date certain. And they all know the rules and regulations. They all know it is going to affect their credit. They all believe somehow you are not going to pull the trigger on it.
    So if there is some kind of a statement, which clearly I put it in a neon sign in the biggest light that I could shine on it, and even on the envelope saying, On August 2, we are turning you over to the credit bureau if we don't hear from you.
    And the worst thing that is going to happen is you are going to get paid.
    It is the same effect of putting a police car on the side of a highway that has ongoing traffic. Everybody gets into compliance. You know it is about to happen.
    So additional mailing is necessary. Put it on the same statement. Not even an additional piece of paper.
    The entire statement is computerized. They program it; you know how late the guy is. There will be a statement there in some form where people will see it that says, Hey, you ain't going to pay this bill, good things are not going to happen next week.
    But we have taken care of the cost of all that, the paperwork, et cetera. And it is just a computer function that gets done automatically just as everybody's individual interest and payment, the number and what they do is report it.
    Mr. TAYLOR. I couldn't agree with you more. It is a good business decision and one that we practice in my institution to make sure that those concerns are alerted. The only thing we wish to bring up with that was to make certain that there wasn't a mechanism in place that put some at a disadvantage, i.e., those that might not do a monthly statement. They may do something that alerted the consumer, but make sure that we weren't in a technical non-compliance situation——
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    Mr. ACKERMAN. If you send out statements every two months, it could be two months, that could before—I would do a countdown, three months before, two months before. You know, Your time is up, buddy.
    Mr. TAYLOR. Right.
    Mr. ACKERMAN. You know, we are turning you over. You know, the idea is for you on the lending end is to get your money out rather than secretly turn the guy in——
    Mr. TAYLOR. Absolutely.
    Mr. ACKERMAN.—to somebody that is not going to help you, because he is not going to pay it if he doesn't know you have reported him, and probably believes half of the time that he is getting away with it.
    Mr. TAYLOR. Yes.
    Mr. ACKERMAN. So I think that you will find that very helpful, like the insurance people now who fought second opinions before going for surgery now won't even let you do anything until there is a second opinion, because they discovered the bottom line is helped tremendously by that which was forced upon them at a time.
    But I thank you and others in the industry who have brought all of these kinds of concerns to the table that we didn't anticipate. We want this to be as quest free as possible, and as bottom line productive as it can be.
    Mr. TAYLOR. Thank you.
    Mr. ACKERMAN. Thank you very much.
    Mr. TIBERI. Thank you, sir.
    The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing.
    Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.
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    I would like to thank all six of you for patience and for your testimony today. And we begin next week marking up this bill in subcommittee.
    But for this day, this hearing is adjourned.
    [Whereupon, at 5:05 p.m., the subcommittee was adjourned.]