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Wednesday, June 4, 2003
U.S. House of Representatives,
Subcommittee on Financial Institutions and
Consumer Credit
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 10:08 a.m., in Room 2128, Rayburn House Office Building, Hon. Spencer Bachus [Chairman of the subcommittee] presiding.
    Present: Representatives Bachus, Castle, Royce, Kelly, Gillmor, Ryun, Biggert, Hart, Capito, Tiberi, Kennedy, Hensarling, Murphy, Brown-Waite, Barrett, Renzi, Sanders, Maloney, Watt, Ackerman, Sherman, Meeks, Gutierrez, Moore, Gonzalez, Waters, Hooley, Carson, Lucas of Kentucky, Crowley, Israel, Ross, McCarthy, and Davis. Also attending was Representative Lee.
    Chairman BACHUS. [Presiding.] Good morning. The subcommittee will come to order.
    Our hearing today is about the Fair Credit Reporting Act, FCRA, and how it functions for consumers and the economy. It is another in a series of hearings the subcommittee is holding with respect to FCRA, and how secure consumers feel with respect to their personal information. At our last hearing, we had a representative of the Treasury Department and others who discussed the FCRA's importance to consumers and the economy. We also heard a number of views on the importance of the provisions in the FCRA that ensure national uniformity for certain core issues regulated by the FCRA.
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    Today, we will learn why and how the FCRA is important to consumers and the economy and how the national standards established by the FCRA relate to the law's importance in these respects. I believe that the diverse group of witnesses testifying today will assist us to better understand how and why the FCRA benefits consumers and the economy.
    The FCRA is a comprehensive and complex law. Those who are familiar with the FCRA know that it governs the credit reporting process. For example, the FCRA governs those who furnish information to consumer reporting agencies or credit bureaus. It governs the credit bureaus themselves, and it governs those who use credit reports obtained from credit bureaus. However, it is important for us as a subcommittee to examine exactly how each of these entities is governed by FCRA and how the end result benefits consumers and the economy.
    It is my hope that we will also have a thorough discussion with respect to provisions in FCRA that establish a uniform national standard such as those governing furnisher obligations, the content of a credit report, reinvestigation time frames, adverse action responsibilities, affiliate sharing, and pre-screening. The witness panels have been divided into four general groups. Our first panel consists of federal and state regulators, with experience in enforcing FCRA, or regulating institutions governed by FCRA. Our second panel consists of users of credit reports and furnishers of information to credit bureaus. The diversity of this panel reflects the diversity of interests in and application of FCRA.
    Our third panel is intended to provide the perspective of individuals, i.e. consumers, as represented by some of the national organizations representing various groups of people. This panel should provide a lively debate and include the full spectrum of viewpoints. Finally, we will hear from those who work behind the scenes in the credit reporting process.
    We must hear from all these witnesses if we are to evaluate the impact of FCRA. For example, we will hear from a state banking supervisor who may in this rare instance agree on the need for national uniformity with respect to FCRA. We will hear how the pre-screening process has resulted in lower costs to consumers. Also, we will hear the perspective of the Hispanic Chamber of Commerce, of senior citizens, and of consumer attorneys in the FCRA debate.
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    As I have mentioned in the past, Congress will have a choice to make in the very near future. The provisions of FCRA that guarantee a single national standard with respect to many of the FCRA's provisions are set to expire on January 1, 2004. My focus throughout this debate will remain on providing consumers and the economy with strong benefits and protections. I believe this can and should be done at the federal level in order to avoid a patchwork of state laws that may affect the cost and availability of credit, and therefore the economy as a whole.
    I look forward to our witnesses testimony on this important topic. In closing, I would again thank Chairman Oxley and Ranking Member Frank for working together on this important issue and making it a priority for the committee. I would also like to thank the Ranking Member of the subcommittee, Mr. Sanders. Before I recognize him for an opening statement, I will say that the minority requested 11 witnesses, and because of the number, we have eight of those witnesses here today. So this by far reflects a bipartisan selection of panels.
    The chair now recognizes Mr. Sanders for his opening statement.

    [The prepared statement of Hon. Spencer Bachus can be found on page 108 in the appendix.]

    Mr. SANDERS. Thank you, Mr. Chairman. In fact, I thank you and your staff very much for helping us bring our witnesses here today.
    Mr. Chairman, I am particularly delighted that you agreed to my request to have our Assistant Attorney General Julie Brill here with us this morning, and I look forward to her testimony, as well as the testimony of all the other guests.
    Let me very briefly mention, Mr. Chairman, my three top concerns as we debate this issue. First, I believe that every consumer in this country should have the right to a free credit report at least once a year from all three major credit bureaus. Currently, consumers in six states enjoy this right: Colorado, Georgia, Massachusetts, Maryland, New Jersey and Vermont. In Georgia, in fact, consumers are entitled to two free credit reports a year. Mr. Chairman, as you recall during our first FCRA hearing, I asked Assistant Treasury Secretary Wayne Abernathy about his views on the subject. He told me that he believed, ''there is a lot of merit to providing free credit reports,'' and I would hope that both sides could agree to that.
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    But we should not stop at the credit report. Since a consumer's credit score is the basis that credit is used in determining whether you qualify for a mortgage, car loan or a credit card and what interest you will be paying, I believe we must also allow each consumer in this country to receive a free credit score from all three major credit bureaus, and a description of the key factors that may have adversely affected the consumer's credit score similar to California State law.
    Currently, many consumers have to pay a fee of $9 for a copy of their credit report and a fee of $13 to get their credit score from each of the three major credit bureaus. Since these credit bureaus can vary, it is important for many consumers to purchase all three credit reports and all three credit scores. This can add up to $66. Some Internet outfits charge fees that are even higher. Allowing consumers to receive free credit reports and free credit scores would be a win-win situation for both consumers and the industry. For consumers, they would be able to quickly identify errors in their credit reports and resolve them before they become a major problem.
    Most consumers do not even know they have errors in their credit reports until they are turned down for a loan. Correcting these errors would benefit the industry as well. For example, Financial Insights, an industry research firm, estimates that losses related to identity theft among U.S. financial institutions could reach close to $9 billion in 2006. Allowing consumers free access to their credit reports could substantially improve the accuracy of credit reports and cut down on identity theft. The current situation is bad for both consumers and the industry. We can begin to correct this problem through free credit reports and free credit scores.
    Secondly, I would like to focus on what the credit card industry refers to as risk-based pricing. Some of you may have seen a front page story in the New York Times and last week ABC News also carried this. To my mind, if you look at this issue, it is an absolute outrage. When consumers pay their credit card debts on time, they can still see up to a tripling, up to 30 percent interest on what they are paying despite the fact that they have paid the company on time. The reason for that is that the company has determined that they may have paid their car loan late, or two years ago they may have paid their rent late, and suddenly they have seen a doubling or tripling of their interest rates. It is a rip-off of the worst kind and this committee I hope will deal with it. It is fraud. It is a bait-and-switch practice by some of the largest credit card companies in America.
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    Finally, the third issue we must focus on is the ability for States to pass stronger consumer protection laws on FCRA. It is my understanding that there will be several witnesses today who will testify in support of reauthorizing the seven FCRA state preemptions because they believe that preempting the states from passing stronger consumer protection laws somehow benefits consumers and the industry. Well, if the 1996 state preemptions have benefited consumers, I would like to know why identity theft complaints nearly doubled in 2002.
    The issue here is a fundamental philosophical issue. Those of us who are conservatives believe in states's rights and the rights of states to be the laboratories of change. Our big government friends over here think that the big federal government has all of the answers, and they want to tell every state in the union what they should do. So some of us who believe in Newt Gingrich's victims, we want to see the states continue to have the power to protect consumers.
    I thank you very much, Mr. Chairman.
    Chairman BACHUS. With that, I guess we will introduce our witnesses.
    Mrs. KELLY. Mr. Chairman?
    Chairman BACHUS. Any other opening statements?
    Ms. Kelly?
    Mrs. KELLY. Thank you, Mr. Chairman. I thank you for holding the hearing today. This is an issue that is of great importance to this committee and Americans across the country.
    Last month, we heard testimony from the Treasury Department and a diverse panel of witnesses endorsing the extension of FCRA's uniform standards. Several witnesses testified that the failure to reauthorize FCRA will have a negative impact on the flow of credit and our economy. I share these concerns and believe that we must reauthorize FCRA to ensure that we continue to offer millions of Americans greater access to low-cost credit. I would also like to stress the importance of reauthorizing FCRA in our efforts to combat identity theft and help law enforcement officials track down illicit money under the Patriot Act. In numerous hearings, including several in my Subcommittee on Oversight, we have found that criminals and terrorists use complex and sophisticated schemes to manipulate our laws and financial systems. This law is essential to protecting the American people by detecting this activity and helping us weed out the wrongdoers.
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    Today, we continue this work and will hear testimony from another diverse group of witnesses. I am honored to have the opportunity to introduce one special witness from the great State of New York, Superintendent of Insurance Greg Serio. As the committee continues to examine FCRA reauthorization, there are many important issues we must address, but none more important than protecting consumers. This is an endeavor that Mr. Serio has been very effectively focusing on while carrying out his duties as the New York Superintendent of Insurance.
    This is one place where our Ranking Member should be aware our State has been in the forefront, continues to be in the forefront, and we are one of those laboratories without any authorization from the federal government. Mr. Serio has gone ahead on his own and done a lot of these very interesting and very, very specific things that are helping our consumers in New York State.
    So Superintendent Serio, it is a great pleasure to see you. This committee is going to undoubtedly benefit from your expertise. I look forward to hearing your testimony, and I thank you very much, Mr. Chairman, for holding the hearing.
    Chairman BACHUS. Thank you.
    Mr. WATT. Mr. Chairman?
    Chairman BACHUS. Yes, sir, Mr. Watt?
    Mr. WATT. I know we have four panels, and I do not want to prolong this. I just wanted to thank our State Banking Commissioner, Mr. Joe Smith, for being here and welcome him
    I yield back the balance of my time.
    Chairman BACHUS. Thank you, Mr. Watt.
    Ms. Hooley?
    Ms. HOOLEY. Yes, thank you, Mr. Chairman. Hopefully I can get a couple of concerns out on the table now so that people can try to answer as we go along.
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    I am glad that we are doing this series of hearings. I think we have one of the best credit reporting systems in the world, and I hope to keep it that way. There are some areas, however, where I think we need some improvements. One is identity theft, which is the fastest growing crime. But the two issues I hope that our panelists would think about today is inaccurate credit reports. When you have people depending on getting a job and having an accurate credit report, or getting insurance and maybe on that report they have the father's name who has defaulted on a loan, and all of a sudden that father's defaulted loan is on the son's, and the son now cannot get insurance for his home; or the person who has been out of work and finally gets a job only to find out for some reason or another that some bad loans are still on his credit report, I think those are issues that we need to deal with.
    The other issue is, how does a person that has had an issue with identity theft, how do they get through the process without taking a year and a half or up to 4 years, which I have heard about in many stories, where it takes forever and it is so frustrating to get through that process of cleaning up their credit report and getting their identity back.
    So the issue is inaccurate reports, and I know we have a lot of accuracy in our reports, but if you are on the other end of an inaccurate report, then how do you get through the process?
    With that, I yield back the remainder of my time.
    Chairman BACHUS. Thank you.
    Are there other members that wish to make an opening statement? If not, we will proceed to the first panel.
    Ms. Kelly, did you want to introduce Mr. Serio, or are you through with your introduction?
    Mr. Sanders?
    Mr. SANDERS. I will be very brief in introducing Julie Brill, who has been an Assistant Attorney General for the State of Vermont since 1988. She is co-chair of the National Association of Attorneys General Privacy Working Group. Julie has spearheaded Vermont's litigation and legislative efforts in a wide variety of areas affecting consumers, including privacy, fair credit reporting, tobacco and antitrust. We are delighted to have her with us today.
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    Chairman BACHUS. Thank you.
    Our other three witnesses on the first panel are Howard Beales, Director of the Bureau of Consumer Affairs at the Federal Trade Commission. We welcome you, Mr. Beales; Dolores Smith, Director of the Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, who has testified before us on other occasions. We welcome you back.
    Ms. Kelly has introduced Superintendent Serio. Assistant Attorney General Brill, Mr. Sanders has introduced you. And our fifth panelist is Joseph A. Smith, Commissioner of Banks, State of North Carolina, on behalf of the Conference of State Bank Supervisors. Mr. Watt welcomed you. We want to welcome you again.
    At this time, we will proceed to opening statements. We will start with you, Mr. Beales.


    Mr. BEALES. Thank you, Mr. Chairman and members of the committee. My name is Howard Beales and I am the Director of the Bureau of Consumer Protection at the Federal Trade Commission.
    I am pleased to have this opportunity to provide background on the Fair Credit Reporting Act. Although the views expressed in the written statement represent the views of the commission, my oral presentation and responses to questions are my own and do not necessarily reflect the views of the commission or any individual Commissioner.
    Since World War II, the American population has become vastly more mobile, and consumer credit outstanding has grown exponentially. Indeed, consumer spending accounts for over two-thirds of U.S. gross domestic product, and consumer credit markets drive U.S. economic growth. Early on, credit reporting was local or regional. The amount of information collected was limited and not standardized. Credit bureaus, also known as consumer reporting agencies, manually recorded consumer information on index cards, updated the information irregularly, and often retained it indefinitely.
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    Over time, however, small credit bureaus grew to become larger repositories of consumer information, relying on sophisticated computer systems to store, process and transmit large amounts of data. Today, the credit reporting system consists primarily of three nationwide credit bureau repositories, containing data on as many as 1.5 billion credit accounts held by approximately 190 million individuals. Creditors and other so-called furnishers provide information to credit bureaus voluntarily. There is no direct payment to furnishers for providing this data, but the cooperative database enables credit grantors to make more expeditious and accurate credit decisions. Quick credit decisions are important for many consumers who are in the market for new credit. A recent Federal Reserve Board study found that one in five active credit accounts were opened within the last year.
    Because of the national credit reporting system, the credit application process has evolved from a relatively time consuming individualized procedure that relied on loan officers's case-by-case judgment, to a more sophisticated and impartial system that relies on consistent assessments of credit history information. Because of the prevalence of credit reports, consumers today can use the Internet to comparison shop for a wide array of credit products and get virtually instantaneous offers, or they can get a five-figure loan from a car dealer they have never been to before, and drive a car out of the showroom the same day.
    The FCRA provides consumer protections in two vital areas: privacy and accuracy. The FCRA protects consumer privacy by limiting distribution of credit reports to those with specific permissible purposes. Congress also has given consumers the right to opt out of the use of their credit information for pre-screening, and to opt out of the sharing of certain information, including credit reports among affiliated companies. In addition to privacy, credit report accuracy is a core goal of the FCRA. The FCRA seeks to achieve optimal accuracy in part by providing that consumer reporting agencies must follow reasonable procedures to assure the maximum possible accuracy of the information they report. The FCRA also gives consumers the right to know what information the credit bureau maintains on them, and the right to dispute errors, facilitated by the FCRA's adverse action notice requirements. The self-help mechanism embodied in the scheme of adverse action notices and the right to dispute is a critical component in the effort to maximize the accuracy of consumer reports. The commission has given high priority to assuring compliance with these provisions.
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    I would like to briefly discuss the commission's efforts to administer the statute since 1970. The law provides that the commission would be the principal agency to enforce it. A number of formal actions have been brought to enforce the law, including cases to ensure compliance by creditors with the adverse action notice requirement, compliance by credit bureaus with privacy and accuracy requirements, and compliance by so-called furnishers with accuracy requirements.
    Most recently, the commission settled an action against an Internet mortgage lender that failed to give adverse action notices to consumers who did not qualify for online pre-approval because of information in their credit reports. The commission is also engaged in extensive consumer and business education, including the commission's 1990 commentary on the FCRA, and we are working on a revision of that as well.
    The 33 years since passage of the Act has fully demonstrated the wisdom of Congress in enacting the FCRA. The FCRA helps make possible the vitality of modern consumer credit markets. The consumer reporting industry, furnishers and users can all rely on the uniform framework of the FCRA in what has become a complex nationwide business of making consumer credit available to a diverse and mobile American public. The Act, along with the amendments, provides a carefully balanced framework, making possible the benefits that result from the free, fair and accurate flow of consumer data.
    All of these benefits depend on the consumer reporting system functioning as intended. That is why the FTC continues to emphasize the importance of educating consumers and businesses, and of enforcing the law to assure compliance by all those who have a role in making the system work.
    Thank you, and I look forward to your questions.

    [The prepared statement of Howard Beales can be found on page 122 in the appendix.]
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    Chairman BACHUS. Thank you.
    Ms. Smith?


    Ms. DOLORES SMITH. Thank you.
    Mr. Chairman and members of the subcommittee, I appreciate the opportunity to testify about the role of federal regulators under the Fair Credit Reporting Act, and on how the Act promotes the national operations of entities under the Federal Reserve Board's jurisdiction. Today, the three national consumer reporting agencies each receives more than two billion items of information per month and issues roughly two million credit reports each day. The agencies gather the information from financial institutions and other creditors, from collection agencies, and from public records. Participation in the U.S. credit reporting system is voluntary. Creditors need not obtain consumer reports before they extend credit, although most creditors do so to manage risk. There is no requirement that creditors furnish information to consumer reporting agencies, but if they do they must ensure that the information is accurate.
    The FCRA contains important consumer rights and protections to promote accuracy and to protect privacy. For example, consumers have the right to dispute the accuracy or completeness of information in their credit reports and to have inaccurate information deleted or corrected, and to include a statement of dispute in the report if the dispute is not resolved. With respect to privacy, the FCRA restricts the sharing of information among affiliates, unless the consumer is given the opportunity to opt out.
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    The Federal Reserve Board and the other banking agencies play an important role in interpreting and enforcing the FCRA as it relates to credit. Banks are primarily users of consumer reports and furnishers of information. The banking agencies have the statutory authority to jointly prescribe regulations that carry out the FCRA with respect to financial institutions. The Federal Reserve enforces compliance through the examination of state member banks and other entities subject to the Board's jurisdiction.
    In amendments to the FCRA adopted in 1996, the Congress preempted states from enacting laws dealing with seven key areas, including pre-screened solicitations, the duties of furnishers of information, and information-sharing among affiliates. Chairman Greenspan has testified that he supports making permanent these preemption provisions which are set to sunset on January 1, 2004.
    The FCRA promotes interstate and nationwide operations in important ways. Most significantly, the availability of consumer reports containing nationally uniform data allows banks and other financial institutions to make prudent credit decisions quickly and inexpensively wherever they do business and wherever their customers live and work. The Act's national standards, including those governing data furnishers and data users, enable banks to comply with a single set of rules for all domestic operations, thus promoting efficiency.
    The ability to engage in pre-screened solicitations enables banks to effectively market their products to consumers who are most likely to want them, which minimizes the cost of acquiring new customers. Sharing information among affiliates enables large financial enterprises to efficiently manage and use consumer information across multiple account relationships.
    A key consideration in an examination of federal preemption is the impact that different state laws on credit reporting could have on the availability and cost of consumer credit. Maintaining a reliable national reporting system is essential to the continued availability of consumer credit at reasonable cost. Credit information from consumer reporting agencies that is accurate and up-to-date benefits both creditors and consumers. Creditors can make decisions quickly and in a fair, safe and sound, and cost-effective manner. Consumers benefits from access to credit offered by competing sources, quick decisions on credit applications, and again, reasonable cost.
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    State restrictions in areas such as the furnishing of information to consumer reporting agencies or the content of consumer reports could affect consumers by decreasing the availability of credit or increasing its cost. Additionally, credit scoring is an important tool in credit granting, and the predictive power of credit scores depends heavily on the content and quality of the credit bureau data that are used to construct the models.
    State laws that lead to a lack of uniformity in credit bureau data could undermine the utility of the data for assessing credit worthiness. This, in turn, could compromise the effectiveness of the scoring models that creditors rely on for risk-based underwriting and for portfolio management. As a consequence, creditors might have greater difficulty assessing risk, which could lead to higher credit costs and could reduce credit availability for some consumers.
    Thank you.

    [The prepared statement of Dolores Smith can be found on page 423 in the appendix.]

    Chairman BACHUS. Thank you.
    Superintendent Serio?


    Mr. SERIO. Good morning, Mr. Chairman, members of the subcommittee, and thank you to Mrs. Kelly for that kind introduction.
    I am Greg Serio, the Superintendent of Insurance for the State of New York. I come before you today representing the 50 states and the District of Columbia, comprising the National Association of Insurance Commissioners. It is our privilege to provide you with our views on the Fair Credit Reporting Act and the use of credit information in insurance transactions.
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    The States, the District, and other members of the NAIC, as well as the NAIC itself and other groups representing state insurance policymakers, have been hotbeds of activity in the areas of evaluating and regulating the use and the protection of consumer credit information. From Kansas and Texas and a dozen other states where new laws governing credit scoring are expected to be enacted this year; to Ohio and Washington where regulatory action has already been taken; to Alabama where your new insurance Commissioner, Walter Bell, has already made credit scoring a top regulatory issue, there has been a near-universal interest in and engagement on the matter of credit scoring and safeguarding of consumer information.
    The common thread running through the actions of the NAIC and its members, and the state legislatures, of course, is the Fair Credit Reporting Act, with its articulated goals of preserving fairness and equity for consumers in the ways that business utilizes consumer credit information, and its objective of maintaining uniformity for ease for both business and consumers alike. The Fair Credit Reporting Act has been the core of all regulatory and enforcement activities undertaken in recent years.
    The subcommittee has been provided with a compendium of the various state laws, regulations and legislative initiatives relating to credit scoring, credit reporting and other uses by insurers of this information in the underwriting and rating of insurance policies. Our focus, it can be said, has been on managing the use of consumer information or credit score models, limiting or prohibiting them as sole determinants in making insurance underwriting or rating decisions.
    In those cases where credit data, either individual credit information or scores are utilized, the states are routinely requiring adequate disclosure of the source, format or application of that data to the underwriting rating or renewal processes, so that insureds may reasonably understand the basis for an insurer's actions and act accordingly. While some states such as California have not allowed the use of credit data in underwriting or rating on some lines, including automobile insurance, there is strong support for the notion that credit history, that is the economic behavior of an insured, plays some role and has some correlation to the procurement and price of that economic commodity that we call insurance.
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    Actuarial reviews initiated by the NAIC lend support to that notion. However, moderation in the use of such data, with maximum practical transparency, is the goal and has allowed insurers to utilize this data without running afoul of either the Fair Credit Reporting Act or the state laws addressing the use of credit information and the pursuit of fair and equitable treatment for consumers, and the federal law's specific requirements that adverse actions based on credit data analysis be communicated to those against whom such actions are taken.
    It should be remembered also that most states have either their own fair credit reporting standards, such as New York, or general insurance statutes prohibiting unfairly discriminatory practices by insurers that also serve to protect the public from unwarranted intrusions into or use of personal credit data.
    The work of the NAIC on the issue of credit scoring continues under the leadership of our President, Mike Pickens, the Arkansas Commissioner; of our credit scoring working group, Joel Ario, our Commissioner from Oregon; and former Congressman Mike Kreidler, the Washington State Commissioner. The NAIC will also be giving final approval to our regulatory options analysis in credit scoring to be used as a policy guidance document for regulators, and also to a consumer education brochure entitled ''Understanding How Insurers Use Credit Scoring,'' both of which have been provided to the subcommittee. The working group will also continue to consult with the Federal Trade Commission on fair credit reporting and enforcement issues.
    Indeed, it has been the union of federal and state regulators, together with members of this House, the Senate and state legislators from across the country that should give consumers, our shared constituencies, confidence that fair credit safeguards will be continued. Thank you.

    [The prepared statement of Gregory V. Serio can be found on page 340 in the appendix.]
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    Chairman BACHUS. Attorney General Brill?


    Ms. BRILL. Thank you. Good morning. Thank you so much for inviting me here today, Chairman Bachus, and thank you Ranking Member Sanders for that kind introduction.
    My name is Julie Brill and I am an Assistant Attorney General from the State of Vermont.
    I would like to make three points today. First, we do not have a uniform national law for credit reporting. Rather, we have a dual regulatory system which encompasses federal and state laws. Second, the states that have more protective consumer protection laws in the credit reporting area have not been harmed. Their economies are thriving. Third, in light of our dual regulatory system, Congress should sunset the very limited preemption that currently exists in federal law as was contemplated in 1996.
    With respect to my first point, states have enacted a wide variety of state credit reporting laws to address enormous problems that have existed in this industry. In Vermont in the early 1990s, entire towns were listed as tax deadbeats because subcontractors for the credit reporting agencies were unable to read our town records. This debacle affected the lives of literally hundreds of Vermonters. As a result, our State legislature enacted a very strong fair credit reporting law that provided for protections that do not exist in federal law and that go beyond the protections that are in federal law.
    California faces enormous problems, like the rest of the nation, in the area of identity theft. California, responding to this enormous problem, has also enacted provisions in their fair credit reporting law that go well beyond the provisions of federal law. Other states have enacted laws that go beyond the provisions of federal law. My written testimony outlines the wide variety of laws that exist in the states to better protect consumers in this critically important area of identity theft.
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    Congress has authorized this dual system of regulation. The preemption that exists as a result of the 1996 amendments is only in seven limited areas. But even with respect to those seven limited areas, four of them allow state laws that were already on the books in 1996. So with respect to preemption, only three limited areas are truly preemptive as of 1996. Otherwise, states are authorized to enact laws that are not inconsistent with federal law.
    With respect to my second point, the economies of the states with more protective laws have not been harmed. Professor Reidenberg provided some information to this committee last month with respect to important data points relating to mortgage rates and relating to bankruptcy filings for the three states that are specifically exempted or ''grandfathered'' in the seven preemption areas. In my testimony both written and here this morning, I am here to tell you that there are other data points that demonstrate that the economies of these states have not been harmed. We looked at auto loan rates, and found that Vermont is next to lowest in the nation with respect to auto loan rates. That is, we rank 50th out of 51 jurisdictions that are measured with respect to our auto loan rates. You don't get much better than that.
    In addition, we wanted to determine whether or not credit was readily available in Vermont. We examined our three major newspapers over a 10-day period and came up with these advertisements which you see on the poster boards to my left. They are also attached to my written testimony as an exhibit. You will see if you look at these advertisements that zero percent financing is readily available in Vermont; instant credit is readily available in Vermont. So our more protective laws have not harmed consumers.
    With respect to my third point, the National Association of Attorneys General urges Congress to allow the limited preemption provision to sunset as originally contemplated. The States should serve as laboratories of democracy in this incredibly important area, to innovate with respect to fair credit reporting laws, and to assist Congress in the ongoing debate with respect to what works and what does not work for consumers. The States are more agile and better able to address local issues.
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    Finally, I know my time is just out, I just want to make one closing remark. I will not be able to be here as you hear further testimony today, and with respect to other hearings in the future. Our office does not have people who can be here in Washington to monitor the debate. I would just ask that this committee on a going-forward basis ensure that the debate is intellectually honest. With respect to Vermont's economy and with respect to the economies in other places where more protective laws are in place, please remember the poster boards; please remember the auto loan rates; please remember our bankruptcy rates and our mortgage loan rates; and remember that our economies have not been harmed.
    Thank you.

    [The prepared statement of Julie Brill can be found on page 161 in the appendix.]

    Chairman BACHUS. Commissioner Smith?


    Mr. JOSEPH SMITH. Good morning, Chairman Bachus, Representative Sanders, Representative Watt and other distinguished members of this subcommittee.
    I am Joe Smith, North Carolina Commissioner of Banks, and Chairman of the Legislative Committee of the Conference of State Bank Supervisors. Thank you for asking us to be here today to share our views on the Fair Credit Reporting Act.
    States's rights was a keystone of CSBS's founding charter. The organization has a long history of supporting states's abilities to charter and determine the powers of financial institutions. Nearly every innovation in banking services, powers, structures, and consumer protections has come out of the state system. Consolidation and centralization of authority and rulemaking are not always the best answer for bank customers and borrowers. State bank supervisors see the benefits of allowing state innovations not only in bank powers and structures, but also in the area of consumer protections. CSBS does, however, recognize the benefit of a dual system that serves national interests and national needs, as well as local interests and local needs.
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    Since consumer needs can vary considerably among regions, consumer protection is often best addressed at the state level. Uniform nationwide standards, however, developed and enacted by the Congress, by you, may be appropriate and desirable in some specific areas. Technology has changed the world since the original enactment of the Fair Credit Reporting Act in 1970. This revolution has benefited both our financial institutions and the consumers they serve. It has also changed the needs, demands and expectations of both the industry and its customers.
    Congress's 1996 revision of FCRA included experimental preemptions of state authority to enact laws in several areas related to information sharing with, as has been previously noted, some exceptions. These preemptions passed with little debate at the time, and we welcome the opportunity to discuss them today.
    Bank supervisors have always demanded that institutions make decisions based on solid data. Technology now allows financial institutions to extend credit to individuals with whom they have never before had relationships. Much of this revolution has occurred since the 1996 FCRA amendments. Theoretically, this revolution, supercharged by the Internet, should benefit the prudent consumer of financial products as institutions can compete for their business based on their credit records. Underlying this $6 trillion market is a credit information system supported by the FCRA.
    CSBS holds federal preemption of state laws and authorities to a very high standard. Recognizing that our rapidly developing technology-based credit system has benefited consumers and our economy, and that it depends on reliable information and a consistent environment, CSBS adopted a policy earlier this year to support the permanent extension of the 1996 FCRA preemptions, retaining the exemptions acknowledged at that time. While we generally oppose federal preemption, we believe that the benefits of uniformity to our credit-granting system and the value of this system to consumers and our economy outweigh our objections in this case.
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    The credit-granting system is so important to the health of our financial institutions and their ability to serve their customers that we believe Congress should take action before the current FCRA preemptions expire. CSBS's support for preemption in this area does not imply support for the growing preemption of other state consumer protection laws. The Office of Comptroller of the Currency and the Office of Thrift Supervision continue to preempt state consumer protection laws without the kind of public debate we are having today.
    The States are increasingly concerned about the growing pervasiveness and boldness of OCC and OTS preemption, which they now claim extends to traditionally state licensed and regulated operating subsidiaries of federally chartered institutions. It is one thing for Congress to debate policy openly and publicly, and then establish federal standards. It is quite another when a regulator proposes quarterly-ordered interpretations that a clear reading of the law would not support. We hope that the Congress might extend its interest in the legislative preemption of FCRA to other areas of consumer law preemption by the Office of Comptroller of the Currency and the Office of Thrift Supervision. CSBS is committed to working with the Congress to address the needs of an evolving nationwide financial services system in a way that respects the interests of all our nation's financial services providers and minimizes regulatory burdens, while also protecting our nation's consumers.
    I would be pleased to answer any questions members of the subcommittee might have. I thank you for this opportunity.

    [The prepared statement of Joseph Smith can be found on page 436 in the appendix.]

    Chairman BACHUS. Thank you, Commissioner. Commissioner, were you appointed this June, like three days ago?
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    Mr. JOSEPH SMITH. No. Well, I was appointed to this position three days ago. This is my first assignment, and I thank the staff very much for this opportunity.
    Chairman BACHUS. Thank you.
    Mr. Castle?
    Mr. CASTLE. Thank you, Mr. Chairman. You have put together a heck of a panel here, with people in similar positions disagreeing with one another and covering the entire spectrum.
    What I would like to do, and I only have 5 minutes, and I know we want to enforce it today because there are so many panels, so I am going to need very brief answers, if we can get it. But I am very interested in what your recommendations are about what we in Congress should do before January 1, 2004. I understand the dual system. I understand the preemptions we have now. My interest basically is establishing a credit reporting system that will maximize the benefit to the consumers.
    I am interested in your specific recommendations on what we can do. I doubt if I am going to be able to get through all of you, but if you can briefly tell me, not just where you are, because I think I understand where each of you are from your testimony, but what you would specifically recommend that we do with respect to the legislation that we have to take up, which could be just continue the preemptions you have, expand the preemptions you have, do something different, don't do it at all, whatever it may be.
    We will start with you, Mr. Beales, and we will try to go down in order.
    Mr. BEALES. The commission has not made recommendations at this time.
    Mr. CASTLE. Do you have any specific recommendations?
    Mr. BEALES. No, we do not at this time.
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    Mr. CASTLE. Do you have a very brief statement, then, about it so we can keep moving?
    Mr. BEALES. We do not have any specific recommendations.
    Mr. CASTLE. Thank you.
    Ms. Smith?
    Ms. DOLORES SMITH. The Board itself has not taken a position on the preemption issue. The Chairman has expressed his strong support, and the Division of Consumer and Community Affairs basically is taking that position here today, and would make that recommendation to the Board.
    Mr. CASTLE. Which is, in essence?
    Ms. DOLORES SMITH. Which is, in essence, to make permanent the preemption provisions that exist in the seven key areas that were identified in 1996.
    Mr. CASTLE. Any discussion of expansion by the Chairman?
    Ms. DOLORES SMITH. No, nothing at this point.
    Mr. CASTLE. Thank you.
    Mr. Serio?
    Mr. SERIO. While the NAIC has not made a final decision on this, personally speaking——
    Mr. CASTLE. That is good enough.
    Mr. SERIO. If we are in a position where you look at this as a whole, and there are enough safeguards down in the state system, particularly with respect to insurance laws, it actually creates a protective silo at both levels, so that the preemptions as they are probably are providing enough security in concert with the state laws where continuing the preemptions as they are probably would be sufficient.
    Mr. CASTLE. So they probably would be sufficient. Is there a better answer than ''probably would be sufficient''? Something else we should do?
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    Mr. SERIO. No. I think it would be sufficient. It would be adequate, and it would be good to continue that because you do have these other laws that may not fit under the consumer credit banner specifically, but under the state insurance regulatory powers, at least in the insurance realm, we have adequate protections around that.
    Mr. CASTLE. Thank you.
    Ms. Brill? Somehow I think you are going to have a little different answer here.
    Ms. BRILL. Yes. In addition to sunsetting the preemption provisions, we think that Congress should improve the national baseline by requiring free reports, requiring disclosure of scores, improve the pre-screening process, and allow for notice and choice with respect to affiliate sharing, among the other things we think Congress should do, but that will suffice for this morning.
    Mr. CASTLE. I may come back to you.
    Ms. BRILL. Sure.
    Mr. CASTLE. Mr. Smith?
    Mr. JOSEPH SMITH. The CSBS has no additional recommendation other than continuation. We would prayerfully suggest that you could, in looking to additional——
    Mr. CASTLE. You said that at the end of your testimony. Do you have specifics on those different areas?
    Mr. JOSEPH SMITH. We would only suggest that if you are looking for examples of other places you might act, that the experiments in the states, the activities of states in this area would be a good place to look for other policy recommendations, but we have no formal position.
    Mr. CASTLE. Ms. Brill, going back to you for a moment, because I don't know if I agree with your position, but I don't yet have enough knowledge to disagree, but I am concerned. It seems to me that the preemptions work reasonably well. There are problems. Obviously, individual consumers have had problems, and there are things we should probably do to fine-tune it. But it seems to me we have struck a fairly decent balance with the dual system we have now. I am from a small state, too. I am from Delaware, a little bigger than Vermont, though, in population. But I am concerned about the ability of our States to be able to do all of these things; that the federal umbrella has perhaps been helpful.
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    In my judgment, consumer credit information is a lot more accessible today and more easily obtained. There are huge bits of information out there, and I worry about each individual state doing this, and somehow discombobulating the system altogether, and perhaps the dual system is the way to go. I say it as a matter of debate, but I would be interested in your views. I am surprised that you want to eliminate the preemptions altogether.
    Ms. BRILL. Thank you for asking me to clarify that. The problem is that in many respects, the national law is so poor in so many of these areas and provides so few consumer protections. For instance in pre-screening, supposedly there is a notice that goes to consumers, but no consumers ever see that. They do not understand how they can opt out of pre-screening. Looking at affiliate sharing, Vermont does have a law that requires consent before affiliates can share credit reporting information, and we are the only state in the nation that has that. That is because we believe consumers ought to have some kind of notice and choice in that area; that it should not be completely without any option.
    So part of the debate over preemption is wrapped up in what is the national standard. I do not think states are going to jump in willy-nilly to seek to enact laws in every area just because they are empowered to do so. States will closely examine what the federal law is. They will look at local problems, as we did with respect to Norwich, Vermont, and they will ask, do the federal laws adequately protect? And if the federal laws are not adequate, the states will jump in.
    So I do not think there is a reason to fear that once the limited preemption is eliminated—and again it is very limited—once it is lifted that the states are going to start enacting all sorts of laws. They are going to look at what the federal government, what you here in Congress have established.
    Mr. CASTLE. Thank you.
    I yield back, Mr. Chairman.
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    Chairman BACHUS. Mr. Sanders?
    Mr. SANDERS. Thank you, Mr. Chairman.
    Sometimes this discussion sounds a little bit Orwellian to me. As I mentioned earlier, I find it strange that folks who every other day tell us how much they respect the rights of states and those governments which are closest to the people to do the best job for the people. That is every other day. But then when the big corporations say, well, we want to crush the ability of consumers to get protection, suddenly it is the big bad federal government that has to run the show.
    Then I hear people say, well, we are for the consumers; we really love the consumers. I have never heard a member of Congress say they dislike consumers. So let's be straight on this. All of the consumer organizations do not believe that the federal government has the right or should preempt state governments's ability to protect consumers. U.S. PIRG agrees with us. Consumer Federation of America agrees with us. Consumers Union agrees with us. The National Consumer Law Center agrees with us. So those groups who protect consumers want strong consumer protection because they understand that in 50 states with good attorneys general and so forth, they can get that action.
    Those organizations, like the credit bureaus, like the credit card companies, like the large banks, they want preemption. Now, maybe some of you will now announce to the world that the large credit card companies are really pro-consumer. But if that is the case, then we are in an Orwellian world.
    I would ask Ms. Brill, give us some experience about what it means for a state to have the flexibility to go forward to protect consumers in a way that a federal government might not be able to do.
    Ms. BRILL. Yes, thank you. I would be happy to.
    What states need to be able to do is to address problems as they arise. What happened in our State with respect to credit reports was just something that the federal government, that Congress was unable to deal with.
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    Mr. SANDERS. That happened in Norwich. I remember that quite well. How long do you think it would have taken for the federal government, if ever, to address that problem which really impacted hundreds of lives?
    Ms. BRILL. Well, they did not act for another five years. We enacted our law that very next session, and it took Congress another four years to enact its law. Frankly, one of the very most important protections that consumers have with respect to accuracy in their report is the ability to review their report by having access to a free copy of their credit report at least once a year. Congress did not give consumers that right. That provision is one of the most important in our law.
    Mr. SANDERS. Am I correct in recalling that you just said a moment ago that the Association of U.S. Attorneys General is opposed to preemption?
    Ms. BRILL. Correct. The National Association of Attorneys General urges Congress to allow the preemption to sunset.
    Mr. SANDERS. Okay. Just changing gears, a very brief answer, if you could, I would like all of you very briefly to tell us if you believe that Congress should pass legislation allowing every consumer in this country to receive a free credit report and free credit score from all three credit bureaus.
    Mr. Beales? Yes? No?
    Mr. BEALES. We do not have any position at this time. I think it is an interesting idea, and one that is worthy of careful consideration.
    Mr. SANDERS. Okay. Thank you. I have got to move. I am sorry. We just do not have a lot of time.
    Ms. Smith?
    Ms. DOLORES SMITH. I would say no.
    Mr. SANDERS. Mr. Serio?
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    Mr. SERIO. I do not think the NAIC has even addressed that question, so I would not be able to weigh in on it.
    Mr. SANDERS. Ms. Brill?
    Ms. BRILL. Yes.
    Mr. SANDERS. Mr. Smith?
    Mr. JOSEPH SMITH. My association has not spoken. My personal opinion is yes.
    Mr. SANDERS. Okay. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you.
    Mr. Murphy? Ms. Kelly?
    Mrs. KELLY. Mr. Chairman, I have no questions of this panel. It is going to be a long day, so I reserve my right to question at a later time.
    Chairman BACHUS. Mr. Renzi?
    Mr. RENZI. Pass.
    Chairman BACHUS. Mr. Kennedy is not here.
    Mr. Barrett?
    Mr. Hensarling?
    Ms. Hart?
    Ms. HART. Thank you, Mr. Chairman.
    I did not hear everything in great detail, but I guess I have a quick question. It is basically regarding the credit report procedure. This is probably something that some of you might not be particularly interested in answering, but any member of the panel.
    One of the concerns that has been expressed by constituents of mine, and it is a little outside some of your testimony, is that they have serious concerns about what appears on their reports. They have much difficulty in removing inaccuracies from those reports. I am just interested in hearing a quick perspective, especially out of the regulatory agencies, about what you think we ought to do in this reauthorization of the law to change that, or is there anything in it that can help change the situation that is faced by the general public as a result of some of the things that happened to them on those reports.
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    Mr. Beales, you look like you are ready to answer.
    Mr. BEALES. Yes, ma'am. We think accuracy is really a key goal of the statute, and it has been a key focus of our enforcement activities. The provision that is probably most important in the existing statute is the adverse action notice to consumers because it is consumers that are the ones who know whether or not there is a mistake. That has got to be the starting point. I would add, when you get an adverse action report, you can get a credit report for free under the existing statute.
    That said, we are constantly on the alert for ways that the mechanism might be changed in order to improve accuracy, simplify the process, or facilitate corrections when corrections are appropriate. We do not have any recommendations at this time, but I think that is an important thing to look at.
    Ms. HART. Thank you.
    Anybody else on the panel?
    Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you.
    Mr. Ackerman?
    Mr. ACKERMAN. Thank you.
    On the adverse action report, just going down the line, many consumers do not know an adverse action has been taken unless they apply for credit and then receive an adverse action report. In an attempt to get consumers to either straighten out a problem or erroneous reporting, or to pay their bill, would it be a good idea in your opinion to inform consumers that a negatively impacting statement concerning their credit is going to be placed in the report, other than an increase in their credit, which most people do not consider negative?
    Mr. BEALES. I think that would result in an enormous flow of information to consumers.
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    Mr. ACKERMAN. Is that bad?
    Mr. BEALES. Well, I think a lot of it would be information that they already knew; that they missed the payment on the mortgage or whatever.
    Mr. ACKERMAN. Yes, but a lot of institutions do not report them. It is a yes or no question. If your credit card company or bank is going to at that point report you to the credit bureau, or has reported you, should the consumer be notified or not?
    Mr. BEALES. I don't think there is any significant benefit in doing that.
    Mr. ACKERMAN. Ms. Smith?
    Ms. DOLORES SMITH. I agree that there is not a significant benefit.
    Mr. ACKERMAN. Mr. Serio?
    Mr. SERIO. We actually did that on the insurance side. In the one case of credit scoring that we did allow in the rating process, we required that Metropolitan Life consider it to be an adverse action and then take the appropriate action in terms of notifying the consumer of that.
    Ms. BRILL. Yes, we think that would be good information to go to consumers, and I will note that Utah has such a law.
    Mr. JOSEPH SMITH. The association I don't think has a position on this, and neither do I.
    Mr. ACKERMAN. Could each of you, going down the line, tell me if you can tell us what is in the FICO score, what the components are? Would you tell us?
    Mr. BEALES. The FICO score is based on almost everything that is in the credit report.
    Mr. ACKERMAN. What is the formula? I am asking what the formula is.
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    Mr. BEALES. We do not know the formula.
    Mr. ACKERMAN. You do not know the formula.
    Ms. Smith?
    Ms. DOLORES SMITH. Fair Isaac does not make that formula available.
    Mr. ACKERMAN. Mr. Serio?
    Mr. SERIO. I can only speak for New York, but that is why we have not allowed black box statistical models to be used in New York, because of the inability to get that information.
    Mr. ACKERMAN. Thank you.
    Ms. Brill?
    Ms. BRILL. None of the attorneys general knows that.
    Mr. ACKERMAN. Mr. Smith?
    Mr. JOSEPH SMITH. I do not know it either.
    Mr. ACKERMAN. We don't know it either.
    Could you tell me if race is included in the FICO score? Just speak out. Anybody know?
    Ms. DOLORES SMITH. I would be surprised.
    Mr. ACKERMAN. We all would.
    Could you tell me if ethnicity or national origin is in there?
    Ms. BRILL. I don't know.
    Mr. BEALES. To my knowledge, that information is not in credit reports and therefore is not in FICO reports.
    Mr. ACKERMAN. Disruptive behavior, is that in the credit report? Prone to violence, is that in the credit report?
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    Mr. SERIO. If I could address that from the insurance viewpoint.
    Mr. ACKERMAN. Arrest record, is that in the FICO score?
    Mr. SERIO. The reason why we have not allowed the black box language is because it could be contrary to the state unfair discrimination statutes, which is why we can allow it to be used without having that information.
    Mr. ACKERMAN. Okay. Now explain to me why the FICO score is going to be important to the TSA to tell them whether or not I can get on a plane.
    Mr. Beales?
    Mr. BEALES. I think that would be better directed to the TSA. I do not know.
    Mr. ACKERMAN. Are you going to tell the TSA what is in the FICO score?
    Mr. BEALES. We do not know what is in the FICO score. We know how the FICO score was developed. We know what the FICO score does. We do not know what is in it.
    Mr. ACKERMAN. Ms. Smith? Is the FICO score going to help the TSA keep me off the plane?
    Ms. DOLORES SMITH. I don't think so.
    Mr. ACKERMAN. You don't think so, that it is going to help them?
    Ms. DOLORES SMITH. That it would help them.
    Mr. ACKERMAN. Mr. Serio?
    Mr. SERIO. I am not sure how it would work.
    Mr. ACKERMAN. Ms. Brill?
    Ms. BRILL. I will leave that to the wisdom of the federal agency.
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    Mr. ACKERMAN. Mr. Smith?
    Mr. JOSEPH SMITH. I have no idea, sir.
    Mr. ACKERMAN. Does anybody know why the TSA thinks the FICO score is going to help them? What is in there that would indicate to them why a person should not be allowed on a plane if their FICO score is high or low? Does a person with a low FICO score have a greater proclivity for blowing up a plane or committing an act of terrorism? Anybody?
    I yield back my time.
    Chairman BACHUS. Mr. Baker, do you have any questions?
    Ms. Carson?
    Ms. CARSON. Thank you very much, Mr. Chairman.
    I just have a quick question. What happens if an individual who has superb credit, but their credit lays dormant for a long time and they do not use it at all? And then suddenly there is a major activity underway in a person's account, which may imply identity theft; a person not being able to use their credit because they are disabled, and somebody is going out and doing something. Is there any mechanism in place now that would trigger some alert to somebody's credit report in that matter?
    Mr. BEALES. There are monitoring services that are available that people can buy that will report any activity on their credit report. But unless they chose to do it, it is not something that would happen automatically. At the point at which there was some denial or some adverse action affecting the consumer, then there should be a notice.
    Ms. CARSON. Are you saying that the credit agencies do not find any reason to be more sensitive to the activity on an account if it has in fact been dormant for a long period of time?
    Ms. DOLORES SMITH. It would not be the credit agency, but it very likely would be the creditor that is monitoring the pattern of usage and would note that this is unusual relative to the customer's behavior up to that point. In the same way that currently even if an account is not dormant, if there is an unusual pattern. For example, if the customer has been using it for relatively small purchases and all of a sudden there is a several thousand dollar usage, the creditor would get in touch with the customer, typically to say, ''Is this a valid transaction.'' That is something in which the creditor has an interest because under the truth-in-lending laws, the consumer's liability for usage is limited to $50, so the balance would be on the creditor, and it is in the creditor's interest to make sure that that transaction is valid.
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    Ms. CARSON. So the creditor would know that this customer has had very dormant credit for a long period of time?
    Ms. DOLORES SMITH. The creditor should recognize that, yes.
    Ms. CARSON. But isn't it to the creditor's benefit to go ahead and allow the transaction to occur?
    Ms. DOLORES SMITH. It is not in the creditor's interest to allow the transaction to occur if it is not a valid transaction by the customer, because the creditor will basically have to eat the loss.
    Ms. CARSON. Do you know of anything underway now that catches identity theft more quickly than we have historically? I know we went through a period where everybody was honest; everybody had a high level of integrity, and then, boom, here comes a lot of people who want to beat the system, if you will. So do any of you have any mechanism in place that would identify or quickly alert you to some possible misuse of a person's identity?
    Mr. BEALES. We are very active on three fronts in attacking identity theft. One front is working with law enforcement to try to use our database of complaints from consumers who have been victims, to try to locate perpetrators as quickly as possible. A second front is consumer education to tell consumers about what they can do to notify and recognize the risk and to try to keep it as small as possible. A third front is business education to encourage businesses to protect the personal information that may form the foundation for an identity theft, because that is often the source of information that leads to the problem.
    There are fraud alerts that consumers can place on their credit reports if they have been a victim of identity theft, in order to flag for the financial institution that this person's name has been used in fraudulent transactions, and the financial institution should take extra care to make sure that it really is a valid transaction.
    Ms. BRILL. May I respond to that from the state's perspective? Thank you.
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    With respect to fraud alerts, we have a consumer in Vermont who attempted to have a fraud alert placed on his credit report, but was unsuccessful. The fraud alert never appeared. We think the voluntary nature of the credit reporting agencies offering to do fraud alerts when contacted by consumers is problematic. In other words, they do not have a requirement, going back to your earlier question, to automatically do that. They wait to be contacted either by the consumer or the credit grantor. We think that that voluntary system needs to be made mandatory.
    I will also point out that the State of California has gone way beyond what is happening both at the federal level and with respect to many other states. They require a freeze. They require the credit reporting agencies to place a freeze on the consumer's credit report in the event that the consumer requests that. With respect to the freeze, the consumer is in complete control of their credit report and is able to determine who will look at it and who won't. We think that is one of the innovative solutions that this body should be looking at with respect to identity theft.
    Ms. CARSON. But you indicated that you had a consumer in your State that attempted to——
    Ms. BRILL. Yes, to have an alert placed on their credit report and the alert did not appear, despite his request to have it placed on his credit report. Correct.
    Ms. CARSON. Once the consumer did what the consumer should have done, then who was responsible for ascertaining its placement?
    Ms. BRILL. Because there is no law, either federally or in our State, requiring the credit reporting agencies to act when the consumer seeks to have the alert placed on their report, there was no legal responsibility on the part of the credit reporting agencies to follow up on that request. They claim that they do it. My guess is it was an oversight or a slip-up, but the point is if there was a law that required them to place those alerts on reports when requested, then that slip-up probably would not have happened.
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    Ms. CARSON. Thank you.
    Chairman BACHUS. Is there anyone on the majority side that wishes to ask questions?
    Mr. GONZALEZ. Mr. Chairman?
    Chairman BACHUS. Okay. I am going to swap back and forth.
    Mr. GONZALEZ. Thank you.
    Chairman BACHUS. Mr. Gonzalez, go ahead.
    Mr. GONZALEZ. Yes, sir.
    I had an interesting question, but actually Mr. Ackerman has something that is of greater interest, so I would yield to Mr. Ackerman.
    Mr. ACKERMAN. Thank you.
    Just one brief issue, Mr. Beales and Ms. Smith. How long does it take when a credit grantor wants to put an adverse piece of information on somebody's credit report for that to appear on the credit report?
    Mr. BEALES. It would depend on their reporting cycle. I think once the information is received by the credit agency, it would appear on the credit report within a matter of a day or two.
    Mr. ACKERMAN. Twenty-four hours, correct?
    Mr. BEALES. After the report was sent. Typically, creditors would report on a particular cycle. They would report all their accounts at a certain time of the month. So maybe it is 30 days.
    Mr. ACKERMAN. Most do monthly.
    Mr. BEALES. Most probably do monthly, but it may be 30 days before the next batch of reports goes.
    Mr. ACKERMAN. The second question, how long does it take to remove something from the credit report that is negative, that the credit grantor even agrees has been erroneously placed there, possibly as an error in identifying who the true consumer was, or in the matter of a case of identity fraud? How long does it take the agencies to remove that?
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    Mr. BEALES. If the creditor agrees, it would be removed automatically the next time the creditor reported it, because they would not report it anymore.
    Mr. ACKERMAN. Once it is reported, I beg to differ with you, it stays on your credit report until somebody asks that it be taken off. Nothing is removed until specific legal time frames. If you report something and you are late three times within the year, that stays on. That does not go off the second month afterwards.
    Mr. BEALES. Yes, sir, that kind of information would remain, and that is actually one of the reasons that for many consumers there is inaccurate information.
    Mr. ACKERMAN. And if the agency reports it, are you aware of how long it takes the credit agencies to remove it?
    Mr. BEALES. If the information is disputed to the credit reporting agency, it must be removed within 30 days.
    Mr. ACKERMAN. That is not correct. Logic would tell you that, because that is the cycle that is needed to take to put it on. That depends on the cycle that the credit bureaus choose to remove negative information.
    Mr. BEALES. That is the statutory requirement for the period to reinvestigate. If they cannot verify within 30 days, they must remove it.
    Mr. ACKERMAN. I am the consumer that I am referring to in New York. When Gary Ackerman was reported, not me, but it wound up on my report, either as a case of mistaken identity for $200 that went to collection, that was abandoned, reported to the attorneys, et cetera. When that appeared not on whoever the other Gary Ackerman or the make-believe Gary Ackerman was, but on this Gary Ackerman's report, and I asked that it be removed and spoke to the credit grantor, and they recognized that they had made a mistake, or someone or the lawyers had made a mistake, they could not get that removed for six months because the credit bureau said that was their cycle.
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    If you think that was the law, would you be supportive of a law that would require them to move it as expeditiously as they are required to put it on?
    Mr. BEALES. I think what you are describing was a violation of the law.
    Mr. ACKERMAN. If it is not the law, would you be in favor of a law making it the law?
    Mr. BEALES. Yes, sir.
    Mr. ACKERMAN. Ms. Smith?
    Ms. DOLORES SMITH. I really do not have that familiarity with how credit bureaus act.
    Mr. ACKERMAN. I am not that familiar with computers, but I know if you can put it on within 30 days, you can get it off within 30 days. The question is, what is sauce for the goose is sauce for the gander?
    Ms. DOLORES SMITH. The answer is that it certainly would be reasonable to require them.
    Mr. ACKERMAN. Thank you.
    Mr. Serio?
    Mr. SERIO. Yes, I think we would be supportive of that.
    Mr. ACKERMAN. Ms. Brill?
    Ms. BRILL. Yes.
    Mr. ACKERMAN. And the new Mr. Smith?
    Mr. JOSEPH SMITH. Yes, sir.
    Mr. ACKERMAN. Thank you.
    I yield back the gentleman his time.
    Chairman BACHUS. I thank you, Mr. Ackerman.
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    Let me ask this question, and I guess I will ask Mr. Beales because you would be in the best position to answer the question. I notice the Assistant Attorney General from Vermont said that almost no one uses this 1-800 line. I think that was your testimony.
    Ms. BRILL. Yes. It is difficult to find. Correct.
    Chairman BACHUS. I had heard that over five million people had used it. Obviously, there is a big difference in almost no one and almost five million. What is the true story?
    Mr. BEALES. As I understand it, there are several million people who have opted out. I do not know what the precise number is. I think that that is something that the credit reporting agencies should be able to tell you as to how many people are on the database. I think the notices that people get in the pre-screened offer, there are certainly ways that they could be clearer and more conspicuous to identify that number and let people figure it out, but a great many people have found it.
    Chairman BACHUS. I would agree that it is hard to find. Most people are not aware of the number. But even with that a given, it is my understanding we have had five million opt-outs, so it would be interesting to find that figure.
    We talked about credit scoring and disclosure of credit scoring by credit reporting agencies. California is moving a law right now to do just that. If you require a credit bureau to do that, now, the credit score, if a lender or bank or mortgage company or insurance company, any of them are doing a credit score, that is their credit score, isn't it? Isn't that the insurance company who would formulate their own score? The bank, if they are going to lend money, it would be their score? It is not the credit bureau's score, is it?
    Mr. SERIO. That is not necessarily true.
    Chairman BACHUS. Okay.
    Mr. SERIO. It might be. In fact, that is one of the things in the case we had in New York with Metropolitan Life, they actually came in and said that by taking the different factors they get from the credit bureaus, and then creating their own credit model, and basically limiting it to data from their population of insured, they did create a MetLife credit score. That is what gave us the confidence that it was a finite data pool; that it was their own folks; that it was directly related to their financial risk; and that is why we did allow it, together with the safeguards of reporting adverse actions if they were to deny the discount for the insurance if they did not reach whatever the credit score standard was.
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    Chairman BACHUS. Yes, because if First National Bank loans money, they come up with their own internal credit score, which is their property.
    Ms. Smith, does the credit bureau even keep that score?
    Ms. DOLORES SMITH. First of all, my understanding is that each of the credit bureaus is basically developing their own credit scores for credit bureau customers, so it may have some utility for some creditors. For banks, what we expect is that they will be doing their own underwriting based on the risk factors that they consider. They would be looking at the credit report and pulling data. If the bank, as you suggest, uses a credit scoring model, it would be one that has been developed for the bank, because the idea is to evaluate credit worthiness in terms of the bank's clientele, not who may be in the population of customers at the credit bureau.
    Chairman BACHUS. Ms. Brill, in Vermont, you have testified they pretty much lead the nation. I am just going to assume that. Is there a problem with telling a credit bureau to release a credit score that may be a lender's credit score? Have you tried to do that?
    Ms. BRILL. We do not now have a law requiring disclosure of scores. There are about four States that do.
    Chairman BACHUS. Have you ever attempted to do that?
    Ms. BRILL. Yes, we did. We originally had a law that would require disclosure of scores. It was back in 1992 when our law was first enacted. At that time, I believe no other state had a law requiring disclosures of scores. The industry came into our legislature the next year, or it was right around the time that the FTC developed its guidance which basically did not require disclosure of scores. The industry came in and said it is way too expensive to do for Vermont; we are going to pull out of your State, et cetera, et cetera. So our legislature devolved down to the federal standard and did not require disclosure of scores.
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    Chairman BACHUS. So you actually backed off requiring it, or repealed a law that did that?
    Ms. BRILL. Correct, although our office would like to see disclosure of scores now, and we do support legislation that is pending in our State legislature to require disclosure of scores.
    Chairman BACHUS. Okay.
    Mr. Beales, what was the problem with requiring those scores?
    Mr. BEALES. The difficulty with requiring disclosures is which score, because there are many different credit scoring models in use. There are some fairly standard ones that are very widely used, but there are also customized ones for individual companies or individual creditors. It is not so much a conceptual problem as a which score problem, because whatever score was disclosed may or may not be the score that was actually used in making a particular decision.
    Chairman BACHUS. Okay, thank you.
    Mr. Davis?
    Mr. DAVIS. Thank you, Mr. Chairman. Good afternoon to the panel.
    From listening to the discussion, it seems that there are two questions. One of them Mr. Ackerman I think very skillfully pursued with you, and it is the question of what would the content of a national standard be if we have one; and the second one Mr. Sanders I think pursued with you, and it is the question of what is the utility of having a national standard.
    Ms. Brill, I want to take advantage of your expertise as someone who is actually out there practicing in this area and litigating in it to educate me a little bit. Let's say hypothetically a credit card company is headquartered in Florida. And let's say they send out a solicitation to someone in my State of Alabama, and someone in Alabama obtains credit from them. Whose laws control in that situation? Is it the Florida law that is the law of the headquarters state, or is it the Alabama law as the law of the consumer?
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    Ms. BRILL. We would say the Alabama law.
    Mr. DAVIS. So essentially it is a rule that the law of the state where the consumer seeks credit would govern?
    Ms. BRILL. If there were a fight over the jurisdictional issue, one would need to show that the company purposefully entered the economy of Alabama. Assuming there was sufficient advertising, sufficient telemarketing and other forms of outreach to that state, then I believe the law of Alabama would probably apply.
    Mr. DAVIS. And in the modern day and age with solicitations and sending these things in the mail, you would almost always have that voluntary entry into the stream of commerce, wouldn't you?
    Ms. BRILL. Almost always, yes, as long as it was not solely over the Internet.
    Mr. DAVIS. So if someone for example in my State of Alabama wanted to raise some kind of a legal claim against a credit card company in Florida, obviously Alabama law would govern that claim. Is that right?
    Ms. BRILL. Yes. I should say that it really depends on the nature of the law, and if the law is focusing on a consumer right with respect to that offer, then yes, I believe the consumer would be able to assert that Alabama law applies.
    Mr. DAVIS. So if a credit card company, say, had headquarters in Florida and was primed to be a national company and sent solicitations to all 50 states, that would mean in effect that consumers in 50 different states would be able to invoke 50 different sets of laws if they filed suit. Correct?
    Ms. BRILL. To the extent that the different states have different laws, that is currently the case. That is right.
    Mr. DAVIS. All right. Now, have you done or can you shed any empirical light for me on whether or not any research has been done on the degree to which the 50 states do have different sets of laws and the degree to which there is an amount of uniformity? Obviously, I do not expect you to give me a 50-state answer, but as a general rule are the laws more uniform than not, or is there significant variation between the laws?
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    Ms. BRILL. My written testimony sets out the various state laws that exist in the credit reporting area. You were asking a question with respect to a credit card solicitation, and I was understanding that the law that may apply might not necessarily be credit reporting, but might have to do with fair credit billing or something else, another area where the states are not preempted and have various laws. But with respect to credit reporting, my written testimony does set out the different types of state laws that exist.
    I believe that there are a wide variety of state laws now in the credit reporting area, and that is why I say we have what I would call a dynamic dual regulatory system dealing with credit reporting.
    Mr. DAVIS. All right. Given the dynamic duality, if you will, of that system, one of the concerns that people on the other side of this debate raise is that absent a national standard, a credit card company has to make do with the patchwork of laws from different states. I think you acknowledge that is kind of the reality. So what kind of guidance would you give a company, let's say for whatever reason we do not reauthorize the preemptive standard and say the states are given a broad leeway to formulate their laws, what kind of practical guidance would you give to a credit card company in Florida that is running a national business, to help them get through this maze of laws?
    Ms. BRILL. Contact a lawyer who can research all the laws, or contact the National Association of Attorneys General which can provide a compendium of the different state laws. I am sorry, but that is currently the situation. That is what they have to do right now.
    Mr. DAVIS. I guess what I am getting it is the more nationalized the system obviously creates one set of incentives, and the more the system is driven by state law, it creates another set. I am trying to focus on the very narrow policy issue, because people on the other side of this debate raise the argument that credit may be less freely extended, for example, if there is a wide patchwork of state laws, and that if there was one national uniform standard, that if it is robust enough and fair enough, that that would give some practical guidance and better practical guidance to the credit companies. Do you agree with that as a general matter?
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    Ms. BRILL. It is a hypothetical question because we do not have a uniform set of standards right now. We have a wide variety of state laws. So hypothetically, I would like to see the data, the regression analysis that would show that credit would be more freely available. I have never seen an economic analysis to show that. As I tried to point out in my opening statement, the economy of Vermont has not been harmed in any way by our more protective laws. We have quite a number of more protective laws, not only in fair credit reporting, but also in the privacy area. So I would like to see the regression analysis showing that.
    Mr. DAVIS. Okay. I think my time has expired, Mr. Chairman.
    Chairman BACHUS. Our last member, Mr. Hensarling.
    Mr. HENSARLING. Thank you, Mr. Chairman.
    Obviously our discussion today has a lot to do with consumer protection. It appears to me that there is no greater consumer protection than a competitive marketplace. Given that each week back in my home in Dallas, Texas I receive a dizzying array of credit offers, it gives the appearance that we do indeed have a healthy, robust, competitive marketplace in the extension of credit.
    When we look at consumer protection, it seems like it divides up into four areas: access to credit, affordability of credit, privacy, and accuracy. I am convinced from my study of economics, my observation of what is going on in the real world, and the preponderance of testimony that this committee has received, that indeed we do enjoy the greatest access and affordability as to credit to be found in the world.
    I guess the relevant question might be: Do we pay too high a price in the category of privacy and accuracy? I have heard occasional anecdotes here and anecdotes there, serious ones, concerning consumers that have been wronged by this process. But my question to the panel is, can you quantify this problem for me? Can you give me a metric? Can you put it in some kind of context? Out of the millions or tens of millions or hundreds of millions of credit transactions each year, how often do we have consumers who legitimately complain about privacy concerns or accuracy concerns? What is the scope of the problem? Perhaps each one of you could very briefly address that.
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    Mr. BEALES. We do not have a reliable quantitative measure of the problem. We do not know of any measures of accuracy that we think are reliable as to the extent of inaccuracies. There is no question that it happens. Our focus on accuracy and privacy is to focus on the process of notices to consumers and their ability to correct and reinvestigations, and furnishers providing accurate information.
    Mr. HENSARLING. Thank you, if I could interrupt. I do have a limited amount of time.
    Ms. Smith?
    Ms. DOLORES SMITH. We do not have data that would quantify that for you.
    Mr. HENSARLING. Okay, thank you.
    Mr. Serio?
    Mr. SERIO. We have not seen any significant breakdown. In fact, it has been more of a balance between the need to run in a competitive marketplace and the protections that the consumers have been looking for.
    Mr. HENSARLING. Thank you.
    Ms. Brill?
    Ms. BRILL. I have not seen the data. It is an excellent question. One of the problems is, of course, consumers do not have broad access to their credit report, and as a result, they might not know that there are inaccuracies in the reports.
    Mr. HENSARLING. Mr. Smith?
    Mr. JOSEPH SMITH. We do not have any quantified data. With my colleague the attorney general, we work them one at a time.
    Mr. HENSARLING. Okay. Thank you.
    Mr. Chairman, I would like to yield the balance of my time to you for a follow-up question.
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    Chairman BACHUS. I appreciate the gentleman from Texas.
    I keep hearing things today, and we have a panel of magna cum laude graduates, so I am a little bit intimidated by that. But I did hear testimony that said that credit bureaus do not update their files for six months after a consumer disputes something on the report, and that is a real problem. What is the basis for that? It is my understanding that current law requires the credit bureau to update their file within 30 days, and that is a uniform standard. So doesn't the present law take care of that?
    Mr. BEALES. Mr. Chairman, that is my understanding. It should be corrected within 30 days or deleted.
    Chairman BACHUS. So what can we do that we are not doing now, when we say after 30 days you can sue them for not doing it?
    Mr. BEALES. Right. Ultimately, it is an enforcement question of making sure that the law is complied with.
    Chairman BACHUS. But what I am saying is that another law is not going to do anything more. I mean, it is not a problem with the law.
    Ms. BRILL. May I respond on that issue, Mr. Chairman? I think one of the problems may be with respect to the duties of the furnishers of that information. I am not sure, I think it was Representative Ackerman who brought up that issue. The issue may be that the information gets deleted once, but then becomes reinserted into the credit report in a subsequent cycle. So it might take a longer time to get the information permanently deleted.
    I think that that is a problem in the credit reporting industry now, and I think that one way to address that is to improve the duties upon furnishers and also to improve the ability of consumers to bring a private right of action with respect to a furnisher's failure to permanently delete inaccurate information.
    Chairman BACHUS. Okay. Let me ask you this, Chairman Greenspan testified before our committee, and I think Ms. Smith in your testimony today you also mentioned this, that the national credit reporting system has resulted in a democratization of credit availability, allowing more Americans in low-and moderate-income categories to enter the financial mainstream and own their own homes. Does the Federal Reserve have statistics, or do you compile statistics on consumer credit patterns, and do they bear out that statement?
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    Ms. DOLORES SMITH. We do study consumer patterns through surveys that are carried out by the Michigan Survey Research Center. So we will generally have some idea of consumer patterns. We do not have, so far as I know, data that would spell out exactly in the economy how much can be attributed to any particular cause.
    Chairman BACHUS. Okay. If you have uniform standards, one thing that people have testified, and I think there is pretty much agreement that they do allow banks to make quicker, less expensive credit decisions. Does everybody agree on that?
    Ms. BRILL. I am sorry, what is the question?
    Chairman BACHUS. That a uniform standard would allow banks to make less expensive or it reduces the cost of the banks of making decisions and they can make them quicker.
    Ms. BRILL. I do not agree.
    Chairman BACHUS. You do not agree.
    Ms. BRILL. No. I do not believe we now have uniform standards, and I think that in Vermont we have more protective standards and our credit decisions are very quick and credit is readily available at very low rates.
    Chairman BACHUS. So Chairman Greenspan's saying that they allow banks to make prudent credit decisions quickly and inexpensively, you dispute that?
    Ms. BRILL. I do.
    Mr. SANDERS. Mr. Chairman, in Vermont some of us on occasion do disagree with Chairman Greenspan.
    Chairman BACHUS. How about Ms. Smith?
    Ms. DOLORES SMITH. Ms. Smith believes that the Chairman is correct.
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    That the availability of the data from the credit bureaus on a uniform basis does enable banks to make credit decisions more quickly, and that they are prudent credit decisions.
    Chairman BACHUS. So it does increase the cost of credit underwriting when you do not have uniform standards.
    Ms. DOLORES SMITH. It would make it more difficult and it would cut down on the efficiency generally. I think it is hard to say what it would be for a particular institution, but if you are looking at the industry as a whole I think that it is a given that having a uniform system does facilitate operational efficiency.
    Chairman BACHUS. Mr. Serio, do you agree?
    Mr. SERIO. Yes, Mr. Chairman, thank you.
    We agree with that entirely in terms of not just the speed with which decisions are made, but actually making better underwriting decisions in the insurance realm, which would benefit all the policyholders of a typical company. The safeguards come in from the other side of the process, from the state side. That is why together, as our testimony indicates, that really works well with the best of both worlds, from both the federal and the state realms because you have, particularly for banks and insurance, if I can add banks in for a moment, they are both regulated industries and they both have a certain amount of skin in the game, if you will, to make sure that the information they are getting is good. They are using these things to maximum efficiency and effectiveness. That is why, to now look at it in the abstract of whether it works or does not work, but rather how does it work as a whole, and we think it does.
    Chairman BACHUS. Right. We are not saying that that makes the case that you should have uniformity. I am simply saying that all our testimony to date, and on the other panels, there has been pretty wide agreement that uniformity allows quicker, more cost-efficient decisions. Now, whether it is worth paying more costs, which are passed onto consumers, or whether it is worth it is another debate.
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    Ms. BRILL. Mr. Chairman, very respectfully, I would urge this committee to look at the data. In Vermont, our credit decisions are obviously extremely prudent because our bankruptcy rates are the lowest in the nation.
    Chairman BACHUS. But it would be lenders outside Vermont lending to Vermonters that would have to comply with your law, and so the cost would be incurred by them. I am not sure you would have that data.
    Ms. BRILL. What the cost is? You are correct that I do not know what the incremental cost is to the industry of complying with Vermont's law. I do not have that data.
    Chairman BACHUS. Obviously the cost of that is going to be to those 49 other states, institutions there or insurance companies there trying to comply with your law. The cost of complying with the Vermont law is going to be spread out over 50 states.
    Ms. BRILL. I am not certain that that is true. It may very well be.
    Chairman BACHUS. But do Vermonters borrow money from out-of-state institutions or get insurance from out-of-state institutions?
    Ms. BRILL. Absolutely. All I am saying is that I am not sure that the institutions would spread the costs across the nation, or whether they would impose a premium on Vermonters. I was merely responding to the point about the prudence of the decisions and the accuracy of the information, and their ability to evaluate the credit worthiness of Vermonters. It would appear to be high, given that our consumer bankruptcy rates are the lowest in the nation.
    Chairman BACHUS. In fact, Mr. Sanders actually said that in Alabama they are one of the highest in the nation, and in Vermont they are one of the lowest, and he says that the Fair Credit Reporting Act has a lot to do with that. But I went back and saw where ours were in the south, and they have always been historically the highest, and New England has historically always been at the lowest, and that was 50 years ago, and this law is not that old. But that is a good argument if you can make it and get away with it.
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    Mr. Sanders?
    Mr. SANDERS. Just a couple of points, and I did not suggest that people's interest rates were directly 100 percent impacted by the Fair Credit Reporting Act. Obviously, there are a thousand factors that determine that. But just a general statement in terms of the state of credit in America, we should not forget that since the year 2000, bankruptcy rates are up by 23 percent, and they are currently the highest in the country.
    Mr. Beales, I did want to address a question to you. You are the Director of consumer affairs for the FTC, and in that position presumably you are one of the key consumer representatives in this country, the person that millions of people presumably look to for help. I am sure that you will agree with me that a consumer's credit score is of enormous consequence to that individual in terms of purchasing a home or a car or the overall interest rates that that person pays. I don't think anyone disputes that.
    Picking up on Mr. Ackerman's line of questioning, what we have learned today, and you will correct me if I am wrong here, is that you, whose job it is to represent millions of consumers, do not know how a credit score is calculated. You do not know it. I do not know it. Nobody up here knows it. We do not know why one credit bureau may develop a higher or lower score than another. We do not know that one's score may be higher or lower because one is black or white or Hispanic; because one may live in a bad part of town or a fancy part of town; because one is a woman or a man; or because one may have lost the job three years ago for no fault of one's own.
    Given that reality, that you have told us that you do not know the methodology by which these scores are determined, do you believe that you, me, this committee and the American people should receive a description of the key factors that may adversely affect a consumer's credit score? Do we have a right to know how these scores are determined?
    Mr. BEALES. Congressman, I believe, with all due respect, that we do understand the methodology by which these scores are developed. We understand it in some detail. We do not know the particular mathematical formula for any particular score, but we do understand how they are developed. They are developed in a way to predict as well as it is possible to statistically predict the different characteristics that are correlated with the risk that somebody will not repay.
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    Mr. SANDERS. One second, I am not quite sure, but we do not know. Mr. Bachus is from Alabama, I am from Vermont, what criteria? Is he a better risk because he is from Alabama? We have members here who are black or white, women or men, you do not know. You do not know how much weight. If somebody was laid off from a job three years ago, how much weight does that have in terms of their ability to get decent credit? You do not know the answer to that. I am asking you a simple question, as presumably a representative of consumers in this country, do you think the people have a right to know?
    Mr. BEALES. What people do have a right to know, and what they get now under the Equal Credit Opportunity Act, is the four most important factors that influence their score; if it was based on a credit scoring decision, then the four most important factors that influenced that are identified. Now, everything matters in a credit score. It is the nature of the beast. The cut that was made in the ECOA is to identify the four most important ones; these are the things you, the consumer, ought to focus on.
    Mr. SANDERS. I would simply say that my understanding is that the Equal Credit Opportunity Act requires that credit scoring models be statistically sound and empirically derived. That is fine. But serious concerns have been raised that the use of credit scoring models may have a disproportionate impact on minorities and women, among other factors. Do you want to comment on that?
    Mr. BEALES. The origin of these models was to comply with the ECOA, to replace subjective judgments that may well have been correlated with race or gender, with objective characteristics where the creditor could say, and you could about any particular model, here are the things that go into it; here is the business basis for this decision, which the law allows. It is not discriminatory. Now, whether the current models are in fact or not, I have not heard that allegation previously, but that is the history of these models. They were developed to avoid charges of law violations.
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    Mr. SANDERS. But you do not know.
    Mr. BEALES. We have not investigated the particular models.
    Chairman BACHUS. Would the gentleman yield for just a second?
    Mr. SANDERS. Yes.
    Chairman BACHUS. I think the Federal Reserve maintains some of those models. You could maybe ask Ms. Smith.
    Mr. SANDERS. Mr. Beales can comment on that, but I cannot imagine for the life of me, Mr. Chairman or Mr. Beales or any member of this committee, why this is not public information. If women are not getting the same type of credit ratings because they are a woman, why don't we know about that? And why don't you demand that we know about it and why isn't that made public?
    Ms. DOLORES SMITH. I will address that with respect to women. I think that we don't know about what kind of factors may have an impact on the basis of race and ethnicity, but initially, 25 years ago, there was a problem with credit scoring systems and the impact that they had on the availability of credit to women, largely because the credit bureau reports were based strictly on information about the husband, in the case of a couple, or just basically information about men, rather than men and women. So over time, that remedied itself as women received credit and as information about them entered into the database at the credit bureaus, and into the development of these credit scoring models.
    With respect to race and ethnicity, there are, I suspect, factors that do affect the availability of credit to them. They are likely, though, to be based on related factors and correlations having to do with minorities having lower incomes and having less in the way of assets.
    Mr. SANDERS. But Ms. Smith, you are presuming these things, because we don't really know.
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    Ms. DOLORES SMITH. We can only presume.
    Mr. SANDERS. But don't you think that on an issue of this magnitude we should not have to presume? That this information should be made public? Why shouldn't we know exactly how they come up with their scoring methodology?
    Ms. DOLORES SMITH. First of all, I will say that on the credit scoring methodology and on credit scoring systems in general, this was a decision that basically the Congress made back in 1974 or 1975, when it amended the ECOA.
    Mr. SANDERS. Right, I know that. But shouldn't we change it right now? Tell me why you think it is wrong to make this information public to the people.
    Ms. DOLORES SMITH. But what information is it that you are talking about? How the systems are developed?
    Mr. SANDERS. Precisely.
    Ms. DOLORES SMITH. The problem with telling people how the systems are developed is, and you have testimony from Fair Isaac that I think will lay that out more clearly than I can, but it has to do with this being information that the creditors are using to make their underwriting decisions. So the concern is that under the ECOA, as Mr. Beales noted, the consumer does have the right when they are turned down for credit to know the principal reasons, but not necessarily the score, with the expectation that the score is not going to be very helpful to them.
    Mr. SANDERS. We are going around the bush here a little bit. I cannot imagine any reason why people not know how the score is derived.
    Ms. Brill, did you want to comment on that?
    Ms. BRILL. We agree.
    Mr. SANDERS. That is a Vermont response; very brief and to the point.
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    Any other comments on that?
    Mr. BEALES. Congressman, I think we do understand how the reports are developed. I think the reason that the algorithm itself is not and should not be made public is that it is expensive to develop these models. It is a piece of intellectual property, and if you make it public, anybody can use it.
    Mr. SANDERS. Expensive? Let's see. I would just comment that if one looks at the compensation packages that the heads of these companies make and the profits these banks make, whenever we ask them to do something that is going to drive up consumers's costs, but somehow or another it never affects the compensation packages or the profits or the dividends that are paid out. I think the public does have a right to have this information.
    Thank you very much, Mr. Chairman.
    Chairman BACHUS. Any other members who wish to ask questions?
    Ms. Maloney?
    Mrs. MALONEY. Thank you, Mr. Chairman, for holding this committee meeting. I am very appreciative to all the panelists. In particular, I would like to welcome Superintendent Serio from the great State of New York, and thank him for once again joining the committee to offer the views of state insurance regulators. This is his second appearance before our committee. He testified earlier on the need for antiterrorism insurance in the aftermath of 9-11 and how the availability of insurance was affecting the recovery of our city.
    Superintendent Serio, in your testimony you extensively describe the approaches different states have taken on the use of credit reports in rating and underwriting insurance. I certainly agree with you that this is a critically important issue that magnifies the importance of the accuracy of the credit reports and the need for consumers to be educated as to how they are used.
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    Insurers argue that credit information is a good predictor of potential losses when used for insurance underwriting. Mistakes or inaccuracies on credit reports have the potential of significantly raising the cost of insurance for consumers. Given your experience in New York and with the state laws across the country, do you see any role for federal intervention in this area beyond extension of the FCRA provisions allowing consumers the ability to correct mistakes in their credit reports?
    Mr. SERIO. Mrs. Maloney, we have as a body at the NAIC taken the approach first that disclosure is paramount, maximum, practical, transparent, if you will, at least to the regulatory bodies. Some of the points made by my fellow panelists about the need for confidentiality on some of those models, we would at least think that it needs to be disclosed to the regulators so that we can make decisions about whether they are being unfairly discriminatory or not under existing state insurance laws.
    I think that has worked. In the matter that I mentioned a little while ago with respect to one filing that we do have in New York that we have allowed where there has been a discrete data set from Metropolitan Life put together so that they can use a credit scoring mechanism, but where it is readily identifiable, where that data came from, that the information is then related to the consumer. There is not necessarily a need to tinker with the FCRA because we do have these other laws that are already providing a lot of that detail work, if you will, specifically in those regulatory environments, to achieve that maximum protection.
    Mrs. MALONEY. Thank you.
    One of my colleagues has a piece of legislation before our body that says that credit reports cannot be used by insurers. Would you comment on that piece of legislation or that idea, whether you agree with it or disagree with it, and why?
    Mr. SERIO. I think on behalf of the NAIC, we have found actuarial support for credit reporting data and credit scoring mechanisms to some degree. I think you will find in the compendium of the laws and the regulations that we have provided to you that the focus has been that it is a worthwhile and useful tool, but not to be taken alone. I think a lot of the action in the states is moving towards that it is some determinant of risk, but it should not be the sole determinant. I think that is where a lot of the legal enactments have been going.
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    For it to be a sole determinant would be problematic for the Commissioners, and that is why this is one of several or a series of factors or indicators to go into underwriting. But as a set of indicators, it is a legitimate risk factor.
    Mrs. MALONEY. I would like to follow up on my colleague's questioning on how systems are available. As I understood it, you believe that how they are developed should be available to regulators, but not the public. Are they available to regulators now or not?
    Mr. SERIO. In a lot of ways, from the insurance side, a lot of the regulators do have the right to ask for that material. But like many other pieces of information that regulatory bodies get, these are what you might call proprietary data. I think Mr. Beales was alluding to that, that in the hands of the regulators to evaluate, it does provide requisite consumer protection without losing that counterbalance, which is the competitive marketplace, proprietary data; things that have been constructed at great cost. I do not think we are approaching this from the perspective of not to evaluate it, but I think there has got to be a question of in whose hands do you get the best and highest use of that information.
    Mrs. MALONEY. Thank you very much. My time is up, and I thank you very much for traveling down from New York. We appreciate it.
    Mr. HENSARLING. [Presiding.] On behalf of the Chairman and all the members of the subcommittee, we thank you for your enlightening and patient testimony. Panel one is now dismissed, and we would at this time call panel two.
    I would like to welcome our second panel. We appreciate your agreeing to testify before this subcommittee today. At this time, to introduce our panelists, I would first like to yield to Mr. Castle.
    Mr. CASTLE. Thank you, Mr. Chairman.
    I would like to introduce my friend Clint Walker, who is on this end of the panel, who hails from my home state of Delaware. There are not a whole lot of us, so we appreciate him being here. He is the general counsel and Chief Administrative Officer of Juniper Bank in Wilmington. He is also very active in the community in Delaware and serves on the Board of the Wilmington Renaissance Development Corporation and the Delaware Community Investment Corporation. As a matter of fact, Juniper is an enterprise zone on the Christiana River which you go by on your Amtrak train. If you are going from here to New York, you will see it on the right-hand side there where the ballpark is. The state has been very appreciative of all the contributions by Juniper in terms of jobs and community involvement.
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    For today's purposes, he has plenty of experience in consumer credit issues and FCRA. Not only has he been general counsel of the First USA Bank and Citibank, but he was recently appointed to the Consumer Advisory Council of the Board of Governors of the Federal Reserve. In addition, Clint is former Chairman of the American Bar Association's Subcommittee on Privacy, so there is a heck of a lot we can learn from his background and his experience, and we appreciate Clint being here today.
    I may not be here all the time because I have to do some voting in the Education Committee, but we appreciate your being here, as well as the other panelists.
    I yield back, Mr. Chairman.
    Mr. HENSARLING. Thank you.
    At this time, I would like to yield to Ms. Biggert for our second introduction.
    Mrs. BIGGERT. Thank you very much, Mr. Chairman.
    It is my pleasure to introduce Kevin Sullivan from the great State of Illinois, a little bit larger state, but which also has many of the model insurance laws. Mr. Sullivan is Vice President and Deputy General Counsel for Government Relations at the Allstate Insurance Company. He is responsible for development and advocacy of State and Federal public policy positions. This is actually a new position as of January 2003. He has been very active in the company since 1984. Prior to going to Allstate, he served as the Commissioner of insurance for the State of Nevada, as well as Regional Counsel for the National Association of Independent Insurers. He then had several legal positions in the insurance departments in the states of Nevada and Nebraska. So he is well informed on these issues as well.
    He is a graduate of the University of Nebraska. He and his wife and children now reside in Libertyville, Illinois. I would like to welcome him to this panel.
    Thank you, Mr. Chairman.
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    Mr. HENSARLING. Thank you.
    I have the pleasure of introducing our other panelists, Mr. Ramon Rodriguez, the Chief Operating Officer of the United States Hispanic Chamber of Commerce; Mr. Leonard Bennett, member of the National Association of Consumer Advocates; Ms. Julie Smith, President of Buzzuto Management Company, on behalf of the National Multi Housing Counsel and the National Apartment Association joint legislative program.
    Mr. Rodriguez, we would like to call upon you at this time to receive your testimony. Please, if you can, press the button on the microphone so that we can hear you. If you are unacquainted, we have a light system here. We would ask our panelists to try to stick to the five minutes, and you will get a yellow light when there is one minute to go in your testimony.
    Mr. Rodriguez?


    Mr. RAMON RODRIGUEZ. Thank you, Mr. Chairman.
    Good afternoon, Mr. Chairman and members of the committee. Thank you for the opportunity to testify before this committee relevant to an issue that is of vital interest to the consumer in particular, to financial institutions in general, to small business owners, and in particular to Hispanic-owned businesses.
    My name is Ramon Rodriguez and I am the Chief Operating Officer of the United States Hispanic Chamber of Commerce, commonly referred to as the USHCC. Since its founding in 1979 in the state of New Mexico, the USHCC has been at the forefront of advocating for and on behalf of Hispanic business owners, both on a national and international level. As the leading Hispanic business organization in the United States, we represent the interests of more than 1.5 million Hispanic-owned businesses in the United States and Puerto Rico.
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    Our primary mission is to promote and enhance business opportunities with corporate America and the public sector for the constituency we represent. One of the challenges that confronts our constituency continuously is access to capital. The entrepreneurial spirit of the Hispanic community is unequaled within the minority business community. It has twice as many businesses as the next largest minority business sector, and growing at an exponential rate, generating over $200 billion in annual gross receipts.
    With an increase in the number and profits of Hispanic businesses in this country, the community has become a central figure with the country's financial markets. For Hispanic businesses, access to capital means the ability to grow and expand their enterprises to become more competitive in the business world. Part of that access to capital is shaving access to credit and having a mechanism in place that will not impede the free flow of that credit, that in some instances can mean the difference between taking advantage of an opportunity or not.
    Mr. Chairman, now that you know who we are, allow me to focus on the Fair Credit Reporting Act and the importance of uniform national standards to our members. Because others have and will testify about the intricate inner workings of the Act and what will happen if any aspect is materially disrupted, I will not do so today. Suffice it to say that all of the economic benefits being described apply equally to our businesses and our members, and more importantly, all of the consequences of disrupting or balkanizing the current system falls on us as well.
    Having said that, let me make some important points uniquely from our perspective. Let me begin with some statistics I have seen. Seven out of ten businesses are started with less than $20,000 of capitalization. Small businesses represent 99 percent of all U.S. employers and they account for 80 percent of all new jobs. Over 45 percent of small businesses rely upon personal credit cards as a major source of financing, and since the 1996 amendments, those in the lower half of the income spectrum have enjoyed by far the largest increase in access to competitively priced credit. Minority homeownership and minority ownership of businesses have increased steadily since 1996, due largely to competitively available credit. Unlike any time in our history, those in the lowest one-fifth income bracket have, by far, seen the greatest increase in homeownership as a result.
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    These phenomena have occurred because Congress enacted laws that allowed a truly national market for credit to develop, and gave businesses both large and small the ability to accurately assess credit risks like never before. Not surprising then that recent studies also show that those who achieved the most gains since 1996 will, should the current system become balkanized, suffer disproportionately. One study indicated 1.8 million fewer jobs and 19,000 fewer home purchases a year if FCRA is not renewed. Because our members are among those who have benefited the most from what the 1996 amendments made possible, we will suffer disproportionately should the current law be permitted to lapse. We urge you not to let that happen.
    Let me share with you a letter our President, George Herrera, recently sent to the White House on this topic. I share this because I know this administration shares our concern. The letter reads as follows: ''This administration has always been attentive to issues of importance to the Hispanic business community, particularly issues that impact upon our ability to enjoy the same economic opportunities as others. On behalf of the United States Hispanic Chamber of Commerce, allow me to focus on two economic issues important to both our members and to our community.
    ''There is increasing discussion within the chamber of the potentially severe economic consequences should the expiring provisions of the Fair Credit Reporting Act be permitted to lapse. Equally of concern is having states like California continue efforts to restrict our companies from knowing their customers and acting upon information now available to them to better their business potential. I urge the White House to actively work to obtain the legislation necessary to prevent these things from happening.
    Throughout the years, but more so recently, the Hispanic business community has contributed greatly to the growth of our nation's economy. The economic success of our members and of individuals within the community is due, in substantial part, to credit becoming widely and fairly available at competitive rates. These laws have extended the reach of credit markets in ways that have largely abolished artificial restrictions prevalent only a few short years ago. We must not retreat and we must not allow a patchwork of laws that ultimately will unfairly hurt our members and our communities.''
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    George concluded by saying, ''One recent study I saw predicated a severe economic impact should Congress not act. It came as no surprise that the findings also indicated that we would suffer disproportionately. That is why this is important to our members and that is why I am asking for your help.''
    George makes the point well. With the current law, a credit system that is the envy of the world has developed. Our members can both extend and receive credit at a speed and cost never before dreamed possible. The days when most small businesses only sold their wares to customers in their neighborhood are long gone. Our members need and rely upon a credit reporting system that reflects national consistency. Only then can our members accurately judge the credit worthiness of their customers regardless of where they are, and only then can our members benefit from intense competition to fulfill their credit needs, regardless of what street or neighborhood where they live or do business.
    Allow me please to make three final points. First, many of our Hispanic business members succeed because they are able to market aggressively and successfully. Those of us who have succeeded in business know that customers do not come to us.
    Mr. HENSARLING. Mr. Rodriguez, unfortunately I do need you to sum up so that we can go to our other panelists.
    Mr. RAMON RODRIGUEZ. Yes, I am just about there, sir. Thank you very much, Mr. Chairman.
    Let me then address the one point that I think is very, very important as well, and something that was mentioned in the first meeting.
    Secondly, the letter explained that we are very concerned about the efforts in some states to restrict our companies from knowing their customers and acting upon the information now available to better their business potential.
    In summing up, Mr. Chairman, I would simply like to say that one of the things that our organization also supports as it would benefit our consumers and our constituency is the opt-out options that would be available to those consumers as it relates to their respective credit. It is a critical element of the FCRA and I certainly urge that.
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    I urge the Congress and the Administration to resolve these issues quickly. Otherwise, we believe this country risks a significant economic retreat, and if the economists are correct, it will fall hardest on those whose gains are only recent, that is minority business communities.
    Thank you, Mr. Chairman.

    [The prepared statement of Ramon Rodriguez can be found on page 332 in the appendix.]

    Mr. HENSARLING. Thank you, Mr. Rodriguez.
    Mr. Sullivan, we would like to receive your testimony now.


    Mr. SULLIVAN. Mr. Chairman, members of the committee, thank you for allowing me to be here today to testify on the importance of the access to credit reports for insurance company purposes. I would like to especially thank Mrs. Biggert for the generous introduction.
    I am in fact, Deputy General Counsel for Government Relations to the Allstate Insurance Company. Allstate Insurance Company is the second largest writer of personal lines insurance in the United States, primarily automobile and homeowners insurance. I will direct my comments to those particular lines of insurance.
    You have heard a lot about the Fair Credit Reporting Act and its importance for the lending industry. It is also of growing significance in helping the insurance industry make automobile and homeowners insurance more affordable and available to millions of Americans. I would like to take this opportunity to provide you with some indication of why the continued use and access to credit management information is important to insurance companies if they are going to be able to charge consumer prices which match the risk of loss that those consumers present.
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    Finally, I would like to take a moment or two to highlight some of the concerns we have with the recent activities at the state level, which have threatened the continued viability of the full use of the information contained in consumer credit reports.
    Insurance underwriting has in fact been recognized since 1970 as a permissible purpose under the FCRA and it is used in a very rudimentary fashion to underwrite homeowners insurance, where companies look at credit records to determine precarious financial positions and concerns for potential arson and fraud. But in the last 10 years or so, the insurance industry and Allstate in particular began to recognize a strong correlation between major public record items on credit reports and future loss potential.
    We began to look at things like bankruptcies, collections, repossessions, and realized that people who had those things on their record were 40 percent more likely to incur losses than people with out them, a very, very significant indicator of future loss potential. We could not ignore that significant difference if we were to price in a manner matching risk. We called that financial stability, and we used it as an additional factor in helping us to underwrite insurance, not in lieu of all the other underwriting factors. Throughout the 1990s, we developed better information and more sophisticated models for both automobile and homeowners insurance by taking a look at our own book of business, literally hundreds of thousands, millions of customers. We built pricing models which allowed us to develop better, and what we consider more accurate prices. To this day, we now have the ability to give people with the best credit records lower premiums than those with the worst credit records, a very significant differential. We think that that is a reasonable way to provide our customers with the best value.
    What is credit scoring and how is it used? Very quickly and simply, insurance scores are derived from a review of credit reports. The Allstate model is a proprietary model, but like others it evaluates how people handle the acquisition of credit and how they handle and meet the obligations that they incur. We look at the presence of public records, things like bankruptcies, collections, delinquencies, the number and types of accounts an individual has and their account payment history. We look at credit inquiries and credit utilization, which is the relativity between the balance they carry and the limits they have available to them. The resulting score, again, is used in addition to other rating and underwriting factors to arrive at a price that we offer to an applicant.
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    It is important to point out that our goal is to help improve our ability to predict and to properly distribute the premiums to those individuals who are most likely to incur loss. It is in fact the best predictor of future loss we have yet discovered. Again, the differential between homeowners insurance is even greater than that for automobile insurance, where there is a 60 percent difference. In homeowners a person with a bad credit record is twice as likely to incur losses as an individual without that.
    So we are concerned that the states, almost 40 of them as Commissioner Serio acknowledged, are developing their own particular regulations to limit the ability of us to use credit records. We are concerned about that, that it will basically regulate the use of credit information right out of the acceptable factors, and that will result in worse prices for some and less availability of insurance coverage for others.
    So we are very supportive of the FCRA. As Congress continues to examine the preemptions, we are looking forward to working with the subcommittee in an effort not only to extend the preemptions, but also to find solutions to the problems caused by inconsistent and anticompetitive restrictions on the use of insurance scoring at the state level.
    Thank you, Mr. Chairman.

    [The prepared statement of Kevin T. Sullivan can be found on page 473 in the appendix.]

    Mr. HENSARLING. Thank you, Mr. Sullivan.
    Mr. Bennett, we would like to receive your testimony now.

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    Mr. BENNETT. Good morning, distinguished members of the committee and subcommittee. My name is Leonard Bennett. I am here on behalf of and as a member of the National Association of Consumer Advocates, the organization that includes among other things 850 members, many of whom, as myself, are consumer protection attorneys. I litigate these cases. This is the first time I have appeared before Congress. I am not sure if I will appear again.
    I come from a conservative background. I went to the George Mason University School of Law and Economics, and had as one of my teachers Justice Ginsburg. I have a finance degree and have what I believe to be the only frontline experience other than the Vermont Assistant Attorney General that you heard from today, and I might be one of the few speakers that you hear from that has that experience.
    You pass laws. We can talk about the policy, and you can talk and debate about the statistics analyzed by government analysts, government relations, and spokespersons for trade groups. But I am the individual who goes into court, in my case the Richmond federal court, not known for its liberal views, and attempt to enforce these laws. As a conservative by ideology, I do not want the Federal Trade Commission to have an army of regulators patrolling the streets in my community to enforce these laws. So I am supportive of the efforts of NACA, the efforts of Congress in providing us tools to enforce the law by private cause of action.
    I have heard a lot today about the importance of credit and information. There is an important concept I learned, one of the few things I may recall from my finance undergraduate degree, called the efficient market hypothesis. That concept is that business actors can only make within a stock market context rational decisions when they have accurate information. It is true that Hispanic businesses need accurate information to make decisions and that Allstate, if it knows whether or not an individual has positive credit and is a good credit risk, may want to consider that in its decisions. It is true that Juniper Bank may want to know and may want access to information about whose credit is acceptable. But without accurate information, all of those systems, all of those decisions fail.
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    Our economy has a problem. The problem is, our credit system is failing. I am a proud American and I would put our system up against anyone's system in the world, but we can do better. The Fair Credit Reporting Act has failed. Bankruptcies are skyrocketing. That means Juniper Bank and State Farm and other businesses that use credit reports are not able to make rational decisions and predict who is going to file bankruptcy. Identity theft is up. Identity theft is a symptom. It is not a cause; it is not an isolated problem. It is a symptom of a broken system.
    I have in my written remarks provided details of the mechanics of the system. For those that were here for the last panel, and a number of questions that the distinguished representative from New York asked, or the ranking member asked, these questions are answered.
    I have about a minute and 28 seconds. I want to point to just one of those, and that is the failure of the reinvestigation system, and let you know how it works. Whenever you have a credit problem, you contact me or you write a letter to the credit bureaus. Eighty percent of the disputes come in by writing; 20 percent by phone call. They have minimum wage employees that have to process one consumer every four minutes or less. In the case of Equifax, and as a proud America this particularly offends me, Equifax contracts out their dispute work to a foreign company in Jamaica, that uses Jamaican employees. I assume it is not a jobs program for lesser-developed nations, but rather to save money.
    Your dispute, in my case the letter, may attach documents, paid-in-full notes, a letter from the creditor, whatever, if you are an identity theft victim, or otherwise it is reduced to a two-digit code for identity theft or a mixed identity. For the representative from New York's problem, that code will come out to the furnisher, not his/her. That is all they get.
    I am glad that Representative Castle is not here, because I litigated the only case, the only one since 1997, since the 1996 amendments took effect in 1997, against a furnisher that has ever been able to go to trial. We won in Richmond. The defendant was MBNA. MBNA said, and this is the last thing I will read, that there are no national standards. I quote that, and I will not read it again. It is in my written testimony. MBNA's position on appeal in their appellate brief is, dear judge, dear court of appeals, there are no national standards that regulate furnishers. Read the position of the largest credit card company in America.
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    Please review my written testimony, and I will certainly answer any questions that the committee has.

    [The prepared statement of Leonard Bennett can be found on page 150 in the appendix.]

    Mr. HENSARLING. Thank you, Mr. Bennett.
    At this time, we would like to receive your testimony, Ms. Smith.


    Ms. JULIE SMITH. Thank you.
    Good afternoon, Mr. Chairman and distinguished members of the subcommittee. I am Julia Smith, President of Buzzuto Management Company, an owner, developer and manager of apartments in the mid-Atlantic region. It is my pleasure to appear today on behalf of the National Multi Housing Council and the National Apartment Association joint legislative program to discuss the experience of apartment providers and the rental housing industry with the Fair Credit Reporting Act.
    The National Multi Housing Council and the National Apartment Association represent the nation's leading firms participating in the multi-family rental housing industry. The NMHC and the NAA believe that eliminating the current uniform federal treatment of adverse action notices, consumer report contacts, and furnisher obligations can be expected to impose new operational costs on rental housing firms and increase uncertainty about the credit and legal history of our residents. These increased operating costs and risks will have a material impact on the cost and availability of rental housing.
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    Recent state legislative proposals addressing consumer data demonstrate the benefits of FCRA's system of functional regulation. These state proposals suggest that states may opt to regulate in a patchwork fashion, varying coverage of their consumer data laws by industry, rather than by function as the FCRA does. While we support the continuation of the national preemptions now found in FCRA, we support efforts by Congress and the Administration to develop new measures to address identity theft problems that have gained wider national attention since the enactment of major changes to the FCRA in 1996. The uniform national standards that FCRA now provides have increased the usefulness of consumer report information, enabling rental housing providers to make more informed decisions about resident and employee applicants.
    The January 1, 2004 expiration of current state law preemptions under Section 624 of the FCRA, however, raises concerns for rental housing providers in three specific areas: one, adverse action notices; two, permissible consumer report information and the obsolescence of that information; and three, consumer data furnisher statutory obligations.
    The expiration of Section 624 preemptions could raise operating costs and risks for rental housing in three areas. Adverse action notices, without additional congressional action, the expiration of Section 624's preemption of state laws addressing Section 615 A and B beginning next year could mean that rental housing firms operating in multiple states would be required to provide many more versions of the adverse action notices under circumstances that would vary with each jurisdiction.
    Today, rental housing providers are typically providing standard form adverse action notices in the vast majority of states under uniform conditions. Adverse action notices provided by rental housing owners are promoting wider awareness of consumer history that, in turn, can be used to improve the accuracy of file data where the consumers access and review their report and dispute inaccurate data.
    The NMHC and NAA are concerned about the higher operating costs that could result from a legal regime where the content of the adverse action notice and the circumstances under which it is provided varies with each jurisdiction. Permitting states to vary the content of what information may be included in consumer reports as the expiration of Section 624 preemption of the obsolescent limitations and other provisions in Section 605 would do, could substantially expand crime and credit risk for rental housing owners and residents.
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    The NMHC and NAA believe that creating new opportunities for States to delete information for consumer reports based on varying policy rationales compromises the national consumer data system.
    On a national basis, rental housing residents and providers could bear hardships of states that decided to use this new authority to restrict the availability of negative criminal and credit history. For example, a resident or employee applicant from a state that had decided to restrict disclosure of prior sexual offender history, as some states already do following Megan's Law, could very well be obligated to document that he or she was not a sex offender, where the applicant's application to rent or work included a reference to time spent in a non-disclosing state.
    The NMHC and the NAA are concerned that a rental housing provider's ability to reduce crime risks in the community it owns by screening out applicants with criminal history profiles could be significantly compromised by the ability of states to restrict the sharing of criminal history data through consumer reports. Naturally, a state law or municipal ordinance enacted under a state enabling law that restricted the disclosure in consumer reports of prior criminal history would make it easier for criminals to opt not to disclose prior crimes and more difficult for rental housing providers to detect a failure to disclose.
    Section 624's existing preemption of state laws outside of Massachusetts and California governing a furnisher's duties provides benefits that should also be preserved. Expiration of the preemption on furnishers' duties would likely create varied new state-imposed furnishers' duties that might not track the realities of reasonable business practices, particularly in industries such as rental housing where small businesses predominate. For example, a state may choose to specify a short amount of time for a furnisher to conduct an investigation upon notice of a dispute under FCRA section 623 B. This mandate may appear to provide additional consumer benefit, but in practice the state standard may promote hurried and inaccurate investigations as the state deadline does not provide adequate time for small companies, as well as large companies, to undertake a full and fair investigation.
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    FCRA currently provides businesses with standards of care and deadlines that are capable of being implemented. These provisions and the experience of NMHA and NAA members have worked well to balance customer and user desire for file accuracy with a furnisher's business practices. Where the duties of furnishers are left to the states to define, the operation and practices of rental housing providers furnishing consumer data would have to be adapted and updated with the advent of each new statutory change.
    In closing, we share the concerns voiced by members of this committee and witnesses before it about the crime of identity theft, which has received increased public attention since the passage of the last major changes to the FCRA in 1996. The Act imposes duties on rental housing providers furnishing consumer information to verify disputes. Thus, where identity theft has compromised, a person's rental, credit, or criminal history, the FCRA provides a resolution mechanism for victims to work with rental housing providers and other furnishers to correct records that have been compromised.
    We look forward to working with this Congress and the Administration to address identity theft concerns in the context of the extension of the state law preemptions now found in the FCRA. The expiration of the existing preemptions presents an opportunity to maintain uniform national standards, while providing new tools to address crimes such as identity theft that have gained greater prominence since 1996.
    Thank you very much.

    [The prepared statement of Julie A. Smith can be found on page 443 in the appendix.]

    Mr. HENSARLING. Thank you, Ms. Smith.
    Mr. Walker, your turn.
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    Mr. WALKER. Good afternoon, Mr. Chairman, members of the committee. First, I would like to thank Congressman Castle for his generous introduction. As he stated, my name is Clint Walker. I am the Chief Administrative Officer and General Counsel of Juniper Bank. Juniper is a young and growing bank focused on issuing credit cards to U.S. consumers. I appreciate the invitation to appear before you today to discuss how the FCRA affects our bank, consumers and the economy as a whole.
    The FCRA has provided the legal framework that has been instrumental in the shaping of an extremely efficient credit reporting system that supports millions of credit decisions each year. Consumers receive direct benefits from the system in the form of lower credit costs, more choices for credit, and greater convenience. For example, FCRA governs the important underwriting marketing tool known as pre-screening. Pre-screening is used to provide firm offers of credit to consumers who meet certain established criteria. If a consumer responds by requesting credit, the bank must honor the offer, so long as the consumer continues to meet the credit criteria initially established. Under FCRA, these pre-screened offers must notify consumers they can opt out of pre-screening in the future by simply calling a toll-free number.
    Because the pre-screening rules established under FCRA are the same across the country, lenders are able to develop and market products on a nationwide basis. It is these uniform rules that enable a new bank like Juniper to enter the market and compete nationwide with the giants of our industry. The competition enabled by pre-screening provides tremendous benefits to consumers in the form of lower rates, no annual fees, and wider credit availability.
    In addition, there are other significant benefits related to pre-screening that have attracted less attention, but are just as important. For example, Juniper has found that accounts obtained through pre-screening have a loss rate of approximately one-fourth to one-half of those associated with accounts obtained through other means. Moreover, the fraud rate on accounts acquired through pre-screening is about one-seventh the fraud rate associated with accounts obtained through other means. This is in part because pre-screening allows banks to more carefully and efficiently target offers through the use of their underwriting criteria.
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    The contents of the consumer report are also largely standardized under FCRA, because FCRA establishes time frames for determining when the information becomes obsolete and it preempts state laws. This is critically important because if we know that the contents of a credit report are uniform across the country, we can accurately evaluate the credit risk posed by each consumer regardless of where that consumer resides. This enables us to offer lower rates and make credit more widely available.
    On the other hand, if states were allowed to restrict the contents of credit reports, those reports would be less reliable and we would have to increase our prices or reduce availability to compensate for the increased risk. Consumers with less than perfect credit histories would suffer the most. For example, today a bank may decide to extend credit to an individual with one or two delinquencies in an otherwise positive credit report. However, if the bank is aware of those delinquencies, but doesn't know if additional information is being shielded under state law, the bank might not be able to extend credit to that consumer or may only do so at increased costs to offset the additional risk.
    In addition to being a user of credit reports, Juniper is also a furnisher of information to credit bureaus. In fact, it is card issuers like Juniper that supply much of the information in credit reports, and when we at Juniper look at a credit report, we typically find that the most useful and up to date information has come from other credit card issuers. Under FCRA, furnishers have certain obligations and these obligations are uniform across the country. They include certain obligations to reinvestigate. We take these obligations very seriously, and we assign a person to every inquiry we get from a credit bureau about our information.
    These obligations were carefully crafted in 1996 to balance the need for accuracy and concerns about impeding the supply of information. In particular, Congress recognized that imposing unreasonable burdens on furnishers could have a chilling effect on the flow of information that is the lifeblood of the credit reporting system. As part of the delicate balance struck on this issue, FCRA precludes states from imposing different standards. It is important that this delicate balance be preserved. If a state were free to impose stricter standards, furnishers would be forced to reevaluate the practice of furnishing information to credit bureaus or respective consumers in that state. Indeed, some furnishers may feel they have no choice but to stop or restrict furnishing information about consumers in that state.
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    In conclusion, the benefits to consumers associated with uniform standards under FCRA are clear. These national standards enable consumers to access a multitude of credit choices at lower costs than ever before, and have produced significant benefits to the economy as a whole.
    Thank you again for the opportunity to appear before the subcommittee. I would be happy to answer any questions you may have.

    [The prepared statement of Clint Walker can be found on page 484 in the appendix.]

    Chairman BACHUS. [Presiding.] Thank you.
    I will convene the questioning. Mr. Rodriguez, how can an efficient credit reporting system allow entrepreneurs who must rely on their personal credit histories to obtain financing to start new businesses?
    Mr. RAMON RODRIGUEZ. Mr. Chairman, it is our belief that the more proactive that accurate and liberal reporting can be shared with that consumer, the more proactive in turn that consumer can be in terms of addressing issues of concern that might appear on his or her respective credit report.
    As a result, we firmly believe that with that opportunity made available to that consumer, he or she can turn a business opportunity into an opportunity to be gained as opposed to an opportunity that was lost because of other tactics, dilatory or otherwise, that may be exercised by the respective reporting agency or the respective creditor.
    Chairman BACHUS. Can you discuss how credit reports have given those who maybe historically have been unable to get access to credit, the ability to do so now?
    Mr. RAMON RODRIGUEZ. I do not have any tangible, specific knowledge of that, Mr. Chairman, but again just referring to my previous response, I believe that the greater sharing of information that occurs, the more liberality of that sharing of information, it would assist those who in the past may have experienced some negative credit history of some kind, to be able to provide the necessary explanations, as Mr. Ackerman indicated that he had to his respective agency, and be able to preclude some negative event from occurring that would prevent that individual from taking advantage of other credit opportunities or business opportunities.
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    Chairman BACHUS. Thank you.
    Ms. Smith, your written statement discusses the need for uniformity with respect to adverse action notices that must be provided under the Act. Can you explain how these notices are helpful to consumers?
    Ms. JULIE SMITH. They are very helpful. If an applicant applies for an apartment and the application is not accepted or rejected, all apartment operators are required to send that applicant written notification letting them know what the circumstances were in rejecting that application, and then giving them the resources that they need to contact, to find out what they need to do in order to take care of whatever issue it was that caused the rejection of the application.
    So that is in these standard notices that are being used in the industry, and have made it much easier for so many of the apartment companies, many who are so small, to comply with that requirement.
    Chairman BACHUS. There has been speculation that if we had several different state laws and these adverse notices had to comply with all those laws, that it could make the adverse notices several pages long. Would consumers be less likely to read that adverse notice if you were talking about a several page long document?
    Ms. JULIE SMITH. It could be very intimidating to them. The notices that are being issued now are very clear and I think are very consumer-friendly in that they do give very clear direction on what they need to do and what their next step is. I would be a little concerned about something that was lengthy and potentially intimidating to the consumer.
    Chairman BACHUS. Okay, all right.
    Mr. Walker, your written statement indicates that fraud losses on accounts acquired through pre-screening are significantly lower than fraud losses on accounts acquired through other means.
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    Mr. WALKER. That is correct.
    Chairman BACHUS. Does this suggest that pre-screening is less likely to result in identity theft than other types of credit card applications?
    Mr. WALKER. I would not say, Congressman, that it is less likely to result in identity theft, because people cannot really use pre-screen solicitation for identity theft. All the information that is in that, frankly, is name and address, which a crook could get from a telephone book. I don't think it is any different from a regular solicitation that is sent in the mail.
    Chairman BACHUS. Okay. How are pre-screened offers different from general solicitations?
    Mr. WALKER. They enable us to do several things. First of all, we find that an individual who makes that extra effort to come to you to seek a loan is a riskier applicant. It is basically adverse selection; why are they going to that effort, and some people, not by any means all, but some people are doing that because they know something about themselves and they want the credit.
    Second of all, pre-screening enables you to get information about the consumer at two different points in time: one, at the time when you basically make the pre-screened offer; and two, when the individual responds, and you can see what has happened to the individual during that period of time. The migration of credit information is very, very important in determining risk incident, and it is a great opportunity for us to mitigate risk.
    Chairman BACHUS. All right, thank you.
    Ms. Maloney?
    Mrs. MALONEY. Thank you, Mr. Chairman.
    I would like to thank all of the panelists. Mr. Bennett, you seem very fed up. In your testimony you really leveled some rather scathing charges against the investigative provisions in the FCRA. I would like to ask you, have you contacted the FTC or other governmental agencies to talk about the system's shortcomings? If you have, what has been their response?
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    Mr. BENNETT. Congresswoman, understand that speaking here is a strange experience for me because I am asking you to help put me out of business by solving these problems. I am the litigator, but I can say that NACA itself, as well as our allies, particularly the U.S. PIRG have been in touch with the Federal Trade Commission. But as you would expect and as I would hope as an advocate of small government, the Federal Trade Commission is not funded in the capacity that would be necessary in order to monitor a number of the provisions of the FCRA. The most important one, the one that has not been discussed but a bit here, is Section 1681 S(2)(a). That is the requirement that says that a furnisher must maintain complete and accurate records. It would be a wonderful national standard if it were enforceable, but because of the (c) and (d) subsections of that statute, it is only enforceable through the Federal Trade Commission.
    I would gather, and I would believe, and I would bet some of my limited reputation on it, that the Federal Trade Commission has not prosecuted a furnisher for violating Section 1681S(2)(a). The Federal Trade Commission has done some admirable work on monitoring the violations of the statute by the credit reporting agencies, but it is impossible to monitor that. It is impossible. Think of all the collection agencies in the world out there that can just fold up shop and move on to the next town. It is impossible because think of the volume for these large institutional investors who report and monitor, for the Federal Trade Commission to be expected to keep up with that.
    You provided us an incentive, congresswoman, as has this committee, and as I hope it will do with any amendments that are made, for private individuals, conservative, liberal, southerners like myself, or you have an excellent attorney in New York that prosecute these claims; a number of states, and Alabama, Mr. Chairman, you have some of the best Fair Credit Reporting Act brains in the country. If you give us the tools, we can help make it right; eliminating preemption, not putting any more pressure on the furnishers is not the way to make it right.
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    Mrs. MALONEY. I know from my own experiences, and Congressman Ackerman pointed out, that identity theft is really on the rise. It is a huge problem in New York and probably across the country. But I would like to specifically ask you, what should we do to change the system? Do you have any specific recommendations? I would like to invite you to submit it to the panel in writing if you would like more time to think about it. But do you have specific ways that it would work better for consumers and for people who are trying to help the consumers?
    Mr. BENNETT. Let me formally say, as you might expect, that we fully endorse the legislative recommendations in U.S. PIRG's written testimony. Representative Sanders, the ranking member, has some, and Chairman Bachus, with your skills in the privacy area, I am sure can come up with many. We certainly would like the opportunity to submit that in writing.
    I will answer this as Leonard A. Bennett. The biggest problem out there right now is that the statute has too many loopholes with respect to the investigation process. Credit reporting agencies believe that they do not need to do anything independent in the investigation process under Section 1681 I. The agencies do not believe they need to evaluate information independent of the furnishers. I have deposition excerpts I provided in my written testimony, for example, where Trans Union's designated spokesperson says, we just mimic what the furnisher says. In that particular case, they even say, we ignore third party documents.
    I have a case that is in litigation now in which a Bank of America customer refinanced his second mortgage in early 2002, and Bank of America, apparently by mistake, reported it as a foreclosure and charge-off in late 2002. He sent a copy of the paid-in-full note, the released deed of trust, the letter from the closing attorney and the letter from Bank of America. The credit reporting agency ignores it because only communication directly from the furnisher can result in a change or removal of the credit report.
    On the flip side, the furnisher's liability, and you will see an excerpt from Capital One, the furnishers are not entirely innocent either. The furnisher represented in the Capital One deposition taken last month in my home state explains an episode in which the reporting agencies, all three, independently came in to the furnisher and said, this is the response that we want you to make to our investigation demands. We want you just to parrot or mirror what we say. The employee in the deposition said, well, I asked the reporting agency, should we look at original documents; should we review our account statements; should we actually do something more than just look at the computer screen? They were told no.
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    Identity theft, for example is a symptom. The problem from identity theft is not so much that it happens. In a world of automation, mixed identities and inaccuracies may happen. We would like to see less emphasis on Social Security numbers. In the case of the Capital One case, the one that I talked about, the consumer had a pre-screen, pre-offer sent to the thief, who knew that her Social Security number was one digit off from our client's because of some other mistake that had been made by furnishers. So she crossed out that digit and wrote in handwriting the new Social Security number of our client, and submitted it with the same name.
    Because of the automated system, when Capital One got that, they changed their records to add the thief's name as our client's alias, and then that got sent to the bureaus, who now after multiple disputes keep re-reporting it. Carol Fleischer is her name. She is unable now to convince the world, ''I am not Ms. King,'' I believe her name is, ''but I am not the thief; I am Carol Fleischer and I have good credit.'' So the reliance on Social Security numbers, and not even full matches, is a problem.
    MBNA, the case in which I was able to prosecute a case in Richmond's federal court against MBNA, and it is now on appeal, in MBNA's case, their employees reported that when they get an investigation request in, all they have to do is match up two of the following: name, Social Security number, date of birth and address, two of the following, and if they match them up, bingo. I cannot do much about that because Section 1681S(2)(a) which requires accurate information, and would be a wonderful national standard, I would take that over what California, Vermont and Massachusetts have. That standard is not enforceable unless you, this committee, wants to fund an army of regulators out there knocking on every door, going to Juniper and the like, instead of allowing the free market system that you have set up through private causes of action to work.
    S(2)(b) does not have a standard itself. The quote I used from MBNA is fantastic. It says, thus Congress did not intend to impose upon any furnisher the duty to defend its investigation or records qualitatively under Section 1681S(2)(b). Indeed, the requirements of accuracy as they relate to mere furnishers of information are contained in Section 1681S(2)(a), a section which is expressly made not actionable by consumers like Johnson under Section 1681S(2)(c) and (d). If Congress had wanted to subject furnishers to a qualitative standard, it easily could have done so.
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    So the debate about a national standard, even though I am normally for States' rights, if you want to give me a national standard by allowing us to sue under Section 1681S(2)(a) or an even better legislative idea, make it a safe harbor. In the rules of civil procedure in federal court, if someone files a bad faith notion, we cannot sue them until we have first given them a notice. So we first have to say, hey, your pleading is in bad faith. The Congress could say, you still cannot sue under S(2)(a) until you have written the furnisher and given them an opportunity to correct the problem. That is a fair, reasonable and free market solution.
    Mrs. MALONEY. Thank you. My time is up.
    Chairman BACHUS. Mr. Hensarling?
    Mr. HENSARLING. Thank you, Mr. Chairman.
    One of the advantages of coming to these hearings is occasionally you actually learn something. Mr. Rodriguez, I was very interested in aspects of your testimony that seven out of ten businesses are started with less than $20,000 of capital. I was aware that small businesses, the job engine of America, create the preponderance of new jobs, but I did not realize how many of them started with as little capital. I think you went on in your written testimony to say over 45 percent of small businesses rely on personal credit cards as a major source of financing.
    I really previously had not thought about the extension of FCRA as a jobs issue, but given that we just passed a Jobs and Growth Act in Congress and we are all very concerned about the state of our economy, I guess I am curious whether or not the Hispanic Chamber has developed any kind of model if Congress fails to reauthorize and get us closer to a national standard, as opposed to a 50-state atomistic standard? What would the impact be on jobs, and if you have not developed a model, what are your personal thoughts?
    Mr. RAMON RODRIGUEZ. We have not developed a model per se, but to the extent of our recognition of how important the credit-worthiness and the availability of credit is to the Hispanic business owners throughout this country, to that extent we had entered into an agreement with a financial institution that would make available to those business owners credit cards, both from a MasterCard and Visa perspective, that would provide for them up to a $35,000 line of credit with a very nominal rate of interest as they went into that plan.
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    That amount of money, that $35,000 limit, would, as I indicated in my previous comments, allow in many instances a small business owner, and most of the 1.5 million Hispanic-owned businesses are small to the extent that they are mom-and-pop operations, to take advantage of a business opportunity by using that credit card line of credit to embrace that business opportunity, that but for that line, they would not have been able to, and perhaps may have caused them to shut their operations or, indeed, not be able to grow as they had intended to.
    So that we will certainly look at and are looking at aggressively at developing a model that we can present to this body or some other body at an appropriate time, that would reflect the kind of job loss impact that not extending the FCRA as it currently exists would impose on small businesses.
    Mr. HENSARLING. But it is a fair assessment to say, then, that in the opinion of the U.S. Hispanic Chamber that but for the extension of FCRA there could be a significant job loss due to the unavailability or unaffordability of credit to small businessmen and entrepreneurs.
    Mr. RAMON RODRIGUEZ. We firmly believe that.
    Mr. HENSARLING. Thank you.
    Mr. Sullivan, you said in your testimony that the use of credit-based insurance scoring is the most significant advancement in cost-based pricing in at least the past 30 years, so that is a rather significant and bold statement. I understood in your testimony you alluded to a couple of different studies, but I am curious if you could explain to me why there is a correlation?
    Mr. SULLIVAN. There have been a number of studies that very directly highlight the correlation. The explanation of why is one that is open to speculation. There are various theories and hypotheses. Early on in the process, we began to wrestle with how you would even conduct a study, put together a study that would be able to explain why something happens. Generally in the insurance business, we feel we have a responsibility under the laws of unfair discrimination to statistically justify the differences, and we do not generally get into the whys those statistics seem to bear out.
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    But because we got that question a lot, we began to explore it. We ran across about 30 different studies which speculate that there are issues of risk-taking behavior related, and other issues like stress that result in distracted driving and other sorts of things. We can only speculate as to the reasons why. The critical factor as far as we are concerned in our responsibility to provide coverage at premiums that match the risk of future loss that somebody presents, is that somebody who is 60 percent more likely to have an automobile accident or two-times as likely to have a loss on a homeowners insurance policy should pay more for their insurance than somebody who is less likely to have losses should pay.
    Mr. HENSARLING. Thank you. I am out of time.
    Chairman BACHUS. Thank you.
    The gentleman from North Carolina?
    Mr. WATT. Thank you, Mr. Chairman.
    Mr. Bennett, I have to say at the outset that I have instinctive identification and admiration for you for being here, and thank you for being here. I guess it is based on the fact that you practice like I did in the Fourth Circuit. That is burden enough, given the persuasion of most of the judges in the Fourth Circuit.
    But to come here and suggest to my colleagues, many of whom give lip service to states's rights, but seldom really vote that way, that the right of the private cause of action is the bedrock of conservatism, which all of them have forgotten about. It requires me to just express my admiration for you and I hope they were listening. There has been a concerted assault on private causes of action, not so much necessarily in this committee as much as in the Judiciary Committee, on which I also serve.
    I, like you, believe that without those individual causes of action and the prospect of class actions that are effective, you will have a bureaucracy at the FCC and the FTC and all of the other agencies that is so big, trying to enforce these things, that they will be absolutely unmanageable. So I have a lot of identification and agreement with you on that issue in particular.
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    The question I have is to you and the other panelists about one concern that you raised, which is the over-reliance on Social Security numbers. What would replace that, but for the use of Social Security numbers? I mean, names seem to change regularly; addresses seem to change regularly; and about the only consistent identifier that most people have is the Social Security number. So the question I am raising with you first, and I will let you address it and get the ideas of the other members of the panel also, is, without that consistent identifier, wouldn't matters actually be worse, rather than better?
    Mr. BENNETT. I have read the U.S. PIRG testimony and it goes into great detail about this question. Let me say that I would not advocate personally, and I have not spoken to our Director of NACA who is here, but I would not necessarily advocate eliminating the use of Social Security numbers. The problem is total reliance on it. For example in the Carol Fleischer case I talked about, the mere existence of the same Social Security number was all you needed to get a credit card. Now, I assume that Juniper Bank and Allstate do much better in that regard, but a lot of the credit reporting agencies, all three of them, and many of the furnishers, rely almost entirely on either the Social Security number or, even worse, a partial Social Security number.
    Mr. WATT. Okay. Let me hear from the other panelists about their experiences in this area, and whether they have any positions on undue reliance on Social Security numbers. I guess we are not advocating no reliance on Social Security numbers, but maybe less reliance on it, or reliance on it in conjunction with other things.
    Mr. Walker, you look like you might have an opinion on this issue.
    Mr. WALKER. I do, Congressman. I think the use of the Social Security number obviously is incredibly important, just for the reasons you said. It is the one unique identifier. I am Clint Walker; there is a Clint Walker, Jr.
    I also agree with Mr. Bennett that it should not be used as the sole piece of information identifying a customer or employee. You should look at a variety of things. That frankly depends on the situation that arises, and how many other pieces of information you look at, but we never look at solely just the Social Security number, but it is very, very important. Frankly, we would love to see if we could have the use of the full Social Security number when we get pre-screened lists. That would make our ability to predict fraud even greater.
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    Mr. WATT. It looks like my time is up, unless there is somebody else who has a burning desire to get into this debate. If not, I will yield back. We have a long day here with two more panels and I do not want to abuse the privilege. Anybody else have any burning desire to address this issue?
    Mr. RAMON RODRIGUEZ. Mr. Congressman, I guess my wanting to respond would indicate a burning desire, although that is not necessarily so. I will say that any system that relies on human input, if you will, mechanical, automated or otherwise, I would think would not at all ever become full proof, unless of course creditors wanted to consider optic identification or establish DNA banks of some sort or something. But it is a challenging situation.
    Mr. WATT. I do not think the FCRA is ready to go there quite yet.
    Mr. RAMON RODRIGUEZ. Nor do I.
    Mr. WATT. We will keep going. I yield back, Mr. Chairman, in the interests of time.
    Chairman BACHUS. You are not speaking for Mr. Sanders are you?
    Mr. WATT. Yes, I think I am even speaking for Mr. Sanders on that issue.
    Chairman BACHUS. All right, thank you.
    Mr. Tiberi?
    Mr. TIBERI. Thank you, Mr. Chairman.
    Mr. Rodriguez, I did not get to hear your testimony today, but I looked at your written testimony that you have submitted, and I want to follow up on Congressman Hensarling's questioning a bit. You write in your written testimony that the Fair Credit Reporting Act and the importance of uniform national standards to your members. Would you believe that in addition to extending FCRA as a benefit to your members, that having some sort of uniform privacy standard for consumers would be to the benefit for consumers to understand? Some simplified way for consumers across the country, would that be a benefit to your members as well?
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    Mr. RAMON RODRIGUEZ. Without a doubt, Mr. Congressman. Quite frankly, generally speaking, it would be to consumers across the Board, not only to the constituency specifically that we represent. One of the panelists indicated before in terms of the simplicity of the language that could be used, and that is certainly something that we advocate also very aggressively in terms of being able to present to those consumers plain English as opposed to any language that is couched in legal jargon that would tend to either dissuade them or otherwise confuse them as to what it is that they might be reading. So in direct answer to your question, yes.
    Mr. TIBERI. Expanding on what you said in your testimony and expanding on what Congressman Hensarling said, clearly you testify that the Fair Credit Reporting Act that was passed before I got here, the amendments in 1996, have clearly helped small business owners, consumers, minority homeownership. If we do not extend FCRA at the end of this year, those amendments, do you think that it will have a reverse effect on what has been a positive outcome thus far?
    Mr. RAMON RODRIGUEZ. Again in direct answer to your question, Mr. Congressman, yes we do. And just to elaborate on that for a moment, one of the reasons is because of the patchwork legal effect that would result by individual states then being able to control and mandate certain credit reporting requirements et cetera, et cetera, it might preclude a business owner from being able to cross those borders and do business in another state where that credit may not exist or may not be readily available. That would certainly have a domino effect across the nation for our constituency, and that is something that we certainly are very concerned about.
    Mr. TIBERI. Mr. Sullivan, being in the financial services arena as well in more than one state, what effect would it have to you as a company, and then on to consumers, what sort of cost do you believe would be entailed in having at minimum maybe 50 different standards, if not more, if localities went into that business as well?
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    Mr. SULLIVAN. Yes, the cost to comply with the various different notice requirements and other things would be staggering. I suspect with each additional state, we would be talking about just reprogramming expenses in excess of $100,000 per state. But we also see an expense to the consumer in the limitation of the ability to use the information in consumer reports to make offers of lower prices to individuals with good credit performance.
    As a result of not having the information as readily available to us, we would be likely to write less insurance coverage because we are taking on greater risk of loss. We found in states where we have implemented credit-based insurance scoring, we have written approximately 20 percent more business than we otherwise would have. That is just one of the benefits that have inured to consumers through good access to credit information.
    Mr. TIBERI. Thank you.
    Mr. Bennett, I came in partly at the end of your testimony so I heard a little bit about it. I want to follow up on the issue of the credit bureaus, the issue of liability. I think you and I would both agree that information provided to credit bureaus today is voluntary. Do you believe that if we tightened up the issue of liability for information going in, that that would possibly be a disincentive for those who are reporting information to credit bureaus, and thus they would have less information?
    Mr. BENNETT. I do not believe so.
    Mr. TIBERI. Why not?
    Mr. BENNETT. I disagree, representative, with your premise, which is that it is voluntary. Under Section 1681S(2)(a) of the statute, furnishers are required to, at least aspirationally if the Federal Trade Commission does anything, provide accurate and complete information. Right now, and if you recall the New York Times article on this very issue, a number of large institutional creditors do not submit information under the current regime for the very reason that it is unenforceable under Section 1681S(2)(a) its aspirational standard is unenforceable by private cause of action, and they have an incentive to keep their customers locked in. The way credit scores work, among other things, the more positive your payment history, then the higher your credit score, to simplify it. By not reporting positive credit information, which is what a large number of institutional creditors may do, then they maintain control of those customers, who do not maintain the score, to leave that sub-prime lender and then now have that zero percent interest or the 2.9 percent credit card.
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    Mr. TIBERI. Unfortunately, Mr. Chairman, I ran out of time. I was going to ask a follow up, but I appreciate the opportunity.
    Chairman BACHUS. Thank you.
    We will conclude this panel. I would say this, Mr. Bennett, the Federal Reserve and some of the bank regulators do put out guidance to the banks that they are under an affirmative duty to report positive credit information. I do not know how that fits in, but I would make that statement.
    This concludes our second panel. We very much appreciate your testimony. It has been very helpful. You are dismissed.
    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 those witnesses and the responses will be put in the record.
    This panel is discharged.
    At this time, we are going to take a recess to either 2 o'clock or to 10 minutes after the close of a vote on the House floor, if such a vote intervenes between now and two o'clock. We are going to recess until 2 o'clock. If there is a vote on the House floor between now and two o'clock, then we will reconvene 10 minutes after the conclusion of that vote.
    Mr. TIBERI. [Presiding.] Back in order. I will ask the panelists for the third panel to be seated. I will call on my colleague, Mr. Royce, to introduce one of our panelists.
    Mr. Royce?
    Mr. ROYCE. Thank you, Mr. Chairman. I thank you for chairing this hearing and I greatly appreciate this opportunity to introduce one of our witnesses today, and that is David Lizarraga. He is Chairman and CEO of the East Los Angeles Community Union, which is also known as TELACU. David and his organization is not only a great friend of my district and to Los Angeles, but to all of Southern California. TELACU is a nonprofit community development corporation that is based in Los Angeles. Since 1968, TELACU has worked to bring economic opportunity to East Los Angeles and other areas of California that are in need of creative entrepreneurial economic growth.
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    Almost 30 years ago, TELACU chartered Community Commerce Bank, which is an industrial loan company based in Los Angeles. Through Community Commerce, TELACU has provided access to credit to thousands and thousands of customers. A significant number of these customers had difficulty obtaining mortgages and obtaining other loans before Community Commerce's creation.
    David, I look forward to your testimony today. I am interested in your views as to the potential impact on your mission and the customers you serve if Congress were to fail to reauthorize provisions of FCRA that are set to expire at the end of the year. Again, I thank you for being here.
    Mr. Chairman, I am supposed to chair a markup of legislation in my subcommittee at two o'clock, so I am a little late for that markup, and I appreciate very much the opportunity to introduce David here.
    Mr. TIBERI. Thank you, Mr. Royce.
    I will go ahead and quickly introduce the remainder of our panelists. First, I would like to introduce Mrs. Flora ''Grandma'' Green, who is the lead spokeswoman for the Seniors Coalition; also Mr. Ed Mierzwinski, Consumer Program Director for the U.S. Public Interest Research Group; Ms. Shanna Smith, Executive Director for the National Fair Housing Alliance; and finally, last but not least, Dr. Wayne Brough, Chief Economist, Citizens for a Sound Economy.
    I would like to remind our panelists that each of you will have five minutes to give us a statement, and would remind you that we have a fourth panel after you, and we will have questions from hopefully not just me after all of you are finished with your Statements.
    With that, I would like to welcome Ms. Grandma Green to begin the proceeding.

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    Mrs. GREEN. Thank you.
    I am certainly happy to be here. My name is Flora Green, but most everyone knows me, affectionately I hope, as Grandma Green. I am the national spokesperson for The Seniors Coalition. I enjoyed working in the private sector for over 40 years in credit granting and debt collection, so this gives me an added insight on the issue at hand.
    I commend you for your leadership in convening this hearing. On behalf of The Seniors Coalition, I appreciate the opportunity to present seniors' views on the national credit reporting system that has evolved under the Fair Credit Reporting Act and how it serves consumers and strengthens our economy. The Seniors Coalition is the nation's leading free-market senior education and advocacy organization. We are four million strong and are growing stronger every day. Our mission is to empower seniors to speak with a united voice and significantly impact policies and decisions at the federal and state level that affect their healthcare, financial, and retirement security. By leveraging the combined strengths of grassroots organization, education, action and communication, our members are driving positive policy changes at every level of government that improves their lives and benefit the nation as well. Our national credit reporting system serves consumers and strengthens the economy.
    It is no coincidence that we have the strongest economy in the world, even though it is not performing as well as we would all like. There are two reasons for this. One is our entrepreneurial spirit. We Americans are a bunch of practical dreamers and optimists who are willing to invest, take risks, and work hard to create something of value. My father was a farmer and a businessman, so I understand how important this spirit is.
    The other reason for our strong economy is access to affordable credit. This includes the ability to obtain credit quickly at affordable rates to invest in and grow a business. But it also means ensuring that consumers can get the credit they need instantly and at a reasonable cost to buy the goods and services they want. Together, business creation and credit access have helped build an economy that is still the envy of the world. We all want to keep it that way, and renewing the expiring national standards under FCRA will help ensure that we do.
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    There is no question that the strong, efficient national credit reporting system we have today is the direct result of the Fair Credit Reporting Act which Congress enacted in 1970 and strengthened in 1996. This law strikes a balance between the interests of consumers and business. Since it helps ensure the orderly and efficient functioning of our national credit reporting system, it is essential to the health and growth of our economy and provides other benefits as well.
    The experts tell us that all the available evidence points to the fact that our system is working as intended. As a result, seniors and other consumers have convenient access to affordable credit to buy appliances, clothes, cars, homes, and countless other items they need and want. When you consider that consumer spending last year accounted for two-thirds of our gross domestic product and most purchases were made on credit, it is clear just how important our national credit reporting system truly is. The Fair Credit Reporting Act protects seniors and other consumers.
    The Fair Credit Reporting Act is not just vital because it has helped create a national credit reporting system that underpins our economy and ensures that it functions with maximum efficiency. It is also vital because it ensures that all Americans, regardless of their age, income, ethnicity and gender, can obtain access to the same opportunities that credit makes possible. What is more, it provides consumers with some of the most important protections. I want to focus on a very few of these protections and why it is so critical that Congress preserve them as part of the FCRA reauthorization.
    Furnisher Responsibility. The current credit reporting system protects consumers because it requires credit furnishers to adhere to uniform standards. Only when credit providers voluntarily report information that allows credit reporting agencies to create an accurate financial picture of consumers do consumers benefit. When this happens, consumers can obtain the best deal on credit at the most favorable rates.
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    That is why it is crucial that credit providers continue to report information, but some have suggested removing the current limits on credit providers' liability and creating new private rights of action that they believe will help protect consumers. The truth is, this would have the opposite effect. It would cause many credit furnishers to stop voluntarily reporting the information they have collected because they fear legal action based on negative information reported.
    Without adequate or complete information to assess the risks of extending credit to a consumer, many credit providers would simply not approve credit in borderline cases or charge more to cover the higher risk. In either case, many seniors and other consumers would simply lose out by not obtaining the credit they need or at the rates they could afford. The Seniors Coalition favors renewal of the furnisher responsibility provision without changes.
    Reinvestigation time frames. Errors in consumer credit reports can result in diminished or lost access to credit or higher costs to borrowers. While the reported error rate is well under 0.5 percent, errors do creep into credit reports. The FCRA requires that errors in reports be corrected at the consumer's request within 30 days. This ensures that errors are erased in a timely manner.
    Some have suggested that states reduce this mandatory error correction time to 20, 15, or even 10 days. But this could result in consumers being treated differently by credit providers in different states.
    Mr. TIBERI. Grandma, could you kind of try to sum up?
    Mrs. GREEN. I will. I will.
    Mr. TIBERI. Sorry to interrupt.
    Mrs. GREEN. Much of this you have already heard, so I am just going to skip a few pages and I am going to tell you one of the things that seems so important to me.
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    The Seniors Coalition favors renewing this provision to ensure the availability of credit for consumers with less than perfect credit and to protect seniors, consumers, and companies from losses due to identity theft. The Congress' failure to renew the FCRA's expiring national standards would hurt seniors and other consumers.
    Let me sum up. There is an old saying, and it is not grammatically correct, let's don't fix what ain't broke.
    Thank you.

    [The prepared statement of Flora Green can be found on page 264 in the appendix.]

    Mr. TIBERI. Thank you, Grandma Green.
    I would like to introduce Mr. Ed Mierzwinski. Thank you for being here today.


    Mr. MIERZWINSKI. Thank you, Representative Tiberi, Chairman Bachus. It is a privilege to testify before the subcommittee once again on the important issue of Fair Credit Reporting Act reforms.
    U.S. PIRG and the state PIRGs have been active on this issue around the country and here in Washington, in fact since 1989 when Congress first began its efforts to review and renew the original 1970 Act.
    I want to say at the outset that consumer groups think that the Fair Credit Reporting Act is an important privacy law and an important consumer protection law. The Fair Credit Reporting Act is based on the fair information practices. It gives consumers a number of substantive rights to dispute, to review, to look at and audit their information, and to seek redress when their information is inaccurate. As Mr. Bennett and Assistant Attorney General Brill have testified, however, it is sometimes difficult to enforce those rights. That is why we believe that Congress should strengthen the Fair Credit Reporting Act.
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    We believe that one aspect of the strengthening of the Fair Credit Reporting Act is to fully restore states' rights to protect their consumers better. We fundamentally believe that our credit system in this country is not based on the preemption that was temporarily inserted by the Congress in 1996, but is based on a number of other factors. We fundamentally believe that the credit system that has served us well, but could serve us better, will not be jeopardized by expiration of preemption.
    As Justice Brandeis said in his dissent in New State Ice vs. Liebmann, ''It is a happy incident in our federal system that a single courageous state may engage in novel social and economic experiments.'' We believe, as Assistant Attorney General Brill testified and as I outlined in great detail in my testimony, that we do not have a uniform standard around the country, that the Fair Credit Reporting Act did not create a uniform standard. In fact, the states, where they are allowed to, have experimented and have gone far ahead of the Congress in matters of credit report protection.
    In fact, the states have moved more quickly. Vermont passed its law in 1992; California, 1994; Massachusetts, 1995; while Congress fumbled until 1996. Since then, Congress has only enacted one law to deal with the tremendous epidemic of identity theft. All Congress has done about identity theft is in 1998 enacted legislation to criminalize identity theft. Meanwhile, the crime has gotten worse. As the FTC has stated in its annual reports, the identity theft complaints lead all others for the year 2000, 2001 and 2002, and doubled in 2002. Congress, though, has not done anything to rein in the sloppy credit granting practices that consumer groups believe are the root cause of identity theft.
    It does not matter if a thief goes to jail for 5 years or 10 years if no one goes to jail and no one is caught, and it does not matter if you only catch one or two of the people that are doing it, if hundreds of thousands of people are doing it, because the credit card companies are aiding and abetting the identity thieves.
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    Meanwhile, to fill the gap, as again Assistant Attorney General Brill testified, the states have stepped in and enacted a number of laws. California has a list bullet by bullet of five pages of identity theft-related reform laws that have already been enacted. Six states have free credit report laws.
    One example I want to leave you with is that California and Ohio have both enacted legislation that is being implemented over this year and the next couple of years to require the truncation of credit card numbers on receipts. Earlier this year, Visa trumpeted in a press conference that it would voluntarily truncate credit card numbers on receipts. I suspect that had two states not done this, and had not a dozen states been considering this, Visa would not have enacted that so-called voluntary provision.
    I am concerned that the debate in this committee is over the question of whether we should preserve the status quo. I do not think the status quo is good enough. I think that in our testimony we outline a number of problems with the Fair Credit Reporting Act, as other witnesses have discussed today; the abusive use of account reviews to deny or raise the price that consumers pay. The uniformity issue, many people have argued that we have a free flow of credit; that the voluntary system has served us well. Yet no witness has talked about the serious problem that has been identified in several agency guidances and in a recent Federal Reserve Bulletin article.
    Because of the lack of enforcement by the agencies, a number of the largest banks in the country are not fully reporting complete information about their customers. I think that is a serious problem that prevents consumers from shopping around. The accuracy of information should include the completeness of information, yet the Federal Reserve, in a study of 248,000 credit reports, found that 70 percent of credit reports contained at least one trade line where information was not being completely reported.
    My testimony also outlines the problems posed by the preemption provisions in the Act, how the confusion over the affiliate sharing provision has chilled efforts in states to enact stronger financial privacy laws under the Gramm-Leach-Bliley Act's positive provision. I have outlined how difficult it is to deal with opting out under the pre-screening rules. Mr. Bennett has outlined the difficulties in reinvestigation procedures.
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    Finally, my testimony goes into tremendous detail summarizing the Consumer Federation of America report that finds that 29 percent of consumers have a disparity of at least 50 points on their credit scores from each of the three credit reporting agencies, which would suggest in our view that there are significant problems in this system and that the status quo just is not good enough.
    I know I have run out of time, but I would be happy to take your questions. Thank you.

    [The prepared statement of Ed Mierzwinski can be found on page 302 in the appendix.]

    Mr. TIBERI. Ms. Smith?


    Ms. SHANNA SMITH. Thank you.
    My name is Shanna Smith and I am the President and CEO of the National Fair Housing Alliance. I want to thank the committee for the invitation to testify about the access to fair credit and the use of credit scoring in mortgage loans and homeowners insurance.
    The National Fair Housing Alliance represents virtually all of the private fair housing centers in the United States. One of our charges is to examine and challenge discriminatory barriers to homeownership. Many of you know that the Administration this month has announced that it is homeownership month.
    I want to deal first with fair access to credit. As many people know, studies and lawsuits continue to demonstrate that African Americans, Hispanics and women and elderly women in particular are not treated the same when they are applying for credit as similarly situated white males. As a result, these groups of people end up paying higher interest rates or paying more for a product.
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    When you pay higher interest rates, you pay more for a product. The money you have in your pocket at the end of the month is less. Some scholars refer to this as the Black tax. White people who are similarly situated as people of color have the opportunity to have more disposable income, more money for savings. Some people have said, African Americans, Latinos and women ought to be better negotiators when they are purchasing products or trying to get a home loan, or to get homeowners insurance. Yet we have conducted testing, and in our testing we send in people who are equally qualified, African Americans, Latinos, and whites, and none of them are negotiating. They are all asking for the same terms and conditions for a loan. They are asking for homeowners insurance. They are asking to purchase a product. No one is instructed to negotiate harder than someone else. Yet invariably, we find that the African American and Latino applicants are charged higher rates for mortgage loans, higher fees, and when it comes to homeowners insurance, they are paying a higher premium and oftentimes getting inferior coverage.
    That has been demonstrated with settlements that we have had through the HUD administrative procedure with State Farm and Allstate insurance companies in 1996 and 1997. Since that time, those two insurers drastically changed their underwriting policies and procedures to make sure that people living in integrated and predominantly African American and Latino neighborhoods have access to the good products that white consumers in white neighborhoods have always had access to.
    If you listen to the earlier testimony, there are a lot of problems with the accuracy of the information that the credit bureaus maintain. I am telling you that access to credit is fraught with racial and ethnic and gender discrimination. The reporting of that information to those credit bureaus reflects that. If these credit reporting repositories do not keep accurate information and if sub-prime lenders and predatory lenders and conventional lenders fail to report good credit-paying habits of their customers, then those people who are creating credit scoring models are building their models on a foundation that is fraught with discrimination. How can you build something that is supposed to determine equity, when what you are building it upon is full of discrimination? So any of these credit scoring models that are being purported to be able to predict people's behaviors are not accurate.
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    When I first looked at the mortgage lending credit scoring model years ago when it was coming out, our concern was, what is it predicting? Is it predicting a default or foreclosure? Default means I did not make a payment this month. Does that also predict, then, who will cure that default? I think that if somebody is late in payments, it is reasonable to say that they have to pay a higher interest rate or a different fee. But to charge them an extraordinary rate when they are not actually going to go into foreclosure is unconscionable and unreasonable.
    With homeowners insurance issues, one of my biggest concerns is, right when this whole credit scoring issue started with homeowners insurance, we asked them what does this predict. They initially said to us, it predicts who will commit a fraud. I said, well, my goodness; if it can do that, then why don't we have all the police chiefs in the country run our credit reports and arrest us now? If you can predict that, then let's get rid of that. They said, oh, no, no. It can predict who is going to file a claim. Talking with the insurance companies, I meet with them regularly, they say to me that weather is a major reason for claims, and the other predictor they say is that people who filed claims before will file them again.
    So what would my credit score have to do with that? And then you have to ask yourself as a committee, and I will wrap up, if you use a credit score for getting a mortgage loan and that same credit history file is used by the insurance company to deny me homeowners insurance, what is going on? If I am good enough to get a mortgage loan and my credit is good enough for that, why isn't my credit good enough to get homeowners insurance, because without that I cannot close on my mortgage loan. My testimony has many recommendations.
    Finally, I would say that if credit scoring is going to continue to be used by the homeowners insurance companies, then they should be held to the same standards that the lenders are, and there should be some type of reporting by these insurance companies so that we in the civil rights movement can monitor the types of policies, the cost of policies that are made available at the census tract level.
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    Thank you.

    [The prepared statement of Shanna L. Smith can be found on page 450 in the appendix.]

    Mr. TIBERI. Thank you.
    I would like to reintroduce Mr. Lizarraga.


    Mr. LIZARRAGA. Good afternoon, Mr. Chairman, representatives and members of the subcommittee, Representative Waters and Representative Royce.
    I am David Lizarraga, Chairman and CEO of The East Los Angeles Community Union, TELACU, a Los Angeles-based nonprofit community economic development corporation that has become one of the nation's largest CDCs, with more than $350 million in assets. We are the fourth largest Hispanic company in California and 22nd in the nation.
    In the 1960s, East Los Angeles was abandoned by the major companies that had for generations been the lifeblood of the community. We fell into a devastating economic decline. When our country went into a deep economic recession, our communities went into an economic depression. TELACU came together to provide self-sufficiency and with the opportunities to use tools that would create dynamic opportunities to rebuild and enhance the communities it serves. TELACU's mission of providing greater opportunities continues to be realized in the creation of new jobs, responsive financial institutions, expanding businesses, quality affordable housing, and educational opportunities for young people and veterans alike.
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    The refusal of credit to those in traditionally underserved communities locked the neighborhoods in our communities into financial stagnation. In 1976 to begin reversing this trend, and before the Community Reinvestment Act was enacted, TELACU combated redlining by creating a bank of its own. It was called Community Commerce Bank, a community development financial institution designed for the express purpose of serving the credit needs of people in our neighborhoods and communities. I am honored to be Chairman of the Board of Directors of this bank.
    We make loans to families and small business owners, and our bank has now extended its services to under-banked communities throughout California. The success of our bank is a testament to the viability of inter-city lending. Since 1976, our small bank has loaned $1.5 billion to previously un-banked customers. For example, in 1996 we took a chance on a local Hispanic realtor with limited credit and assets, and made him a loan to purchase a single home from HUD and rehabilitate it. It was boarded up, full of weeds, a hangout for gangs and drug dealers.
    This businessman restored the property which was located in a low-income neighborhood in the barrio. We sold it to a first-time homebuyer, brought stability to a neighborhood, and preserved positive quality of life for that block. We now fund 20 small business developers that month after month and year after year make a good living reclaiming neighborhoods just like this one.
    The communities we serve often require that our loan underwriting be nontraditional, but we are highly profitable. We have an enviable delinquency rate. We are highly rated by our State and Federal bank regulators. We have been recognized year after year by the U.S. Small Business Administration as one of the best small business lenders in the region. The services of our bank are available to all our customers, but our focus is on the low-income and minority neighborhoods in our community. The great majority of our current minority customer-base is Hispanic.
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    All financial institutions will soon have to recognize that credit programs reaching the fast-growing Hispanic population in this country will be necessary to sustain profitability. The U.S. Hispanic population is expected to reach 53 million by 2020. The annual purchasing power of Hispanics in the United States, including Puerto Rico, is already estimated to be $630 billion. In the not so distant future, it is projected to reach $1 trillion.
    The service that the consumer credit reporting industry provides is essential to our bank, to the entire financial services industry, and to most businesses and nearly all consumers. Accurate data and information are essential for robust competition in the marketplace. That is one reason that community development financial institutions like ours argue on behalf of accurate information in credit reporting. It is also the reason why we work so hard to educate consumers, so that they can take advantage of their right to ensure accuracy in what is collected and reported about them, and to limit with whom this information is shared.
    This is particularly important to low-income and minority consumers. Accurate credit data collection and reporting can help nontraditional borrowers overcome barriers that have artificially constrained economic growth in minority neighborhoods. If a nontraditional borrower retains a satisfactory credit record that is properly reported, it will be much more difficult for a lender or business to defend a decision not to provide credit.
    One of the major goals of the Fair Credit Reporting Act, including the 1996 amendments, has been to promote accuracy in credit reporting by credit reporting agencies. However, the Federal Trade Commission reported in 2002 that complaints about credit reports are still one of the most common consumer complaints the agency receives, with the largest number of complaints still relating to accuracy.
    I believe the Congress should take appropriate measures to ensure greater accuracy in credit reports, including vigorous oversight and regulatory enforcement. Additionally, public and private support for consumer education can help ensure increased accuracy. But problems are not always related to accuracy. It is sometimes how reports are used, not the credit reports themselves, which is the problem.
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    Finally, Mr. Chairman, let me say a word about common national standards for credit reporting. The provisions of FCRA that makes the federal standard preeminent expires on January 1 of next year. I support a common national standard, Mr. Chairman, but by that I do not mean a standard pegged to the lowest common denominator. I know from our own experience in California that a hodge-podge of local standards could interfere with the good lending that we do at TELACU and Community Commerce Bank.
    Under Gramm-Leach-Bliley, we have had a number of attempts at local privacy standards in jurisdictions we serve across California. A proliferation of such local fair credit reporting standards could create difficulties for our highly regarded lending to low-income and minority borrowers.
    So I would argue for a vigorously enforced federal standard with appropriate oversight for this committee and the Congress. I believe that such a federal credit standard serves our bank well, but more importantly serves our consumers well. I believe that the FCRA has helped advance the kind of lending and credit opportunities that we have worked so hard to make available in our communities, and I strongly urge its reauthorization.

    [The prepared statement of David Lizarraga can be found on page 297 in the appendix.]

    Mr. TIBERI. Thank you.
    Mr. Brough?


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    Mr. BROUGH. Thank you, Mr. Chairman and members of the committee.
    My name is Wayne Brough and I am the chief economist at Citizens for a Sound Economy, which is a 280,000-member grassroots organization that promotes market-based solutions to public policy questions.
    The Fair Credit Reporting Act has allowed the United States to develop an integrated and highly efficient system of information sharing, and allows businesses to provide consumers a wider array of financial services and products at competitive prices. On behalf of the members of Citizens for a Sound Economy, I urge you not to ignore the importance of establishing uniform standards and the need to extend the 1996 amendments to the Fair Credit Reporting Act.
    The Fair Credit Reporting Act has generated tremendous benefits for businesses and consumers by establishing these standards. At the same time, this information sharing has raised serious concerns about privacy. The advances in technology and the commercialization of data have magnified both the benefits and concerns about information sharing. It is the role of the Fair Credit Reporting Act to balance these concerns.
    It is important to remember that the Fair Credit Reporting Act was created to facilitate the exchange of this information. This information does provide benefits to consumers and the economy as a whole, and FCRA sets up the guidelines to do this. Prior to 1970, the market for credit was localized, ad hoc, and limited. The Fair Credit Reporting Act made this a nationwide market with new standards that allow consumers access to a wider array of financial services and products, while increasing competition among providers. Today, with new technologies, the market has become very efficient. The 1996 amendments to the Fair Credit Reporting Act acknowledged these benefits of sharing information, while establishing some new safeguards.
    If you look at the private sector, information sharing has become integral to many. To be successful, businesses must compete and provide better services for consumers, and better information is one source of competition. It allows more customized marketing in products, reduces fraud, and lowers costs. At the same time, consumers in the private sector can exercise choice. Consumers value privacy and businesses are realizing this, and they are beginning to compete based on privacy policies. Privacy policies in the future must consider the benefits of these information-sharing practices.
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    Laws that restrict the flow of information can have detrimental impacts on consumers. The Fair Credit Reporting Act establishes guidelines for the use of credit information. This has allowed the United States to develop one of the most efficient and sophisticated financial services markets in the world. Seventy-five percent of all households are participants in the market for consumer credit or mortgages, and consumer access to credit has increased and so has competition among providers.
    With respect to insurance, I just wanted to go into some things. The insurance companies have used the information in credit scores as a risk characteristic to help predict future losses. This allows companies to price products more efficiently, while covering their costs. Risk classification allows insurers to divide individuals into groups with similar claims and set prices based on the probability of future loss. Driving history, age and gender are common variables to classify risk, but increasingly insurance scores with credit have been found to be more reliable predictors of future risk.
    Why there is the strong correlation between credit history and the risk of future loss is unclear. One theory says that a good credit score predicts risk-averse behavior, which means safer driving habits and better consumer practices. But there are many other theories and none of them are very conclusive. But that does not betray the fact that there is a very strong statistically significant correlation between risk and credit scores. That is enough to make this a useful rating variable. When insurers ignore or are prohibited from using effective rating variables, consumers are harmed because the cost of insurance will be higher than it should be. More accurate information allows insurers to offer a wider array of products to customers they would otherwise not be able to cover.
    There has been some criticism of the use of these credit scores. The first is that the correlation has not been established. But there are a number of studies that demonstrate this. If there was not an established link, I do not think the insurance industry would be very interested in pursuing this as a risk factor.
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    Another criticism is that the information comprising the credit report is inaccurate. There are problems with the accuracy, and I think FCRA was set up to address some of those. But if this was true on a broad scale, then the correlation would not hold true over time. The third criticism is that the use of credit reports has a disparate impact on protected classes. Again, if you look at the studies on this, there are none that have conclusively demonstrated this effect.
    Restricting the use of classifications such as credit history reduces the efficiency of the market. It limits the ability to accurately predict future loss. Making transactions less efficient does not help consumers or producers. The result is higher prices, subsidies, and fewer choices in the market. To be competitive, loss ratios must be predicted as accurately as possible. Otherwise, consumers bear the costs. Concerns over insurance pricing are solved by injecting more competition, not reducing the flow of information.
    The Fair Credit Reporting Act has established important uniform standards and safeguards for credit markets and information-sharing. The consumer benefits through lower costs, increased availability and expanded choices for financial services and products. This information is useful in the insurance market as well. Information about credit provides more accurate risk classification. Restrictions on the use of such tools create inefficiencies that generate higher costs for consumers and higher premiums. To increase availability and affordability of insurance, increase competition. This means using more accurate models of risk and credit histories provide such a role.
    The Fair Credit Reporting Act has acknowledged such uses and should continue to facilitate this use, especially at a time when state-level privacy and credit scoring legislation may be impeding market activity.
    Thank you.

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    [The prepared statement of Wayne T. Brough can be found on page 229 in the appendix.]

    Mr. TIBERI. Thank you, Mr. Brough.
    Thank you all for your testimony. I have a couple of questions here.
    Mr. Mierzwinski, right?
    Mr. MIERZWINSKI. You get it right every single time.
    Mr. TIBERI. Okay. I just look at it and it is tough. So is my name.
    You said the status quo is not good enough. You and I would agree on that. I would like to make the national uniform standards stronger and I think you would like to eliminate them. You touched upon the fact that a single state or a single courageous state could do something I would assume you met stronger than what the national standard is.
    Let me take that example and have you answer this question. Let's assume that California, which is probably a good example, passed a credit standard that was far more restrictive than the current national standard. Wouldn't that mean that the California standard would become the national standard?
    Mr. MIERZWINSKI. I think that that is entirely possible, that a standard adopted by one state could eventually become adopted federally. I think your inference is that because California happens to be bigger than Vermont, for example, that the federal government might, or industry might just decide to adopt California's rule voluntarily on a national basis.
    We would look at that as a good outcome, because we believe in adequate uniform standards. Our view is that one or two states might pass such a law, but that 50 states would not pass 50 different laws. The theory being that you would have balkanization I believe is the term that the industry uses in its advertising. So I think that if a state comes up with a good idea, other states would copy it.
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    I presume that you might have a follow up which is: Is it right for California to make national law?
    Mr. TIBERI. Correct.
    Mr. MIERZWINSKI. I think that if the Congress has failed to come up with an adequate standard, that is the circumstance under which California would act. Secondly, if the Congress comes up with a national standard, the states have demonstrated an ability to move more quickly if there are local circumstances such as Norwich, Vermont or other problems.
    One additional issue that has already occurred and will possibly be a subject of the next panel, I am guessing that the Fair Isaac witness may trumpet the fact that they have made credit scores available nationally. In fact, they opposed vehemently California legislation that actually is the real reason credit scores are now available nationally is because of California.
    Mr. TIBERI. Let me get your thoughts on this issue. Mr. Lizarraga's testimony pretty much applauded what has happened in his community with respect to opportunities that his constituents have benefited from because of FCRA. What would your thoughts be on that issue and the issue of what Mr. Rodriguez talked about, if you were here for the previous panel, with respect to homeownership increase and all the other litany of items that he mentioned that his members have had an opportunity to grow under the FCRA?
    Mr. MIERZWINSKI. Again, the second paragraph of my testimony says this is a very important law that provides tremendous credit opportunity for consumers. But when it does not work, it does not work well enough. Our view would be that the preemption in 1996 is not the reason that all those opportunities are taking effect. We would say that since the industry is the one trying to extend the preemption, that they have a burden of proof to provide, as Assistant Attorney General Brill suggested, regression analysis and detailed studies. All I have seen are white papers mentioning the word ''uniformity'' over and over again like a mantra.
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    Mr. TIBERI. Thank you.
    Mr. Lizarraga, you testified that a strong national system would be preferable to a state system, or maybe even worse in my mind, maybe your mind, allowing even local governments to set standards. Talk about that issue and what it would mean to you in California.
    Mr. LIZARRAGA. I also said that I do not mean a standard pegged to the lowest common denominator.
    Mr. TIBERI. Right, a strong standard.
    Mr. LIZARRAGA. A very, very strong standard. It is very, very difficult to extend credit to individuals when you have this patchwork of rules and regulations that, yes, we would all adopt a uniform state standard that would be a level playing field for everybody and a rule we can probably all follow. On the other hand, when that does not preempt even local municipal standards and you have counties and cities coming up with their own rules and regulations, it makes it almost impossible to extend credit or for credit to be applied for in any meaningful way.
    The people that are really affected in our community are folks that really have the least access to credit facilities. The only other facilities that are available to them if they do not participate would be bank cashing, check-cashing types or hard-money lenders in the community. That makes it very difficult. We do have individuals that come to our bank to establish credit almost for the first time. This uniformity would be very, very helpful if it would preempt local municipalities, in addition to providing a standard that states would adopt.
    Mr. TIBERI. Thank you.
    I am going to defer to the ranking member of the committee, Mr. Sanders.
    Mr. SANDERS. Thank you, Mr. Chairman.
    My own view is in fact that we should have very strong federal standards, but that should be the floor. On top of that we should give in our democratic society where a lot of people give lip service to states' rights, we should give those states that want to go further the right to do so. Because my experience in government has been is that lo and behold in Colorado or in Utah, somebody comes up with an idea. And you know what? It works. And then in Massachusetts, they say look what they did in Colorado; that is a good idea; we can do that. And you will find that many advances that have been made in our society do take place not because the federal government has deemed them, but because somebody in some place has an idea, other states adopt the idea, and eventually it filters on up to the federal government.
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    So I think we want strong national standards, among other things making sure that every citizens in our country can get a free credit report. But in addition to that, we certainly do want to give states the options to go further.
    I would like to ask Mr. Mierzwinski his view on the impact if some are successful here of limiting those states who want to go beyond federal standards in protecting consumers' rights.
    Mr. MIERZWINSKI. I think that the limitations on states's rights means that we are stuck with whatever standard Congress comes up with. I am convinced, after working here for 12 years, that it is very difficult to move the inertia of Congress and that it is easier for the states to respond. They respond more quickly when local problems occur. So the issue would be that Congress would pass a law and then think that that was the be all and end all law. Then when a problem came up, we would not be able to convince Congress to fix it.
    Mr. SANDERS. And large states like California or small states like Vermont will come up with different problems that have different needs. If we are letting the federal government make all of the decisions, then states are not going to be able to respond to the particular needs of their own consumers.
    Mr. MIERZWINSKI. That is exactly right.
    Mr. SANDERS. I would like you, again, Mr. Mierzwinski, and others can jump in; let's not be naive about the nature of this debate. On one side, we have virtually all of the consumer organizations who do not believe that the federal government should preempt. On the other side, we have very powerful multi-billion dollar interests. What are the dynamics of what is going on here?
    Mr. MIERZWINSKI. I think there is a lot of money on the table, and there is a lot of interest in preserving the status quo by the vested interests. I think they believe that the system is accurate enough for their purposes. That is an important point, accurate enough. It tends to lean towards false-negative information and there are enough people out there with risk-based pricing paying at risk-based prices. People are not just being denied anymore, the way they used to be. People are simply paying more. The industry is happy with that system. It is just not good enough.
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    Mr. SANDERS. Let me just jump in and ask anybody. I did not mean just to focus on Mr. Mierzwinski. One of the scandals that has upset me very much, and we will see if it happens or not that this Congress will move. We are going to introduce legislation. You may have seen on the front page of the New York Times last week this outrage by which credit card companies tell an individual you are going to be paying 5 percent, and then lo and behold three years before you were late making an auto loan or late on your rent, and suddenly your interest rates go from 6 percent to 30 percent.
    I think the federal government, the Congress, should deal with it. My guess is that because of moneyed interests, we will not deal with it. My guess is there are some states that may want to deal with that issue. What do you think? How should the people get protection from the rip-offs of the credit card companies who are tripling, quadrupling their interest rates? Mr. Brough, do you have a thought on that?
    Mr. BROUGH. In my opinion, I think the best protection is a very competitive market. Having access to a wider array of credit and a wider number of providers in a larger market is the best way.
    Mr. SANDERS. But all of the credit card companies are doing that. MasterCard is. Citibank is doing it. They send out five billion credit card applications a year, five billion. Do you think that unless government acts to protect consumers, consumers will get protection?
    Mr. BROUGH. I think under the existing framework and in a competitive market, there will be entrepreneurs in the credit markets, as well as in other markets, and they will respond to this void.
    Mr. SANDERS. Okay.
    Mr. BROUGH. If there is an opportunity to make money, they will do it.
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    Mr. SANDERS. Yes, Ms. Smith?
    Ms. SHANNA SMITH. He mentions a competitive market, but if you open and close accounts in order to get better deals, your credit score can be lowered because of that activity. So you are caught one way or the other. You are either paying a higher interest rate, stuck in that situation so that you do not open and close accounts, or you open and close accounts for a better interest rate and you do not get it when you go someplace else to buy a car because your credit score is lowered.
    Mr. SANDERS. Mr. Mierzwinski?
    Mr. MIERZWINSKI. I think that, Congressman Sanders, this New York Times story on account review abuse is a very important story that the committee should look into further. Very quickly, first of all, what if you were a victim of identity theft or mistakes on your credit report and your credit score declines because of that? Second, what if you are a victim of your bank intentionally gaming the credit scoring system by failing to completely report on you, to deflate your credit score so that you cannot shop around? Should you pay higher rates because of that?
    Mr. SANDERS. Or what happens if you have an emergency in your family and you need to borrow money? Your credit goes up because somebody was sick in your family.
    I want to thank you. I have gone on beyond my five minutes.
    Thank you, Mr. Chairman.
    Mr. GILLMOR. [Presiding.] Thank you very much, Mr. Sanders.
    The gentlelady from California, Ms. Waters?
    Ms. WATERS. Mr. Chairman, I want to thank you for holding this hearing. I am sorry that I could not be here the entire day. There are just so many other activities going on in this building that we all have to spread ourselves pretty thin. But I think this is a very, very important hearing.
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    I am very pleased at this particular consumer panel and wanted to be here for this panel more than any other because it is from this panel that we can really learn what is wrong with the credit reporting system. I am very pleased that Mr. David Lizarraga is here from TELACU because I have worked with him for many, many years. His description of what he and his organization have been able to do is not as generous as it should be. They have done a phenomenal job starting out in East L.A., but spreading out across the state in many communities. So I know that he understands what it takes to be able to empower citizens who have been redlined; who have been dropped out of the system; who have not had credit opportunities, and what it means to be able to not only counsel, but devise systems that will include, rather than exclude.
    To that end, Mr. Chairman, with all of the information that you are hearing today, one area that is of particular interest to me is, of course, credit scoring. I dislike credit scoring, period. I don't like it. I wish we could eliminate it, get rid of it once and for all. It is absolutely ridiculous for those who are in the position to extend credit to simply look at numbers and make a decision about whether or not someone is credit-worthy.
    I believe that the numbers oftentimes are not accurate, and we do not have any way of knowing what has gone into that information. I believe that through credit scoring, we are denying our credit-worthy people the opportunity to own a home, to make purchases that are needed by their family for a decent quality of life. I believe that this is the one area that this Congress should put some time and attention into. Again, my preference would be to get rid of it.
    You know, credit scoring to me is like mandatory minimum sentencing, which I have been fighting for many, many years. Mandatory minimum sentencing in the criminal justice system takes away the ability of the judge to use his good sense and discretion to determine what a person is all about, and to be able to review their history and their record, and come up with some decision about their intent, et cetera, et cetera. The same thing with credit scoring.
    You have heard Mr. David Lizarraga refer to the kind of individual that he is attempting to serve. I know so many people who have worked hard all of their lives. Some of them made a mistake, got laid off from a job, could not take care of their responsibilities. But the minute they got a job, not only did they pay their bills, but they paid them faster and they speeded up the amount of time to pay those bills. I know some folks who do not know how to give all of the information that is needed to make the assessment, and so they have been good bill-payers, for instance, with electric bills and utility bills, and that should be taken into consideration and this credit scoring does not usually take that into consideration.
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    But the person who is there using that credit score to extend credit does not see a person. They don't see a human being, an individual. They don't get to understand something about this individual and what makes them a good credit risk, despite the fact this, that or some other may be missing or has not happened.
    So if there is anything that I could say today, it is that African Americans, Latinos, people of color, immigrants who work very hard are hurt by this system, and that should not be. I will close by saying, and you are very generous with your time, that consumers are at the mercy of public policymakers. I am astounded by the amount of power that we have to determine the quality of life for our consumers, and we have failed in too many instances because we have not cared enough or we have gotten too many campaign contributions. We like to party with the very people who are the enemies of the consumers that we are sent here to protect.
    I would just hope that we would see this whole area of credit reporting as one area that we could use our power to work on behalf of the consumers of this country. I am pleased and proud that our panelists are here today, and I would just ask this committee to take this information seriously and not only have national standards remain that we can judge the credit reporting by, but get rid of some of the problems in the system, credit scoring being the first one.
    Thank you very much.
    Mr. GILLMOR. The gentlelady's time has expired.
    The chair will recognize himself for a couple of questions. One question, and this responds to what you brought up, Mr. Mierzwinski. You made the statement that banks intentionally falsely report on people's credit to prevent them from going somewhere else. What evidence do you have of that? It would appear to me that that would expose any financial institution to a significant amount of liability if they did that. So I am asking you, where is your proof?
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    Mr. MIERZWINSKI. My proof, Representative Gillmor, is actually a speech by OCC Comptroller Hawke, an advisory from the FFIEC, and a recent bulletin article in the Federal Reserve Bulletin. The regulators recognize this important problem, but I do not think it is a problem as you have surmised it is. The reason is that under the Fair Credit Reporting Act, there is an accuracy standard, but there is no completeness standard. Also, there is no requirement that you report.
    So I believe the regulators, if you read the FFIEC guidance which I cite in my testimony, the regulators have said, some of you are not reporting completely; apparently, this is because of competition; you don't want others to catch your customers. So what we recommend to all of you is that when you are calculating your own risk analysis, you take into account that other banks are not reporting completely.
    It is bizarre and it is twisted, but it actually gets at one point that was discussed earlier this morning, which is that very few of us know what goes on inside the black box at Fair Isaac, but the banks know, and that is the reason the banks are not reporting. They are not reporting because they know it deflates credit scores.
    Mr. GILLMOR. Let me ask Mrs. Green, the FCRA has established the framework under which consumers can obtain credit from lenders remotely, such as over the phone, through the Internet or by use of mail. Would you comment on how that might benefit senior citizens, especially those that might have difficulty leaving their homes?
    Mrs. GREEN. I think there is some benefit to that. I know the seniors that I have talked to in the past few weeks concerning the issue of the Fair Credit Reporting Act are concerned. They feel that Congress needs to act to reestablish the standards that have been in effect, ones that they are comfortable with. There is great concern over a crazy-quilt type of action that might result.
    I agree also that this is where ideas come from. I understand that, as well as many of my counterparts. But the senior population as a whole has grown up, let's say that, with the kind of issues that the Fair Credit Reporting Act has been of help to them. They are concerned that they are going to lose that. Getting back to the original question, you know, people of my age are usually pretty conservative and we are a lot more astute than sometimes our children think we are, and are able to make decisions for ourselves. I am seeing this and I am hearing it. But their greatest concern with this issue is that Congress will not act and that they will be left at sea.
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    Thank you.
    Mr. GILLMOR. Thank you, Mrs. Green.
    Mr. Brough, what impact will limitations on the use of insurance scoring have on consumers?
    Mr. BROUGH. I think you are in a position where you are going to see the size and scope of the providers in the market start to dwindle a bit. Obviously, that puts upward pressure on rates. Basically, I think it restricts choice, and you are going to see some increases in prices as a result.
    Mr. GILLMOR. One final question, this is for Mr. Lizarraga. I hope I have pronounced that correctly. What would be the impact on low-to moderate-income consumers if the FCRA is not reauthorized?
    Mr. LIZARRAGA. I believe that it would have a negative impact in that we really need a national oversight; a national agenda, if you want to call it that way, that addresses the needs of consumers. I really believe that what Ms. Waters indicated a little bit earlier, that we can step up to the plate. Our bank does not use credit scoring. We do not use Fair Isaac. We believe that we can evaluate a person by the person's character, their capability to pay, their credit and their collateral. We use all kinds of different types of methods of assuring ourselves that they can pay that loan. I have to tell you, we have 0.01 percent delinquency, and out consumer is a low-and moderate-income borrower.
    We also are very pleased to tell you that this last month, we did not have one single REO. So I just want to tell you that it can be done, but we do need some help and assistance and a strong national legislation in this regard that would be very, very helpful. We are plagued by the ability of local municipalities wanting to be of assistance, trying to step up to the plate to assist communities, coming up with rules and regulations that make it so difficult for us to really advance credit to our communities.
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    Mr. GILLMOR. Thank you.
    Before I go to the next questioner, just a comment to Mrs. Green, who mentioned about how seniors know more than what their children think they do. I have six-year-old twins and they already think they know more than their father does.
    Mrs. McCarthy?
    Mrs. MCCARTHY. Thank you, Mr. Chairman.
    Ms. Smith, there was something that you had said earlier, that if you take the credit cards and you close them out, that when you got for another possible loan or anything, your interest rate is going to be higher?
    Ms. SHANNA SMITH. Your credit score can be lower. The more you use credit, if you open and close accounts because you are trying to get better rates, it can have a negative impact on your credit score. Housing counselors will tell when they are working with people, they will say, okay, you have too many open lines of credit; close those lines. We have learned that if you close your oldest lines of credit, which might have the highest interest rates, and you open a new line of credit with a lower interest rate, which is to my benefit if I do that, it is going to have a negative impact on my credit score. It is going to push my credit score down because the credit scoring companies look at the length of time I have had the credit, not the terms and conditions of the credit, but how long I have had that account open. While I am doing something good for myself, I am being punished through a credit scoring model.
    Mrs. MCCARTHY. Following that through, though, because I just found this out as I was going through the testimony in the last two days, I probably have a drawer full of credit cards that I do not use, nor have I used them for probably a long time. They have been sitting there. There used to be a day when people actually sent you a credit card.
    Ms. SHANNA SMITH. Yes.
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    Mrs. MCCARTHY. I have found out that when I went for a refinancing of my home, on my credit report came out all these credit cards that I have.
    Ms. SHANNA SMITH. Right.
    Mrs. MCCARTHY. Now, the question is, obviously I have not used them. I know I have not used them probably for five or six years. So, what do you do? If I cancel them all, am I going to go into that other racket? Or to be honest with you, I used to just cut them up. Now, I found out that they are still active, even though I cut them up.
    I consider myself a fairly smart consumer. I guess if I was getting charged every month, which the credit cards do not do anymore because they are looking for your business, but wouldn't it be reasonable for the credit agencies to think, well, if you have not used them, and yes I know they can be an open end of credit, but if you have not used them, because how many of us go to Bob Stevens, it is an electronics place, hey, open up a credit card, he will give you 20 percent off. Well of course, I want an extra 20 percent off so I open it up. I have not used that card since.
    I can probably go down a whole bunch of things. Wouldn't it be fair to say if you have not used your card for, say, three to five years, that if it is going to be on the report, it should say ''inactive''?
    Ms. SHANNA SMITH. I agree. When I did my own credit score, I found I forgot that I had this old credit card that I had not used for 8 years. It still showed up. I had an R-1 credit rating on it because I had never used it, but there they will say, well, those are open lines of credit. Theoretically, you could charge all the way up to the maximum on that open line of credit, so I understand why they might be worried if once they closed the loan, we are going to run out and use that credit card.
    But at some point, we ought to be able to cure that without being penalized for curing that. Right now, I don't know for sure because no one knows what is in the black box of all the credit scoring agencies. I worked with a reporter in Cleveland, and she was doing that with her credit versus her husband's credit. She closed out his old accounts and his credit score went down. She is white and lives in a white neighborhood, so it was just about how the system works.
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    Mrs. MCCARTHY. Now, to follow through with that, I am also curious about this, because when I go home this weekend, I am going to have to go through all my credit cards. To tell you the truth, I don't have the time to call up the credit company. I will tell you why, because one credit card that I did have when I was going to use it because I wanted to use it to fly, I saw it was 21 percent interest. Now, obviously that is a credit card that has been there for a long time. You know what? I am going to call them up and I am going to renegotiate the rate.
    Well, I tried calling at 5 o'clock in the morning. I tried calling at 11 o'clock at night. I tried calling whenever I could and never got through. To be honest with you, I gave up and I opened up a new account, same card, but they were sending you so many in the mail, so I just opened up a new account at 7.8 percent. I still have that card. That really ticked me off that I just couldn't get rid of it, but now I dropped that card, too, because if I cannot call them and talk to them, why do I want to do business with them?
    Ms. SHANNA SMITH. Imagine if you are a consumer who had a real complaint and you were trying to correct that complaint for your credit report.
    Mrs. MCCARTHY. They tell you to write them.
    Ms. SHANNA SMITH. Yes.
    Mrs. MCCARTHY. Thank you.
    Thank you, Mr. Chairman.
    Mrs. GREEN. Could I add something to that?
    Mrs. MCCARTHY. Absolutely.
    Mrs. GREEN. I spent my years in debt collection. That was the old bill collector in me that knew the answer to what you are saying. When I ran into people with this situation, I instructed them, if the account had a zero balance, particularly one that they did not use, to request it be cancelled and request that the credit grantor notify the credit bureau it was being closed at the consumer's request. And that helped.
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    Mrs. MCCARTHY. Thank you.
    By the way, I will echo what the Chairman said. I have a 36-year-old son who questions everything I do financially.
    Mrs. GREEN. I have four sons and I don't know how they can know it all when I do.
    Mrs. MCCARTHY. That is all right. We still have some good time left in us.
    I yield back the balance of my time.
    Mr. GILLMOR. The gentlelady yields back.
    The gentleman from California, Mr. Royce.
    Mr. ROYCE. The difference is, if you knew Paul's kids, they really do know more than we do. They are geniuses.
    I wanted to thank David Lizarraga for answering my question earlier, and for his views on a strong national standard for fair credit reporting.
    I wanted to ask Mr. Brough a question. Mr. Brough's testimony pointed out the importance of consumers' access to credit to our overall economy. To hone in on that point, I wondered if you would elaborate on how FCRA and in particular the 1996 amendments have lowered the cost and access to credit for consumers.
    Mr. BROUGH. There, I think what you are looking at is again the importance of a uniform standard. Having something that actually sets a nationwide standard allows the providers of credit to produce a wider array of products and serve a wider array of customers because now they are not dealing with small localized markets. At the same time, I think there is some value in looking at how these credit scores work. If you look at what we had previously, it was sort of these individual decisions, and I think, if you have these statistically valid models, what they find holds over time. So there are benefits to these things.
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    But I think it is the notion that providers have to compete among each other, and the wider the market of providers, the more competition you are going to have on the provider side. What gets that market large is the fact that you have consumers out there demanding this. And the wider market of consumers you are serving, it means all of these producers are going to have to be competing for that business. In the end, I think that is where we see the gains in the economy.
    Mr. ROYCE. That goes to the issue of a wider market, but how about safety and soundness and the economy? In your view, has the FCRA and the 1996 amendments helped to improve that safety and soundness of the financial system through better information? In other words, you can manage risk better if you have that information?
    Mr. BROUGH. Exactly. I think, and there are sort of two sides to that. One, you can manage risk better, so the businesses are being more prudent. At the same time, you have different tools to serve different customer bases. Given that, you see some people getting credit that may not have been able to get credit before.
    Mr. ROYCE. So you have more access to credit, but can you quantify at all the safety and soundness issue, the argument that companies are better able to manage risk and therefore you have a sounder system?
    Mr. BROUGH. Personally, I have not done that, and I do not have a good answer for you on that, because I have never really tried to do that, but I think if you did look at the risk management tools out there.
    Mr. ROYCE. You are saying it is intuitive that that would happen?
    Mr. BROUGH. It is intuitive, and I do think that the risk management tools that are available to people today are better than the risk management tool that were previously available. Logically, that would mean that we are in a better position.
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    Mr. ROYCE. Thank you, Mr. Brough.
    Thank you, Mr. Chairman.
    Mr. GILLMOR. Thank you, Mr. Royce.
    Next is Mr. Crowley.
    Mr. CROWLEY. Thank you, Mr. Chairman, and thank you for all of you here today. I am sorry, like my other colleagues, we have been torn back and forth from different committees today, back and forth and mostly within this building for me.
    I want to congratulate the chair, as well as the ranking member, for the number of panelists who have come before us today, as well as the balance that has been brought to these hearings. I especially want to welcome my friends from PIRG who when I was in the state legislature I got to know them a great deal, and I see a few in the audience here today.
    Maybe you can, Mr. Mierzwinski, and maybe any of the panelists please respond. In your Statement, I was not here for it, but I have some notes on it from my staff, you mentioned concern about the status quo that exists right now with the seven provisions that are set to sunset later this year. If that were to happen, and I am assuming that is what you would prefer to see happen, and go back to the state legislature and have each state then theoretically develop its own set of laws concerning fair credit reporting.
    California and New York, well, let's be more specific, New York, New Jersey, Connecticut, Massachusetts, Vermont, New Hampshire, Pennsylvania, all kind of bordering states around New York, for instance, would all theoretically have different standards. It could be anywhere from grace periods which could be different depending on the state. Does that not create somewhat of a bureaucratic nightmare for institutions that are evaluating whether one should have or should be denied or be given credit? If so, if it does create that bureaucracy, does it not potentially raise the costs of interest in terms of what is charged to the individuals receiving that loan?
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    Mr. MIERZWINSKI. Congressman, that is the industry's position, and they have argued very forcefully that that would occur. Earlier today, Assistant Attorney General Brill from one of the states with a stronger existing law under the grandfather provisions, Vermont, said that their citizens do not pay higher rates. They studied zero percent and instant loans, and found that bankruptcy rates are low, car loan rates are low, mortgage rates are low, and consumers are well-off.
    I just do not see the states balkanizing the system like that. If we have a high enough, strong enough federal standard, the states will only act if a new problem arises. The idea of different grace periods is one of the examples you suggested. I believe that those might be construed as inconsistent under the federal law. And the federal law, we have never disagreed, should prohibit inconsistent state laws. We have only supported the notion that states should have stronger laws provided they are not inconsistent.
    So I do not think that the industry's nightmare will come to pass. The States are rational actors.
    Mr. CROWLEY. Unless, of course, you are from Vermont.
    Mr. MIERZWINSKI. Yes, he is not here anymore, but 5 or 6 years ago, the realtors joined with the consumer groups in California because the realtors were having trouble getting consumers locked in mortgage loans. They were saying, ''Oh, your credit score is too low.'' The consumer was saying, ''What is my credit score?'' And the realtor would say, ''I can tell you, but then I have to kill you.'' They were not allowed to tell consumers their credit scores, and Fair Isaac vehemently opposed disclosing credit scores. It was in their contract with the credit bureaus that the ultimate consumer could not look at credit scores. They did not know why they were being turned down or paying too much for mortgages.
    Fortunately, we got the realtors on our side. As a former state legislator, you know they have a lot of juice. The realtors and the consumer groups got California to pass that law. Now it has been adopted virtually nationally by Fair Isaac. We think it should become mandatory. That is the way the state-federal system should work.
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    Mr. CROWLEY. Would anyone else like to comment on that question? No one else wants to comment? How balanced is this?
    Ms. SHANNA SMITH. I would like to say that we look at this like the Fair Housing Act. When the Fair Housing Act was passed in 1968, it was the federal standard. That federal law did not preempt any state or local fair housing laws. So states like Mississippi and Alabama, who still have not passed a Fair Housing Act for their state, the people who live there are protected under the federal law. But states like California and Ohio looked at the 1968 law and said, well, we really need to protect families with children and people with disabilities because the federal law didn't. So they added those protections.
    If you think that the Apartment Association, who testified here today, has to follow those various laws that are different from the federal fair housing law, the mortgage lenders, the homeowners insurance companies, the real estate industry, they all have to follow these different fair housing laws that are not only at the state level, but at local levels as well. It has not wreaked havoc in those industries.
    Mr. CROWLEY. I would just comment. I am having trouble with this. I am sure many members are as well. The idea is we have 50 different states, and if they were to have 50 different standards, it would be complicating to industry in some way. I would hope that at least someone would admit to that. Would that not be the case? It would not be complicating these institutions? If so, does that complication, what does that do? That is what I am asking.
    Mr. BROUGH. I think it does a couple of things. One, it changes the demand for some of these products within the state. I think the other thing that you are going to see, it is going to be very difficult for large-scale providers to go into a number of markets. In that sense, you will have people specializing in different states. When you start doing that, you lose some of the fluidity in the markets.
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    So I think if you are a company and you were going up, say for instance in the insurance market, you have 50 insurance Commissioners. Obviously, if you have to re-tool to operate in every single state, you are adding costs to the process. So clearly there are costs involved. I would be very leery to think about over-stepping the bounds and then having this system.
    On the other side of that is when you start to pull things apart, it is not just the regulators or the legislators that are innovating. The market is trying to innovate, too. As you start throwing up these little barriers around the country, it gets more difficult for the people in the marketplace to come up with new products and serve consumers. So in that sense, I do think you have to be careful about the balance between the federal and the state regulations.
    Mr. CROWLEY. My time has expired.
    Mr. TIBERI. [Presiding.] The gentleman's time has expired. Thank you.
    Ms. Maloney?
    Mrs. MALONEY. Thank you very much, Mr. Chairman. Mr. Mierzwinski, I agree with many of the comments that you raised in your testimony about the need to address identity theft; also your comments earlier with Ranking Member Sanders on default pricing. That particular issue is particularly important.
    I would like to ask you, Mr. Mierzwinski, and Mr. Brough, if you would comment on the statements that were made earlier by Mr. Bennett when he said that the FCRA, and to quote from his testimony, he says, ''Disputes are up, identity theft is rampant, and consumer complaints to the FTC and FCRA in the identity theft areas are overwhelming all other matters.'' I would like to ask, do you agree with his interpretation? If you do agree, what specific changes would you recommend to improve the system to make it work better?
    Secondly, following up on Mr. Brough's comments, I represent a retail hub, New York City. People come from all over the world and all over the U.S. to shop there. Every single store has their own credit card. You walk into any store and they will issue a credit card on the spot. They don't care where you are from. I don't know how they do it, but they just do it really fast. My question is, if you do not have a federal system, what would the impact be on what is financially important to New York City, which is that people shop there; they spend money; and they can get access to credit? I would like to begin with Mr. Mierzwinski on the first question, if you would respond to that; and Mr. Brough, to the first question on how it can be improved.
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    Secondly, the question of a financial hub like New York City, or it could be any city where you can get access to credit quickly, if you did not have a federal system, would that be an undue financial burden on the ability for New York stores to issue credit? This is an issue that retailers have raised to me, that they believe it is important to their ability to be in the marketplace.
    Mr. Mierzwinski?
    Mr. MIERZWINSKI. Thank you, Congresswoman. The second question first, very briefly, and this responds also to Mr. Crowley's question to me. If the federal standard is high enough, the states are not going to enact 50 different laws. But if the federal standard is not high enough, you should leave the states with the opportunity to react to changing local conditions. It is not in their interests as rational actors to hurt their economies by passing laws that become barriers.
    The banks put up this straw man that there are going to be barriers. They have said there would be walls around North Dakota if they strengthened their affiliate sharing law. That is not true. They said there would be walls around Vermont. That is not true. So the federal law should be strong enough that you do not have to worry about the states, but leave them there just in case as a fail-safe.
    Getting back to your first question, I totally agree with Mr. Bennett when he said that the FCRA reinvestigation system and consumer redress mechanism is broken. The consumers who complain to the credit bureaus are put in voicemail jail. They are given to people who are supposed to handle their complaint within four minutes, and they have great difficulty getting through. If you have your congressman or congresswoman call, they have a concierge service for those people, but the average citizen gets terrible service. Then if you do get a lawyer and go to court, there is a circular problem with the law that Mr. Bennett explains in great detail in his testimony, where no one is responsible, no one is ultimately liable.
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    It is very difficult to prove actual damages. It is very difficult to prove a violation. The companies rely on how difficult it is to sue them, so that they have calculated that their litigation costs are so modest that they do not have to improve their reinvestigation quality. So they sue the few consumers and they drive them nuts in court who sue them. They leave the rest of us hanging out, complaining, stuck in voicemail jail, not improving our credit reports. The answer, the solution in my view is, make it easier to sue the companies. That will force them to feel it in their pockets. If they feel it in their pockets, they will improve the system.
    Mr. BROUGH. With respect to that question, that is an area that I have not looked a lot at, but I think these problems do pop up. I have seen the numbers that do not suggest that it is as rampant as some people say. Again, this is not my area of expertise, but whether it is just an issue of enforcing what is already on the books versus adding something new, I think that is what I would look at. Like I say, that is not my area of expertise.
    On the other issue of New York stores, I think those kinds of questions are real questions. One of the things to look at and remember is that we have gone through this period of financial services deregulation. That entire market is a lot different than it was five or ten years ago. So when you look at that market, I think the competition has occurred since then is heating up, and the ability to move within the states is something that has to be looked at. So I would definitely say that you do have to be careful about throwing up state barriers against stores.
    Mrs. MALONEY. Thank you.
    Mr. TIBERI. Thank you.
    The gentlelady's time has expired.
    Mr. Meeks?
    Mr. MEEKS. Thank you. I want to say exactly what Mr. Crowley said, in that I apologize, with committee hearings bouncing back and forth. So I apologize for not being here, but I will digest all of the testimony and information I heard in the period of time that I was here. It was very important, particularly on the dialogue with the gentlelady from Long Island, Ms. McCarthy, on this whole scoring piece and making sure that it is equitable.
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    What I am hearing is that a national standard would probably be best if it was a high standard. The question is whether or not the standard is high enough with what we do nationally. So I would implore all of you to work with us so that if we do a national standard, that it is a good one, and high enough. Because it seems to me, I know for example I do not want, going back to the interests of consumers, consumers to be determined in different ways based upon the state that they are in, to determine whether they will or will not get credit. We have this debate among ourselves also. For me, the whole issue of predatory lending, some states have good laws, other states don't, so it means that some people are victimized depending upon which state they live in.
    From my viewpoint, I would rather make sure that there is a high standard across the nation so that no one would be victimized by predatory lending. Likewise, the same thing with reference to credit and the credit history. I tailed in on Ms. Waters's comments, and I know that in the African American community and the minority community, they are victimized more by bad credit and the credit ratings than anybody else I know, and it stops them from doing a lot of opportunities that his nation has, as a result of having a bad credit rating.
    In fact, I know of individuals now where they cannot get insurance, and are considered a high insurance risk because they have bad credit. And then it gets all involved in their insurance being denied, yet the reverse is not happening if you have a good insurance rate, you cannot get credit. So it seems as though you are having both ways.
    But that being said, here is my question, and I guess for anybody on the panel. With these pre-screening processes which allow consumers to receive credit card offers for which they have already been screened to be qualified for, as a result many people receive numerous credit cards every week. Often we do not want them, but sometimes we do use them.
    Here is my question, the credit bureaus have said that they are concerned about sending negative credit reporting notices because they will be lost as junk mail. My question simply is: Do you believe that sending negative credit reporting notices would be beneficial or detrimental for consumers? I will ask one on each side.
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    Mr. BROUGH. Beneficial.
    Mr. MEEKS. Beneficial.
    Mr. BROUGH. Beneficial.
    Mr. MIERZWINSKI. Congressman, that would be beneficial, if I understand your question correctly. I could point out that Colorado requires that any consumer who is credit-active, that is he either has two inquiries or two negative items. I believe the law may have been recently changed, but they wanted to make sure that people didn't just have no credit. But everybody who has inquiries on their credit report or a negative item put on their credit report annually is required to receive a notice from the credit bureaus of all of their credit reporting rights. That notice then triggers them to consider asking for their free credit report, which is also allowed in Colorado. So then they find out more about their rights.
    In terms of the use of credit scores, by the way, our organization opposes their use and does not believe there is a causation relationship between credit scores and insurance risk.
    Mr. MEEKS. Thank you.
    I am not sure, going back to again Mr. Crowley's piece, and what you were talking about, I just want to have one question, with reference to if there was a consumer or a person who was in transit. Say, for example, if we did not have this high national standard or it was still where it was in one state, in Vermont, and you move from Vermont and you move into New York, and there are two different standards. How would that affect the individual consumer? Would they have to change their status at all? Would the original contract be what governs? Would the state that they moved to govern? How is that now? Because, you know, we have some states with a higher standard than others.
    Do you understand the question?
    Mr. MIERZWINSKI. If I understand, are you saying that if the consumer wants to sue, under which laws does he sue under?
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    Mr. MEEKS. No. I got my credit card in Vermont, which had a high standard for notifications, et cetera, et cetera.
    Mr. MIERZWINSKI. Right. Okay.
    Mr. MEEKS. And I moved from Vermont to New York, and they have a lower standard. What happens?
    Mr. MIERZWINSKI. I do not see that anything would happen. The difference in the credit cards in the two different states, I do not know what would happen. Could you explain in more detail?
    Mr. MEEKS. I yield to Mr. Crowley.
    Mr. CROWLEY. If you issued the credit card in Vermont, you have a 90-day grace period. And then you moved. You made a purchase in Vermont and you moved to New York and they have a 60-day. Which would apply? Which grace period would apply?
    Mr. MIERZWINSKI. I don't know the answer to that, but I don't think that is a Fair Credit Reporting Act issue. I think that is a truth-in-lending issue. The Truth in Lending Act is completely different than what we are discussing here. What we are discussing here is whether states can pass stronger laws to sue furnishers; whether states can pass stronger laws on notices and timetables under the Fair Credit Reporting Act and some other issues. But I do not see how that one applies.
    I would defer to Attorney General Brill and ask her in a follow-up question.
    Mr. TIBERI. Mr. Crowley, is that good?
    Mr. CROWLEY. I was just making a point that there may be other issues, that may not necessarily be a grace period, it could be something else. I am just using it as an example, and it may be the wrong example, but you get the idea.
    Mr. MIERZWINSKI. Again, we see that there are dozens of different credit reporting laws already, Congressman, and we do not see these problems occurring. Again, the federal law we see it as being a floor. Any law that is inconsistent with the federal law, we support being preempted. We disagree that ''stronger'' means ''inconsistent.'' Under the current statute, if an industry group believes that a state law is inconsistent, it can appeal to the FTC and ask it to overturn it. I do not know that that happens very often.
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    Mr. TIBERI. The gentleman's time has expired.
    Thank you to the panelists from the third group for being so patient with us. I would like to ask the fourth panel to be seated. I would like to tell the members that we are informed that there will be a series of votes around 4 o'clock, so I will ask the group of the fourth panel to get seated as quickly as possible. I will provide the introductions and we will get started. I will begin introducing the fourth panel today, starting from my left: John Ford, Chief Privacy Officer, Equifax; Cheryl St. John, Vice President, Fair Isaac Corporation; Mr. Richard Le Febvre, President, AAA American Credit Bureau; Mr. Paul Wohkittel, III, President, Lenders' Credit Services, Inc. and Director and Legislative Chair of the National Credit Reporting Association; Tim Spainhour, legal compliance leader, Acxiom Corporation; and last but not least, Mr. Anthony Rodriguez, staff attorney with the National Consumer Law Center.
    Thank you all for coming. You each will have 5 minutes. The light will turn red. If you could wrap up at that point in time, and then we will hopefully be able to ask you some questions if there are any of us left, including me.
    Mr. Ford?


    Mr. FORD. Thank you, Mr. Chairman.
    Mr. Chairman and members of the subcommittee, I am John Ford, Chief Privacy Officer for Equifax. I commend the members of this subcommittee and its excellent staff for the thoughtful and thorough manner in which it is reviewing uniform national standards under the Fair Credit Reporting Act. I appreciate this opportunity to present the Equifax point of view on this important public policy matter.
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    Before I go further, I would like to address for the record the implications made by a member of the second panel that somehow Equifax fails to provide quality reinvestigation services because we outsource some of our credit file maintenance operations to Jamaica. We are an international company with operations in many countries. As a publicly traded corporation, we have obligations to reduce unnecessary costs and to provide quality services. Our small operation in Jamaica does both. In fact, all of the service representatives happen to be college graduates.
    Founded in 1899, Equifax is a publicly traded corporation that for 104 years has provided reliable information, products and services to our customers so that they, in turn, can make reliable and profitable risk decisions. Equifax treats consumers as valued customers, too. In fact, one of our fundamental operating principles is that by enlightening, enabling and empowering consumers through a comprehensive suite of credit solutions to better manage their credit health, consumers win, business wins, and our economy wins.
    Our bottom line is really very simple. As a steward of sensitive financial information about virtually every adult American, Equifax must adhere to high standards for protecting privacy, for accuracy, and for customer service. Anything else is not just unsatisfactory, it is a threat to our very mission and success.
    Today, there are three nationwide credit reporting companies engaging in real competition, competition that works to help promote a robust, healthy marketplace and to provide consumers with appropriate protections, knowledge and convenient and timely access to the goods and services they want. Also contrary to statements of an earlier panelist, banks, retailers and other information furnishers are not required to participate in the system, but most do so voluntarily because they understand the benefits of a full-file system for their business and for their customers' satisfaction.
    In terms of data accuracy, I offer some statistics to help put that issue in perspective. Credit reporting agencies receive from data furnishers approximately two billion data elements each month on about 1.5 billion accounts for more than 210 million consumer files. We issue close to three million consumer credit reports every day. We at Equifax have a vested interest in the accuracy and the integrity of these credit reports and our credit database. So do our competitors, and so do lenders whose ability to make informed decisions depends on reliable data. If we provide inaccurate and unreliable data, we risk losing our customer's business and consumer trust. It is a testament to the extent of accuracy and reliability in the U.S. credit reporting system that lenders are willing to risk their capital with only a consumer application and a copy of a consumer's credit report.
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    Some consumer group reports often mistakenly count cosmetic errors as errors that impact a creditor's risk decision. If a credit report has a transposed character in the address or a missing middle initial, for example, these are cosmetic errors, data that is not critical to the risk decision. A data item that is true, but not yet updated, is also not an error. Error rates of the size touted by anecdotal, non-scientific research simply are not supported by the millions of highly efficient and predictive risk assessment decisions made in the marketplace every day. To generalize from sample sizes of 50 or 150 to a population of more than 210 million is simply faulty logic.
    Equifax and our industry care very much about the integrity and the reliability of our databases, and we have invested millions of dollars in advanced technology and in skilled employees with an objective of putting the right information into the right file 100 percent of the time. Are we perfect? Absolutely not. Are we making great progress? Absolutely yes.
    In the late 1980s, Congress began considering and deliberating possible FCRA reforms. These efforts culminated in the adoption of an extensive set of consumer protections in 1996. Having greatly strengthened the consumer protections afforded by the FCRA, Congress also elected to establish uniform national standards by preempting state authority with respect to carefully selected FCRA provisions. Much of the legislative language about the 1996 FCRA amendments reflect bipartisan support of national standards for credit reporting and a single set of federal rules.
    Add to the lengthening list of reasons to retain national standards the fact that consumers are highly mobile and often have a presence in multiple states today. Forty-two million Americans move every year; six million Americans have second or vacation homes, many in a different state from their primary residence. In addition, millions of Americans live in one state, but work in another. If federal uniform standards were to lapse, it is possible that the most stringent state law from a large state would likely become the de facto national standard. I think there is sufficient evidence as well that despite statements to the contrary, that left in a vacuum, the states are not hesitant at all to jump in and to act with different and potentially conflicting law.
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    In closing, Mr. Chairman, I reiterate our position that retention of the current national standards in the FCRA is absolutely essential. Our banking system is national. Our credit reporting system is national. Our economy is national. Consumers' mobility is national in scope. Our enforcement and interpretative framework via the regulatory agencies is national. So should our governing law be national.
    Thank you, Mr. Chairman.

    [The prepared statement of John A. Ford can be found on page 234 in the appendix.]

    Chairman BACHUS. Thank you.
    Ms. St. John?


    Ms. ST. JOHN. Thank you.
    Mr. Chairman, members of the subcommittee, my name is Cheri St. John. I am the Vice President of global scoring solutions for Fair Isaac Corporation. Thank you for the opportunity to testify regarding the critical role played by uniform national credit reporting standards and credit scores that help consumers get the credit they deserve.
    Fair Isaac invented statistically based credit risk evaluation systems, now commonly called credit scoring systems. Thousands of credit grantors use the scores known as FICO scores generated by Fair Isaac's scoring systems implemented at the three national credit reporting agencies. We also develop custom credit scoring systems for hundreds of the nation's leading lenders and insurance scoring systems for many leading insurance companies.
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    Fair Isaac has also given consumers an active role in credit reporting by pioneering consumer credit empowerment with its myFICO.com score explanation Web site. Millions of consumers have already taken control of their financial health by using myFico.com to obtain actionable credit information, including their FICO scores.
    There are three main points I would like to highlight today. Point one, with credit scoring, more people get credit; they get it faster; and it is more affordable. By enabling lenders to extend credit quickly, while safely managing their risk, credit scores have made credit more accessible at lower rates to more people. More people can get credit because credit scores allow lenders to safely assess and account for the risk of consumers who are new to that lender and who may have been turned away by other lenders.
    Scores make credit more affordable by reducing the cost of acquiring new accounts and managing portfolios, reducing loan losses, reducing marketing costs with pre-screening, and cutting the cost of capital with securitization. FICO scores are accepted, reliable and trusted to the point that even regulators use them to help ensure the safety and soundness of the financial system.
    Point two, more data means smarter scores. Smarter scores help everyone get the credit they deserve. Fair Isaac supports the renewal of the national uniformity provisions of the FCRA. The current reporting system helps both consumers and lenders. If uniformity in credit information is lost, scores will be less predictive, lenders will be less able to distinguish risk, and consumers will be hurt. Consumers with better payment history will lose the benefit of always paying on time every time, and end up paying higher prices for credit. Varied rules that limit the nature and quality of the credit data available will only diminish the value of this powerful and beneficial tool.
    Point three, people who understand their scores and improve their credit health have more credit power. Fair Isaac is the leader in helping consumers understand their scores and take control of their credit health. National uniformity in credit data empowers consumers by promoting consumer awareness and understanding of their credit standing, and helps prevent identity theft. If credit data varied from state to state, consumers would find it harder to understand and take charge of their credit, and harder to tell whether changes to their credit report are from state regulation or from suspicious activity. Well-meaning state regulation should not be allowed to diminish a consumer's role in managing his or her credit.
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    Removing information from credit reports, or even varying reported information from state to state would make the process of obtaining and understanding credit more difficult for consumers. Credit cost and availability should be based on each consumer's behavior, not on the state of residence.
    In conclusion, credit scoring and the national credit reporting system created by the FCRA benefits consumers, lenders and our nation's economy.
    I thank you for the opportunity to share Fair Isaac's experience and knowledge in this important area, and I would be happy to answer your questions.

    [The prepared statement of Cheryl St. John can be found on page 464 in the appendix.]

    Chairman BACHUS. Mr. Le Febvre?


    Mr. LE FEBVRE. Good afternoon, Chairman Bachus and distinguished members of the subcommittee. My name is Richard Le Febvre. I am President and CEO of AAA American Credit Bureau. AAA was one of the first resellers that was allowed to re-score consumers' credit files dating back now five years. AAA has a national reputation and has calculated a tremendous number of consumers' credit scores with great success, and is considered one of America's foremost re-scoring companies.
    I thank you for this opportunity to testify before you today on an issue that is fundamentally important to the American economy as a whole, and to individual Americans, the American dream of buying a home, an automobile, obtaining credit and insurance, and any other valuable asset.
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    Now, I want to explain what re-scoring is. Re-scoring is updating of credit information, updating account balances, deleting and updating inaccurate trade lines, deleting obsolete trade lines, updating and deleting public records, deleting inaccurate late payments, and updating incomplete or missing data. Every day, these errors can and do cost consumers money and result in credit denials. The errors cost consumers money by causing increased interest rates and less favorable credit terms. This is not meant to say the reports have a lot of inaccuracies, but inaccurate information in credit reports is a recurring and troubling problem that, under certain practices, now directly impacts facets of American lives.
    H.R. 1473 is an insurance bill that I helped Congressman Gutierrez with with regard to the consumer disclosure section of that bill. I wanted to discuss reinvestigation or Section 1681 I. It is my opinion that the repositories do an overall good or fair job. But when the dispute is more sophisticated, requiring more basic thought, then they fail in their responsibilities.
    Throwing technology at a problem with credit reporting errors does more harm when sometimes only a human can protect consumers against inaccurate reporting, no matter whose fault it is. The average dispute time at the repositories is 10 to 15 disputes per hour. As a national reseller handling consumer disputes, our average time per dispute ranges between 30 and 45 minutes; some lasting even longer. Dispute quality coming from the repositories must be questioned at an average time of one every five minutes.
    Another problem I see all the time is reinsertion of previously deleted data that is updated or removed after re-scoring. I want to explain what a CRA-reseller is. The FTC created what they call the Credco consent decree, which is the bible of all re-sellers. But the industry is tying the hands of their CRA-resellers. One bad bureau trade line in a tri-merge credit report ruins consumers' credit worthiness and credit reputation. Consumer choices being destroyed by industry is focusing consumers to check their credit files in advance or buyer beware, or be ready to pay extremely high fees for re-scoring. It is a position that consumers should not have to face.
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    In the past, for $50, a reseller has verified two years of employment history, interviewed the consumer, sent them a copy of their credit report, verified any outdated trade lines, verified balances on accounts, verified any open collection of charge-offs, verified any public records, and verified whatever the consumer brought to our attention. This was all done within 24 to 48 hours.
    Adverse action notice, which is one of the major issues under the FCRA, gives consumers a heads-up that something is wrong, causing them financial hardship. In today's information superhighway evaluations, these systems deny consumers the right to see their consumer reports, their credit reports, and scores that were used for the evaluations. Consumers cannot fight what they cannot see.
    Risk-based pricing. Most consumer rate sheets show rates in terms based on minimum score requirements. Consumers cannot even apply for certain kinds of mortgages without meeting the minimum score requirements.
    Account review. In many cases, credit card companies check the consumer's data almost on a monthly basis. I have seen interest rates double and triple over my 12.5 years in business, and lines decrease. I strongly question the logic for re-studying consumers' rates during a consumer's financial crisis, or they are a victim of errors, or victim of identity theft. I truly believe it puts the consumer further into debt and many times into bankruptcy. Infected scores lead to higher rates and terms. It also leads to increased risk for new lenders, lowering the consumer's credit worthiness and credit reputation, harming consumers and lenders that want to do a good loan.
    Please review my examples. In my prepared statement, I gave you some examples that we have had. I want you to review numbers one, three and four, and if you have any questions, I would be more than happy to answer them.
    Thank you.
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    [The prepared statement of Richard Le Febvre can be found on page 271 in the appendix.]

    Chairman BACHUS. Thank you, Mr. Le Febvre.
    At this time, Mr. Paul Wohkittel.


    Mr. WOHKITTEL. Good afternoon, Mr. Chairman and distinguished committee members.
    I am Paul Wohkittel. I am the President of Lenders' Credit Services in Baltimore, Maryland, and I am the Legislative GSE Chairman and a Director of the National Credit Reporting Association. Thank you for inviting me to today's hearing.
    Lenders' Credit Services is a credit reporting agency that provides specialized mortgage credit reports, and it is referred to as a reseller in the Fair Credit Reporting Act because we do not gather and maintain a database of credit data on consumers, like the three main repositories do. Instead, we purchase their files and create specialized hybrid reports with the data and resell these specialty reports to our end-user, the mortgage lender.
    In short, while the primary function of the repository is to collect and maintain consumer credit data, the primary function of resellers is to research and amend the data and perform enhanced customer service for lenders and borrowers alike. The services of my firm are utilized because we are highly specialized agents in the credit reporting industry, with the responsibility to act as a safeguard to assure the accuracy of the credit reports for the benefit of the lenders, and especially for the protection of consumers.
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    An excellent illustration of the valuable service we perform is the recent introduction of credit re-scoring. With the soaring popularity of automated underwriting systems that are driven to a high degree by risk-based scoring, consumers can be denied or offered higher than deserved interest rates if inaccuracies exist in their credit file, costing tens of thousands of dollars over the life of the loan. Our staff will fully analyze the entire credit report, and if inaccuracies exist, we will expediently correct them in conjunction with the credit repositories to generate a new and accurate score.
    The National Credit Reporting Association, who I also represent today, is a nonprofit trade association that represents the consumer reporting industry and specifically reseller firms specializing in mortgage reporting, employment screening and tenant verifications. There are approximately 300 credit reporting agencies in the U.S. that specialize in mortgage reports. NCRA's more than 125 members provide in excess of 25 million reports per year to the mortgage industry to specifications required by HUD, Fannie Mae and Freddie Mac for mortgage underwriting. NCRA commends this committee for holding these hearings to seek a broad-based look at the credit reporting industry. The effectiveness of this industry is critical to the entire economy.
    Further, we believe that the United States' credit reporting system, in a macro sense, is the best such system in the world. I say this from experience, as I have attended and presented at conferences in Central Asia and Eastern Europe, and I have knowledge of the systems in the different countries. I personally am currently involved in constructing a credit bureau in Kazakhstan, and I expect to begin one in Ukraine in September of this year. In these projects, I am afforded the opportunity to incorporate the best parts of our system and the Fair Credit Reporting Act. I am also able to spot developmental needs that, if addressed, could make our already superior system even better.
    NCRA believes that an improvement to the system would not include allowing the preemption protection to expire. The need for a uniform national standard is clear to maintain the levels of efficiency that consumers currently enjoy when purchasing a product or a service on credit. Instead, we believe the focus should be placed on fine-tuning the Fair Credit Reporting Act to allow it to address the needs of all parties concerned in the credit lending process.
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    Four suggested enhancements are to strengthen the responsibilities of furnishers of information section; to provide better disclosure of the original qualifying report when any adverse lending actions exist; to enhance the definitions section of the Fair Credit Reporting Act pertaining to consumer reporting agencies, to better define and delineate responsibilities between repositories and intermediary agencies known as resellers; and finally to increase the availability of consumer assistance from these intermediary agencies.
    In closing, on behalf of NCRA, Lenders' Credit Services, and resellers nationwide, I would like to thank you for inviting us to this hearing, and state that we stand ready to assist in a unique way to address and meet the challenges posed to the greatest credit reporting system in the world.

    [The prepared statement of Paul J. Wohkittel can be found on page 490 in the appendix.]

    Chairman BACHUS. Thank you.
    Would the gentleman from Arkansas, Mr. Ross, like to introduce your colleague from Arkansas?
    Mr. ROSS. Thank you. I do have a statement prior to his being recognized, if that is okay.
    Thank you, Chairman Bachus and Ranking Member Sanders, for holding this second hearing to discuss such an important issue. The Fair Credit Reporting Act is an essential part of our economy and it is important to discuss its use and effects on both businesses, as well as consumers. I am pleased that Tim Spainhour from Crossit, Arkansas in our congressional district, Arkansas' Fourth District, is here today in Washington, our nation's capital, to represent Acxiom and is testifying during this panel.
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    Acxiom is a leader in responsibly providing innovative data management services to leading companies in America. It is an Arkansas-based company. Their role in respect to the Fair Credit Reporting Act is as a processor in the creation and use of pre-screened consumer lists in credit, and also insurance solicitations. They are the only high-tech company in the state, and they have some 5,000 employees. Acxiom has been listed by Fortune magazine as one of the best companies to work for the last three years, and continues to bring highly skilled workers to Arkansas.
    So I look forward to hearing the testimony of Mr. Spainhour as we continue to evaluate the Fair Credit Reporting Act and its implications on consumers, respected business like Acxiom, and the economy.
    Again, thank you, Mr. Chairman, and I yield back the remainder of my time, so that we can hear from this witness.
    Chairman BACHUS. Thank you. Mr. Ross, did you say they were the only high-tech company in Arkansas or the largest?
    Mr. ROSS. It is our understanding that they are the only high-tech company in Arkansas. It probably depends on your definition, Mr. Chairman, of ''high-tech.''
    We are pretty much a farm state, a lot of agriculture and a little bit of manufacturing, but we would welcome a lot more high-tech companies to make their home in Arkansas.
    Chairman BACHUS. Okay, thank you.
    Mr. Spainhour?

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    Mr. SPAINHOUR. Good afternoon, Chairman Bachus and Ranking Member Sanders, and the distinguished members of the subcommittee. My name is Tim Spainhour and I am the legal compliance leader of Acxiom. I would like to thank you for holding this hearing and inviting Acxiom to participate.
    The reauthorization of the preemptive aspects of the Fair Credit Reporting Act is important to Acxiom's clients, and therefore to Acxiom, and is vital to the national credit reporting system that consumers enjoy the benefits of today.
    Although the scope of today's hearing is rather broad, I will limit my testimony to a single, discrete aspect of the activities in which Acxiom is involved. Specifically, I will address the role of the processor in the creation and use of pre-screened consumer lists.
    For more than 30 years, Acxiom has been a leader in responsibly providing innovative data management services to leading companies in America. In a nutshell, we help businesses, including those businesses that use pre-screened lists for credit and insurance solicitations, to recognize and engage customers who have the highest need for their products or service.
    Simply put, in the context of pre-screening, Acxiom's role is one of a data processor, not a bureau. We provide information products and services to our customers, and we build and maintain the computer systems that are the foundation of those client's customer management and marketing programs. Our clients use these systems and the consumer data available to them to identify potential customers.
    In your May 8 hearing, testimony was presented which suggested that pre-screening may increase competition among issuers of credit, thereby providing consumers with greater access to favorable credit rates. Although pre-screening may offer such consumer benefit, not every consumer who meets or exceeds a credit issuer's minimum credit criteria for a firm offer of credit, will respond to that offer.
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    Acxiom assists credit issuers in matching consumers with the offers they will find most interesting, and then assuring that those offers are delivered to the right address. Furthermore, many consumers have expressed an interest in not receiving such offers. In this regard, the FCRA requires that consumer reporting agencies, which prepare pre-screened lists, also maintain an opt-out system whereby consumers can elect to be omitted from those lists.
    Because consumers have the ability to opt out from inclusion in pre-screened lists, and in light of the substantial costs associated with large-scale pre-screened solicitations, our customers have a clear economic incentive to market only to those consumers who are most likely to respond to their offer. That is where Acxiom's expertise comes into play.
    The credit issuer will first determine the criteria they will use to make a firm offer and communicates that criteria to a consumer reporting agency. Once the list of consumers meeting the issuer's credit criteria has been determined by the consumer reporting agency, a processor such as Acxiom will assist in further refining that field of potential customers to those who are more likely to want or need the product.
    The process of refining the list of potential customers may entail the use of what we refer to as a partner file obtained by the issuer. A file such as this could identify participants in a frequent flyer program, who will be offered a product that accumulates frequent flyer credits. Or the issuer may wish to market to consumers who have demographic characteristics similar to those who have responded to similar offers in the past. A processor like Acxiom applies demographic data to the records and then identifies those consumers whose demographic characteristics are similar to past responders.
    For example, golf has become a very popular sport. An issuer may offer a credit card with a golfing theme as the background on the actual card itself and utilize that same theme on the envelope and the letterhead that communicates the offer. That offer would be targeted to consumers who have an interest in golf or who live in areas near golf facilities.
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    Acxiom also performs the services needed for postal certification in order to assure that each letter gets delivered to the most current, correct address and qualifies for available postal discounts. This includes processing the file for address standardization, carrier route pre-sorting, and the application of the national change of address file to make sure the most current and accurate addresses are used. In other words, Acxiom utilizes all the tools at its disposal to assure that the right consumer gets the offer intended for him or her. This saves our clients money and lessens the amount of unwanted mail in a consumer's mailbox.
    Consumer choice is important to the credit issuers and to Acxiom. Another service provided by the processor is to assist the issuer in honoring consumer preference. There are some consumers who do not want to receive pre-screened offers and who have opted out with the consumer reporting agencies. The issuer will also provide the processor with a list of consumers who have elected to opt out with them. Acxiom, as well as other processors who are members of the Direct Marketing Association, also apply the opt-out list maintained by the DMA. The issuer may also want to eliminate those consumers who are already customers or who have received recent offers.
    By narrowing the scope of pre-screened offers to only those consumers most likely to welcome such offers, our activities complement and are consistent with the intent and policies underlying the FCRA. We add value to the pre-screen process by helping credit issuers place welcomed offers in the correct mailboxes. Without our expertise, consumers would receive more unwelcomed mail through less accurate targeting. Without this system, the issuers would incur higher costs, which would be passed on to consumers.
    Let me sum up this way. While waiting in line a year or so ago at my polling place, I was asked by a poll worker who saw my name badge from Acxiom, ''What does Acxiom do?'' I explained that we assisted companies in marketing their services and products to consumers. She said, ''So you are the reason I get nine pieces of mail every day.'' I said, ''No ma'am. I am the reason you don't get 19.'' That is the essence of what we do, and I appreciate the opportunity to explain it here today.
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    Thank you.

    [The prepared statement of Tim Spainhour can be found on page 459 in the appendix.]

    Chairman BACHUS. Thank you.
    Mr. Anthony Rodriguez, National Consumer Law Center?


    Mr. ANTHONY RODRIGUEZ. Thank you, Mr. Chairman, Ranking Member Sanders and members of the subcommittee.
    My name is Anthony Rodriguez. I am a staff attorney at the National Consumer Law Center. We are a nonprofit organization that advocates on behalf of low-income consumers. We work with thousands of attorneys across the nation on consumer law issues, and we publish 12 legal treatises on consumer law, including one entitled Fair Credit Reporting.
    My comments today will address a number of issues, and I will list those issues now. First, we think the system is broken and needs to be fixed, and that Congress ought to enact high standards for accuracy, high standards for accountability when there are problems that arise as a result of those inaccuracies contained in credit reports, and failures by credit reporting companies and furnishers of information to conduct adequate investigations or reinvestigations when a consumer disputes the accuracy of information in their credit report.
    Second, the fact there is real harm caused by these inaccuracies and caused by failures to reinvestigate. The harm that is caused to consumers is real; it is emotional harm; it is economic harm; it is the aggravation of having to deal with inaccurate information that is not caused by them, but caused by furnishers and the credit reporting agencies that deal with this information and disseminate it.
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    Third is the lack of incentives that exist in the system to ensure accuracy, in particular the lack of incentives for furnishers to provide accurate information and the fact that the current law preempts them from any state laws that would provide them with an incentive to ensure accuracy. Whether it is a lawsuit, whether it is defamation, negligence, those are currently preempted unless they can show malice, and we think that the preemption ought to end.
    First, with respect to the broken system. I think it is not just anecdotal information about inaccuracies. There are various studies that have demonstrated that there are inaccuracies in our credit reporting system. U.S. PIRG has conducted several studies, at least six of them in the 1990s, and their last report in 1998 that showed that 29 percent of credit reports contain serious errors, not just minor errors dealing with incorrect addresses or incorrect names, but serious errors that included inaccurate delinquencies or accounts that had never belonged to the consumers, contained in their reports. These are serious errors that affect a consumer's ability and cause real harm to consumers when they seek to obtain a loan, seek to obtain educational opportunities, and other opportunities as well.
    Finally, with respect to the broken system, we look at the complaints to the FTC, the fact that over the past several years the primary complaint has been about credit reports. The leading complaint now is about identity theft. The FTC itself reported just last year that they received approximately 3,000 calls per week to their identity theft hotline, and that approximately 43 percent of all their complaints are identity theft-related. This is as reported by the FTC, and it is available on their Web site.
    Finally, the Consumer Federation of America conducted a study in 2002 that showed that, and they reviewed over 500,000 consumer files, and in that report, it reflected that for credit scores, there was a range of 50 points between the three credit bureaus. That range affects a consumer's ability to get credit. It affects whether or not they will be in the prime market for a loan or a sub-prime market for a loan. Therefore, it also affects whether the consumers affected by that information are subject to predatory lending practices as well.
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    This, in essence, demonstrates the fact that the system is broken and in need of repair, and the fact that the harm is real, lost educational opportunities, payment of higher finances when the information is inaccurate, difficulties and the fact that they have to pay higher rates as well, higher points, higher fees. All of this is a result of inaccurate information.
    In conclusion, what NCLC proposes is that there be high standards established by Congress, and that those high standards address accuracy; that they address accountability; and they address access to information, that consumers must have complete access to this information that is being disseminated about them.

    [The prepared statement of Anthony Rodriguez can be found on page 323 in the appendix.]

    Chairman BACHUS. Thank you.
    Mr. ANTHONY RODRIGUEZ. Thank you.
    Chairman BACHUS. Mr. Rodriguez, let me ask you a question that you really did not maybe deal with in your testimony. The Law Center deals with public accommodation cases, I would suppose. Is that correct?
    Mr. ANTHONY RODRIGUEZ. I am not sure what you mean by ''public accommodation.''
    Chairman BACHUS. Okay. ''Public accommodation'' is a whole field of law, not housing discrimination in public accommodation; like accommodation in a motel, hotel.
    Mr. ANTHONY RODRIGUEZ. Right, whether it is for disability-related or any civil rights-related public accommodation.
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    Chairman BACHUS. Okay. Do you practice that?
    Mr. ANTHONY RODRIGUEZ. We do not specifically practice that, but I would be happy to see if I can answer a question if you have one.
    Chairman BACHUS. How about housing discrimination?
    Mr. ANTHONY RODRIGUEZ. We address it in the context of writing a legal treatise on the cost of credit and predatory lending and discrimination that may occur as a result of predatory lending or discrimination in the context of lending.
    Chairman BACHUS. Okay. Well, it probably would not apply. What I am thinking of is there are national standards, or there is a national law in public accommodation and housing discrimination.
    Mr. ANTHONY RODRIGUEZ. For example, in the context of disability, we have the Americans With Disabilities Act.
    Chairman BACHUS. Right.
    Mr. ANTHONY RODRIGUEZ. That is a federal law that establishes standards with respect to access to public accommodations for people with disabilities. That is a floor. States have the right to enact stricter laws, and I practice in Massachusetts where they in fact have stricter laws that regulate all of the entities within the state in terms of their public accommodations.
    Chairman BACHUS. Okay, well, I think that is what I was asking. You practice public accommodation cases.
    Mr. ANTHONY RODRIGUEZ. That is right.
    Chairman BACHUS. I am not trying to trap you. You practice public accommodation, and as you are saying, there are state laws or federal laws.
    Mr. ANTHONY RODRIGUEZ. There are both.
    Chairman BACHUS. It is important to have a good national law, though, is it not? Or good national standards?
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    Mr. ANTHONY RODRIGUEZ. Yes, it is.
    Chairman BACHUS. Then if our present Act is broken, we ought to attempt to fix it, should we not?
    Mr. ANTHONY RODRIGUEZ. That is our recommendation, yes.
    Chairman BACHUS. Right. Okay. That is what I was asking. And that would be helpful, to try to have a good uniform national standard. I am not talking about preemption.
    Mr. ANTHONY RODRIGUEZ. Yes, it is important to have a uniform national standard that sets the floor as to what the standard should be.
    Chairman BACHUS. Wouldn't it sometimes be an advantage, particularly to people that may be less informed or less sophisticated in dealing with financial matters? You hear that the average American moves every six years. But I would think that many of your clients, of the groups you represent, actually move more often than that, do they not?
    Mr. ANTHONY RODRIGUEZ. I don't know the extent to which individuals move, but generally yes, that is accurate.
    I think it is also important to point out that national standards are fine, but they have to be real standards that have real teeth in them.
    Chairman BACHUS. Okay. I agree with you.
    Mr. ANTHONY RODRIGUEZ. And that is what we are concerned about, that the current system does not have the adequate protections for consumers to ensure accuracy, provide them with the necessary access to the information, and to hold both credit reporting agencies and furnishers accountable when problems arise.
    Chairman BACHUS. Okay.
    Mr. Sanders?
    Mr. SANDERS. Thank you, Mr. Chairman, and I thank all the guests for being with us today. We appreciate your being here. Let me pick up on a point that Mr. Rodriguez was making. I am looking at a statement from the Consumer Federation of America, which was the report that I think you were referring to. Essentially, they analyzed over 500,000 credit files and they found that in terms of the scores from the three major credit reporting agencies, that nearly one out of three files, 29 percent, had a score discrepancy between the three reporting agencies of 50 points or more. Did you understand what I was saying? Okay. Credit scores, in fact, ranged from 400 to 800, from rather poor to excellent.
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    Now, given that reality, do you believe, and I would like to start off with Mr. Ford and Ms. St. John, do you believe that all consumers should receive an annual free credit report which includes their credit score? Given the significant amount of discrepancies that exist right now, do the American consumers have a right to get free credit reports which include their credit scores?
    Mr. Ford?
    Mr. FORD. Thank you for the question, Mr. Sanders. Let me make sure that I understood what you said, because I may want to offer a correction. To my knowledge, the 500,000, that number you used, did not represent credit files or credit reports, but 500,000 credit scores.
    Mr. SANDERS. No, I am reading credit files, which is the word in front of me.
    Mr. FORD. Okay. My reading of the report indicates that it was credit scores, not credit files; that actually 51 credit files were used in drawing their conclusions.
    Mr. SANDERS. Well, again, I am reading from the Consumer Federation of America, Mr. Chairman, which analyzed 502,000 credit files, and F-I-L-E-S is the word that they have here.
    Mr. FORD. I understand what you are saying. We respectfully disagree on that. But the real question is whether consumers should be given a free disclosure of their credit score. Was that your question?
    Mr. SANDERS. Should they receive annually a free credit report which includes their credit scores, that is the question.
    Mr. FORD. Mr. Sanders, the Equifax position on that is that the current FCRA provides the best balance between consumer interests and business interests. We understand, and I am sure you know, that in cases where the need is significant, consumers already get a free report, when they are the subject of an adverse action, when they are a victim of identity theft.
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    Mr. SANDERS. Mr. Ford, I am hearing you say no to my question.
    Mr. FORD. You are hearing me say no.
    Mr. SANDERS. Okay. Ms. St. John?
    Ms. ST. JOHN. With respect to the question of should a credit score be included with the credit report, I think it is important to address specifically which score, and point out that there are different kinds of scores that are used in different circumstances. Having said that, the most widely used scores, as we indicated, we believe are the FICO scores, and it would be important to disclose the scores that most lenders use.
    With respect to the question about should it be a free credit report free score, it is a complicated issue. We feel that score disclosure is best done in the context either of a lending decision in the sense where a lender can have that conversation and explain the various different factors, or a complete service like Fair Isaac is offering that offers the opportunity for consumers to be able to ask questions.
    Mr. SANDERS. I don't mean to be rude, and I apologize to Mr. Ford. There is just not a lot of time.
    Mr. Rodriguez, what do you think?
    Mr. ANTHONY RODRIGUEZ. Yes, and it ought to include information that not only relates to the consumer, but also it should be whatever information is given to the creditors as well.
    Mr. SANDERS. It would seem to me, and I will open it up to anybody else who wants to comment, that if one credit bureau has me at 600 and one credit bureau has me at 400, and this is the information that is going out to people that I am going to do business with, I think I have a right to know how that information was ascertained, so that I can defend myself and perhaps pick apart some of the inaccuracies that might be out there.
    Mr. Spainhour?
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    Mr. WOHKITTEL. I would like to clarify something. The National Credit Reporting Association was an active participant in that study with the Consumer Federation of America. That was in fact over 500,000 files, no scores. That represents over 500,000 people.
    Mr. SANDERS. Mr. Ford, do you accept that?
    Mr. FORD. I will have to go back and look for myself, sir.
    Mr. SANDERS. Okay.
    Mr. FORD. May I make another comment, though?
    Mr. SANDERS. You sure can. Let him finish and we will get right back to you.
    Was that your Statement, sir?
    Mr. WOHKITTEL. That was my statement.
    Mr. SANDERS. So, Mr. Ford?
    Mr. FORD. We have been talking about whether the states should enact stronger laws, and I think in the case of California, for example, the credit score disclosure, as far as I know it is the only state that mandates disclosure of a score, there also a reasonable charge is allowed. So the issue of ''free'' is not on the table at least for California.
    Mr. SANDERS. Well, it is on the table for the United States Congress. I will bring it on the table if others won't, but it certainly is on the table here.
    Other comments on that issue? Yes, sir.
    Mr. WOHKITTEL. I agree under 609 as far as the repositories disclosure, along with an understanding that the consumer understands that that score fluctuates, because a lot of consumers think when you have a 720 FICO score they have a 720 FICO score for the next two or three months. As long as there is disclosure that that will fluctuate up and down, I think it is great.
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    Mr. SANDERS. Good, thank you. But in general, let me throw it out to anybody who wants to respond to this, we heard the consumer representative from the Federal Trade Commission earlier today saying he, none of us, understands how that score is determined; that this is kind of a trade secret. That disturbs me, and you probably have different criteria for the different companies.
    Is there any reason that that information as to how a company, the methodology, should not be made public, so that we would know that somebody from rural America is judged the same way from urban, black, white, woman, man? What is the objection to making that information public?
    Ms. St. John, did you want to comment?
    Ms. ST. JOHN. Yes, please. We actually have published the factors that go into the FICO scores for a number of years, and made that information available both in terms of the factors that are considered and even more importantly, what is not considered by the FICO scores. So a question that I know was brought up in the first panel this morning was a question of if race is included in the scoring system. It is absolutely not. Race, religion, ethnicity, national origin, gender are all prohibited bases. They are not considered.
    Mr. SANDERS. They are not considered at all.
    Ms. ST. JOHN. No. And that is information that we have published for a number of years in various different consumer booklets and made available since 2000 on the Web free of charge.
    Mr. SANDERS. Mr. X lives in a low-income area; Mr. Y lives in a fancy suburb. Are they treated exactly the same?
    Ms. ST. JOHN. Income is not a factor used in the FICO scores at all, so the FICO score would not see that. In addition to that, Fair Isaac specifically did look at a study, and this is part of our written testimony, to see if the scores varied in a high-income area versus a low-to moderate-income area, looking at application data. What we found was that the same Fair Isaac score indicated the same level of risk, regardless of whether someone was in a low-to moderate-income or in a high-income area.
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    Mr. SANDERS. Okay.
    Mr. FORD. I had one comment, if I may.
    Mr. SANDERS. Yes, sure.
    Mr. FORD. Equifax recognizes that there is a great deal of interest on the part of consumers to find out more about what is in their score, what it means. We do provide a product on our Web site that allows consumers not only to see what their FICO score is, but to understand the ingredients, you might say, much as a colleague told me the other day that Coca-Cola will tell you what the ingredients are, but they will not tell you the formula because that is proprietary. But we tell consumers, and FICO does as well, how their score relates on a national index and the system allows him to play a ''what if'' scenario, what if I change this, what affect does it have on my score. So it is not free, but it is part of our service.
    Mr. SANDERS. How much do you charge?
    Mr. FORD. $12.95. It is part of our effort to help educate consumers about what the credit score is and what impact certain actions are going to have on that score.
    Mr. SANDERS. Okay. Thank you.
    Chairman BACHUS. Thank you.
    That was like 10 minutes. What I am saying is, I think that is fine, because there are a limited number of us and these are serious issues. We might as well have some in-depth inquiries. So I am not complaining. I am actually affirming that we need to do this.
    Mr. Hensarling?
    Mr. HENSARLING. Mr. Chairman, in the interest of actually economizing on the time, I would simply like to yield my time back to you.
    Chairman BACHUS. Yes, I will have 10 minutes, right?
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    Mr. SANDERS. I don't know that that is going to economize.
    Chairman BACHUS. Thank you.
    I will start with Mr. Ford, and work my way across. We have heard a lot of people, a lot of testimony about how difficult it is to correct an error on a credit report. I know that is anecdotal evidence, you know, this person, that person. But we have a great interest in that. In general, how long does it take to resolve the average consumer dispute? Is there a time frame within which the vast majority of disputes are resolved?
    Mr. FORD. Mr. Chairman, the answer to that question is, by statute the credit reporting agencies must within five days of receiving the dispute from the consumer forward that to the credit grantor-provider, and we must correct the file or, depending upon the answer from the credit grantor as well, within 30 days.
    Chairman BACHUS. All right. I did hear earlier someone said that if they submit information to the credit bureaus, that the credit bureaus will actually say, well, we actually have to have that information corrected by the furnisher. I myself, I will give you some anecdotal, I received a collection letter and I called a credit bureau. It was actually from a credit bureau that had a debt collection service associated with it, and they tried to collect it. They actually in fact told me that I needed to call the hospital which had supplied them the information.
    As a practical matter, I can see a reason for that. But at the same time, I was calling them saying that I had a cancelled check, that I had paid that. I would think that there ought to be some provision where I could have sent them the cancelled check and then they could have called the hospital.
    Would you like to comment on that?
    Mr. FORD. I will.
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    Chairman BACHUS. You can see how that was frustrating.
    Mr. FORD. Absolutely. I would be frustrated, too, and I am frustrated often when I call places and things do not go the way that I want them to as quickly as I want them to. We are talking about an individual case versus an overall policy.
    Chairman BACHUS. I understand that.
    Mr. FORD. Let me say first that we believe that the overall system is designed to make the process straightforward and clear for consumers to take a look at their credit report, see if there is anything wrong, and go through a dispute or reinvestigation process. If a consumer provides Equifax with documentation, we will forward that documentation, with discussion, to the credit grantor who is responsible for that line or the collection agency, in this case, but to the credit grantor. We will help facilitate the resolution of that issue.
    Equifax is in the middle. We have a difficult time in the middle being the arbiter of truth. When a consumer provides us with adequate documentation, it makes our job a whole lot easier. But the fact remains, if they provided that documentation to the credit grantor, the credit grantor is going to change it as well.
    Chairman BACHUS. So the situation I ran into, where the agency told me ''we cannot actually accept something from you''?
    Mr. FORD. That is not the policy of Equifax. We would accept the documentation.
    Chairman BACHUS. Ms. St. John, we have heard complaints from some consumers that the current credit scoring system penalizes comparison shopping for financial products and services by lowering a consumer's credit score based on the number of inquiries that are made by potential creditors. For example, we have heard the scenario where a consumer seeking the lowest interest rate when refinancing a mortgage generates multiple inquiries by potential lenders, that that drives down their credit score, and that would result in driving up the cost of the mortgage.
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    Is that a legitimate criticism? And is it fair for consumers to lower their credit scores based on multiple inquiries?
    Ms. ST. JOHN. Fair Isaac has made a number of innovations and improvements in scoring over the years. One of the things we looked at several years ago was this question of rate shopping and inquiries, and ways to take that into account. The FICO scores in fact do take into account rate shopping. Any inquiries within the prior 30 days as of the time that the score is being calculated are actually not counted. In fact, we go back in time and look over a specific period of time, looking for multiple auto and mortgage inquiries and counting those as a single incidence.
    So we have done research to find ways to accommodate rate shopping and continue to look at number of inquiries as a predictive variable, but one that is calculated fairly along the lines of what you have indicated. That was a change that was made in the FICO scoring systems at all three credit reporting agencies a few years ago.
    Chairman BACHUS. If I comparison shop, and I would actually think that is what you would do if you were trying to get the lowest rate. I would call four or five mortgage lenders. There is a lot of refinancing right now. In fact, I have done that very thing. That would, in fact, or could under credit scoring lower my credit score today?
    Ms. ST. JOHN. Comparison shopping is actually taken into account when we calculate the number of inquiries. So multiple auto or mortgage inquiries within a very specific period of time would be counted as a single inquiry. If that was spread out over a longer period of time that someone was searching, it is possible it could be counted as more than one. In general, multiple inquiries indicate a higher degree of risk in some cases, not in all cases.
    Chairman BACHUS. Okay. Have you performed any validations of your proprietary credit score models? In other words, do you have any data that would suggest that the credit scores you assign to individuals are statistically valid and predictive of their consumer behavior?
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    Ms. ST. JOHN. Absolutely. The scoring formulas are tested extensively by Fair Isaac in terms of the data and holdout samples from which they are developed. Even more importantly, they are tested by those lenders on an ongoing basis, and by regulators who oversee the financial institutions.
    Chairman BACHUS. Okay. Mr. Le Febvre, your testimony is fairly critical of the role that credit scores play in the consumer credit system. Yet Federal Reserve Board Chairman Greenspan recently commented that the emergence, and I will quote; the emergence of credit scoring technologies which rely on the availability of information about the financial experiences of individuals has proven useful in expanding access to credit for us all, including for low-income populations and others who have traditionally had difficulty obtaining credit.
    Do you agree with Chairman Greenspan's assessment that credit scoring has in fact served to democratize credit availability and helped to open up opportunities to those who may have previously been shut out of the mainstream financial system?
    Mr. LE FEBVRE. In certain circumstances, I believe he is correct. Back years ago before scoring, a lot of low-to moderate-income minority groups would not. If you look at my example one, my issue with scoring is I base it on what we call ethnic tendencies. When you look at minority groups, they have different tendencies than the rest of the population.
    So what happens is, if you have a thin file and you have one error, versus the average white male with one error, the impact on a FICO score is tremendous. If you look at example one, what they had is a three-year credit history, a three-year mortgage payment history, but they made one $10 mispayment that was an error, and the average FICO score drop was 72 points, 121 points, and 178 points.
    Chairman BACHUS. Okay. I will tell you what, because of time, we will look at those and I appreciate it.
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    Mr. LE FEBVRE. Sure.
    Chairman BACHUS. We will re-read those things.
    I want to move to Mr. Ackerman and then Mr. Crowley, and then we will actually recess the hearing.
    Mr. Ackerman?
    Mr. ACKERMAN. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman, for this wonderful hearing. I ask unanimous consent that an opening statement, I just want to put it in the record, to save time, if that is okay.
    Chairman BACHUS. In fact, I will ask unanimous consent for all members.
    [The prepared statement of Hon. Gary L. Ackerman can be found on page 111 in the appendix.]
    Mr. ACKERMAN. Good. Thank you.
    Several quick points. Mr. Ford, you said that you used the Coca-Cola analogy of ''what is good for Coca-Cola is good for the finance industry.'' But I did want to call your attention, I just happen to have a bottle back here that is Diet Pepsi, if you would accept that as an equivalent.
    Mr. FORD. Being from Atlanta, I cannot do that.
    Mr. ACKERMAN. You are right. They do not put the recipe or the formula, but they do put the ingredients. But the law requires, and they all follow the law if you are an ingredient reader, when it says what it contains, which in this case is carbonated water, caramel color, aspartame, phosphoric acid, potassium benzoate, caffeine, citric acid, natural flavors.
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    The point is, they are listed in weighted order. It does not tell you how to make it, so you do not know the exact recipe, but you know that the prime weight in this thing that you are about to consume is carbonated water. If you are trying to cut back on salt, you know where it is relatively. If you are trying to cut back on sugar, you know there is none in here. It is aspartame, and whatever.
    So that is very, very helpful to the consumer, and that is why, as you say, Coca-Cola does it. So it would be helpful to the consumer to know what is the most important factor. If you listed it in order, that would certainly be of great benefit. Voila, the worst thing that happens is you create a better consumer. If you have better consumers, it is better for the industry. And if the consumer knows what is important, that is what the consumer hopefully will concentrate on. If you go to school and you know the important thing is getting good grades and staying out of trouble, that is what you concentrate on. If you knew that was not important, then you could be a real cut-up. That is why people are motivated, because you know what the rules are. If you do not tell consumers what the rules are, you should not penalize them for not being good at getting high scores in the game.
    I guess that is a comment.
    Chairman BACHUS. That was a Pepsi you were using to talk about Coca-Cola.
    Mr. ACKERMAN. Yes, but they all do the same. Every can you read has ingredients listed in the order of which is the most that makes up that product.
    Mr. FORD. Congressman, may I respond briefly to your comment?
    Mr. ACKERMAN. Yes.
    Mr. FORD. And I will likely defer to anybody else on the panel. I certainly will defer to anybody else on the panel who wants to add to it.
    I recognize what you are saying about the ingredients and listing them in order of importance. When I mentioned that Equifax provides score power at our Web site, we also provide the four most significant reasons accounting for the score. So in some respects, the analogy still holds true because we tell consumers what are the four primary reasons that caused the score.
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    Mr. ACKERMAN. What is in the report that would make the people responsible for aviation safety use that report in determining the profile of flyers and whether or not they might be arrested?
    Mr. FORD. I am not aware that they are, sir. I am not aware that they are using scores.
    Mr. ACKERMAN. They are. They have announced they are using the FICO scores to make determinations on flyers as to whether or not they are going to search them. Is it their neighborhood? You know, that is why I asked the ethnicity questions and those other profiling questions. I am not saying they are wrong or right, but the public has a right to know. We are getting very suspicious of what information you have in there and what weight it is given in the score, because they are just getting the scores and making determinations. So maybe you could get back to us on that.
    The other question that I raised before had to do with how long it takes to get something off of your credit report if it is outright wrong, and everybody agrees it is wrong, and there is no contention that it is wrong. The suggestion previously was that the law said 30 days. That is not so. Section 611 of the Fair Credit Reporting Act requires that the reporting agencies have to ''promptly,'' is the word, remove inaccurate information. What is ''promptly''? We know that you get it on with 24 hours after it is reported, usually. How do you get something off? In my case, and I will not mention any company because I won't embarrass anybody here, but it was six months to get it off, when the person who put it on sent me copies of the letters he kept sending every day, every week, ''please take this off; we made a mistake.''
    Mr. FORD. Is your question directed to me, sir?
    Mr. ACKERMAN. Yes.
    Mr. FORD. It is my understanding that the statute requires us to respond within 30 days.
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    Mr. ACKERMAN. That is not the question. You have to make a determination within 30 days, according to the statute. The person who put it on said it was wrong; shouldn't have put that on; it is identity theft or the wrong person with that name, my name; please take it off. The answer was: We take it off according to the cycle, which is going to be six months.
    This says ''promptly.'' ''Promptly'' is six months? That is as early as you could do it. Do we need to say that it has to be within a certain time frame? If you can put it on within 24 hours after it is reported to you, why does it take six months, 180-times 24 hours, to take something off? While I am trying to take advantage of a mortgage rate, which now no longer exists, or finance a house or a homebuyer for a first-time, or buy a car.
    Chairman BACHUS. Let me interrupt just a second. We have about 5 minutes on the floor.
    Mr. ACKERMAN. Yes. I am sorry.
    Chairman BACHUS. We can come back.
    Mr. ACKERMAN. Okay.
    Chairman BACHUS. But there are five votes on the floor.
    Mr. ACKERMAN. Five votes.
    Chairman BACHUS. I know Mr. Crowley has been here forever. I apologize to him.
    Mr. ACKERMAN. Why don't we come back?
    Chairman BACHUS. Okay. I am fine with coming back. If you could ask questions, then we will come back.
    Mr. ACKERMAN. I will yield my time to Mr. Crowley.
    Chairman BACHUS. Mr. Crowley?
    Mr. CROWLEY. Let me just ask quickly, and actually follow-up on what Gary said previously in terms of the FICO scores. It goes back to what I think Ms. Smith talked about on the previous panel in terms of the Black tax or judging one on their race, age, gender, and those issues going into determining whether or not one receives credit or not.
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    Let me ask you a question, Ms. St. John, in terms of the FICO scores. Do you share with regulators how or what goes into making up how you determine one's FICO scores?
    Ms. ST. JOHN. Yes. We have worked with both the lenders, who obviously have a keen interest in understanding how those scores are determined, and the regulators.
    Mr. CROWLEY. So the regulators know exactly what you are doing? There is some public entity that has an idea or concept of what you are using to determine those scores?
    Ms. ST. JOHN. In terms of the methodology.
    Mr. CROWLEY. Who are there to protect the interest of the public?
    Ms. ST. JOHN. They have an understanding of that.
    Mr. CROWLEY. No, no. What I am saying is, do they know what formula you are using? Not this is proprietary information are they aware of it; not necessarily the general public; but are the people's representatives in government aware of what the formula is?
    Ms. ST. JOHN. They are aware of all of the factors that go into the score. They have an understanding of the methodology in terms of how we determine those scores and how they are computed. With respect to the exact formulas that are in place, in some cases with insurance scores, those are disclosed in some cases with state insurance Commissioners. The concern that we have with respect to the exact formula is making sure that it is protected because if that information was generally available, it would be subject to gaming if there were potential illegal activity out there trying to unfairly influence the algorithms.
    Mr. CROWLEY. I don't really have enough time to go into more of it, because there are other questions I have as well. I mean, obviously Coca-Cola, someone in the federal government knows what it is in Coca-Cola and how it is put together, and I am sure there are people who work for Coca-Cola who retire, and I am sure there are spies out there asking Coca-Cola, ''how do you make it; how do you do it.''
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    My question is whether or not the interests of the people are represented in terms of the formula and how it is developed and how it is implemented. That is the question I had.
    I had more things, but I think we all have to go over and make our votes.
    Chairman BACHUS. Let me just say this, the chair notes that some members may have additional questions for the panel and they may wish to submit them in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions and for those witnesses to place their responses in the record.
    This hearing is adjourned.
    [Whereupon, at 4:50 p.m., the subcommittee was adjourned.]