[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
THE ROLE OF FCRA IN THE
CREDIT GRANTING PROCESS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 12, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-37
91-542 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North CHARLES A. GONZALEZ, Texas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota ARTUR DAVIS, Alabama
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
STEVEN C. LaTOURETTE, Ohio, Vice BERNARD SANDERS, Vermont
Chairman CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
SUE W. KELLY, New York DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio CHARLES A. GONZALEZ, Texas
JIM RYUN, Kansas PAUL E. KANJORSKI, Pennsylvania
WALTER B. JONES, Jr, North Carolina MAXINE WATERS, California
JUDY BIGGERT, Illinois DARLENE HOOLEY, Oregon
PATRICK J. TOOMEY, Pennsylvania JULIA CARSON, Indiana
VITO FOSSELLA, New York HAROLD E. FORD, Jr., Tennessee
MELISSA A. HART, Pennsylvania RUBEN HINOJOSA, Texas
SHELLEY MOORE CAPITO, West Virginia KEN LUCAS, Kentucky
PATRICK J. TIBERI, Ohio JOSEPH CROWLEY, New York
MARK R. KENNEDY, Minnesota STEVE ISRAEL, New York
TOM FEENEY, Florida MIKE ROSS, Arkansas
JEB HENSARLING, Texas CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
June 12, 2003................................................ 1
Appendix:
June 12, 2003................................................ 67
WITNESSES
Thursday, June 12, 2003
Cloutier, C.R., President, MidSouth National Bank, Lafayette, LA,
Chairman, Independent Community Bankers of America............. 47
Courson, John A., Chairman, Mortgage Bankers Association......... 8
Fishbein, Allen, General Counsel, Center for Community Change.... 15
Gambill, Harry, Editor Publisher, CEO, TransUnion LLC............ 18
Hendricks, Evan, Editor, Privacy Times........................... 53
Hildebrand, Scott, Vice President, Direct Marketing Services,
Capital One Financial Corporation.............................. 57
Loban, George B., Co-Chairman and President, FSF Financial
Corporation and First Federal FSB, Hutchinson, MN, on behalf of
America's Community Banker..................................... 49
Manning, Robert, Caroline Werner Gannett Professor of Humanities,
Rochester Institute of Technology.............................. 51
Moskowitz, David, General Counsel, Wells Fargo Home Mortgage..... 9
Pickel, A.W. III, President and CEO, Leader Mortgage Company,
Lenexa, KS, President-Elect, National Association of Mortgage
Brokers........................................................ 11
Plunkett, Travis B., Legislative Director, Consumer Federation of
America........................................................ 13
Vadala, Michael, President and CEO, The Summit Federal Credit
Union, on behalf of the National Association of Federal Credit
Unions......................................................... 45
Wong, Martin, General Counsel, Global Consumer Group, Citigroup,
Inc............................................................ 55
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 68
Gillmor, Hon. Paul E......................................... 71
Hinojosa, Hon. Ruben......................................... 72
Cloutier, C. R............................................... 73
Courson, John A.............................................. 79
Fishbein, Allen.............................................. 85
Gambill, Harry............................................... 94
Hendricks, Evan.............................................. 109
Hildebrand, Scott............................................ 122
Loban, George B.............................................. 132
Manning, Robert.............................................. 138
Moskowitz, David............................................. 167
Pickel, A.W. III............................................. 174
Plunkett, Travis B........................................... 182
Vadala, Michael.............................................. 197
Wong, Martin................................................. 207
Additional Material Submitted for the Record
Maloney, Hon. Carolyn:
``Cash-Outs Let Homeowners Share the Wealth,'' article, The
Washington Post, June 8, 2003.............................. 215
Courson, John A.:
Written response to questions from Hon. Ruben Hinojosa....... 219
Gambill, Harry:
Written response to questions from Hon. Ruben Hinojosa....... 222
Loban, George B:
Written response to questions from Hon. Ruben Hinojosa....... 233
Moskowitz, David:
Written response to questions from Hon. Ruben Hinojosa....... 235
Pickell, A.W. III:
Written response to questions from Hon. Ruben Hinojosa....... 239
Vadala, Michael:
Written response to questions from Hon. Ruben Hinojosa....... 244
Fannie Mae, prepared statement................................... 245
THE ROLE OF FCRA IN THE
CREDIT GRANTING PROCESS
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Thursday, June 12, 2003
U.S. House of Representatives,
Subcommittee on Financial Institutions and
Consumer Credit
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:11 a.m., in
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] presiding.
Present: Representatives Bachus, Royce, Lucas of Oklahoma,
Capito, Tiberi, Feeney, Hensarling, Brown-Waite, Barrett, Hart,
Renzi, Miller, Sanders, Maloney, Watt, Meeks, Gutierrez,
Waters, Velaquez, Hooley, Hinojosa, Lucas of Kentucky, Crowley,
Israel and Davis.
Chairman Bachus. [Presiding.] Good morning.
Our hearing today is another installment in a series of
hearings the subcommittee is holding with respect to the Fair
Credit Reporting Act. The provisions in FCRA that guarantee a
single national standard with respect to many of the FCRA
provisions are set to expire January the 1st of 2004. As I
Stated last week, my primary focus throughout this debate will
remain on providing consumers and the economy with the strong
protections and benefits of the law.
At our last hearing, we had more than twenty witnesses.
They described why and how FCRA is important to consumers, and
the economy as a whole. Today we will focus on the credit
granting process and the role of FCRA in facilitating the most
robust credit market in the world.
The process of applying for a personal loan, car loan or
even a credit card has become increasingly simple. The consumer
fills out a brief application, and within a matter of minutes,
the consumer will know whether he or she has qualified for
credit. The Chairman of the Federal Trade Commission, Timothy
Muris, has referred to this as the miracle of instant credit.
Even the mortgage underwriting process has become much less
complicated, as millions of Americans are demonstrating each
month.
Today, new homeowners can spend more time picking out new
curtains and wallpaper, because they spend less time on
mortgage paperwork and stress. It should be obvious that these
improvements in the credit-granting process benefit consumers.
Our witnesses today will provide us with the complete
picture of how FCRA operates as part of the credit-granting
process. Our first panel will focus on how lenders assist
millions of Americans in realizing the dream of home ownership.
Just as importantly, we will also learn how a credit reporting
agency, commonly known as a credit bureau, facilitates the
credit-granting process.
The first panel will also include witnesses representing
consumer groups. Our second panel will review the credit-
granting process in a broader scope. We will hear from
representatives of a credit union, smaller banks, a large bank
and a credit card issuer. Each will describe how the FCRA
affects their ability to make credit widely available to
American consumers.
We will hear from other witnesses describing some potential
pitfalls of the credit-granting process. I, for one, am
particularly interested in how the national standards
established by certain provisions of FCRA relate to the credit-
granting process. For example, I am interested in learning
whether FCRA has facilitated a national credit market and
whether having a national system is beneficial.
More importantly, if the national uniformity in place today
were replaced with a patchwork quilt of inconsistent State
laws, would consumers face a less convenient and more expensive
credit-granting process?
I want to thank Chairman Oxley, Ranking Member Frank and
Mr. Sanders for working with me on FCRA re-authorization. I
believe the bipartisan cooperation that we have had on this
important issue to date has been helpful in the debate.
Today, we have accommodated all four of the minority
witness requests.
I look forward to our witnesses' testimony on how the FCRA
facilitates the most advance credit underwriting process in the
world and how it benefits consumers.
The Chair now recognizes the ranking member of the
subcommittee, Mr. Sanders, for any opening statement he would
like to make.
[The prepared statement of Hon. Spencer Bachus can be found
on page 68 in the appendix.]
Mr. Sanders. Thank you very much, Mr. Chairman, for
convening this very important hearing. We have an excellent
panel of witnesses. And I look forward to hearing from them
all.
I will be running in and out because of other commitments.
But I will be listening attentively to what all of our
witnesses have to say.
What I have been hearing from the banking and credit card
industry is that consumers have never had it so good, that
consumers are reaping billions of dollars in savings due to
lower interest rates and that consumers have a much easier time
accessing credit.
It may be true that the credit card industry and the CEOs
have never had it so good. According to the FDIC, credit card
lenders and the banking industry reported record-breaking
profits in the first quarter of this year while revenue from
credit card fees have increased dramatically, from $7.3 billion
in 1994 to $23.9 billion in 2001.
So I think one of the areas, Mr. Chairman, that we are
going to want to take a hard look at is what is going on with
credit card fees, not just interest rates. And fees now account
for 31 percent of credit card industry income. And that is an
issue, I think, that needs a lot of study.
Is gaining access to credit a good thing? Well, obviously,
it is in many instances, but sometimes it is not. According to
Dr. Manning, credit card debt has skyrocketed, from
approximately $51 billion in 1980 to over $610 billion in 2002.
At the same time that consumers are bombarded by a record 5
billion credit card solicitations. Now, that is an incredible
number.
My understanding is, and somebody else can do the
arithmetic, that the American people receive 5 billion credit
card applications a year. And I suspect my son receives about
half of them. Not his father, but my son.
And the largest increase in credit card debt is among
consumers making $10,000 a year or less. Three-fourths of
college students use their student loans to pay their credit
card bills. And the average credit card debt per consumer has
risen from $10,000 in 1998 to $12,000 in 2002, which is not
good.
Mr. Chairman, there is another issue that I certainly am
going to be focusing on today, and I hope you will, as well.
And there were major stories in The New York Times, ABC World
News, Washington Post on what I consider to be a scam, and
nothing less than a scam. And that is, as part of the 5 billion
solicitations that take place each year, the credit card
companies say, Well, sign up with us, 3 percent interest rate.
Not a bad deal. Somebody signs up for 3 percent interest rate.
Suddenly, three months later, they are paying 25 percent, 29
percent interest rate. What happened?
Did they not pay their credit card payments on time? Were
they late? Did they default? The answer is in every instance,
they may well have paid what they owed the credit card on time,
but perhaps they borrowed some money, went to the bank as the
result of an illness in the family, borrowed some more money.
Maybe they were late paying an auto loan two months before.
Maybe 3 years ago they were late on their mortgage, and out of
nowhere their interest rates have skyrocketed.
This is a scam. It is causing severe problems for large
numbers of credit card borrowers in America, and it is
something that we want to address.
So, Mr. Chairman, this is an important day. We have got a
lot of excellent panelists. And I thank you very much for
working with us to bring those panelists here.
I would yield back the balance of my time.
Chairman Bachus. Thank you.
Are there other members who wish to make an opening
statement?
Ms. Hooley?
Oh, Mr. Gutierrez, I am sorry.
Mr. Gutierrez. Thank you, Mr. Chairman.
Well, I am happy to be here today to discuss the role of
FCRA in the credit-granting process. A major concern I have is
the increased use of the insurance scores and the lack of
information about these scores available to consumers. I think
we should research the increased use of credit-based insurance
scoring and excessive negative impact it is having on the
consumer's ability to purchase insurance coverage. Low credit
scores can prevent someone from being insured at all. In fact,
this has stirred complaints across the country, from consumers
who feel that the use of credit scoring for services unrelated
to credit is both discriminatory and invasive.
The mix of information is used to compile a credit score,
which includes much more than just the timeliness of payments.
The methodology includes items such as outstanding debt a
person has and the number and type of open credit lines. Given
the fact that currently 90 percent of property insurers use
credit scoring as a determining factor in their approval
process and as a means to derive rates, we have an obligation
to look at this matter carefully.
A major problem with the use of these scores is the lack of
consistency in how scores are established and unwillingness on
the part of insurers to reveal publicly how they determine
scores. Without a standard to fall back on and without
insurance companies being required to reveal how they tabulate
score, there is no way to make sure consumers are protected
from discrimination.
We should look at, Mr. Chairman, just how it is we have
credit scoring and insurance scoring, as one is tied to the
other.
I thank the chairman for the timeliness of the hearing and
I look forward to the testimony today.
Chairman Bachus. I thank you.
Go ahead, I am sorry.
Mr. Israel. Thank you, Mr. Chairman. I will be very brief.
One of the principal concerns that I have had with FCRA is,
in my view, the unfair and even unpatriotic practice of
harassing families of deployed military personnel for late
payments or scoring against someone who is sitting in a Humvee
in Iraq a late payment.
It seems fundamentally unfair to me that somebody who is
willing to lay his or her life on the line for our freedoms
today is going to be denied credit tomorrow because they could
not make a payment or were late making a payment while being
deployed in very dangerous parts of the world.
I have been focusing on this issue with some of my
colleagues. And I want to continue focusing on this issue and
hope that during questions and answers we can address that
critical and very important issue.
And I look forward to working with you, Mr. Chairman, on a
bipartisan basis to continue developing a response to what is a
very significant problem for our activated military personnel.
And I thank the chairman.
Chairman Bachus. Thank you, Mr. Israel.
Ms. Hooley, and then Ms. Waters?
Ms. Hooley. Thank you, Mr. Chairman.
Very briefly, I am glad we are having these hearings. Of
hearings, I think it is incredibly important. It is important
to consumers, as well as to our credit system and our economy.
I do think we have the best credit system in the world, and
hopefully we will take positive steps to ensure the supremacy
of our credit system, that it continues.
While I am happy having these hearings, I am becoming more
and more concerned about the lack of movement from the
administration. I know we had the undersecretary here earlier.
We have been told that they would have something ready in June.
I have now heard rumors, and I hope they are just rumors, that
we won't be ready until mid-July.
I hope we do not delay on this issue. I think, again, it is
an issue that we need to deal with, not only for our economy,
but for consumers. And I just think this attention deserves
attention from the White House, as much as this subcommittee
has provided for this issue.
I am looking forward to the rest of our hearings. And,
again, I would like to thank the ranking member and the
chairman for having these hearings. I think they are incredibly
important.
Thank you.
I yield back the remainder of my time.
Chairman Bachus. Thank you.
Gentlelady from California?
Ms. Waters. Well, thank you very much, Mr. Chairman.
I would like to thank both you and our ranking member,
Congressman Sanders, for this hearing today.
Today we have the opportunity to discuss one of the most
important issues facing this subcommittee all year, the ability
of consumers to have access to accurate credit information,
maintain their privacy and be given the ability to safely
conduct their business without having their identity stolen.
The Fair Credit Reporting Act was originally enacted by
Congress in 1970 to bring the consumer credit reporting
industry under Federal regulation and create certain
obligations and rights governing credit reporting transactions.
The 1996 amendments to the Fair Credit Reporting Act were
designed to address widespread problems experienced by
consumers who were going to buy credit are being charged too
much for inaccuracies in their credit reports.
We all understand the need to have easy access to credit
information and to have a uniform national standard. It is
equally important that the information be correct. According to
the Consumer Federation of America and the National Credit
Reporting Association, who conducted an exhaustive study of
over 500,000 credit reports, they found that nearly eight out
of 10 files, 78.4 percent, were missing a revolving account in
good standing.
In addition, one file out of three, 33.3 percent, was
missing a mortgage account that had never been late. And two
files out of three, 66.7 percent, were missing another type of
installment account that had never been paid late. This
includes mistaken identities, misapplied charges, uncorrected
errors, misleading information and variation between
information reported by the various credit repositories.
Part of the solution to strengthening consumer accuracy and
access to their credit report can be found in the State of
California. Consumer reporting agencies must disclose the names
and addresses of all sources of information used in the
consumer's report. California also requires consumer reporting
agencies to, with a reasonable degree of certainty, match at
least three categories of identifying information within the
consumer's file with the information provided by a retailer.
The categories of identifying information may include the
consumer's first and last name, month and date of birth,
driver's license number, place of employment, current
residence, previous residence or Social Security number. This
effectively reduces a successful attempt at identity theft, and
reduces the chance for mistaken identity.
Also in the California law a consumer has a right to
receive his or her credit score, the key factors and any
related information. Under new provisions, a consumer would be
able to have a security freeze placed on his or her credit
report by making a request in writing by certified mail with
the consumer credit reporting agency.
A security freeze prohibits the consumer reporting agency
from releasing the consumer's credit report, or any information
from it, without the expressed authorization of the consumer.
Effective July 1, 2003, upon receipt from a victim of identity
theft of a police report or a valid investigative report, a
consumer reporting agency must provide a victim of identity
theft with up to 12 copies of their credit report for the
consecutive 12 month period free of charge.
These examples create the opportunity for banks, credit
card companies, department stores and auto financing and other
furnishers who provide accurate information voluntarily to
complete a report, the full scope of information, increasing
the likelihood credit bureaus will not miss any negative
information. With strong consumer protections, Federal
preemption of States would not be necessary because Federal law
would be the doer rather than the seller.
I yield back the balance of my time.
Chairman Bachus. Are there any other opening statements?
Let's first introduce this panel. We have a very, I think,
esteemed group of panelists.
John Courson is president and CEO of Central Pacific
Mortgage Company, located in Folsom, California. Mr. Courson is
also chairman of the Mortgage Bankers Association of America.
Prior to that, he was the CEO of Westwood Mortgage Company and
president and COO of Fundamental Mortgage Company.
And I note one thing interesting about his resume is that
he served as president of the California and the Michigan
Mortgage Bankers Association, and as a director of the Texas
Mortgage Bankers Association, so quite a few positions in
different States.
David Moskowitz is senior vice president, secretary and
general counsel for Wells Fargo Home Mortgage. He has been in
that position since 1994. Prior to that, he was with Prudential
Home Mortgage Company, where he was associate general counsel,
and Perpetual Mortgage Company in McLean, Virginia, prior to
that as general counsel. Educated at Union College in
Schenectady, New York, he has a law degree from Case Western,
and admitted to several different State bar associations.
A.W. Pickel III, is currently president and CEO of Leader
Mortgage Company, a mortgage banker broker company
headquartered in Lenexa, Kansas. He is president-elect of the
National Association of Mortgage Brokers. He graduated from the
University of Illinois, Urbana-Champaign, in accounting. And as
I mentioned to him earlier, he then went to work for an
international Christian organization known as the Navigators,
where he worked with college students at major universities.
And I can personally tell you that the Navigators have been
very meaningful to me.
And I know several of folks who do the same thing you do,
very dedicated people. I commend you for that work. A long list
of different awards, too numerous, really, to mention. But we
welcome you to our hearing today.
Travis Plunkett, he serves as the Consumer Federation of
America's chief liaison to members of Congress, to Federal
regulators and to agency administrators. Consumer Federation of
America is a non-profit association of over 300 organizations
that advances the consumers' interests through advocacy and
education, has a combined membership of 50 million Americans.
Its primary focus is on credit reporting, bankruptcy, credit
counseling, consumer privacy and insurance. Frequently
interviewed by national and news media, written a number of
consumer guides. He holds a Bachelor of Arts from the great
University of Denver. I noted that you served in the U.S. Army
intelligence and security commands. So Mr. Israel, some of his
questions might also be something you could shed light on.
Allen Fishbein, general counsel of the Center for Community
Change, he specializes in the area of expanding the
availability of responsible lending and banking services for
the underserved. He testified before our committee before.
And actually, Mr. Fishbein, we are going to have a hearing,
I guess, later in the month on the underserved and how to
better reach them with banking services, something that I am
sure you could assist us with.
Prior to joining the Center, he was senior adviser for
government-sponsored enterprise oversight, Fannie Mae and
Freddie Mac. He supervised the department rule-making process
at HUD for new affordable housing goals for the two
enterprises. He has written several books. Past member of the
Federal Reserve Board's Consumer Advisory Council. And I close
by saying that he has been honored by the District of Columbia
Bar as Consumer Lawyer of the Year with a degree from Antioch
School of Law, here in Washington, D.C.
Mr. Gambill, present chief executive officer of TransUnion,
joined TransUnion in 1985, rose, obviously, up through the
ranks to the top position. Prior to joining TransUnion, Mr.
Gambill was regional credit manager for Rhodes Furniture in
Atlanta, Georgia, and also held management positions at Belth
Department stores and Sears Roebuck.
So, you can obviously give us a good view, from your
background both from a credit reporting agency and also from a
furnisher of information to a Credit Bureau.
He has a Bachelor of Science degree in Business
Administration from Arkansas State, and also served in the U.S.
Army for six years, and, as I was, he was an enlisted man who
rose up through the ranks. That is why I have such fear of
generals, even today.
[Laughter.]
He became a staff sergeant, which is a very respected
position.
An Arkansas native, currently resides in Aurora, Illinois,
with your wife, and you have two children.
With that, we will start with Mr. Courson, chairman of the
Mortgage Bankers Association, and go just in order.
Thank you.
STATEMENT OF JOHN A. COURSON, CHAIRMAN, MORTGAGE BANKERS'
ASSOCIATION
Mr. Courson. Good morning, Mr. Chairman, and members of the
subcommittee.
I want to thank you for inviting MBA to participate in this
very important discussion. I am proud to testify this month, in
June, which has been designated by the president as
Homeownership Month. I applaud the subcommittee for holding
these hearings and giving the mortgage finance industry an
opportunity to share with you the great success that our nation
and its homeowners have experienced as a result of having the
American dream met, due in part, to the Fair Credit Reporting
Act.
Let me share with you, if I may for just a moment, some of
that success. As you know, home ownership brings good things to
our citizens and to our economy. In the last 2 years, over $100
billion has been put back into the economy from refinancing of
real eState. The real eState sector employs 1.36 million, of
which approximately about 500,000 come from our industry, the
mortgage lending industry.
FCRA plays an integral role in this success by creating a
structure that produces reliable consumer information used to
lower the cost of home ownership, offers the dream of home
ownership to underserved markets and produces innovative
mortgage products.
I am here today to strongly recommend that you reauthorize
the preemptions contained in FCRA in their current form and
maintain the national standards, uniformity and protections.
Let me emphasize, Mr. Chairman, FCRA has national
standards, uniformity and protections, all important for
consumers and the mortgage industry because it gives rise to
the following benefits.
It enables Americans to move to new States and purchase
homes with relative ease. It lowers the cost of credit to
consumers, as lenders compete for customers on a national
level. It speeds the consumer's access to credit, as mortgage
lenders underwrite loans assisted by automated systems that
provide a timely response to the consumer's mortgage
application. And it permits lenders to evaluate risks more
accurately through the analysis of consumer credit data,
thereby enabling mortgage lenders to extend credit to Americans
who, under traditional evaluation models, were considered too
great of a risk.
And it allows for greater innovation in mortgage products,
as lenders take a successful product in one State and implement
it in another State, allowing those consumers to also benefit.
Seven important Federal preemptions included in FCRA's 1996
amendments provide standards of accuracy, consistency and
uniformity among the users of consumer information: those who
report consumer information and credit bureaus that collect and
distribute information. The preemptions, which Congress
included on an experimental basis, also provide for consumer
protections, to prevent the misuse and inaccurate reporting of
consumer information.
The mortgage lending industry believes FCRA and the
preemptions within it have proven to be a financial success for
consumers and the economy, and should be extended and made
permanent.
You know, the United States, Mr. Chairman, has the best
mortgage finance system in the world. Should Congress decide to
dismantle part of this well-operating structure, it will
negatively affect the availability and cost of mortgage
products in this country. The following are just a few
examples.
The cost of credit for consumers will increase as lenders
who currently operate under national standards face higher
costs to discover and comply with the myriad of State laws.
Consumers will have fewer lenders among which to choose as
varying non-uniform State laws give rise to regional barriers
that will make it difficult to operate nationally.
Innovation in mortgage products will slow, as non-uniform
standards set forth in disparate State laws decrease the amount
of available consumer information, which is necessary for
advancements to better serve the needs of our borrowers.
Further, consumers will face a patchwork of protections with
inconsistent and fragmented State laws.
The housing market is serving consumers, the mortgage
lending industry and the economy well. It is important to note
that housing has been a tremendous support to a weak economy in
recent years. Failing to reauthorize the standards, uniformity
and protections of FCRA would have severe adverse effects on
serving our customers and your constituents.
I thank you for inviting the Mortgage Bankers Association
to testify, and look forward to answering your questions.
[The prepared statement of John A. Courson can be found on
page 79 in the appendix.]
Chairman Bachus. Thank you.
Mr. Moskowitz?
STATEMENT OF DAVID MOSKOWITZ, GENERAL COUNSEL, WELLS FARGO HOME
MORTGAGE
Mr. Moskowitz. Thank you, Chairman Bachus, Ranking Member
Sanders and members of the subcommittee.
My name is David Moskowitz, and I am general counsel for
Wells Fargo Home Mortgage, headquartered in Des Moines, Iowa.
Wells Fargo, our parent company, is a diversified financial
services company offering mortgage, securities, insurance, real
eState services, online banking, institutional and retail
banking products under the Wells Fargo brand through a number
of separately incorporated affiliates to 15 million customers
nationwide. Wells Fargo's headquarters is in San Francisco. The
company has 130,000 employees, has mortgage offices nationwide,
has a retail banking presence in 23 States.
I thank you for the invitation to testify today. I would
like to share with you some of Wells Fargo Home Mortgage's
experiences in providing products and services within the
framework established by the Fair Credit Reporting Act.
Wells Fargo Home Mortgage works in concert with its other
Wells Fargo business affiliates in providing financial service
products to its customers. Marketplace experience shows that
consumers expect that the financial service companies they do
business with to know about their accounts, to respond quickly
to their questions and to advise them about products and
services that will help them reach their financial goals.
The service consumers expect requires that Wells Fargo have
integrated information systems to give consumers what they
want, when, where and how they want it. Subject to the Fair
Credit Reporting Act, Wells Fargo shares customer information
internally to meet these goals.
Providing a new mortgage, refinancing an existing mortgage
and meeting our contractual servicing requirements for
investors and our customers requires information about their
financial affairs. Applying inappropriate restrictions on
transfers of information among affiliates would impede customer
service.
The 1996 amendments to the Fair Credit Reporting Act
recognized the value to customers of the ability to transfer
information among affiliates. This ability is wholly consistent
with consumers' expectations that their questions will be
answered and their needs will be met with a single call or a
single e-mail message, whether their financial products are
provided by a single company or several companies in the same
affiliated group. To put it another way, customers do not care
whether for technical, regulatory or management reasons, Wells
Fargo chooses to organize itself into a particular series of
affiliates of a holding company or subsidiaries of one bank.
What customers do care about is the seamless delivery of
the products Wells Fargo offers, regardless of how we choose to
distribute them.
In Wells Fargo's view, it is consumer expectations and
needs that should shape the public policy that regulates
information use, not legal structure. Because of legal
requirements that prohibited or restricted bank branching,
Wells Fargo, at one time, owned numerous separately
incorporated banks. The Riegle-Neal Act of 1994 allowed bank
holding companies to consolidate banks into as few as a single
charter. Today, for business reasons, rather than legal
reasons, Wells Fargo owns 28 separately chartered banks, but
the number of separate banks that a holding company chooses to
have should not affect public policy relating to information
use.
If a bank holding company conducts its banking business in
a single bank entity, that bank would have all the information
about a customer who had deposits, a mortgage, a credit card, a
home equity loan from that bank. As a single corporate entity,
it could use this information without restriction to serve its
customer.
If, on the other hand, the bank holding company chooses to
conduct its mortgage, credit card and home equity loan
businesses in three separately incorporated banks, and the law
restricted the sharing of information among affiliates, a
customer who supplied the same information for the same
products at three affiliated institutions, instead of a single
institution, would not receive the same level of service from
its financial services company.
To use customer information to provide the same level of
service that could be provided by a single entity with the same
information about the same customer, a holding company like
Wells Fargo that provides services through multiple banks and
non-bank charters would have to consolidate its operation into
as few charters as legally possible.
Because of the uncertainties of the outcome of the FCRA
debate, institutions like Wells Fargo will likely change their
corporate structures to reduce the number of separate entities,
rather than risk restrictions on information sharing among
affiliates.
It is our view that corporate structure should not be a
factor in setting public policy regarding information use. The
touchstone, instead, should be consumer expectation. This is
especially critical to our mortgage business.
Since passage of the 1996 amendment to the Fair Credit
Reporting Act, mortgage servicing has become more efficient.
Wells Fargo customers have more channels through which they can
apply for a mortgage and get assistance or conduct transactions
related to a mortgage, as well as a complete array of financial
products offered by Wells Fargo. With affiliate transfers and
use of customer information, mortgage customers can make a
mortgage payment at their local bank branch, obtain balances,
get consolidated statements and get the support of 24-hour call
centers that serve an entire affiliated enterprise.
It is our goal to provide seamless service and product
advice to customers no matter which member of the Wells Fargo
family of companies provide the particular product or services.
With the FCRA framework, companies can do a better job of
evaluating credit and market risks. This translates into better
and lower cost service to customers. Wells Fargo can offer a
variety of mortgage service and products, such as quick turn-
around on refinancing, discounts on closing costs for signing
up with Wells Fargo's product line, referrals for new
homeowners and alternative financing options for customers.
Finally, Wells Fargo believes the current uniform national
standard for information use, as provided by the 1996
amendments to the FCRA, is vital, and asks that this Congress
provide clarity and stability by removing the sunset provisions
that affect affiliate sharing and other segments of credit
granting.
Congress should also address identity theft and should
grant authority to bank regulators to set new national
standards for notices about information use to customers. The
problem of identity theft and complicated notices about
information use are frustrating to both customers and financial
service providers. The availability of financial services, such
as mortgages, for our customers and the flow of information
required to make those services available, do not stop at State
borders or corporate structures.
Thank you. And I would be happy to answer any questions
that you, Chairman Bachus, or the subcommittee may have.
[The prepared statement of David Moskowitz can be found on
page 167 in the appendix.]
Chairman Bachus. Thank you, Mr. Moskowitz.
Mr. Pickel?
STATEMENT OF A.W. PICKEL, III, PRESIDENT AND CEO, LEADER
MORTGAGE COMPANY, LENEXA, KS, PRESIDENT-ELECT, NATIONAL
ASSOCIATION OF MORTGAGE BANKERS
Mr. Pickel. Chairman Bachus, Congressman Sanders, and
members of the committee, I am A.W. Pickel, president-elect of
the National Association of Mortgage Brokers, and president of
Leader Mortgage Company in Lenexa, Kansas.
I appreciate the opportunity to present NAMB's views on the
Fair Credit Reporting Act. NAMB is the nation's largest
organization exclusively representing the interests of the
mortgage brokerage industry, and has more than 14,000 members.
Thank you, really. I appreciate it, for having us here.
I want to commend this committee for holding a series of
hearings on an issue that is vital to our economy and to
consumers. FCRA, as amended, provides a carefully constructed
balance, which creates uniform national standards that have
increased the effectiveness of consumer report information.
This national uniform standard impacts nearly every
business sector that makes consumer credit-related decisions.
It is also essential to the operation of our current mortgage
industry. As it is estimated that mortgage brokers originate
more than 60 percent of all the residential mortgages, NAMB is
very concerned of the impact changes to FCRA may have on the
mortgage marketplace and the economy, in general.
FCRA has facilitated the information that is provided by
consumer reporting agencies, which is mandatory to make sound
mortgage lending decisions and to help evaluate risk. This
information is essential in order for the mortgage industry to
provide consumers with access to credit and reasonably priced
products. A carefully constructed balance in FCRA creates the
ability to make quick decisions on offers of credit that is
critical to both consumers and mortgage originators. It also
creates competition, which helps to lower credit costs for
consumers.
NAMB believes the extension of the preemption provisions
are necessary to preserve a national uniform standard, some of
which I will address today. If Congress allows the preemption
provisions in FCRA to expire, the outcome of such inaction will
increase risks and costs for mortgage originators, and as such,
will have a detrimental impact on a consumer's access to credit
and availability of mortgage products.
Applying for a mortgage was a very time-consuming process
before the carefully constructed balance of FCRA was created.
Processing a mortgage application required personal contacts
with references, other creditors and contact with individuals
who had knowledge of a consumer's personal finance history.
Now, consumers can gain access to credit virtually
instantaneously on a wide array of credit products.
The information contained in a consumer report is an
essential component to the mortgage process. It dictates the
terms and rates for a consumer's mortgage. If States are
allowed to enact inconsistent laws regarding what information
can and cannot be contained in a consumer report, the ability
for mortgage originators to determine a consumer's credit risk
will be compromised.
Accurate reports benefit not only the consumer, but also
the mortgage broker and the lender, who are able to make more
rapid and accurate credit decisions utilizing these scoring
models when underwriting a mortgage loan. The lack of a
national standard on the contents of a consumer report would
add a level of uncertainty in the risk profile of the
consumer's credit history. As a result, the price of credit
will increase for all consumers, and access to credit will be
reduced, which could result in a reduction in our country's
historically high homeownership rate, something that NAMB is
very proud of.
Uniform adverse action notices provide a consumer with
consistent information regardless of their location. If this
preemption provision expires, an adverse action notice may
differ from State to State. This could result in confusion to
consumers and a significant increase in operational costs to
the industry, from which consumers will suffer the
consequences.
Mortgage brokers generally do not furnish information to
consumer reporting agencies. However, the lenders with which
mortgage brokers transact business and many other industry
sectors do furnish information to consumer reporting agencies.
If States are allowed to enact inconsistent laws regarding
furnisher requirements, furnishers may decide that compliance
with different State laws is too burdensome and may choose not
to submit the information at all, making consumer reports both
inaccurate and unreliable.
Finally, we also think that the procedures for disputing
inaccurate information need to maintain uniformity.
Inconsistent investigation time restrictions would lead to a
cursory and inaccurate investigation to the detriment of
consumers. Mortgage brokers often work with consumers to help
them to review and correctly dispute items on their credit
report, when necessary to obtain the most rapid modifications
necessary to obtain the best mortgage for them. Cursory and
inaccurate investigations of credit disputes will frustrate
this working relationship between a mortgage broker and their
consumer.
NAMB believes it is important that Congress maintain our
current uniform credit system, which has provided the economy
with strong benefits and protections and has enabled millions
of consumers to obtain the dream of home ownership.
Thank you very much for the opportunity to testify here
today.
[The prepared statement of A.W. Pickel can be found on page
174 in the appendix.]
Chairman Bachus. Thank you, Mr. Pickel.
Mr. Plunkett, we welcome your testimony.
STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Good morning, Chairman and Ranking Member
Sanders.
My name is Travis Plunkett. I am the legislative director
of the Consumer Federation of America. Thank you very much for
the opportunity to offer our comments on the important issue of
the role of the Fair Credit Reporting Act in the granting of
mortgage loans.
I have three main points I will touch on today.
First, accuracy and completeness of information about
consumers' credit history is the very foundation on which the
entire credit reporting system is built. And that foundation is
shaky. We agree that there have been positive effects to the
automation of credit reporting over the last 15 years, but
broad and credible evidence demonstrates that the status quo
has led to serious problems with credit reporting accuracy and
completeness.
Second point: The furnishers of credit reporting data--
creditors, collection agencies and others--are responsible for
many accuracy and completeness problems. Provisions of the Fair
Credit Reporting Act to require furnisher accountability need
to be improved.
Third point, the dispute resolution process under the Fair
Credit Reporting Act, which is supposed to help consumers
resolve problems with credit reporting accuracy, is flawed and
is becoming obsolete. It needs to be overhauled and modernized.
Now, let me touch on each of these points briefly and tell
you that there is a lot of detail and specific recommendations
in my written testimony on each point.
On accuracy, we agree with Howard Beals, the director of
the Bureau of Consumer Protection at the Federal Trade
Commission, in speaking about credit scoring and the trend
towards credit scoring. He said, ``Even small differences in a
consumer's credit score can influence the cost or other terms
of the credit offer, or even make the difference between
getting approved or denied. Accuracy of the information
underlying the score calculation is paramount.''
A study released by the Consumer Federation of America and
the National Credit Reporting Association has found dramatic
and costly discrepancies in credit scores in underlying credit
information among credit repositories. We looked at half a
million actual mortgage consumers seeking mortgage credit.
Researchers then closely examined the files of consumers with
scores near the 620 cutoff; this is the commonly known dividing
line between prime lower-cost mortgage credit and sub-prime
higher-cost credit.
The study found wide variations in credit scores for a
given consumer among the three national credit repositories.
The average discrepancy for all consumers was 41 points. The
credit scores for nearly one in three consumers varied by 50
points or more. In credit scores for one in 25 varied by 100
points or more. This means that roughly 8 million consumers,
one in five of those who are on this borderline, are likely to
be misclassified as sub-prime upon applying for a mortgage.
A similar number of consumers are likely to benefit from
errors in their report. However, I don't think anybody in this
room would argue that individual consumers benefit from system-
wide averages like this. And I don't think anybody in the room
would agree that consumers should have to cope with a credit
reporting system that functions like a lottery.
Falling below the cutoff score for prime mortgage can lead
to a complete denial of credit or be extremely costly. We threw
out an example in our written testimony. The upshot is we
compare an A-loan, less than ideal credit, to an A loan. The
consumer at A would pay $124,000 more in interest payments over
the life of a 30-year fixed $150,000 mortgage. There is a
detailed analysis in the testimony of this report.
Let me add that the Federal Reserve has come to similar
completions about one aspect of the problem that we highlight,
and that is the completeness of reporting by creditors. The
primary area of concern that they identify with data integrity
was that of missing credit limits. This can have a major
detrimental effect on consumers' credit score and on their
credit rating overall.
The Controller of the Currency has also raised concerns
about complete reporting, as has the Federal Financial
Institutions Examination Counsel, which brings me to closing
and to highlight the second and third issues that I mentioned
at the top.
If one of the major problems is inaccurate and incomplete
reporting by the furnishers, then we need to go and look at
many of the recommendations that have been thrown out by CFA
and others to increase complete reporting by those furnishers.
We suggest if they use the system, voluntary approach, if they
use the credit reporting system, they need to report
everything.
Finally, we need to look at our dispute resolution process.
It doesn't allow consumers access to their credit score in most
cases. Most States don't allow it and FICRA doesn't allow it,
and it doesn't allow consumers to get quick, timely access to
their report to correct errors and get that good credit offer,
that good mortgage loan or that other offer of credit that they
would like to get. It is a serious problem, and we need to look
at modernizing the dispute resolution process.
Thank you.
[The prepared statement of Travis B. Plunkett can be found
on page 182 in the appendix.]
Chairman Bachus. Thank you, Mr. Plunkett.
Mr. Fishbein?
STATEMENT OF ALLEN FISHBEIN, GENERAL COUNSEL, CENTER FOR
COMMUNITY CHANGE
Mr. Fishbein. Thank you, Mr. Chairman, and Mr. Sanders and
members of the subcommittee.
My name is Allen Fishbein, and I am general counsel of the
Center for Community Change. I want to thank you for the
opportunity to testify today and share my thoughts at this
hearing on the role of FCRA and the credit-granting process.
My written testimony focuses on a series of issues
pertaining to the impact of credit scoring and automated
underwriting in providing fair access to mortgage credit, which
we think bears on the issues that are the concern of this
hearing.
In 1969, during the debate on the original FCRA, Senator
Proxmire spoke of the congressional intent behind the law,
saying that the aim of FCRA is to see that the credit report
system serves the consumer as well as the industry. ``The
consumer has a right to information which is accurate. He has a
right to correct inaccurate or misleading information,'' said
Senator Proxmire. ``And he has the right to know when
inaccurate information is entered into his file. The Fair
Credit Reporting Act seeks to secure these rights.''
Referring to this legislative intent, last year, William
Lund with Maine's Office of Consumer Regulation Stated, ``Just
as the FCRA demystified the storage and the use of credit
information, credit scoring is now serving to re-mystify that
process.'' And we share the regulator's concern.
The rapid growth in the use of credit scoring and related
technologies have worked to improve access to credit for many,
particularly in mortgage lending. However, it also has added an
additional veil of secrecy over the credit decision-making
process. This veil has created uncertainty and suspicions among
consumers about the role that these scoring technologies play
as gatekeepers for obtaining credit. Lifting this veil,
particularly for the mortgage lending arena, is long overdue,
but is likely to require congressional action to achieve.
Let me highlight the main points that are in my written
testimony in the time I have this morning, let me say that
there have been great changes in consumer credit reporting and
consumer credit decisions since FCRA was originally enacted,
and even since the 1996 amendments. Computerized credit scores
are contained in huge national databases today. Credit scoring
and application scoring technologies play significant roles in
a vast majority of the credit-granting decisions that are made.
Perhaps no area has changed greater than in mortgage
lending. In less than a decade, mortgage loaning has gone from
a largely manual decision-making process to an automated one.
Predictably, fans of credit scoring say that it represents an
improvement over manual underwriting, because it is more
objective, it has a greater predictive value for judging which
than does manual underwriting. The efficiencies that scoring
provides permits expanded underwriting and has contributed to
increases to homeownership overall and for increases in
homeownership for the underserved.
They also say that scoring is fair and unbiased, but only
the developers of these scoring systems know this for sure.
Their confidence in the fairness of these systems must be
accepted today as an article of faith, because these systems
are very closely held and proprietary. Former President Reagan
once said in another context, ``Trust, but verify.'' And that
is our position about assessing the accuracy and fairness of
the scoring models that are used today.
Concerns about the fairness and accuracy have been raised
almost since these new systems have gone into effect in the
mortgage area, and the stakes are higher than ever before. No
longer is it just about access to credit, meaning affecting
people at the margins, but the advent of risk-based pricing,
which is being used more and more in mortgage lending and other
areas of consumer credit, means that scoring also affects how
much credit costs and the terms and conditions that are
extended. In other words, it affects virtually every consumer.
Consumers that do not meet the minimum cutoffs that credit
scoring assigns are relegated to the higher priced sub-prime
market.
The concerns about the scoring models in place are several
fold. Research, as Travis and others have suggested, indicate
significant inaccuracies and inconsistencies in the underlying
credit reports. This represents a double-whammy, in effect. If
the reports are inaccurate, then it is likely the credit
scoring models are, as well. The CFA study indicate that one
out of five of households are at risk of being misclassified,
as a result of these inaccuracies, into the sub-prime market.
But regulators have also voiced concerns that certain
creditors may be manipulating credit reporting systems in an
effort to hang on to what they view as their most favorable
customers by not reporting favorable information about their
coustomers.
There are also a host of methodological issues, including
under representations of key demographic groups, such as low-
income people and minorities, and important omitted variables
from the credit scoring methodologies, such as non-traditional
factors that may pertain to predictiveness: counting rent
payments and utility payments, as examples.
And when pressed, all the purveyors of credit score models
will acknowledge that minorities, African-Americans and
Hispanics, are disproportionately adversely affected by the
methodologies today in place. In other words, on average,
minorities fare worse under credit-scoring methodologies than
do white households.
This doesn't necessarily mean they are discriminatory. But
given the legacy of lending discrimination and housing
discrimination in this country, adverse impacts should be
treated very seriously. And it should trigger very strict
scrutiny, such as an effects test analysis, which would ensure
that the factors and their weight are being used correctly in
the models; second, that there is a business necessity for
using these factors; and third, that less discriminatory
approaches that would achieve the same ends are not available.
But despite these legitimate concerns, independent review
and analysis has not been conducted to ensure the validity and
the fairness of the scoring systems that are in common usage
today. We urge, therefore, the establishment of an effective
and meaningful oversight process, which would evaluate and
regularly monitor the statistical scoring models that are used.
We think Federal agencies such as the FTC and HUD can be
used for these purposes.
In conclusion, let me say such steps we believe are
necessary to lift the veil of secrecy that exists. These steps
are entirely consistent with the objectives of FCRA to ensure
accurate credit reporting and are necessary in order to achieve
full consumer confidence in credit decisions that are being
made today.
Thank you, Mr. Chairman.
[The prepared statement of Allen Fishbein can be found on
page 85 in the appendix.]
Chairman Bachus. Thank you, Mr. Fishbein.
Mr. Gambill, before you testify, I want to say this to all
members.
Mr. Gambill is CEO of one of the credit bureaus or credit
reporting agencies.
And I want to commend you for testifying. Often, no matter
where the fault may lie, it is directed at the credit reporting
agency. You sometimes find yourself the whipping boy, even
though someone may have supplied you with bad information or
because someone is receiving a credit score that they don't
like. So I think most of the members of this panel are
knowledgeable of that fact and will bear that in mind during
the questioning.
We welcome your testimony. And we also, I think that all
the members of this panel realize the problems in the system,
that we all work together. But I think we would all agree,
including consumer groups, industry, et cetera, that credit
reporting agencies are a valuable component of our lending and
borrowing process and our economy, and perform a very
fundamental role. So I thank you and welcome your testimony.
STATEMENT OF HARRY GAMBILL, CEO, TRANSUNION LLC
Mr. Gambill. Thank you very much, Chairman Bachus.
And thank you, Congressman Sanders, and members of the
subcommittee for inviting me to be here today.
As you know, TransUnion is one of the nation's largest
consumer credit information companies. We are a facilitator of
commerce that provides credit granters with information and
analytic tools that enable them to better understand their
customers and make more informed decisions. And we provide
consumers with choice, access, reliability and the promise of a
robust and more stable economy. All of this relies on Federal
preemption. Federal preemption brings uniformity to the risk
management process that is inherent in the granting of credit.
Uniformity allows lenders to make fast, reliable business
decisions on a national basis. Uniformity means consumers are
treated equally and presented with a constantly evolving array
of financial products and services uniquely tailored to meet
their personal lifestyles and qualifications. Uniformity allows
regulators to assess risk and take appropriate measures to
protect the interest of depositors and the American public.
If Federal preemption were allowed to expire and each
State, county or municipality are permitted to adopt their own
laws, the credit reporting system will be severely fragmented,
and the consequences to the consumer and our economy will be
significant.
We have seen this play out in other markets around the
world. In many countries, consumers, regardless of their credit
profiles, don't have access to long-term mortgages at all or
must pay interest rates of more than 20 percent on the loans
that they can get. This is the direct result of the lack of a
comprehensive and uniform credit reporting system. Consumers in
those countries really have few options. They are generally
tied to one institution, their bank, for all of their financial
needs.
There has been a good deal of discussion before this
subcommittee on identity theft and data accuracy issues. These
concerns are not taken lightly by TransUnion, but should not
override a law that, and I quote from legislative history,
``recognizes the fact that credit reporting and credit granting
are, in many aspects, national in scope, and that a single set
of Federal rules promotes operational efficiency for industry
and competitive prices for consumers.''
To address the concerns of identity theft and data
accuracy, I believe we start with consumer education. Consumers
are more engaged in the credit reporting process today than
ever before. We believe the public and private sector must each
take a role in ensuring consumers know their rights under the
FCRA. And TransUnion has responded to the need for consumer
education by making tools available that help individuals
manage their financial help. We are committed to providing
education to consumers through a multitude of channels, but our
ability to do that, if we first have to find out their address,
will be severely limited.
We make our living by accurately and efficiently processing
2 billion pieces of information into 192 million credit files
every month, and we do it well. We recognize, however, that
some consumers have questions and issues regarding the
information in that file. And that is why we have recently made
large investments in technological platforms to automate the
re-verification of information. Fifty-two percent of our data
providers now participate in the automated process of re-
verification, and our goal is 100 percent participation.
We believe this approach will seamlessly resolve most
matters quickly and efficiently, but we face a significant
challenge from credit repair clinics. If these credit repair
clinics are allowed to continue to generate spurious volumes,
and they are currently responsible for 35 percent of our total
re-verification volume, our ability to deliver fast, accurate
resolutions will be hamstrung.
That will bring us to identity theft. We understand the
personal nature of an individual's credit information, and have
taken substantial steps to protect the integrity of our systems
and our information. We are strongly committed to continue to
be part of the identity theft solution.
TransUnion led the industry with the creation of a fraud
victim assistance center, which has been recognized by law
enforcement, as well as the media, for its unprecedented
service to identity theft and other credit fraud victims. Our
fraud victim assistance experts work with consumers, law
enforcement and credit granters to assist victims and aid in
the apprehension of perpetrators.
Earlier this year, TransUnion and our competitors announced
that we now share information related to fraud identity theft
victims. Consumers can now make one call to any of the three
national bureaus and be confident that all of us will put the
appropriate safeguards in place.
U.S. lenders are purchasing millions of credit reports each
day. These reports allow lenders to make decisions that allow
consumers to enjoy same-day commitments on home loans, receive
instant credit approval at the retail point of purchase and
drive off a car lot with the vehicle of their choice in
minutes. Lenders are making those decisions based primarily on
the information contained in a credit report, because the
credit report system works.
This system is critical to our economy. Our economy is
driven two-thirds by consumer purchasing, and we believe our
system must be maintained.
Thank you again for the opportunity to be here. We at
TransUnion are committed to assisting your committee in any way
that we can with respect to this important matter.
[The prepared statement of Harry Gambill can be found on
page 94 in the appendix.]
Chairman Bachus. Thank you, Mr. Gambill.
At this time, we are going to have questions from the
members of the committee, and I am actually going to waive my
questions. I will say that I am sure that Mr. Sanders or
someone else will ask, particularly Mr. Gambill, about free
credit reports. That is something we are hearing a lot about.
And if that question is asked, I would like you to detail
the impact that will have, you know, on your company. I think
if we discuss that, we need to know about the impact of it.
Mr. Feeney has no questions.
Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
There appear to be some accusations of huge inaccuracies
within our credit reporting system. So I guess, Mr. Gambill, my
first question would be for you. Can you quantify for me the
number of credit records or reports you are responsible for and
how often consumers have complained about inaccuracies? How
often have records been changed because of inaccuracies in the
report?
Mr. Gambill. I will give you some of the information, and I
would like to have my team be able to work with individually so
I can really understand your question.
About 8 million consumers a year avail themselves of the
opportunity to get a free credit report from TransUnion. That
represents probably about 8 percent of the households in the
United States. About half of the consumers that then get a copy
of their credit file ask us to re-verify something on it,
either because they don't understand it or they may disagree
with the rating as provided by one of our data furnishers.
So, the 8 million people, which represents about 2 percent
of the files sold, on who we sell files ask us for copies of
those in a free manner. Then, about half of those ask us to re-
verify something on those files. The average file has about
nine trades on it, so now I am getting into math. I had better
stop trying to do and have the team work with you on it
individual basis.
But 2 percent of the people ask for a copy and then half of
those ask us to reverify something.
Mr. Hensarling. Thank you, that is helpful to me. When I
hear about accusations of huge inaccuracies within the system,
I am a firm believer that the world works off of incentives. I
am trying to figure out who might have an incentive to put
inaccurate information into the system in the first place. I am
somewhat curious.
I guess my next question would be for Mr. Courson and Mr.
Moskowitz, since you both are in the business of extending
credit. I assume that to be profitable you would like to make
more credit transactions instead of fewer. And to make more
transactions, you need accurate information so that you can
price the risk premium accordingly. And if that assumption is
true, in your observation, who has an incentive to put
inaccurate information into this system?
Mr. Moskowitz. I don't think any lender has an incentive to
put inaccurate information into this system, including lenders
that would like to retain their existing customers. Each lender
has a vested interest in the performance of the loan and the
success of the consumer who has the loan. And the integrity of
that system and the quality of that information is the
necessary foundation of that.
If we merely were interested in retaining our own
customers, or a lender was merely interested in retaining its
own customers, you could argue that. But a company like Wells
Fargo has a much larger interest in expanding its customer base
and relies on the integrity of the information in the system.
Also, to protect itself from identity theft and from fraud,
it relies on the information, corrects erroneous information
promptly and would assume that all lenders in that position who
have integrity would do the same thing.
Mr. Hensarling. Mr. Courson?
Mr. Courson. Our members, obviously, are primarily
originating and selling loans, Congressman, into the secondary
market, so we have another standard that we have to meet in
terms of standing behind the information we have. And there is
really, as Mr. Moskowitz says, no incentive for incurate
consumer credit reporting.
As a matter of fact, lenders are the ones that are standing
behind the loan based on the accuracy of the information that
we receive. Lenders are both users and furnishers of
information provided through the CRAs as we make our credit
decisions.
Mr. Hensarling. Given that my time is rapidly running out,
I would like to ask each of you to just give the briefest of
answer to this question. If we did not reauthorize the Fair
Credit Reporting Act, would there be more credit offerings or
fewer credit offerings to the American people? Would the credit
be more expensive or less expensive? Just from left to right.
Mr. Courson. There clearly would be less credit offerings,
particularly because you have to deal with a patchwork of 50
different sets of State laws. Clearly, we have a national
mortgage market. The easy and fluid movement of capital across
State lines exists because of the seamless ability of mortgage
lenders to obtain credit information, make credit decisions and
offer products. If Congress starts putting barriers up, and we
have to deal with 50 different standards, obviously, some
lenders will withdraw, some will not compete, there will be
less markets available and, therefore, a higher cost to the
consumer.
Mr. Moskowitz. And I would follow up that comment by saying
that the current national standard that we have allows lenders
like Wells Fargo to make credit more available by innovating
products that identify the needs of communities, low-to
moderate-income communities, and that the failure to extend
FCRA would limit those opportunities because of the impact on
liquidity in the marketplace.
Mr. Pickel. Since we sell to both the companies that MBA
represents and Wells Fargo and others like it, we feel like it
would increase the cost quite substantially. As a further
comment, we feel like it would increase the cost, especially in
rural areas, where credit may not be extended as much as often
where mortgage brokers really excel, and also when you have a
city that is on a State line if the States enact different
laws.
Thank you.
Mr. Plunkett. As we heard last week, we have a national
mortgage and lending market created through joint State and
Federal regulation. The Fair Credit Reporting Act is not
expiring; some very limited provisions are expiring. If minimal
baseline meaningful Federal standards were on the books, you
would get a lot of uniformity. And States like Vermont could
respond to localized problems and help their citizens after,
then Congress would be able to respond.
So I don't see, if that approach were taken, which is the
approach we are recommending, I don't see a change in lending
at all.
Mr. Fishbein. I would agree with Travis on that. I think if
we allow the States to be more active players in this process,
that could very well improve the level and accuracy of
reporting.
Mr. Gambill. To try to directly answer your question, there
would be more offers to apply for credit, because absent the
prescreening preemption provisions of FCRA, lenders would still
have to find new cardholders, but they couldn't target their
mailings. So, they would have to broad scale mailings to people
offering the opportunity for them to apply without having those
mailings be pre-approved.
Consumers would then apply, and the turn down rates would
go up, of course, because they will have gone to everybody, not
only those people that already meet the eligibility standards.
So, the ultimate result would be higher costs, probably same
amount.
Chairman Bachus. Okay.
Thank you, Mr. Hensarling.
Mr. Sanders?
Mr. Sanders. Thank you, Mr. Chairman.
Representatives of the industry have argued that they want
to preempt States from passing strong consumer protection
legislation. Just to set the record straight, because I hear a
lot about concerns about consumer needs today, let's be clear
that every major consumer organization in America, including
the two that are represented at the panel right now, but U.S.
PIRG, Consumer Federation of America, Consumers Union, National
Consumers Law Center disagree with industry.
And they believe, as I believe, and I think many, Americans
believe, that what we want are high national standards to
protect consumers, but we want to allow States to go even
further so that they can address their own local needs and
become laboratories for democracy.
Second point that I want to make is that in a recent study,
Consumers Federation of America examined over 500,000 credit
bureau files. And they found, among other things, that 29
percent of the people whose reports that they examined had a
range of 50 points or more between the highest and lowest
scores. One in 25 of the people whose reports they examined had
a range of 100 points or more between the highest and lowest
scores.
As everybody here understands, that makes all the
difference in the world between whether somebody's going to get
reasonable interest rates or very, very high interest rates.
Now, given that reality, what I would like to ask is
representatives of the industry, and perhaps everybody on the
panel, but we will start with Mr. Gambill. Given that reality,
do you think that these errors could be reduced by allowing
consumers to receive free credit reports and free credit scores
at least once a year?
In other words, wouldn't the consumer at least have a
fighting chance to know why his or her interest rates are
escalating, perhaps because of false information, if they, in
fact, had a report in their hands?
Why don't we start with Mr. Gambill?
Chairman Bachus. Without taking the gentleman's time, I
mean, just extending your time, you said ``errors.'' You mean
differences in scores?
Mr. Sanders. Well, I mean that when you have three separate
companies coming up with three separate ratings, somebody is
making a mistake. ``Errors'' is the word I would use.
Mr. Gambill?
Mr. Gambill. Yes, sir. I think I heard a question about
free reports, Congressman, and also a question about accuracy.
Mr. Sanders. Free reports and free credit scores so
consumers could know what is going on in their lives and why
they may be paying higher interest rates than they should be
paying.
Mr. Gambill. Yes sir. Thank you.
You know, when people ask me in my job, What keeps you up
at night? one of the things that keeps me up at night is, how
in the world will we do it? If Congress decides to pass a law
that says that we need to give away credit reports to consumers
with 200 million of them likely to ask, here in America,
existing law provides free reports to people who have been
declined for credit; who are unemployed; who are on welfare;
who are or think they have been victims of fraud; or who are or
are likely to be seeking employment.
In our case at TransUnion, that represents about 8 percent
of the households in America. But we know that that is a
relatively consistent percentage of the volume of reports that
we sell. And we know how to manage a business and manage our
support functions to deal with those 8 million reports or so
that we are going to provide on an annual basis.
I don't know how to build a business around the fact that
there might be a front page article on USA Today tomorrow
suggesting everybody that reads USA Today is now eligible for a
free credit report, and they should call.
Mr. Sanders. Well, my time is limited, and I am gathering
that you think that this is not a good idea?
Mr. Gambill. Yes sir.
Mr. Sanders. Okay.
Mr. Plunkett, what do you think? Do you think consumers
should have a right to know how their interest rates are
determined?
Mr. Plunkett. We think it is the best and least expensive
way. As Assistant Secretary of Treasury Abernathy said a few
weeks ago, Imagine tens of millions of Americans having easy,
free access to their credit reports. They can prevent these
problems before they occur. It is the most cost effective way
to do it.
And in speaking about costs, we need to talk more about
cost to consumers if we don't act, not just cost to business if
we do act.
Mr. Sanders. Okay.
Mr. Courson, do you want to give us a view on that?
Mr. Courson. Mr. Sanders, obviously mortgage lenders are
also users of consumer information. I really feel that we are
not the appropriate party, however, to respond. As to whether
access to credit reports should be free.
Mr. Sanders. Mr. Moskowitz?
Mr. Moskowitz. As we said, we have a vested interest in the
accuracy of the information. And an informed consumer who
understands the ramifications of their credit and their
performance and their life and how they manage their credit is
a benefit to that consumer, and ultimately will increase the
likelihood that they will become a homeowner.
Mr. Sanders. So, do you support the right of consumers to
get free----
Mr. Moskowitz. I can't comment on whether or not it should
be free or not, but availability and knowledge of what is in
your credit report is a good thing.
Mr. Sanders. Mr. Pickel?
Mr. Pickel. Well, like Mr. Moskowitz, I don't think I can
comment on whether or not it should be free. But I do want the
credit reports to be accurate. And I will tell you, sir, as a
mortgage loan officer working with consumers, oftentimes it
takes a lot of time to work with a consumer on a credit report.
It is somewhat intimidating, it is hard to read, I am not sure
if they just got it, it would help. But that is not for me; we
want it to be accurate, and we want them to get home loans.
Mr. Sanders. Mr. Fishbein?
Mr. Fishbein. I agree that the disclosure ought to be
regular and be free for credit reports and scores. I think the
industry should actually be promoting this as much as
possible----
Mr. Sanders. Right.
Mr. Fishbein.----in an effort to try to correct the
complaints about inaccuracies and inconsistencies. The best way
to do that is by providing people with more information.
Mr. Sanders. Who is going to know about their credit
history better than the consumer himself?
Mr. Fishbein. Correct.
Mr. Sanders. Okay.
Thank you all very, very much.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
Mr. Fishbein?
I will ask a question now.
One of my staffers was recently burglarized. You know, they
stole his TV and they stole a stereo system. And he went down
to the D.C. police department and asked for an incident report
on that, and he was charged $10 for it. Do you think he should
have been given a free police report?
Mr. Fishbein. Well, I don't know whether we want to use the
standards of the D.C. police department for judging access to
credit reports.
Chairman Bachus. I mean, do you think that was fair that
they charged him for that report?
Mr. Fishbein. We hear a lot of talk about new technologies
and cheaper and faster. Technologies have a tremendous ability
to provide people with information relatively inexpensively.
And I think that ought to be pursued very carefully by the
industry in an effort to get more----
Chairman Bachus. But you didn't answer my question. I mean,
we are talking about free reports; do you think they should
have given him a free report? I mean, he pays taxes, you know,
he actually pays the city of D.C. Should he have been given
free reports?
Mr. Fishbein. Well, if the D.C. government had a way of
providing this information inexpensively, then I think it could
be done. Again, I think we don't want to use that measure. What
we are talking about here is----
Chairman Bachus. But you understand what I am saying. They
charge money for this report, and actually, he pays taxes to
D.C. And actually, as taxpayers, we don't pay taxes to
TransUnion.
Mr. Sanders. Mr. Chairman, I would agree with you. You are
absolutely right. Perhaps he should have been given a free
report, and maybe if they had Statehood and collect revenues,
they would be able to do it. But----
[Laughter.]
Chairman Bachus. Well, actually, I was charged $5 for
somebody who ran into my car in Alabama. I was charged $5 for
an accident report. I didn't demand any. I guess we could give
everybody everything free, but who would pay for the cost of
maintaining these systems. The cost would go up, wouldn't it, I
mean, if they are giving away 20 million free reports?
And I guess as a practical matter, I am just wondering if
all of this was available and free and you could get it for
free, why would anybody pay them for a report? How would they
make any money? And wouldn't they just go out of business?
Mr. Plunkett. Mr. Chairman?
Chairman Bachus. I mean, if you give away your product, how
do you stay in business? I guess that might be my question. And
I am asking the two consumer people. I mean, how do you get
around that?
Mr. Plunkett. Well, revenues for the credit reporting
agencies has certainly increased in terms of their direct sales
to consumers. But as the bulk of their revenue is generated
through the users of the system, the furnishers and those who
use the system for risk analysis and other purposes. However,
we have seen a growth in premium services that are charging
consumers for some items that we think are vital and should be
free, like the credit score or----
Chairman Bachus. Well, now, you are----
Mr. Plunkett.----credit reporting information.
Chairman Bachus. Aren't you charged for a lot of services
that are vital today?
Mr. Plunkett. I would agree with Representative Sanders
that certain government documents are so important, such as a
police report, such that they should endeavor to give you those
documents as cheaply as possible. In this case, consumers are
the subject of these documents. They have an absolute right to
ensure that the information about them is accurate. And the
best way to do that is to make access easy through free
reports. Six States require this already.
Chairman Bachus. Well, you know, I was just looking, I had
a list of when you get a free credit report. Today, current law
says that credit bureau has to give a free report to people on
public assistance, people seeking employment, people denied
credit, people denied insurance, people denied employment,
people that think they may be the victim of identity theft. And
everybody else pays $9. In other words, if you can afford it,
you pay for it.
And I am not talking about accuracy or anything else. I am
talking about that it is at great expense that they maintain
these systems. I mean, they are a for-profit corporation. And I
don't think that there is anything wrong with that.
Mr. Sanders. Mr. Chairman, could I----
Chairman Bachus. And, you know, if we wanted to start a
public agency to maintain records, or something, but I am just
wondering even almost the constitutional implications of
starting to tell people to give away their product. Does that
bother you a little bit from a constitutional standpoint?
Mr. Plunkett. I haven't heard, Mr. Chairman, of any
constitutional issues being raised regarding the six States
that require it now. Overall, it decreases cost in the system,
and in many ways makes the system more effective for lenders.
If the information is more accurate, they can predict risks
more accurately. If consumers correct errors, the lenders have
a better system, as well. Overall, I see it as a win-win.
Chairman Bachus. Okay. All right. Thanks.
Mr. Gambill, do you want to respond?
Mr. Gambill. Well, yes, sir. Thank you.
At $9, providing reports to consumer that want it is not a
moneymaker. Okay? If it was, you would see us advertising it a
lot more heavily than we do now. Our companies aren't that big.
The credit reporting companies in America in information
services are well under $1 billion in sales. We spend, already,
probably 10 percent-ish of our money dealing with this
population of consumers, that we are happy to deal with and
help, that are entitled to free credit reports.
So it represents a huge change if we are to go from
disclosing 8 million reports a year to disclosing a 100
million, or 200 million.
And as I said, I just don't know how we will do it. I am
sure that we will, if we are somehow required to, but I don't
know how we will plan for it. And I don't know how we will be
able to continue to give the kind of service and automation
investment in re-verification issues for consumers that are
entitled to free disclosures if we have everybody that is
responding to e-mails that may go out. There was a recent e-
mail that had millions of people opt out unnecessarily. It cost
us $2 million at TransUnion just to deal with that kind of
thing. I don't know how to mange it.
Chairman Bachus. Let me say this, we have a vote on the
floor. We are going to recess this hearing until the end of
vote, and it probably will be at least 30 minutes.
I do want to say this in closing, we have talked about the
difference between the report at the credit bureaus, the
difference in credit scores. And we have talked about that as
an error. But, you know, conservative groups give us a score,
you know, and liberal groups give us a score, and I may get a
95 from one conservative group and a 90 from another group. He
may get a 2 from one conservative group. And a five from
another. But that wouldn't be an error.
I mean, that would be each group using a little different
criteria. And I don't call these groups and say, You have made
an error. This other group scored me at an 85, you scored me at
a 10. There is a 75 percent discrepancy here. I mean, they are
using different input. And, I mean, this is proprietary.
This is the most popular thing that both sides of the
people talking about free credit reports, I just think somebody
has got to pay for it. If you ask these credit reporting
agencies to pay for it, and it costs 50 percent of their
revenues, that is a problem. I mean, that is almost
confiscation of property.
We will recess this hearing at this time.
[Recess.]
Chairman Bachus. The subcommittee will come to order.
The gentleman from North Carolina, Mr. Watt, is recognized.
Mr. Watt. Thank you, Mr. Chairman.
It is a good way to slip back in and cut the line before
everybody else gets back. So I am glad to be able to do that
because I have to go to the floor and do something on this
class action bill.
This is the third set of hearings we have had on fair
credit reporting. And I have been trying to get to as many of
the panels as I can to see whether there was any kind of
consensus starting to be built about some things that we might
begin to coalesce around. And I wanted to try to see, maybe,
whether some consensus is beginning to emerge on at least some
principles that we could start to draft a bill around.
Mr. Plunkett, your testimony may be interpreted by some to
suggest that you are disenchanted with a Federal standard. But
it seems to me that most of the things that you raised
questions about would probably be worse off if we didn't have a
Federal standard, at least in some areas of the country they
would be worse off. In some areas of the country they might be
better off.
So I guess the question I want to ask you before I start to
try to see whether there is any consensus is whether you are
advocating for no Federal standards? I don't think that is what
you are doing, but I want to clarify and be clear on what it is
you are advocating for.
Mr. Plunkett. We propose strong Federal baseline standards.
We have also endorsed the notion that the existing eight
preemptions should be allowed to expire and then where States
deem it necessary, they could exceed, not conflict with, but
exceed the strong Federal baseline standards.
Mr. Watt. So you are not advocating for expiration
necessarily, maybe improvement of the existing standards with
that being the base, rather than--and then States could go
beyond that? Would that be a fair characterization of what you
are----
Mr. Plunkett. Absolutely, Congressman. And in that
circumstance, it would be very rare and quite unlikely,
especially initially, that States would choose.
Mr. Watt. But, I mean, is it clear to you that the kinds of
things that are covered in the eight standards that exist,
whether they are the correct minimum Federal standards, but the
kinds of things that are addressed in those eight standards
should be the kinds of things that you would set a minimum
Federal standard for?
Mr. Plunkett. Absolutely.
Mr. Watt. Okay.
And now, Mr. Courson and Mr. Moskowitz, I take it, and Mr.
Pickel, also, I guess, all of you agree that there needs to be
Federal standards, I take it?
Now I guess, ideally, if you had a Federal standard, and
the standard was good enough nationwide, we wouldn't have to
worry about States preempting or States passing something even
more aggressive.
How would you all react to the existing eight things being
massaged and clarified in some way and maybe trying to get to
some consensus on the things that I have heard really most
people complain about? Those are errors and accuracy; credit
scoring; dispute resolution; maybe free credit reports, if some
consensus could emerge on that; discrimination or adverse
impacts on minorities; and identity theft.
Do you all think that those are the kinds of things that
there ought to be some Federal standard for, I guess?
And I am assuming you all were probably for the Federal
standards whenever this thing was done 15 years ago. But now
you have decided it is a good idea to have that Federal
standard. Are those kinds of things the things that we also
should have some minimum Federal standard on?
Mr. Courson. Congressman, as you know, you are correct in
saying the uniform national standard fo consumer credit
information credit the free flow of capital across State lines.
Mortgage lenders are very concerned that their ability to
originate loans across State lines with consistent standards
will be in jeopardy if the preemptions disappear. The
preemptions were put in place in 1996, and as a result,
mortgage lenders are doing increasing volumes of business, both
purchase and refinance. The system is working. Mortgage lender
flow enable credit to move back and forth, across State lines.
My concern is that once Congress gives States the
opportunity it will block the free flow of credit requirements
among States. My fear is, as we have seen in other areas.
Mr. Watt. I understand that, but would you accept the
proposition that on the things that I have just described, the
list of things, that there ought to be some Federal standard?
Mr. Courson. Well, I think you have to look at each of
these areas on an individual basis. We are talking about the
FCRA including the preemptions that target to some very
specific areas. There are other issues that have been discussed
today, and our concern is that we don't want to disadvantage
the consumers by not maintaining the preemptions so that we can
continue to have free flow of credit.
There are other issues to discuss, but I think that we have
to realize, too, that the FCRA basically deals with those
specific seven items.
Mr. Watt. You mean there is something on my list that
should be discussed outside of fair credit reporting? I mean,
it seems to me that all of those things are being impacted by
fair credit reporting.
Mr. Courson. Some of them would affect our industry, and
others on the panel, also.
Mr. Watt. I know I am over my time, but it would great if I
could hear from Mr. Pickel and Mr. Moskowitz.
Mr. Moskowitz. I would echo what Mr. Courson said. The
concept of uniform, understood Federal standards that ensure
consistency in decision-making is obvious to us. And the
ability of a myriad of State regulations overlying those
standards would actually undermine the effectiveness of those
standards and would ultimately impact liquidity and
availability of credit, in general. So we would not be in
support of that.
Mr. Pickel. NAMB has not taken a position on identity
theft. But that said, we really want the credit reports to be
as accurate as possible, and if it is a Federal standard on
those issues that you brought up, it would seem like to me that
would be better than individual standards by State on those
issues, sir.
Mr. Watt. Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Watt.
The gentleman from Illinois, Mr. Gutierrez?
Mr. Gutierrez. Thank you, Mr. Chairman.
Mr. Gambill, what is the total profit of your corporation
for the issuance of credit reports? That is, when private
individuals ask you for a credit report, what is the extent of
that? Is it 2 percent, 5 percent?
Mr. Gambill. Well, we almost have no revenue from that
particular source at this point, Congressman. And right now it
is underwater. We were trying to build a business there. We
acquired a company to help us do online disclosures in a more
efficient way. But we are at below break-even at this point on
the sale of reports directly to consumers. I would like to see
that ultimately become something in the 15----
Mr. Gutierrez. Why are you losing money on that particular
part of your business?
Mr. Gambill. Well, I am just trying to build my sales. I am
trying to build the consumer base that uses the products and
services that we have available. And we have a level of cost
right now that is greater than our sales. Our sales are about
$30 million in that space, and so are our costs.
Mr. Gutierrez. So where do you derive most of your profits,
then?
Mr. Gambill. From the sale of credit reports to lenders.
Mr. Gutierrez. To lenders?
Mr. Gambill. Yes, sir.
Mr. Gutierrez. I was just curious about where you derived
most of your profits from, because I know that everyone else,
kind of, was speaking about issuance of credit reports and
their availability to the public. And I guess it is the nature
of your relationship with the public that I think is different.
And that is that you gather information on me and everyone else
in this room. You don't ask me if you can use that information,
but yet you sell, you barter and you use that information to
say, as you say, that makes the majority of your profit in your
corporation.
So I think it is different than when I go down and, I don't
know, get a birth certificate from someone, and say I need a
birth certificate because I had to enroll my daughter in
school, and I need a birth certificate to get that, in that you
are in the business of gathering my information, selling my
information. And I think you have a responsibility with me and
everyone else whose information you are using in order to
generate profit for your corporation. So I think in that sense
it is a very different relationship than other kinds of
relationships that have been expressed here today.
So I would just like to see how this committee could take
that very special relationship that not only Mr. Gambill who is
here and was kind enough to come before this committee, not
expecting to get a very pleasant reception here today. He knew
he was going to have to answer some hard questions today about
how it is you do it.
But, yes, they should make a profit. And I think government
has to protect the right of the people that send us here, the
consumers, and what the relationship between Mr. Gambill's
corporation or any of the other two major corporations that
issue credit information that is garnered for the public to
make sure that it is the best information available, and they
can correct that information. Because, as Mr. Gambill has
testified, he makes most of his profit, because he loses money
on the other part, from one area, and that is selling the
information.
So when I walk into a department store and they say, you
know, we will give you 20 percent off if you take this credit
card, he makes some money. Because they call and say, Mr.
Gutierrez would like this credit card, get his 20 percent off.
And that is where he makes his money. And I want to make sure
that I don't have any problems. I get my credit card, I get my
20 percent off.
And that is really not a very, very serious issue, whether
I am going to get 20 percent off on a tie or a shirt or
something I might purchase that maybe I really don't need. But
when it comes to my home.
And I think, Mr. Chairman, that we have found, and I think
this could be proven in one study after the other, that there
are problems, problems that range from 10 to 20 to 25 percent
of errors that exist on these credit reports that the credit
agencies have taken from the public to make a profit from.
So I think they have a responsibility with the public. I am
sure they don't want to shirk that responsibility with the
public. And I think we have a responsibility. We regulate how
much I pay for my telephone bill, how much I pay for my gas. As
a matter of fact, the price of my milk has a relationship with
actions in the Congress of the United States, even when I buy
my Snickers bar, since we subsidize peanuts, or sugar and
everything else in this Congress.
So the Congress has taken action in order to avail the
public of the best possible avenue. And since we do have
Freddie Mac and Fannie Mae, and we take on issues, and we have
a huge institutional responsibility to guarantee that people,
and we have mortgage insurance for those, I mean, we are in the
business of helping people in homeownership. And it seems to me
that if we just look at it, not so much vis-a-vis the
corporations and what their profit--they should make a profit,
I agree with that--what is our responsibility to, kind of,
blend in all the other actions we are taking to guarantee
homeownership, which we know is a key critical point of our
economy, that we do that?
And lastly, Mr. Chairman, I hope that at some point, since
it has now been it is a fact, that insurance and what I pay for
insurance, which makes up part of my monthly payment when I go
to a bank and they say, Oh, Mr. Gutierrez, you are going to pay
PMI, and you are going to pay this for taxes and you are going
pay this for insurance, since insurance is also now being
driven by what is on a credit report, although I don't
understand if I made a late payment what that has to do with
lightning striking my house----
[Laughter.]
----but seriously, that does happen. It is a fact that we
also look and expand as the insurance corporations now have
gotten into using the credit bureau in terms of determining
what a person will pay for insurance, because that could mean a
lot of difference in someone's home ownership.
Thank you, Mr. Chairman.
And I want to thank all of the panelists for coming here
today. They have been very, very informative.
Chairman Bachus. I appreciate it, Mr. Gutierrez,
I would just, if you will yield for an additional minute, I
would simply say that I don't disagree with what you are
saying.
I think that I would point out that the information the
credit reporting agencies are getting is not actually by going
through our records, it is people that are furnishing those
records. We do business with someone and that party supplies to
them our record of payment or our credit relationship with the
people that they are in association with. And then they
actually share it, not with the general public, but they share
it with people who we go to, like you say, where we go to
someone and ask for, How about, you know, a $10,000 loan or a
$200,000 mortgage? Then they share it with that person. They
are not putting it out in the public domain.
But I think that you are asking and thinking, I mean, we
are all asking these questions, and that is the way we get a
decision-making.
The gentlemen from Ohio?
Mr. Tiberi. Thank you, Mr. Chairman.
Chairman Bachus. Mr. Tiberi?
Mr. Tiberi. Mr. Gambill, let me direct a question to you,
at least, let me give you my bias up front. I believe we should
extend, permanently, FCRA and I have introduced a bill with
Representative Lucas. Not only to do that, but also to create a
uniform standard with respect to privacy. And I have seen, as a
realtor, before I came to Congress, the incredible result that
the amendments to FCRA had with respect to consumer credit in
Ohio, in central Ohio, where I was a realtor.
Now, put on your prognosticator hat, if you can, and tell
me what you think would happen if my State legislature, and I
was a State legislator, in the chairman's State legislature.
And the ranking members State legislature, in Vermont, created
three different types of standards that could happen if we
don't extend FCRA, the amendments to FCRA. What would happen in
terms of your role as a person who is obviously very much in
the middle of the whole credit scoring issue?
Mr. Gambill. Congressman, we would have to invest in and
develop significant new technologies to ensure that we complied
with whatever the rules were relative to a consumer who was
either seeking credit in Ohio, but had lived in Vermont, or was
seeking credit in Vermont, but had lived in Ohio, or was
seeking credit in Vermont or Ohio, but the credit grantor was
in Delaware or South Dakota, to be sure that we understood how
all of those rules interacted together.
Mr. Tiberi. And that would cost how much?
Mr. Gambill. Oh, a couple of million dollars per time.
Mr. Tiberi. And that would come from the Federal
government, you assume?
Mr. Gambill. No, sir, I am assuming that I would try to
extract that from my customers----
Mr. Tiberi. Okay. And your customers----
Mr. Gambill.----who use the information, who then are going
to try to extract that from their customers.
Mr. Tiberi. So someone is ultimately going to pay for it?
Mr. Gambill. Yes.
Mr. Tiberi. And what may end happening is that that first-
time homebuyer may actually end up not being able to qualify
for a first home because of increased cost to their mortgage.
Mr. Gambill. Right. If a lender's costs go up, they either
have to lend to less risky people, or charge more to the people
they lend to.
Mr. Tiberi. Mr. Courson. Did I say that right?
Mr. Courson. Correct.
Mr. Tiberi. Can you comment on that, as far as the lending
industry?
Mr. Courson. Sure. Well, unfortunately, I have been around
this business long enough; I have seen how it works without
this. The issue of trying to get a borrower's credit history
who has lived in other areas is a nightmare. It is slow, it is
debilitating and very costly.
And the gentleman's correct that, in fact, the cost of
trying to put this together, somebody is going to ultimately
pay, and it is going to be the consumer.
Mr. Tiberi. Thank you.
Mr. Moskowitz? Your testimony was very good. Let me ask you
to expand on it, if you would, from a Wells Fargo perspective.
And that is, and you may not be familiar with my legislation
with Mr. Lucas, but taking the FCRA point one step further, how
would a national standard on privacy impact Wells Fargo, and
then ultimately, the person who has a loan with Wells Fargo, if
we go ahead and take that step and do it?
Mr. Moskowitz. Obviously, we believe that in a multi-
jurisdictional company like ours, the ability to have a
national standard, one which provides clarity to consumers,
consistency and understanding of what the treatment of their
information will be, is something that we think is
advantageous.
With respect to the issues raised about various
jurisdictions creating their own separate myriad of local,
county and State-level requirements, we operate in multiple
States. We have customers who have accounts in one State and
live in a different State. Conflicting requirements would
severely impact the liquidity of the marketplaces that we do
business in.
So for example, mortgages that have to comply with various
standards would be more difficult to securitize, would impact
the interest rate scenarios that are available now, and would
ultimately impact consumers' ability to get credit.
Mr. Tiberi. This is the final thought, Mr. Chairman. So
correct me if I am wrong: Whether it is with respect to credit,
whether it is with respect to privacy, to a multi-
jurisdictional company like Wells Fargo or any other company
that may be in more than one State, ultimately it is going to
cost you more money to deal with those different State
requirements, and that will eventually be passed on to your
customer. Is that correct?
Mr. Moskowitz. That is right. The current system is a model
of efficiency in that it allows, in particular, an operating
subsidiary of a national bank the ability to efficiently drive
down costs, serve customers, have consistency and clarity in a
way that we have never seen before.
Mr. Tiberi. Thank you.
Chairman Bachus. Thank you.
The gentlelady from New York, Miss Maloney?
Mrs. Maloney. I thank the chairman very much for yielding.
And I would just like to State that despite the
controversies of this week, I think we have to remember that
the U.S. mortgage market is the best in the world, and the fact
that home ownership is at 68 percent in this country is truly
an incredible success. A major contributor to the high
percentage is the ease with which consumers can now get
approval for mortgages, because of advances in technology,
including automated underwriting that relies on the FCRA.
Mortgage decisions are now made at speeds that would have
astonished people trying to buy a home just a year or two ago.
The ease with which people can be approved for a mortgage is
one of the major factors that has kept the economic slowdown of
the last 3 years from getting any worse.
As we all know, in the current low interest rate
environment, mortgages are being refinanced at record rates,
and this would be impossible without automation and readily
available credit histories. And, Alan Greenspan has testified
before this committee several times that it has truly been the
mortgage market, the refinancing, that has helped our economic
situation in this country.
The Washington Post detailed the impact that the ability to
refinance so easily is having on the economy last Sunday in an
article that I would request unanimous consent to place into
the record. But to summarize----
[The following information can be found on page 215 in the
appendix.]
Chairman Bachus. Without objection.
Mrs. Maloney. Thank you, Mr. Chairman.
To summarize it, it said that since 2001, banks will have
processed more than 27 million mortgage refinances by the end
of the year. Out of those, homeowners will have converted more
than $270 billion of home equity into cash, either to spend or
convert high interest debt into very low interest loans, at
least another $20 billion that is freed up in lower monthly
mortgage payments. And in total since 2001, refinancing will
have delivered about $300 billion directly to consumers who
will have more money to spend and pump up the economy.
That is in comparison to the $263 billion that the Bush tax
cuts of 2001 and 2003 will have put back into the economy by
year's end, which have less direct impact on spurring consumer
spending, because they have gone not only to individuals, but
also to businesses and in some cases, State and local
governments.
So I do believe that there is a significant argument for
the importance of FCRA and the health of the macro-economy in
our nation.
At the same time, the reliance on automated underwriting
magnifies mistakes in credit reports. This can be especially
dramatic for individuals who are close to the line of being
approved or denied a mortgage.
So my first question is to Mr. Plunkett.
The credit reporting agencies are in the business of
selling reliable information to their clients. If their data is
wrong, as your studies indicate, why does the lending industry
continue to rely on them? And wouldn't incorrect data lead to
losses for lenders and motivate them to find another means of
monitoring and predicting whether people will default on loans?
Mr. Plunkett?
Mr. Plunkett. Well, the research shows, Congresswoman, that
there are mistakes of omissions and mistakes of co-mission,
omission being incomplete reporting. And the Controller of the
Currency has commented on that issue. It is a good question.
Why would furnishers shoot themselves in the foot, so to speak,
by not submitting complete information?
And what the Controller said was that he thinks that some
sub-prime lenders in particular are gaming the system by not
including positive information about their borrowers, because
they don't want their borrowers to be solicited by another
lender, and they don't want to lose them, because their
borrowers may find a better deal and go elsewhere. So that
might explain a part of the incomplete problem.
Regarding the mistakes of co-mission, which we detail in
our report, I don't think there is intent there to do harm: I
think there is sloppiness. I think we have sloppy procedures,
and we have a dispute system for consumers that doesn't work
very well. So once a mistake is made, corrections are not made
easily.
Mrs. Maloney. Okay. Well, thank you.
Mr. Gambill, how do you respond to the findings of the
Consumer Federation that credit reports contain widespread
errors?
Mr. Gambill. Congresswoman, accuracy is how we make our
living at TransUnion. We compete on the basis of the ability to
have the freshest, most accurate, most complete file that is
available to the lending community, so they can make the best,
most useful decision about whether to lend money or develop a
financial relationship, how much to charge for that and how to
manage the overall relationship with the consumer.
There are going to be differences in files because we
compete. There are going to be lenders who provide information
to TransUnion and don't provide information to Equifax and vice
versa, or there are going to be lenders who provide information
to Experian and not to TransUnion, either because I haven't
persuaded them to do so, haven't found out about them or there
is something else going on between us and that particular
lender that keeps one of us from putting their information in
the file.
So certainly, our products do differ in the marketplace. If
they weren't, if they were all alike, you wouldn't need but one
of us.
Mrs. Maloney. Could I briefly ask Mr. Courson and Mr.
Pickel, in following up on this line of questioning, in your
experience as a mortgage banker and broker, at your place in
the loan process, do bankers ever question the information in
credit reports? Do they question it, or do they just accept it?
Mr. Courson. The credit information that we receive is
really one part of a total underwriting. We are looking at the
entire set of circumstances. And frankly, most of that
information that we garner initially, as you know,
Congresswoman, is from the applicant. So when we get that
information from the applicant, what are their debts, where do
they have credit, where have they had credit, we are able,
then, to compare that to the records that we receive from third
parties.
And if there is a discrepancy, it is really up to lenders,
because we are the one making the loan, to reconcile those.
And, in fact, we do resolve some of the disputes, if you will,
or some of the questions as part of the process, because we
need to know what is accurate before we put our credit and
funds on the line.
Mrs. Maloney. But so do the bankers work off the decisions
that come from the automated underwriting process? Or is that
just one part of a whole that they look at?
Mr. Courson. Automated underwriting, which has as part of
it, credit, and other factors are used for automated
underwriting. It is utilized, in our case, at the outset of the
process. If, in fact, the loan is approved, and gets an accept
from and automated underwriting system, that loan is one that,
in our office, and I think most offices, would go on to be
made.
Sometimes, however, they are not. They will have a decision
that is called a refer. In that case, what we do now is we go
outside the system, we have to look at hard data and do further
investigation to determine why, and then make a judgment, our
underwriters make a judgment whether to make that loan or not.
Mrs. Maloney. Okay. Thank you.
Chairman Bachus. Thank you.
Mr. Sanders?
Mr. Sanders can take one minute.
And then, Ms. Hooley, you can have your full five minutes,
or three minutes, or whatever.
Mr. Sanders. Thank you very much, Mr. Chairman, and I will
be brief and I appreciate you giving me the time.
Just a few basic points, number one, the name of our
country is the United States--S-T-A-T-E-S--of America. And it
is based on some brilliant work done by the founding fathers of
this country, who created, if I may quote some of the
panelists, a patchwork.
They said we should have a Federal government with certain
rights, a State government with certain rights, local
governments with certain rights.
Some of us, and I get disturbed with my conservative
friends who seem to change their tune every other day whether
they like the big, bad Federal government usurping the powers
of the folks back home, or whether they don't, depending the
issue in front of us.
I happen, as a former mayor of a city, to think that
everything being equal, give the people backup, give the
governance, give the State legislators the right to address the
local problems if they can. That exists in a dozen different
areas, and the word ``patchwork'' here is a misnomer. That is
what America is about.
If we want to do away with States, we can have one nation,
call it ``America'' and resolve the 50 State legislatures.
So I think States should have the right to protect
consumers and not be preempted from doing that.
The second point that I want to make, the issue came up a
moment ago about costs. My goodness, if Vermont or California
does something that is going to raise up the costs, how are we
going to pay for that? And Mr. Gambill suggests, well, it is
going to be passed on to the poor old consumer.
Let me make another suggestion. According to Standard &
Poor's, the top four executives of MBNA, who are the largest
credit card dispensers in America, make close to $300 million a
year. The top guy, the chairman and CEO, Mr. Lerner, makes $195
million.
Now, maybe they could pay for some of this consumer
protection by lowering the outrageously high compensation
packages that their top executive makes.
Third point that I would ask Mr. Gambill, a question. We
have heard, unofficially, so I have to tell you its
unofficial--I haven't seen it in print--that it costs, when you
supply information to a large consumer of yours, a bank for
example, it costs you 37 cents, or they pay you 37 cents for
the consumer report and score. Is that roughly accurate?
Mr. Gambill. For a large issuer, Congressman?
Mr. Sanders. Yes.
Mr. Gambill. Yes, sir.
Mr. Sanders. All right. So when we are talking about making
that available for millions and millions of Americans with
Citibank, or these other big ones are paying, are 37 cents,
approximately. I think the American people deserve the respect
that providing these reports would bring them, and I don't
think 37 cents is too much cost to provide that information.
Thank you.
Chairman Bachus. Do you think maybe those top three CEO's
ought to get a free report?
[Laughter.]
Mr. Tiberi. Mr. Chairman? Mr. Chairman? Mr. Chairman?
I just want to make note that one of those CEO's, Mr.
Chairman and ranking member, passed away last year, Mr. Lerner.
Just for the record.
Mr. Sanders. I appreciate that.
Chairman Bachus. Yes.
Ms. Hooley?
Mr. Meeks, Ms. Hooley, we yielded to Mr. Sanders, instead
of Ms. Hooley, so if it is all right with both of you, Ms.
Hooley, and then Mr. Meeks.
Ms. Hooley. Thank you, Mr. Chair.
There are so many questions, I don't know where to start.
But I am going to start with Mr. Gambill.
And one of the things you said was if there was a free
credit report, 200 million would likely ask for a free credit
report. My question is where do you get the number? And isn't
it true that in the six States where it is currently free there
have been no increase in the requests? Can you help me verify
that or not verify that?
Mr. Gambill. In the six States where it is currently free,
there has been an increase in the requests.
Ms. Hooley. How much of an increase? Do you know?
Mr. Gambill. No, I could get my people back to your----
Ms. Hooley. Okay.
Mr. Gambill.----office with that data----
Ms. Hooley. Okay. I would like that.
Mr. Gambill.----and the very specific information because
there are differences across each State as to what they need to
do and why that works.
It is something more than doubled. And in using my ``200
million,'' I just mentioned that there are 200 million adults,
roughly, 195 million on whom we maintain files. And if there
were big publicity spread across large pieces of news media, I
don't know how many of them are going to request copies of
their file. I don't know how to build an organization that
could respond to the sudden influx of 1 million more, 10
million more or 7 million more that could result from a big e-
mail campaign or a big piece of news publicity.
Ms. Hooley. Let me ask you a couple of questions. One of
the things that I have been very interested in is identity
theft and what that has cost all of us from the increase in
cost for that.
We are looking at a way to do a couple of things. One is to
make sure that individuals take some responsibility of what is
on their credit report. And the second issue is, I mean, and it
is been brought up several times today, it is how do we make
sure those reports are accurate? I mean, I would hate to have
somebody not be able to buy a house because the report was
inaccurate or not be able to get a job. And I understand that
before somebody is going to look at their credit report for
employment purposes, that they have to tell them they are going
to do that.
But if, you know, all of a sudden you see that report and
there are some things on there that are not accurate that make
your report look bad, I am guessing that an employer may say,
Well, you know, it is going to take too long to clear this up,
or provide some doubt.
So how do we do a better job in making sure that we have
accurate reports? And then, and I just got my own; now, there
is something on there that is inaccurate. I don't think it
probably affects my score. But I made a point of every year
getting mine because I have been involved in this. But how do
you make sure that they are more accurate? And again, how do
you make sure that people have the ability to take some
responsibility for themselves on this? Many people have no idea
where to get their credit report or what their credit report is
even all about.
Mr. Gambill. Well, Congresswoman, the accuracy issue is an
issue around which, as I said, we compete. There are probably 5
million credit reports a day, more or less, being purchased
from either TransUnion or one of its two competitors in the
United States today, and lending decisions are being made 5
million times a day based on those credit reports. Consumers
that are adversely affected by the information in the file, so
that they get either no loan or a loan at a higher rate than
they had applied for, are notified where the report came from,
they are notified what the principle factors were in the score
that, if there was a score, that caused them not to get the
loan and they are notified how to get their report for free
from the supplier of that report.
We then, within the Fair Credit Reporting Act, upon
receiving a request from them, are obligated to fulfill that
request within a specified, regulated time frame, which we
report to our regulating bodies on that, that we have
accomplished.
Upon receipt of re-verification request, we now have
automated systems in place so that we can, in fact, deliver to
our issuers and lenders information that suggests consumers
have asked us to re-verify a piece of information that is in
their file. They can respond to us in an automated manner thus,
decelerating the process dramatically and however they respond,
we report back to the consumer what the results of that re-
investigation were.
The consumer is also welcome to get a copy of a score.
Scores are snapshots, they change constantly as the file
changes and as information on the application that the consumer
may have provided, changed.
Ms. Hooley. How do they get a score?
Mr. Gambill. When they get a disclosure, they are asked if
they would like to have a score as well. They will get a score,
as of that moment.
Ms. Hooley. You think there are some ways, for example,
when they go to refinance their home or their automobile, or
whatever they are refinancing, they are going for a loan the
first time, do you think it would be an appropriate thing at
the time to, when you are giving the information to the lender,
that you provide a free credit report to the person that is
asking for the loan? Does that seem reasonable?
Mr. Gambill. I don't know how doable it is. I would be glad
to get a team to look at it under those circumstances and work
with the committee on those kinds of ideas.
Ms. Hooley. Okay. I would like any ideas that you may have
that, again, trying to make sure that individuals have some
responsibility, and then trying to deal with the accuracies,
are huge issues for me.
I have a question for Mr. Moskowitz. You mentioned in your
testimony that there needs to be better notices and that should
be part of the debate. Do you want to elaborate a little bit on
what you mean by that?
Mr. Moskowitz. Well, in our view, an informed consumer, a
consumer who understands their credit file, the reasons for an
adverse action is more likely, in the future to solve their
credit problems and become a candidate to become a customer of
ours.
On the side of privacy, a desire for consistency in
disclosure is nationwide and adds to that same debate, so we
have long advocated national standards for clear and
consistent, understandable disclosures on both of those topics.
Ms. Hooley. What do we need to do to make those clear and
understandable?
Mr. Moskowitz. I think Congress needs to review and analyze
the effectiveness of the disclosures that exist now, make
improvements as necessary so that the information that is
provided to consumers is understandable to them and is usable
by them. And so for an example, in the context of adverse
action, the reasons actually fit the reality and that the
consumers then are armed with the information necessary to
address any issues that they may have.
Mr. Plunkett. Congresswoman, we have a substantive
suggestion on that if I----
Ms. Hooley. Okay. I am ready.
Mr. Plunkett. We have found in our research that we would
agree here, that the reasons that are provided are very vague
and don't go to the specific problem, the specific trade line,
as it is called, that is creating the problem or trade line.
When you get explanations as vague as, serious delinquency or
derogatory public record or collection filed, that is too
vague. We need more specific information on exactly which
account is the problem, so that you can then act and see if
there is an error.
Ms. Hooley. Do any of the credit reports come out--any of
you can answer this--do any of the credit reports come out,
have their score on it, what that score means? Do you know, any
of you?
Mr. Moskowitz. Well, I can comment on our ability to comply
with California requirements that obligates Wells Fargo to
describe or conclude in an adverse action notice, the
requirements for basic drivers of a FICO score, and we provide
that information. We have no evidence that that has actually
added any value to consumers in addition to the value that is
provided into generic action reason codes, or that consumers
actually understand what that means.
We are strong advocates of informed consumers, educated
consumers and consumers who can take information that they know
of themselves to increase their likelihood to obtain credit.
Mr. Plunkett. I would respond by saying that if the
information we are getting is that, yes, most people don't
understand their credit score yet. But the first step is to
provide them with the score and with an explanation of the
major factors that are used in determining the score. And that
is how you start the education process.
So the California law is something that we would like to
see nationally. This is an absolutely essential piece of
information that consumers need to have, that then provokes
them to ask questions about not just what the factors are, but
how they are weighted: What is more important, a collection or
a delinquency? And they start asking questions about the
underlying data. Is there a problem? Has one a creditor made a
mistake in listing a delinquency that is not a delinquency? How
do I correct it? This is all information the consumer should
have.
Mr. Moskowitz. And I would add one last comment to that,
which is that, no credit score and no FICO score has ever been,
in our company, the reason for a loan being rejected. It is a
reason for a loan to be approved. If those issues or factors
arise in the context of evaluating a consumer, we delve more
deeply, analyze the reasons, look at the other factors in the
broader underwriting spectrum that need to be examined.
Ms. Hooley. So I would assume----
Chairman Bachus. We are actually over----
Ms. Hooley. Okay.
Chairman Bachus. Had a little over 10 minutes.
Ms. Hooley. Sorry.
Chairman Bachus. But I mean you have been a leader on this
issue, so I want to give you some leeway.
Ms. Hooley. Well, maybe some of these questions I can write
them up and have them answer them afterwards. I am really
looking for, how do we do this in a way that makes sense for
the consumer? How do we make sense, so that again, we can try
to prevent identity theft, and again get through the process
and make sure that we have accurate reports so that people are
not turned down for inaccurate reports? And how do we educate
the public on the issue?
Thank you, Mr. Chair, for your tolerance.
Chairman Bachus. Thank you. Thank you, Ms. Hooley.
One thing that I would say that we talked about sometime,
the vagueness of the response, like delinquency or serious
delinquency. I think that part of that is civility. We don't
want to say, you don't pay your bills or you don't pay on time
or the other thing is liability. You know, if you get specific
in a report, say that someone doesn't do this or that; I am
just wondering if that may not be some of the reasons.
Mr. Meeks?
Mr. Meeks. Thank you, Mr. Chairman.
Let me ask, Mr. Gambill, first question is how much money
does it cost anyway? How much money did it cost to send out a
report?
Mr. Gambill. We send out 8 million reports a year to
consumers, and I said earlier, we have 4 million of them that
ask us to re-verify issues or questions that they may have on
those reports. We spend $60 million on that process.
Mr. Meeks. And have you ever explored on, would it save
money if you sent out some notification et cetera,
electronically?
Mr. Gambill. We send out as many as we can, electronically,
Congressman. The issue becomes the rigor with which we need to
authenticate somewhat electronically, but be sure that they are
who they say they are. We don't want people to get credit
reports that aren't theirs. So we have to be fairly rigorous in
the questions that we will ask before we deliver the report
electronically.
We are now up to a point, where about 70 percent of the
people that try to get their report electronically are
successful at it. That will ultimately, I think, drive our
price and cost down. But currently, that is----
Mr. Meeks. As you move along and you begin to perfect it,
that should help some cost down because, like my colleague from
Oregon, I am concerned about identity theft, and I agree with
also, Congressman Ackerman, who talked about when a person
receives a negative credit information, it was hitting them, if
the individual knows that a report is going to hit them
immediately, number one, they can correct it, so that we don't
have the of debt that was indicated by Ms. Hooley, where
someone goes in for mortgage closing, or they go in for a job
and they have a negative credit report, and then all of the
sudden, they are hit with something they had no idea was there.
And it takes time.
But if they had a notification at the time it had hit the
report that they had a negative report, then that would help
them and prevent identity theft, saving billions of dollars,
I'm sure, because I know from the credit card company, that is
one of the major problems that they talk about, they are
loosing all kinds of money. Is there anything that you can
conceive or come up with that would make it logistically
possible to have something where there is a hit and a consumer
knows about it?
Mr. Gambill. Those kinds of things are certainly possible
if they are electronic. And we offer those kind of services to
consumers on a subscription basis that can go through the rigor
of being authenticated electronically so that we can, via e-
mail, give them some electronic notices as to when things
change about their credit files.
To wholesale mail, that kind of information out, I believe,
would increase our exposure to fraud as a country, not decrease
it, because I am sending information to some address about some
individual, about some trade line, that hit some credit file, I
have no real idea whether I have sent that to the right
individual or not.
Mr. Meeks. I just want to check, because someone told me
that at a speech somewhere is it correct, that you said .6
percent of your revenue would gain from selling the report to
the public. Is that correct?
Mr. Gambill. Well, your math is better than mine; it is
about $30 million. I mean I will calculate that percentage if
you would like.
Mr. Meeks. Okay. Let me ask a quick question of Mr.
Moskowitz.
I asked that because Wells Fargo gets my money every month.
[Laughter.]
Mr. Meeks. Might as well make you----
Mr. Moskowitz. Mine too.
Mr. Meeks. There is this huge concern about the crafting of
privacy notices and legislation on privacy by various States.
We have heard the testimony here. What would be your
recommendations for a uniform national privacy law that would
simplify the issues for customers without completely opening--
and now is the big question--Gramm-Leach-Bliley? Is there any
recommendation, you think? It took us such a long time to get
there, you don't want to open the whole thing up. But do you
have any recommendations?
Mr. Moskowitz. Well, we agree that the possibility of
inconsistent State privacy disclosures will confuse people, and
we believe that regulators should be asked by Congress to
improve existing annual notices and establish uniform
disclosure requirements that make it clear how information is
used by a company.
We are strong supporters, though, as you know, of the
ability of a company, like a bank, with its operating subs, to
organize itself in the way that it wishes to and to be able to
freely share information internally to accommodate the needs of
customers without restriction, except that as provided by
existing FCRA law.
Mr. Plunkett. Congressman, I might just add--Congressman,
this is Travis Plunkett.
I might just add that, the privacy notices are already
regulated nationally through the Gramm-Leach-Bliley Act. So we
are not going to see that change. We think the notices need to
be improved, but that is a national regulation right now.
The folks who want to extend the affiliate sharing
preemption, one of the eight preemptions under the Fair Credit
Reporting Act, your question was how do we do this without
messing with Gramm-Leach-Bliley. And unfortunately, the
proponents of extension of the affiliate sharing preemption
have brought Gramm-Leach-Bliley into play already because they
have claimed that the prohibition on States passing affiliate
sharing restrictions for credit reporting purposes extends
beyond that and actually affects the Gramm-Leach-Bliley Act and
doesn't allow the explicit provision in Gramm-Leach-Bliley that
allows States to go further with privacy loss. It doesn't allow
those States to deal with affiliate sharing.
So we already have a linkage that folks who want to extend
this affiliate sharing preemption have made the Gramm-Leach-
Bliley, so it is hard to deal with the affiliate-sharing
problem, and we think it is a problem, without bringing Gramm-
Leach-Bliley into play.
Mr. Moskowitz. And we don't think there is an affiliate-
sharing problem at all. We believe that the ability to share
information for appropriate purposes within a company that has
chosen to organize itself in separately organized corporations,
which could be organized that way for both expertise reasons,
for regulatory purposes and liability purposes, is a primary
driver of the efficiency of the market that has lowered
interest rates for consumers.
It has allowed companies like Wells Fargo to develop
innovative products that have allowed us to become the primary
lender, the number one lender to low-to moderate-income groups
and in low-to moderate-income communities, and to ethnic
minorities. And those efficiencies are undermined by our
inability to share information internally in a way that
addresses those communities' needs.
Mr. Plunkett. And we have said we would simply like
consumers to have the option to stop sharing of that
information. And if they see an economic advantage, they will
certainly allow it.
Mr. Moskowitz. And consumers have the ability to opt out--
--
Mr. Plunkett. Not on affiliate sharing.
Mr. Moskowitz. Yes, they do.
Mr. Meeks. This is my last question, gentlemen, on
affiliate sharing. Should the same be true of major
corporations that provide completely different services, for
example, commercial banking and investing banking?
Mr. Moskowitz. The ability of a company that has unrelated
business?
Mr. Meeks. Yes.
Mr. Moskowitz. Well, we believe that the most efficient way
for a company with multiple businesses is to organize itself as
the way it chooses to do so and to provide services to
consumers in a way that is consistent with that organization,
and not be forced to reorganize in a way that could accommodate
that sharing and that is inconsistent with its own internal
business model.
Mr. Plunkett. See, I don't think many consumers know about
the affiliates of their bank, for instance. Many banks now have
lots of affiliates. So the bank is also has an affiliate in the
insurance business or the security business, I think, polls
show again and again, consumers want the choice. They will
consider the cost and the benefits, but they want choice to
stop the sharing of that information between the bank
affiliate, the insurance affiliate and the security affiliate.
Mr. Moskowitz. And that choice could impact the ability of
a company to control fraud, to manage its servicing portfolio
and could be able to deliver its products to Wall Street in a
way that reduces inefficiencies and increases cost.
Mr. Meeks. Thank you. I yield back.
Chairman Bachus. Thank you. I think that concludes our
testimony of the first panel. I appreciate your testimony and
commend you on your answers, and it has been very valuable to
us as we consider this important matter.
First panel is discharged, and we will go right to our
second panel at this time.
We want to welcome our second panel, from my left to right.
First panelist, Mike Vadala, president and CEO of Summit
Federal Credit Union, located in Rochester, New York. Summit
has $275 million in assets, 42,000 members from over 500
companies. Probably more importantly, he is the secretary of
NAFCU. More importantly, I see you are active on the alumni
board and the management advisory council of Syracuse
University. I commend you on your NCAA basketball win, except
for your victory over Auburn, which you got very lucky there.
[Laughter.]
Chairman Bachus. But other than that, you probably deserved
to win every game. And very active in various charities in the
Rochester area. I welcome you back before the committee. I
think you have testified, actually, in 1997 on credit cards and
other different issues.
Our next panelist is Rusty Cloutier. He serves as a
director of the New Orleans branch of the Federal Reserve Bank
in Atlanta. President, CEO of MidSouth Bank, Lafayette,
Louisiana, a bank of $365 million asset bank. Earned a
Bachelor's in Science from Nichols State. Is that where Billy
Tauzin went?
All right, so we know that is a very good institution.
He also served as a member of Fannie Mae's National
Advisory Committee. Again, director of Our Lady of Lords
Regional Medical Center, Chamber of Commerce and chairman of
the Community Bank, Bankers of Louisiana. I welcome you to this
hearing.
George Loban, co-chairman of FSF Financial Corporation and
First Federal FSB, $560 million stock institution in
Hutchinson, Minnesota.
Where is Hutchinson, Minnesota?
Mr. Loban. Hutchinson is just west of the Twin Cities,
about 40 miles----
Chairman Bachus. I see.
Mr. Cloutier.----40 or 50 miles, Minneapolis, St. Paul.
Chairman Bachus. Then, a member of the board of directors
of America Community Banks since 1998, serves on various
committees for them. A chairman of the board of the Minnesota
League of Savings and Community Banks, and served two terms as
chairman and two terms as the member of the board of the
Federal Home Loan Bank in Des Moines. So, welcome you and quite
an experienced background.
Robert Manning is a Caroline Gannett Professor of
Humanities, Rochester Institution of Technology, Rochester, New
York. That is the same town that our first panelist is from, so
we have two from Rochester. Professor Manning recently wrote
Credit Card Nation, which has gotten a lot of publicity. He has
testified extensively before the Senate and the House on
lending issues, credit issues, and sub-prime and predatory
lending issues.
We welcome you back. I think this committee's well aware of
your experience.
Dr. Manning is a past Fulbright lecturer to Mexico, Ph.D.
from John Hopkins, Northern Illinois University, M.A. and B.A.
from Duke University.
Our next panelist is Evan Hendricks, editor and publisher
of Privacy Times, a Washington-based newsletter specializing in
privacy acts and what else?
Mr. Hendricks. Fair Credit Reporting Act, medical records,
employment records.
Chairman Bachus. Privacy issues and various policy issues.
He served as consultant on privacy and business issues for
major corporations, including Ericsson, a Swedish-based
wireless company. And since August 1998, served on the Social
Security Administration's panel of experts. He was a paid
consultant for CNN, Multi-State Tax Commission and various
other commissions. He is quoted regularly in major and small
newspapers including The Washington Post and The New York Times
and ABC Nightline and is a familiar face on the nightly news.
So we welcome you.
At this time, to introduce the general counsel for global
consumer group for Citigroup, I am going to yield to the
gentlelady from New York.
Mrs. Maloney. I thank you for giving me the honor of
welcoming one of my constituents from the great State of New
York and the great city of New York. And I would like to
introduce Mr. Martin Wong, and he is from Citigroup, one of our
important financial institutions and he is general counsel of
Citigroup's Global Consumer Group, and he has worked in various
positions at City since 1987. He earned his B.A. in public
administration from Loyola and J.D. from the University of
Baltimore.
And we welcome him and thank him for taking the time to be
with us. Thank you.
Chairman Bachus. And our last panelist, Mr. Scott
Hildebrand. He is vice-president, Direct Marketing Services for
Capital One. He has had various responsibilities there, but
direct marketing probably describes most of them. Prior to
joining Capital One, Scott was vice-president at Epsilon, a
leading database, marketing firm, formerly owned by American
Express.
While there, he advanced customer relationship marketing,
had a number of Fortune 500 companies improving customer
retention, cross-sell and profitability. In addition, he served
as a consultant for 80 little PepsiCo's Frito Lay and Kentucky
Fried Chicken business units and the Marriott Corporation. He
attended Georgetown University, B.A. degree.
And then he received his MBA, in marketing and finance,
from the Kellogg School of Management at Northwestern
University.
So all-in-all, a very competent panel. We look forward to
your testimony.
And at this time, we will just go right to testimony.
Mr. Sanders. I will be just very brief.
Chairman Bachus. Well, actually, Mr. Sanders.
Mr. Sanders. Thank you very much, Mr. Chairman.
This is a very important panel dealing with a very, very
important issue. The reality is that right now, in my view,
among other problems with the industry, a major scam is being
perpetrated on large numbers of Americans. And that scam, as I
mentioned earlier, Mr. Chairman, and one of the underlying
points that we have to reiterate, Mr. Chairman, is that not
every American is all that sophisticated in all aspects of
financial transactions. Bottom line is that companies promise
people, or at least indicate that they are promising people,
credit at a certain interest rate. And if I say to you, Mr.
Bachus, I am going to charge you six percent for a year, your
expectation is that if you pay your bills to me on time, that
is going to be six percent.
That is usually the way we do business in America. And yet,
increasingly, what we are finding is that those interest rates
are zooming up despite the fact that the consumer is paying his
or her bill to the credit card company on time.
But I can understand if I am late in paying the bill, you
say, Hey Mr. Sanders, there is a penalty, they will raise your
interest rates. If I pay the bill to you every month, on time,
I have a right to believe that my interests are going to remain
the same. And with the growth of sophisticated information
acquisition, what credit card companies are learning, is that
maybe 3 years ago, I was late in paying an auto loan. Or even
more egregious, there was an illness in my home. I pay my bills
on time. There was an illness and I have to borrow money to
provide to pay the medical bills. And because I borrow more
money, because I borrow more money, not because I am late in
any of my payments, credit card companies say, well he is now a
greater credit risk. He is more in debt. But maybe I pay my
bills on time.
And arbitrarily and often, in fact, without the knowledge
of the consumer, interest rates go way, way up: 25 percent, 30
percent, usurious rates, which are leading to bankruptcy and
terrible situations for large numbers of the American people.
Mr. Chairman, I hope that we can work together on
addressing this rip-off. Large multi-billion dollar companies
should not be involved in a scam like that. They should be
embarrassed. And I hope that we can discuss this today and vote
in a bipartisan way, tripartisan way, in addressing this issue.
Mr. Chairman, thank you very much.
Chairman Bachus. I thank the gentleman.
Mike, Mr. Vadala, you will lead off.
STATEMENT OF MICHAEL VADALA, PRESIDENT AND CEO, THE SUMMIT
FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF
FEDERAL CREDIT UNIONS
Mr. Vadala. Thank you, Mr. Chairman.
Ranking member, Sanders, members of the committee.
I think I am glad we lost to Auburn in football this year,
and I wanted to remind you of that so that we----
Chairman Bachus. I had forgot about that.
Mr. Vadala. My name is Mike Vadala, and I am here today on
behalf of the National Association of Federal Credit Unions to
express our views on the Fair Credit Reporting Act. I am
president and CEO of the Summit Federal Credit Union,
headquartered in Rochester, New York. The Summit currently
serves over 42,000 members in all 50 States. Due to the
complexity of the different laws that exist on a State by State
basis, the Summit does not offer real eState loans outside the
State of New York, but we do offer credit for all other
consumer purposes to our members. If the FCRA preemptions are
not extended, it is likely that the Summit will not make any
loans outside of New York.
The foundation of America's National Consumer Credit system
is FCRA, enacted by Congress in 1970 to streamline credit
reporting and to provide consumers with protection from
inaccurate and inappropriate disclosure of the personal
information by consumer reporting agencies. In 1996, the FCRA
was amended and now contains seven specific Federal preemptions
to ensure that the National Consumer Credit System remains
viable and can continue to deliver affordable and accessible
credit and financial services to consumers.
NAFCU agrees with Federal Reserve Board Chairman Alan
Greenspan that Congress should permanently reauthorize the
preemption provisions of the FCRA. Doing this, will give credit
unions the ability to continue to offer their members credit in
a timely manner and at a fair market price. It would also
codify the ability of credit unions to share certain member
information with our affiliates, thus making credit union
members aware of the opportunity to obtain additional financial
services.
Failure to reauthorize these preemptions could drastically
change the way a credit union conducts business. A credit union
such as ours could be forced to incur additional costs
necessary to comply with several new and changing State laws.
As you may know, credit unions, on average, are small
financial institutions and may not have the resources necessary
to comply with differing laws across the States. They would,
therefore, be forced to forgo lending in many States in which
they have members. This could result in the potential of
millions of consumers loosing a viable lending option and may
make smaller credit unions even less competitive.
Credit scoring and credit reports are two important factors
in evaluating the creditworthiness of borrowers. Combined with
our loan office experience in judgment, credit scores and
credit reports have contributed to a very successful lending
program at the Summit. We acknowledge that at times there are
errors in credit reports, but we are pleased with the
improvement that we have seen in recent years as a result of
National Standards and improved technology.
We have also found that many times, well-trained credit
officers can find these errors. Errors aside, credit reports
are very valuable in verifying that a member has listed all of
his or her debts on a loan application. These reports also
provide details as to the payment history on those debts. With
more members opening credit lines in multiple States, it would
be unquestionable or unreasonable for the requirements
reporting to vary from State to State.
A consistent method of credit reporting allows us to get
the information that is necessary to extend credit responsibly
to our members.
Credit scores are also an important part in the extension
of credit. At the Summit, we have found that the credit scoring
modules are statistically valid, and that the accuracy of
credit reporting and credit scores are much improved over what
they were prior to 1996. We use credit scores to offer
automatic approval on loans and to determine loan rates on
several loan products. We find those with lowest credit scores
have the highest delinquency rates.
There are many factors that contribute to credit scores
including, repayment history, amount of credit owed, credit
history, new debt and credit mix.
In general, people know that when they don't manage their
debts properly, it will show up on their credit report and hurt
their credit rating. But even so, more needs to be done to
educate consumers about credit. As an institution owned by our
members, the Summit's vision is to educate our members so that
they understand their credit scores. Today, we are doing so on
a case-by-case basis, if members ask for explanations.
Mr. Chairman, in conclusion, growth in the credit union
community is strong and the safely and soundness of credit
union is second to none. We are providing credit to more
Americans in more locations than ever before. We urge the
subcommittee to reauthorize the preemptions included in the
FCRA so that we can continue our unique role in serving
America's consumers, while strengthening our economy.
NAFCU thanks the subcommittee for the opportunity to appear
before you today and comments the House Financial Services
Committee for examining this important issue. Thank you.
[The prepared statement of Michael Vadala can be found on
page 197 in the appendix.]
Chairman Bachus. Thank you, Mr. Vadala.
And at this time we will hear from Mr. Cloutier.
STATEMENT OF C.R. CLOUTIER, CHAIRMAN, INDEPENDENT COMMUNITY
BANKERS OF AMERICA
Mr. Cloutier. Mr. Chairman, I had the honor, a week ago, to
be with the Community Bankers of Alabama, and they talked a lot
more about football between Auburn and Alabama than we did
about banking, but it is my pleasure to be here today and I
appreciate the invitation from you and ranking member, Sanders
and the members of the committee.
My name is Rusty Cloutier. I am chairman of the Independent
Community Bankers of America and president of MidSouth Bank
National Association, a $400 million community bank located in
Lafayette, Louisiana. I am glad to be here today on behalf of
the Independent Community Bankers of America, representing over
46,000 small community banks across America that want their
voice heard.
ICBA supports the FCRA uniform national standard that will
expire on January 1, 2004, and we strongly urge the committee
to make these provisions permanent. Within the text of FCRA,
Federal preemption is essential to ensuring constant uniform
standards. FCRA is an important tool in promoting economic
growth and uniform credit reporting standard also insure the
availability of credit, especially to the low and moderate-
income borrowers that are so important in my State of
Louisiana.
If Congress fails to renew the uniform standards, the
current system will be undercut by the enactment of a myriad of
State laws with potential conflict standards. This will result
in increasing costs to the industry and a significant impact on
a bank's ability to evaluate the creditworthiness of its
customers.
We live in a highly mobile society. Customers often move
frequently and live in several different cities and States.
Some community banks serve customers in neighborhood States and
allow customers to apply for credit over the Internet.
Certainly, a bank does not have to consider a customer's
State or States of residence when reviewing his or her credit
report in order to understand what, where and when and how the
information was reported. The information reported in my credit
report is based on the same Federal standard as the information
in yours. Without uniform national standards, how and when
information, such as loan delinquency, payment history is
reported, would detrimental, would be determined by each State.
A borrower from Louisiana would then have a credit report
with different standards and containing different information
from that of a borrower from the State of Alabama or the State
of Mississippi. And if that borrower had lived in each of the
States, his credit report would contain the information
reported, based on the standards of each of these States. This
would be overwhelming for both the bank and the consumer to
understand. Community Banks want clear and consistent policies
and standards.
The history in the success of community banking in this
country is predicated on the extension of credit. Our current
system is fair and effective. Consumers have grown accustomed
to the availability of quick low-cost credit. Stricter consumer
protections on a State-by-State basis will ultimately be
detrimental to the consumer who may experience delays in credit
decisions and banks may lose the opportunity to extend credit.
Reauthorization of FCRA uniform provisions will benefit both
consumers and community banks.
Let me turn for a moment to a very important issue of
identity theft. It is the nation's fastest growing crime and
resulted in at least $1 billion dollars in losses to banks last
year, including mine. FCRA plays a major role in this fight.
Therefore, it is essential that the current national system of
credit reporting is maintained. ICBA strongly supports measures
to thwart identity theft.
We would also support measures to allow customers to obtain
a copy of their credit report free of charge annually. The
benefit to community banking and having a customer who has been
able review his credit report outweighs the cost of lost
opportunities to extend credit to that customer due to
inadequate or incorrect credit file information that may take
several months to correct. Our customers should not have to be
faced with denial of credit before they are able to receive a
free credit report.
Information sharing is also an important topic in this
debate. ICBA strongly urges the committee to maintain an
appropriate balance between the critical protection of a
consumer, financing privacy and the community banks' legitimate
information sharing needs, that insures our customers have the
essential products and services they need. The use of
outsourcing in joint agreement with trusted long-term partners
is vital to our ability to compete.
The joint agreement business model that we use is the same
as the affiliate model for large banks and should be treated
the same. Treating these business models differently would be
unfairly discriminated against community banks in small
communities that they serve, because of their regular size and
corporate structure.
Please remember that it was not the community banks who
started the discussion on privacy by selling their information.
A consumer opt-in requirement would be detrimental to the
community banks and to their customers. Thus far, only 5
percent have opted out of having the information shared with
affiliate third-party, so it is likely that opt-in rates would
be similarly as low.
In conclusion, FCRA and the nation's credit reporting
system, helps ensure that customers can easily access complete
competitively priced products. The reliability of credit
information, in maintaining, by the credit bureaus is critical
to this goal.
ICBA strongly urges the committee to support the permanent
reauthorization of the uniform national standards that will
sunset on January 1, 2004.
Thank you for the opportunity to testify today and I will
be glad to answer any questions at the appropriate time.
[The prepared statement of C.R. Cloutier can be found on
page 73 in the appendix.]
Chairman Bachus. I appreciate that, Mr. Cloutier.
And Mr. Loban, if you will testify?
STATEMENT OF GEORGE LOBAN, CO-CHAIRMAN AND PRESIDENT, FSF
FINANCIAL CORPORATION AND FIRST FEDERAL FSB, HUTCHINSON, MN, ON
BEHALF OF AMERICA'S COMMUNITY BANKERS
Mr. Loban. Thank you, Chairman Bachus, Ranking Member
Sanders and members of the committee.
My name is George Loban. I am the co-chairman and president
of FSF Financial Corporation and First Federal Bank. We are a
$560-million stock institution based in Hutchinson, Minnesota.
I am testifying today on behalf of America's Community Bankers,
where I serve on the board of directors and as chairman of the
Privacy Issues Subcommittee.
I appreciate this opportunity to testify on the role of the
Fair Credit Reporting Act and the credit granting process. The
FCRA aids uniform national standards allow community banks and
others to make prudent credit decisions quickly and
inexpensively wherever a customer may reside. They insure that
credit reporting information is consistent from State to State,
facilitating a national market for credit and risk management.
This, however, is scheduled to change if Congress does not, by
the end of this year, reauthorize the FCRA's uniform national
standards.
Failing to act could result in a patchwork of conflicting
State laws and substantially erode the quality and integrity of
our credit reporting system.
More importantly, a lapse in reauthorization could
drastically impact a wide variety of players in our economy.
For example, my institution serves consumer mortgage
customers in over 40 States. Yet, we are by no means, a large
business. If we were forced to comply with 40 different State
laws, we would be forced to either to hire a team of compliance
specialists, or else we would have to turn away out of State
customers. The FCRA's uniform national standards allow First
Federal to service mortgage customers effectively nationwide,
and at a lower cost.
Our story is just one real life example of why Congress
must reauthorize this year's FCRA's uniform standards on a
permanent basis.
We also urge that laws regulating information sharing
practices not discriminate against financial institutions based
on size or corporate structure. Community banks often work with
third parties affiliated and nonaffiliated to offer our
customers new financial products. Where no affiliation exists,
there is a contract dictating how and what information may be
shared.
The disclosure and opt-out requirements of the Gramm-Leach-
Bliley Act treat certain disclosures of information between
financial institutions and a third-party identically.
Regardless of whether the two institutions are affiliated, ACB
urges that any prospective laws follow suit.
Our system of credit, however, is not without it glitches.
The rising number of identity theft cases is creating enormous
hardships on victims and community banks. This disturbing trend
indicates that something more needs to be done to safeguard
information from perspective identity thieves.
ACB urges Congress to pass legislation to increase
sentences for identity thief crimes and make it easier for
prosecutors to prove identity theft. We also look forward to
working with the subcommittee on additional legislation to help
combat identity theft.
Finally, improvements should be made to the credit
reporting system itself to help protect consumers. During
debate on the regulatory release bill, representative Gary
Ackerman sponsored an amendment requiring Federally insured
depository institutions to notify a customer every time it
furnishes negative information to a consumer reporting agency.
This amendment would result in billions of new notices sent
to consumers monthly. This would greatly increase cost and
paperwork burden of financial institutions and their customers.
ACB and others opposed a similar amendment last year. But
while we disagree with Representative Ackerman's proposed
solution, we recognize that he may have identified a problem.
The continued integrity of the Federal Credit Reporting
System demands that credit reports be as accurate as possible.
ACB supports empowering consumers by providing them access to a
free annual credit report, and enhancing their ability to
correct errors on their credit reports, especially those
resulting from incidence of identity theft. While we recognize
that these tools do not come without some cost to the industry,
we believe these costs can be balance against the benefits
provided to consumers.
Again, thank you for this opportunity to testify. I look
forward to any questions you may have.
[The prepared statement of George B. Loban can be found on
page 132 in the appendix.]
Chairman Bachus. I appreciate that, Mr. Loban.
Our next panelist, Dr. Robert Manning--Dr. Manning?
STATEMENT OF ROBERT MANNING, PROFESSOR OF HUMANITIES, ROCHESTER
INSTITUTE OF TECHNOLOGY
Mr. Manning. Thank you, Chairman Bachus for providing the
opportunity to share my views with the committee on this
increasingly important topic of credit card industry policies
and the protection of consumer rights under the Fair Credit
Reporting Act.
Also like to commend Ranking Member Bernie Sanders for his
efforts in protecting consumers from deceptive marketing and
contract disclosure practices of the credit card industry.
These twin issues of rising consumer debt and shockingly
low levels of financial literacy, which includes, a lack of
understanding of consumer rights which have grave implications
that the continued well-being of the nation, especially as
Americans cope with these increasingly perilous economic times.
Today, I would like to direct my focus on the impact of
Federal deregulation on banking as it affects consumer lending,
specifically, revolving credit. How the enormous profitability
of the industry has created institutional pressures to increase
its client base, consumer debt levels and especially escalating
penalty fees. And then, conclude by examining specific abuses
that are facilitated by the FCRA and its implications of
statutory reform.
I think what is critical to our understanding is that we
have gone from a system of community banks to one of national
and global conglomerates where the demand for crossmarketing
with affiliates through such merges as Travelers and Citibanks
have lead to increasing strain on consumer privacy and the
availability of consumer financial information.
In this period of the last 20 years, the best client has
been transformed from installment lending contracts with people
who had low debt levels, to today, the best client is someone
who will never repay their loan, specifically through unsecured
or revolving credit.
Credit cards have played a pivotal role in the transforming
of the structure of the financial services conglomerates, and I
show you in chart one, it gives a lot of the empirical
background for my presentation, but the key is, since 1977, we
have gone from 50 banks controlling about half of the market to
today, 10 banks control 80 percent of the credit card market.
And this, I believe, is critical as we look at the rise of
the nationally chartered banks that through their process of
consolidation it has severely reduced the role that local and
State level legislation plays, and that this lack of regulatory
control over issues such as, State usury laws, fee caps,
mandatory arbitration, meaningful notice of disclosure has
really shifted the emphasis now about Federal preemption, and
its role now moves increasing to Congress, especially to this
committee.
We all know the enormous profitability of the credit card
industry today, even during this recession, even though we have
heard many complaints that the industry is suffering. In fact,
and over the last 10 years, the credit card industry's
profitability has more than doubled, and the banking industry
as a whole. And recently, we can look at it terms of the sale
of credit card debt, from 18.4 percent premium paid last year,
actually risen to 19 percent today.
In terms of FCRA, I think what is critical here is that the
institutional pressure to recruit new people, and particularly
people with the least knowledge of their rights under FCRA, and
especially in terms of the terms of their contracts, has lead
to a dramatic increase of fee revenue, from $1.7 billion in
1996 to $7.3 billion in 2002.
Who are some of these people that we see now that with some
of the amendments of the 1996 FCRA, that are being increasingly
solicited? What we have seen is, a tremendous increase in the
working-poor, households with less than $10,000; senior
citizens and college students. And I refer to the charts that
show the dramatic increase in working-poor households where
average debt of a recent survey of the University of Michigan's
Consumer Finance Survey shows that the biggest increase in
credit card debt is among those households with less than
$10,000, from less than $600 in 1989 to over $24,000 in 1998.
And in my comments, I included a case to show the abusive
contracts that have been offered in this process, where a
$400.00 credit limit includes $371.00 in fees. We looked at
seniors who, for the first time, are now being aggressively
solicited, 65-year-olds, we are seeing that their average
credit card debt is more than doubled in this period of time.
And I refer to my most recent survey of college students,
which shows now, the shifting of the marketing permitted now.
With under the 1996 amendment, that we seen a dramatic shift,
not from upper classmen, but to freshmen and even high school
students, where the supposed ability of students to pay for
their loans neglects the debt component where you will see from
the data that more increasingly, three-fourths of college
students with student loans are using them to their credit
cards. Sixty percent of freshmen are actually using, have maxed
out on their credit cards and using one credit card to pay for
another.
So I want to conclude with three specific cases that I
think are particularly germane to today's discussion. One is
the issue of prescreening that enables banks to look at a
client's accounts with other banks. When is a fixed loan really
a fixed loan over the term of the contract? And I refer to
cases where people specifically have had their interest rates
raised from 0 percent to 25 percent because of outstanding debt
balances on other accounts.
I would like to emphasize also, with my participation in
some FCRA litigation, that there needs to be an extension of
the period of time for filing litigation. Many consumers
clearly do believe that banks and the credit reporting agencies
will respond to their requests, and for those who fall through
the cracks, we really need to accommodate their special
circumstances.
And I want to conclude with a final case that I feel is
particularly important to those both that link both issues of
credit cards and housing. And that refers to the case of
Household Finance versus ACORN, where the screening process was
specifically to seek two criterion, people with high credit
card debts and people who own homes. And the point of this
marketing program was to upsell, that is to consolidate credit
card debt into the home mortgages, and through this process of
consolidation, these higher interest rates meant that there
could not be a possible home refinance nor could the home be
sold, because it had negative equity.
So for these and other reasons, I hope that the committee
will carefully examine the impact of FCRA reauthorization, not
only for process of fairly granting, but also fairly
administering consumer credit accounts.
Thank you.
[The prepared statement of Robert Manning can be found on
page 138 in the appendix.]
Chairman Bachus. Thank you, Dr. Manning.
At this time, I have to go out and make a statement. So I
am going to switch chairs with the gentleman from Ohio, Mr.
Tiberi who will chair the hearing.
And Mr. Hendricks, we will start with your testimony.
STATEMENT OF EVAN HENDRICKS, EDITOR, PRIVACY TIMES
Mr. Hendricks. Thank you, Mr. Chairman and Congressman
Tiberi.
My name is Evan Hendricks, editor and publisher of Privacy
Times.
I come today prepared to discuss solutions to some of the
problems.
And yes, we have what may be the best credit reporting
system in the world, but the great thing about this country is
we never stop trying to improve it. I think, more importantly,
there is substantial evidence of potentially deep flaws in the
system that are harming consumers, and also new evidence that
marketing of credit services might be facilitating identity
theft. I intend to explore those.
With the advent of the national credit reporting system, we
realized we needed a Fair Credit Reporting Act. We enacted one
in 1970.
In 1990, problems with inaccuracies in credit reports was
the leading cause of complaints to the Federal Trade
Commission, so it took 6 years to upgrade the law. It should be
no surprise right now that we need to continue to advance
consumer protection in this area, and we need a strong national
floor, and that the States play a very important role in
consumer protection.
The main purpose of the 1996 amendments was to make the
correction of mistakes in the credit report, a routine process
and to articulate a higher standard of care, to make it so you
don't have file a lawsuit to get your credit report corrected.
Unfortunately, that goal has not yet been achieved, as I
have seen in too many instances how, that the only way a
consumer could get a credit report corrected was by going to
court. That is clearly not the policy we want running this
country, and when we are trying to cut down on litigation. Yet
the practices of some furnishers and some credit reporting
agencies actually encourage litigation for those that really
care about protecting their good name.
Another reason behind the 1996 amendments was inaccuracy.
Clearly the CFA study, along with the Federal Reserve Board
study, documents serious problems with inaccuracy. And I think
Chairman Greenspan and his staff should read their own report,
before they address this issue again.
The dispute numbers at the CRAs, Credit Reporting Agencies
are running, typically, 7,000 to 10,000 disputes per day, and
this allows, with the number of staff they have and the number
of disputed items per report, sometimes they really only have
two minutes or so to deal with every dispute.
Credit grantors, like Capital One, are seeing their
disputes go up from 1,000 a day about 18 months ago, to now,
4,000 disputes a day. They deal with this by having an
automated dispute problem.
One of the things that can cause inaccuracies in credit
reports is the use of partial matches, and I have seen this
over and over again, where a credit bureau will say, if your
Social Security number's not the same, if there is one digit
difference, sometimes they will assume that if there is enough
common letters in the first name, then they will assume it is
the same person, and they will merge that information together.
And so, it is this use of partial matches of both partial name
matches and partial Social Security numbers, which causes great
deal of inaccuracy. And I have detailed this in my statement.
They deal with the high volume of disputes by using an
automated system to have basically this exchange of messages
between the credit grantor and the credit bureau, in which the
credit bureau asks, after a dispute, Did you say this? And the
credit grantor comes back and says, Yes, that is what we
reported. But they don't really try and investigate in a true
sense of the word to get to find out what the truth is.
In my statement, we have talked about a lot of the damages
that come to consumers in this area. I have also urged this
committee to try and hold hearings, at least spend a morning or
so, listening to the victims of mixed files and identity theft,
so you can get a full range of the damages that people have to
undergo when they are pitted with problems in the system. Not
only can inaccurate data lead to credit denials, but it also
can lead to price-hikes in the age of risk-based pricing, and
cause the emotional distress of trying to correct a credit
report mistake that was not of your making. The damages are
extensive.
In three of the seven areas, where there is preemption, one
of the areas is prescreening. I have just begun an
investigation into this area, and with two phone calls, I have
found that there are major criminal gangs across the country
that are hitting mailboxes, trying to get any personal
information they can get, including pre-approved credit card
offers, also convenience checks, bank statements, so that they
can take this personal information and use it to facilitate
identity theft.
There is quite a range of sophistication among these
groups. Some try and use the pre-approved credit cards or
convenience checks to get money instantly. Others take the
personal information and sell it to fences that are more
sophisticated in counterfeiting and identity theft.
I think in this area I think that we need a stronger
national standard, because if you look at your prescreened
offers, you will see that even though the law says the notices
are supposed to be clear and conspicuous, they are neither
clear nor conspicuous, and that we need to go beyond that and
to have basically a national opt-out registry for credit offers
through the mail, just as we have a registry to stop junk phone
calls.
The duty on furnishers, is also a preempted area. But this
is a very weak standard that basically sets up too many hoops
the consumers must jump through in order to facilitate simple
correction of their errors. I detailed in my statement some of
those hoops they have to jump through and why a stronger
standard is necessary. If Congress is unable to enact the
stronger standard, then we need to let the States feel free to
move forward and protect consumers in this area.
The final area is affiliate sharing, and despite all the
talk of the need for a national standard, the FCRA sets no
standard for affiliate sharing. It just says that the States
will not enact anything in this area. So basically, it favors a
national standard in an area where there is no national
standard.
Now, Gramm-Leach-Bliley has some national standards to the
sharing of financial data, which is simply a very weak and
watered-down opt-out for sharing with third parties. Yet it too
does not set a standard for affiliate sharing.
And so, the FCRA provisions are being invoked by Wells
Fargo and Bank of America in litigation against localities and
ordinances to try and stop those places from protecting their
citizens with stronger privacy protection.
In closing, I would like to say that this is an extreme
importance to the American consumers. The top complaint back in
the 1990s was about credit reports; now it is about identity
theft. It leads the complaint list about all sorts of other
issues that involve out-of-pocket losses.
I think it is very important to the people of America to
protect their good name. I think that is a major item that this
law is all about and that is why there is a grave
responsibility to this Congress to enhance consumer protection.
Thank you.
[The prepared statement of Evan Hendricks can be found on
page 109 in the appendix.]
Mr. Tiberi. [Presiding.] Thank you, Mr. Hendricks.
Mr. Wong?
STATEMENT OF MARTIN WONG, GENERAL COUNSEL, GLOBAL CONSUMER
GROUP, CITIGROUP, INC.
Mr. Wong. Good afternoon, Chairman Bachus, Congressman
Tiberi, Ranking Member Sanders and members of the subcommittee.
Citigroup thanks Chairman Bachus and Chairman Oxley for their
leadership and holding these hearings.
Today, I want to emphasize the importance that Citigroup
attributes to reauthorizing the national standards contained in
the Fair Credit Reporting Act. FCRA provides a national
framework for the credit reporting system, which has been shown
to work well and to provide substantial economic benefits to
consumers. These benefits include affordable credit, wide
credit availability and protection against fraud and ID theft.
FCRA appropriately balances a wide range of consumer
protections, with the crucial need for creditors to have access
to a uniform national database on which to make credit
decisions. It is essential, therefore, that Congress act to
preserve the national framework that is scheduled to expire at
the end of this year. While maintaining national standards for
all seven of the key provisions is crucial, I want to highlight
a few areas that are especially important to Citigroup and
explain why they affect our ability to continue to serve our
customers well.
First, affiliate sharing. Citigroup shares information
among our affiliates for many important reasons, such as
control and credit risk, credit monitoring and fraud control.
It also is important in identifying products and opportunities
that may be beneficial to customers. Sharing information among
affiliates greatly assists in the prevention and detection of
ID theft. It helps to detect unusual spending patterns and
habits that are used to identify fraud and allows us to
promptly notify the customer.
The ability to share information among affiliates also
conforms to customer expectations. For example, a Citibank
customer expects to be recognized and demands a certain level
of service and accountability whenever visiting a Washington,
D.C., Citibank branch of our Federal thrift, or a New York
Citibank branch of our national bank. The legal distinction
between the two affiliated Citibanks is not relevant to the
customer, and it should not affect his or her ability to obtain
products and services.
In 1996, Congress struck the appropriate balance between
the consumer protection and business needs by allowing
customers to opt-out of having certain information shared among
affiliate entities. If different States were allowed to pass
laws governing the exchange of information among affiliates, it
would significantly disrupt out seamless nationwide system of
serving our customers. Complying with a patchwork of State and
local laws would be extremely burdensome and costly for
lenders, and ultimately for consumers.
Second, and I want to talk about prescreening. Prescreening
is essential for targeted marketing. Credit card issuers and
other lenders use prescreening to substantially reduce the cost
and increase the efficiency of identifying potential customers.
For consumers, targeted marketing is vastly preferable to
the most likely alternative, blanket marketing. Most new
entrants and major competitive initiatives in the credit card
industry in the last 20 years were based on prescreening. These
competitive initiatives have provided consumers with lower
interest rates, cards without annual fees and an array of new
discount and bonus features. Prescreening allows institutions
to control their risk by targeting those individuals that meet
certain credit standards.
Accounts obtained through prescreening have lower loss
rates and less fraud than other forms of account acquisition.
The prescreening provisions appropriately balance the need for
consumer protection by providing consumers with the ability to
opt out for a single toll-free call. If States were allowed to
adopt different rules for prescreening or prohibit
prescreening, consumers would not be able to enjoy the same
benefits derived from robust national competition that they
receive today.
Finally, I want to talk about the provisions dealing with
the content of credit reports. Uniform national guidelines for
credit report information allow creditors to price risk more
accurately, which results in lower cost for all consumers and
more credit availability.
If the FCRA provisions that dictate the content of credit
reports were allowed to sunset, an individual State could pass
a law prohibiting creditors from reporting to credit bureaus
until borrow payments were at least 90 or even 180 days past
due.
For credit grantors, the result could be disastrous. It
would grant credit to consumers who appear to have unblemished
credit, but in fact, would have a very high risk of default.
The universal response of lenders to increase credit losses is
to raise interest rates and to reduce credit availability. This
is not a desirable result for our credit society.
Thank you again, for the opportunity to appear before the
subcommittee.
[The prepared statement of Martin Wong can be found on page
207 in the appendix.]
Mr. Tiberi. Thank you for finishing before your time even
expired.
Mr. Hildebrand?
STATEMENT OF SCOTT HILDEBRAND, VICE-PRESIDENT, DIRECT MARKETING
SERVICES, CAPITAL ONE
Mr. Hildebrand. Thank you, Chairman Bachus, Ranking Member
Sanders, Congressman Tiberi and members of the subcommittee.
My name is Scott Hildebrand. I am appearing here today on
behalf of Capital One Financial Corporation, where I serve as
the vice president for Direct Marketing Services. On behalf of
Capital One, let me express my thanks to you, Mr. Chairman, and
Chairman Oxley for the leadership that you have shown on this
important issue.
At Capital One, we believe that permanent extension of the
national standards contained in the FCRA is essential to the
continued health of our nation's economy. Capital One's one of
the top 10 largest credit card issuers in the nation and a
diversified financial services company with over 48 million
customer accounts and $68 billion in managed loans,
outstanding.
In many ways, Capital One is a creation of the competitive
environment established by the uniformity provisions of the
FCRA itself. This competitive environment commenced 30 years
ago with the passage of the FCRA and accelerated greatly with
the amendments to the Act in 1996. We would not have seen
today's level of competition in the balkanized, localized
credit card markets of 30 years ago. Even as late as 1987, the
credit card market was mired in a one-size-fits-all approach,
characterized by across the board rates of 19.8 percent and
annual fees of $20.00.
That market was ripe for innovation, and companies like
Capital One saw an opportunity to utilize the information
provided by the national credit reporting system to customize
product offerings to customers based on particular needs,
interests and risk profiles.
Our founders realized that a one-size-fits-all approach
made little sense in an environment where each consumer
possessed vastly different needs and characteristics. While
some consumers are risky, many more were not.
Either way, consumers suffered. The less risky customers
were simply paying too much and for the rest, credit was hard
to come by, if available at all.
Capital One was able to utilize information within the
legal framework provided by the FCRA to make significant
advances in underwriting, better distinguishing the risk
characteristics of our customer base. Capital One and other
companies were also able to utilize information to create
profound innovations in the marketing and product design of
credit cards. Our company, for instance, lead the charge with
new product ideas, like balance transfers.
By 2003, the moribund competition, the flat pricing
structure of old, was no more. In its place, came fierce
competition with fixed rates as low as 6.9 percent and no
annual fees commonplace. According to Robert Turner, in his
testimony last week, this price competition produced $30
billion in annual savings for consumers across the country.
Capital One has been able to take this market-leading
approach in reinventing other lending businesses as well,
including auto finance. We have pioneered innovations, such as
a unique auto refinance product, that allow consumers to take
advantage of lower rates like they do when mortgage rates
decline.
With regard to specifics of FCRA, two major provisions
warrant further explanation. Data credit consistency and
permitted uses of credit data. The credit data consistency
provisions strike a sensible balance that enables companies
like Capital One to construct highly accurate credit models on
a nationwide basis. Based on the voluntary nature of the
system, it is a frustrating argument for those of us who use
the data as part of credit granting process that, the argument
being, that we do not have a significant stake in the accuracy
of that information provided on consumers. Put most simply, at
Capital One, our models do not work if the information
contained in the bureau reports is not accurate.
The permissible use provisions enable companies like
Capital One to use information to reach potential customers and
to make prudent credit decisions. Prescreening reduces risk.
Losses from customers obtained through prescreened offers of
credit are significantly lower than losses of customers
obtained through other non-prescreened channels. This provides
a vital tool in ensuring the continued safety and soundness of
consumer lending institutions.
Prescreening fosters competition by allowing financial
services firms to identify the credit characteristics of
individuals and offer them credit products with tailored terms
and conditions specifically designed to beat the competition.
Prescreening fosters innovation. Extraordinary ancillary
benefits, such as airline miles and cash rebates attached to
modern credit card products are largely a function of
prescreening.
Prescreening is transforming other businesses as well. Our
highly successful auto refinance product, which can save
consumers up to 4 percent on their loans, is made possible
through prescreening.
Prescreening reduces identity theft. Our data demonstrates
that rates of fraud are 5 to 15 percent times lower for credit
granted through prescreening than from credit generated through
other channels.
Our credit system is the envy of the world. Consistent
national credit data is the foundation of this system, ensuring
that Americans have more access to credit at lower prices than
our counterparts around the globe.
Our best credit card customers today enjoy a fixed rate as
low as 6.9 percent, with no annual fee. The variety of programs
and rewards available simply boggle the mind. These tremendous
innovations have saved borrowers billions of dollars.
The FCRA is a vital instrument, preserving the vitality of
our credit granting system and equally, a vital instrument in
preserving the vitality of our modern economy.
We urge you to reauthorize these provisions and to extend
permanently, our national uniform system of credit reporting.
Mr. Chairman, Mr. Congressman, members of the subcommittee,
thank you very much for the opportunity to testify before you.
I will be happy to answer any questions you have at this time.
[The prepared statement of Scott Hildebrand can be found on
page 122 in the appendix.]
Mr. Tiberi. Thank you. I don't think I have seen two
panelists in the same panel ever complete their testimony under
time. I congratulate both of you.
Let me just begin asking a question relating to something
you just said with respect to prescreening, that prescreening
lowers the fraud rate. Can you explain why you believe that is
or why Capital One believes it is?
Mr. Hildebrand. And it is a great question, Congressman. It
is true, it is about five to 15 times lower fraud in
prescreening, depending on the segment of the population.
Primary reason being that this is a known individual. That is
that we have a peek into their credit records through
prescreening, we offer it out to them, the application comes
back to us. In a non-pre-approved environment, we do not have
all the checks and balances that prescreening affords us. So it
is another data point on the consumer.
Also, there are fraud tools that are available that, when
an application comes in, there are certain indications on an
application that it may or may not be fraudulent. After looking
at millions and millions of applications through prescreening,
we have been able to model these, and so when applications come
through that look a little bit out of the ordinary, our models
squeeze those out and we flag those for fraud. We then proceed
to make a verifying phone call to the true name person, to
verify that, indeed, they did apply for credit.
Mr. Tiberi. I have heard a little bit more about the use of
prescreening being critical of the underwriting and the use of
prescreening as a risk management tool. What is your sense of
that?
Mr. Hildebrand. Oh, it clearly is. Prescreening is indeed
an underwriting tool. In effect, what we were doing is we are
ensuring that the folks, the consumers that we are going to
offer credit to, are credit worthy.
The last thing that we want in our industry is to have
people get overburdened, get in trouble, because we have to
foot the bill for that. So prescreening affords us the
opportunity to pre-select those customers who we think are most
creditworthy and offer them products tailored to their
situation.
Mr. Tiberi. And those who would criticize prescreening, as
Mr. Hendricks did, your response to that would be?
Mr. Hildebrand. Prescreening is much, much more than a
marketing tool. It is indeed an underwriting tool.
Mr. Tiberi. And if we didn't have prescreening today, what
would be the outcome to Capital One customers, in your
judgment?
Mr. Hildebrand. Well to our existing customers, no impact.
To prospects, I hearken back to Mr. Gambill's testimony earlier
today. I believe there would be much, much more mail on
America, because we are still going to try to acquire new
customers. I believe that--I can't speak for Capital One,
because we have not modeled this behavior--the general
consensus in the industry is that there would be less credit
available. That it would probably be more expensive, because
marketing costs would go up dramatically, based on the fact we
are trying to reach many more people, not understanding the
credit risk behind those folks, as prescreening affords us.
Mr. Tiberi. Thank you.
Mr. Wong, you mentioned affiliate sharing from Citicorp's
point of view. Can you give some specific examples how
affiliate sharing proactively and positively impacts me as a
customer?
Mr. Wong. Absolutely, Congressman. Congressman, if you walk
down the street into one of our Citibank branches, you may be
interested in a variety of financial products. He may be
interested in a deposit account, such as a checking account. He
may be interested in a credit card, mortgage or even, perhaps,
an investment account to purchase a bond. Each of these
products are being offered by different affiliates of
Citigroup, and if we did not have information sharing, as you
open each of these accounts or purchase one of these products,
you would have to go to an elaborate opening account process
because we couldn't share the information.
Mr. Tiberi. How would you categorize the ability of
affiliate sharing to help crack down on identity theft within
Citicorp?
Mr. Wong. Very simple example: You, in your pocket, may
have two credit cards issued by Citigroup. You may have an
American Airlines Citibank credit card, or you may have a Shell
card for your gasoline purchases. Those are two different
affiliates within Citigroup. If we were to detect a fraud on
one of your accounts, unusual spending habits, for example, and
it confirmed that it could be a fraud with you, we would then
alert all the other affiliates within the Citigroup and could
place a fraud alert.
Mr. Tiberi. If we restrict or eliminate the use of
affiliate sharing, what impact would that be to a customer?
Mr. Wong. Tremendous. I think the customer, for one, would
not have the ability, in the case of product innovation, to get
the benefits that Mr. Hildebrand described in his statement.
Annual fees, doing away with annual fees and credit cards
mileage programs, all of those things are innovations as a
result of affiliate sharing looking at what customers want from
a broad spectrum of customers. The seamlessness of conducting
business with a customer would go away. It would be painful for
a customer to buy more than one product within the Citigroup
family of companies.
Mr. Tiberi. Thank you. My time has expired. I will yield
time to Mr. Davis.
Mr. Davis. [Presiding.] Thank you, Mr. Tiberi.
Let me welcome all of you this afternoon. There are three
of us who were here that here listening to you. So I apologize
for not having a larger crowd than that.
Let me follow up, Dr. Manning, on something that you talked
about earlier, and that is the problem, or perhaps it is not a
problem from everyone's perspective on the panel, but the issue
of college students and then the secondary issue of very low
income people being singled out for a lot of the prescreenings,
for a lot of the solicitations.
And I will ask you all to educate me a little bit as a
matter of economics on this issue. To a lot of us, I think that
it is somewhat counterintuitive that two of the groups of
people who are singled out are those who are probably least
likely in some ways to be durable credit card customers, or if
they somehow become durable credit card customers, they are
among the most likely people to have default issues or to have
difficulties paying their accounts off.
Dr. Manning, some of your data really caught my attention.
You said that roughly 60 percent of students who get credit
cards, the overwhelming majority of those, I assume get them
after some kind of prescreening solicitations, max out during
the freshman year. A significant number of those who don't max
out are having to use allowance from Mom and Dad or some other
source to provide payments, and that, in effect, the first
significant debt that a lot of young people incur now is not
their student loans, frankly, it is the credit card bills.
Any one of you, I suppose, but in particular Mr. Wong and
Mr. Hildebrand, tell me why economically it becomes so
beneficial for the credit card companies to solicit people who,
on their face, appear to be very high-risk customers,
particularly with respect to college students?
Mr. Wong. May I?
Mr. Davis. Yes.
Mr. Wong. We believe that the credit card is a important
payment tool in society today. Credit cards are needed for a
variety of things from getting a reservation in a hotel room to
acquiring a ticket online, an airline ticket.
College students, we do lend to college students. Our
experience of college students do not suggest at all that this
is a population of borrowers that are a greater credit risk to
themselves or to us.
Mr. Davis. What is their default rate?
Mr. Wong. The default rate of credit of college students,
and I don't have precise numbers, but I will be happy to share
that with you.
Mr. Davis. Do you know that, Mr. Manning? Do any of you
know the default rate for college students?
Mr. Manning. I would love to. That is information the
industry doesn't share with me.
Mr. Wong. But we can tell you that the default rate of
college students is no greater than the general population of
credit card holders in our customer base. And we obviously
tailor the product to college customers to make sure that they
are within their affordability in lines of credit. So
obviously, it gives them great consideration.
Mr. Davis. Dr. Manning, what is your perspective?
Obviously, we have the industry's perspective, I assume. That
they are tapping a relatively untapped market. What is your
perspective on this? Obviously, you have identified it as
something you view as something of a social problem that a
class of people are being targeted who are assuming a fairly
large debt burden as they move into society.
How big a problem is this, in empirical terms?
And number two, what is the practical solution? I mean,
presumably no one advocates it. I don't see a vehicle to
prevent these companies from prescreening college kids, but
they certainly have rights. They are legal adults. But what,
from a policy standpoint, would you have this institution do if
it wanted to address this matter?
Mr. Manning. Well, first, there are a couple of issues.
Number one, the very fact that you are a college student is
the prescreen, and that the industry puts on its head the
underwriting criteria. If you have an 18-year-old that makes
$5,000 and is not in college, most likely he or she will get
rejected for a credit card. But if you are in college, you are
going to get access to multiple thousands of dollars of credit
cards during your collegiate career. So point number one is we
need consistency for the industry.
Number two, of course, the Citibank now is very active in
the student loan market. And in terms of affiliate sharing, we
have some very serious issues here, that one affiliate knows
that the other affiliate can get paid through this borrowed
money.
I want to make it clear I am a very strong supporter of
credit cards. I would like to see every student get a credit
card with a $500 credit limit, if their parent will not cosign
for them. But that limit could not be raised at the end of the
year unless there has been prudent use of that credit card.
So I am not trying to discourage use of credit cards. I am
trying to promote its effective use.
But I think the data here is unambiguous about the
seriousness of the problem. We are no longer talking about
marketing seniors who have some degree of economic background
or real life experience. As you can see from this
representative sample of a major public institution in
Virginia, the marketing of college students has shifted from
seniors and juniors now to freshman, to even high school
students.
I have received quite a few complaints from a Wells Fargo
campaign in California, where representatives----
Mr. Davis. Let me cut you off for one second, if the Chair
will yield me an additional 30 seconds or so.
What is wrong with that? Just from a policy standpoint, in
terms of following your analysis, I suspect that the gentlemen
on this end, Mr. Wong and Mr. Hildebrand, have the perspective
that, well, there is some discrimination in the sense that one
class of people are favored over another. But it is not really
invidious discrimination. It is discrimination based on
favoring people who are likely to be long-term market
participants versus those who are not.
I mean, to say that seniors are not targeted, they are
obviously not going to be long-term customers. To say that
people who aren't in college who are young aren't targeted
isn't such a major proposition, I suppose. You are targeting
people who are likely to be high-income earners versus people
who aren't. I am sure that is the rationale of Mr. Wong and Mr.
Hildebrand.
So what is wrong with that? I mean why should we expect
this particular market to operate in a more evenhanded way than
most markets do in this country?
Mr. Manning. Well, I think anybody who has found themselves
unexpectedly unemployed in this recession would certainly
question the expectations of the industry in offering credit to
an 18-year-old that their risk assessment model would predict
that most of them will get a certain income when they are
freshmen, when there is a robust 5 percent unemployment rate,
and when they graduate there is an 8 percent unemployment rate,
and they are suddenly saddled with $15,000 in credit card debt
and $20,000 in student loan debt, with the expectation that
they would get a $48,000 job.
Students and people in general assume levels of debt based
on their expectations of the future. And students at 18 years
old who do not have real life experience, have not had a full
time job and have not managed a budget, are making expectations
based on a 5 year future, that they don't necessarily have
realistic expectations.
Mr. Davis. I think my time is expired, Mr. Chairman. Thank
you.
Chairman Bachus. [Presiding.] Thank you.
Mr. Manning, I was reading different things here, but one
thing that you said that you might want to propose is to have
parents sign off before a college student can have a credit
card?
Mr. Manning. No, what I said was that every student, I
think, should have a credit card with a $500 credit limit,
unless their parents were willing to cosign for a higher limit,
if they were unemployed.
Chairman Bachus. You know, what strikes me is that it would
be a pretty big dose of big government, wouldn't it, telling a
large segment of our population that they couldn't have credit
above $500?
Mr. Manning. That is only if they don't have an income. If
you look at the credit authorization of college students in the
late 1980s, the industry standard was that parents cosigned
unless the applicant had a certain income level. I am
suggesting that for students that have no income that we
should, at least, assure them of a learning curve of a credit
card with no more than $500.
Chairman Bachus. You say parents, unless their parents sign
on. You know, some parents refuse to help their children at all
while others finance their children's education. So you
basically would be taking maybe, let us say you had a young man
or woman whose parents either were unwilling to sign on, or
weren't willing to help them at all. They might actually
benefit from, let's say, $1,000 or $1,500 credit card.
Mr. Manning. Well, my proposal was one that would increase
$500 per year. I was referring to freshmen when they first
started college, where by the time they graduated they would
have $2,000 in a credit line.
Also, that would not preclude their options for a Federal
and private student loan.
Chairman Bachus. In your book, you are talking about the
wide use of credit cards. I notice the Federal Reserve
estimates that 50 percent or more of all transactions in the
U.S. involve cash. Checks are the second most popular form. And
it says that checks total 72 percent of non-cash transactions
in the United States. Now this was in 1997, credit cards were
18 percent of non-cash transactions.
Is there any statistical evidence from the Federal Reserve,
the FDIC, that youth are having a greater default level today
than, say, other than anecdotal, than say 5 or 10 years ago?
Mr. Manning. Well, that is obviously proprietary
information from the industry, and I would be happy to examine
it.
Chairman Bachus. Well, maybe I would ask the industry. Are
we having larger default rates this year than we were 5 years
ago? And has there been an increase in lending to college
students?
Mr. Hildebrand. Mr. Chairman, I do not know if we have a
higher default rate than we did a few years ago.
I do, however, want to take the opportunity to correct
something that Mr. Hendricks said. He implied that most of the
marketing to college students was prescreened. As a matter of
fact, the only marketing that we do to college students is
through prescreening. The only way that a college student can
be on a prescreened file from the bureau is if they have
already established a credit record.
So these people have, in some way or another, entered the
commerce system of America already when we go out to offer them
credit.
There are other forms of marketing to college students,
tabling, T-shirts, things like that. Capital One does not
partake in those. We treat college students and our
underwriting of college students the way we treat the general
population of America.
Chairman Bachus. All right.
Mr. Hendricks. Just for the record, that is Mr. Manning,
and I am Mr. Hendricks.
Mr. Hildebrand. I am sorry. I apologize.
Mr. Hendricks. We have a mis-merge here.
Mr. Hildebrand. I apologize.
Mr. Manning. I don't think I used the term that most
college students are prescreened. I said that there is a policy
within which there is a preference given to people of a certain
age if they are a college student versus not being a college
student.
Chairman Bachus. Let me ask you this. The FDIC recently
said this in their spring 2000 report, that the credit card is
one of the best innovations of the 20th Century. Do you all
generally agree with that statement?
Mr. Manning. I would certainly say that the transactional
superiority of credit cards in general from a convenience level
certainly in the average everyday life has been a great
advantage. The problem, of course, is that the cost of using a
credit card has increased dramatically, especially for those
who can least afford it.
Chairman Bachus. You are talking about the cost, but here
is another: Dr. Thomas Durkin, Federal Reserve Board, Division
of Research and Statistics, this is in a study issued in 2000:
``Although one can usually find anecdotes to illustrate a
point, consumers who are unaware of the cost of credit cards,
for instance, or consumers who overspend because of the wide
availability of credit, such examples can never lead to a
definitive understanding of issues having broad social and
economic impact.''
You know anecdotal evidence. Do any of you have statistics
one way or the other that we are----
Mr. Manning. My understanding of that survey was that there
were a lot of very critical comments that consumers reported in
the use of credit and the cost of credit and the resolution of
conflicts, and that there was a real concern about whether that
survey instrument was accurately measuring the true criticism
the average American has on credit cards, or whether we need a
better measurement instrument.
Chairman Bachus. Well, I guess that is my point. Or are the
default rates going up? I think we all agree that there is more
credit availability, which is what FCRA has really brought, is
availability of credit to a larger number of consumers, easily
available credit.
I saw another statistic where loans in low-income areas
have gone up 50, 60, 70 percent, to low-income Americans.
Lending to borrowers in low-income neighborhoods has gone up
significantly since 1993, when we adopted these changes.
Particularly the two gentlemen I think that are
representing consumers, do you have any statistical evidence,
not anecdotal evidence, but statistical, that we are seeing
soaring default rates?
Mr. Manning. Well, certainly we can look at----
Chairman Bachus. The interest rates, are they much above
what they were, say, 5 years ago?
Mr. Manning. Well, if you look very clearly at the spread
between the cost of borrowing money from the banking industry
and the cost that they are loaning out to consumers, that fair
share of reduction in costs hasn't been adequately shared with
consumers in that benefit.
Chairman Bachus. Has been shared?
Mr. Manning. If you look at table four, which is industry
data, we see very clearly that the cost of funds went down 28
percent over $7.5 billion between 2000 and 2001, and yet the
interest that was charged went down less than 1 percent, even
though that the total portfolio only went up 8 percent.
Mr. Hendricks. Mr. Chairman?
Chairman Bachus. Yes?
Mr. Hendricks. I didn't come prepared for that, and that is
not my area of expertise.
I did try to provide statistics in my statement about what
appears to be a dramatic rise in consumer disputes arising from
inaccuracies in their credit reports, and some of those are
credit report related.
Chairman Bachus. I apologize. I think, to a certain extent,
this is kind of off the issue. There are less than five minutes
left on the vote on the House floor.
Mr. Tiberi. Mr. Chairman, can I just make one statement in
response to Mr. Manning's comments, the last comments you made,
with respect to the credit card industry. I wish my father were
here. My father is an immigrant with no formal education of
America, sixth-grade Italian education. He has got a credit
card that he pays no annual fee on that he uses all the time
now. He pays it off every month, and the end of the year he
gets money back. He thinks this is a great country because of
that.
So it is just bizarre to me that you can kind of paint this
stroke about an industry and people who have a lack of
education, because my father would tell you he has no
education, and he has figured it out, and he is probably a loss
leader for the credit card industry.
Mr. Manning. There are a lot smarter people than me working
on marketing campaigns that I can't understand, so I am
assuming that most Americans when they read their contracts are
at least as uncertain about the consequences as I am.
Mr. Tiberi. Well, Mr. Chairman, with that----
Chairman Bachus. Thank you.
At this time, we will discharge the second panel.
I very much appreciate your testimony. Your written
statements, which we had yesterday, have been very helpful to
us. Thank you.
[Whereupon, at 2:20 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 12, 2003
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