an application is pending. The system is only completely fair to the extent that everybody involved complies with the law.

Last, under operational fairness, we agree with your proposal to extend civil liability to include any person who furnishes information to any credit reporting agency. We also would strongly support penalties for con artists, computer hackers and others who violate the Act. This would provide incentive for security and accuracy, both which are basic to fairness.

The final area is to address the need for consumer information about the credit industry so the consumers themselves can play a role in insuring its fairness. If consumers are to do that, we need to help them to learn what kind of information is generally found in a credit record, drive home the point that positive and negative information about bill paying habits is important.

In this information age, consumers are bombarded with hundreds of messages every day. Education efforts are most successful when they reach consumers at teachable moments. That is when they are most likely to be receptive to information. Denial of credit is just such a moment. We agree that along with requiring written disclosure to a consumer of an adverse action, we would require consumers be told at a minimum the name of the bureau that furnished the responsible credit report and his or her rights and remedies under the Act.

We support requiring credit grantors to let consumers know how often and what type of information from billing data can be forwarded to credit bureaus. It is working well under a State law in Utah. This notice could be included with monthly billing, statements from the credit grantor. Credit grantors communicate regularly with their customers, so they are in a better position to provide this service than credit bureaus.

Our approach is to meet consumers' demands for fairness in a way that is also fair to industry.

This is a complex Act with many facets. But that is a brief overview of our testimony. As I said at the outset, our primary goal is to restore some of the basic fairness that has been lost in the credit reporting process over the last 20 years without hindering the tremendous benefits the industry provides to consumers.

I would be pleased to respond to any questions.

[The prepared statement of Dr. Guiton can be found in the appendix.]

Chairman LEHMAN. Thank you. We have Ms. Noonan, Associate Director for Credit Practices of the FTC.

STATEMENT OF JEAN NOONAN, ASSOCIATE DIRECTOR FOR CREDIT PRACTICES, FEDERAL TRADE COMMISSION, ACCOMPANIED BY KATHLEEN V. BUFFON, DIVISION OF CREDIT PRACTICES, FEDERAL TRADE COMMISSION

Ms. NOONAN. With me is Kathleen Buffon, Division of Credit Practices at the FTC.

I am pleased to be here today to present the Commission's testimony on the three proposed bills to amend the Fair Credit Reporting Act. The Commission has submitted testimony for the record.

At this time I will emphasize a few issues of particular interest to the Commission.

I turn first to prescreening, which has been the most hotly debated issue of this subcommittee. It is an issue that involves significant privacy considerations as well as implications for business. Although FCRA does not address the practice of prescreening, in 1973 the Federal Trade Commission expressed the view that the FCRA would permit prescreening if creditors who prescreened subsequently offered credit to the people whose names appeared on the prescreened list.

The Commission affirmed its view in its commentary on the FCRA published last month. Because of technological advances, the potential for invasion of consumer privacy is greater today than it was when the Commission first adopted its position on prescreening. Prescreening today often applies dozens of interrelated criteria, so a creditor can know a great deal about each consumers whose names appear on a prescreened list, even though the creditor never sees a hard copy of the credit report.

Thus, reconsideration of the implications of prescreening and the requirements of the law is timely. The bills introduced by Representatives Rinaldo and Schumer would prohibit prescreening altogether. Chairman Lehman's bill would permit it subject to an optout option.

On balance, the Commission believes credit prescreening can serve a useful purpose, and it is better to regulate it than to ban it altogether. The process through which consumers would learn about prescreening and their opt-out option is important. If consumers do not understand the option, the option will be meaningless.

A second critical issue involving prescreening is whether it ought to be limited to credit transactions, as the Commission believes, or permitted for all types of general marketing and list sales, as some would argue.

We believe Chairman Lehman's bill is consistent with the Commission's view, but that is not entirely clear from the proposed legislation. If it is the intention to permit prescreening for marketing purposes, it might be useful to consider whether prescreening should be limited to consumers who expressly agreed to have their information used in that way. That is, to consumers who affirmatively opt-in.

I will now touch briefly on some other aspects of the proposed legislation. All three bills extend the notification requirement in Section 615 so that it would be co-extensive with the permissible purposes section and Section 604 of the Act. This was a change proposed by the Commission when Chairman Steiger testified before this subcommittee last fall. We are delighted to see its inclusion in these bills.

The proposed bills would impose civil liability on creditors and others who furnish information to credit bureaus. Creditors would be required to meet the same standard of care in reporting that credit bureaus currently must meet. This seems equitable and could improve the overall accuracy of the information in the consumer reporting system. After all, it is creditors, not consumer re

porting agencies, who have direct access to the facts of a given transaction and are best situated to correct inaccuracies.

The Lehman and Schumer bills would amend 615 of the FCRA to require report users to provide written notification to consumers when information on a consumer report leads to an adverse decision.

In addition, Representative Lehman's bill would require the report user to tell consumers of their rights under the FCRA when making Section 615 disclosure, a provision that fills a significant need, in our view. These bills would require credit bureaus to provide specific identification information on users who have received a copy of the consumer's report.

The Commission believes that this information should be available to consumers. It could assist consumers and enforcement agencies as well in identifying instances of unauthorized access, and thus, deter unlawful invasions of consumers' privacy.

Chairman Lehman's bill would also permit the Commission to seek civil penalties for violations of the FCRA. This provision parallels those in the Equal Credit Opportunity Act and the Fair Debt Collection Practices Act. We think it is far more likely that companies will disregard the requirements of the FCRA if they are merely ordered to comply with the law in the future upon discov

ery.

Although the civil penalties sanction cannot be expected to deter every future FCRA violation, it does increase the cost of violating the law and would represent an important tool in the Commission's efforts to enforce the Act. We can think of no good reason why this remedy ought not be provided under the FCRA.

Finally, we note that Chairman Lehman's bill incorporates legislation proposed in the last session of Congress that was designed to address deceptive practices engaged in by credit repair companies that purport to be able to rewrite consumer's credit history. The Commission believes consumer fraud in the credit repair area continues to be a significant problem for consumers and industry alike, and fully supports effective Federal legislation to resolve this problem.

Consumer reporting capabilities have expanded enormously during the past two decades. We think it is useful and important to revisit the FCRA to ensure the consumers will have adequate protection in light of these changes in the coming decade, and we applaud you, Mr. Chairman, Representatives Schumer and Rinaldo, and the members of this subcommittee as well for doing so.

Mr. Chairman, this concludes our prepared remarks. I will be pleased to answer any questions of subcommittee members. Chairman LEHMAN. Thank you.

[The prepared statement of Ms. Noonan can be found in the appendix.]

Chairman LEHMAN. Dr. Guiton, how would you respond to a comment I have heard from some users that do a lot of pre-screening, that there is no privacy invasion in a pre-screening situation because no individual information is revealed? And second, because the first pre-screen list is often sent to a third party mailer? Comment on that. Tell me what your contacts with consumers tell you about consumer feeling on this issue.

Dr. GUITON. I have visited some of the credit bureaus. I have seen how they have developed the mailing lists and in fact send them to third parties. There are times when the list is sent back to the requesting party.

One might say if there is a violation of privacy, it is in as much as the general information of the requirements that were set aside for developing that list sets aside consumers into a certain category.

In terms of specific information, that is not disclosed. I find that most consumers are concerned about how much information is known about them in our contacts with them, they believe much more is known than is truly known. Many of them do appreciate the benefits of direct marketing, but they would like to be informed that information is being used that way. So they have concerns that they didn't know nor did they have a choice in the matter. I think that has been their major complaint to me.

Chairman LEHMAN. Do you have any idea what percentage of credit records are inaccurate?

Dr. GUITON. It ranges from 1 percent, the industry's number, to about 40 percent if we look at the Williams' study.

Chairman LEHMAN. You say it is somewhere between 1 and 40? Dr. GUITON. Yes.

Chairman LEHMAN. Clarify your position on the requirement in my bill that reporting agencies and persons who furnish information keep detailed records of the procedures they maintain to achieve maximum accuracy of information.

My understanding from your testimony is that you support detailed records kept with regard to procedures followed in reinvestigations, but you oppose a requirement for detailed records being kept with regard to procedures to ensure accuracy.

Can you clarify?

Dr. GUITON. Yes, Mr. Chairman. My concern is that it would be easier for the bureaus to spend a tremendous amount of time developing procedures to show you while consumers would not be reaping the benefits.

It would be cumbersome and we might not see changes immediately. That is why I suggest revealing the outcomes. That would benefit consumers as opposed to the techniques or the procedures. I think detailing of the procedures could very easily serve as a scapegoat by bureaus spending a great deal of time describing a process rather than correcting the errors.

Consumers still would be dealing with incorrect credit reports. Chairman LEHMAN. I note on the last page of your testimony, you indicate that the Administration could not support my bill unless various issues where addressed satisfactorily. Could you give me a brief list of those?

Dr. GUITON. Sure. One is the cap on the cost of a credit report. We would hate to have the bureaus come back year after year dealing with CPI's and cost of living increases. Another is the free credit report. We are told approximately 90 percent of the credit reports that go out are free anyway because most people who request them do so after they have received a notification of denial of credit.

I just believe there really isn't a free lunch. There is a cost that will be borne by someone and the consumer will ultimately pay. Chairman LEHMAN. If I do those things, I will have the Administration's support?

Dr. GUITON. I think those are two major issues.

Chairman LEHMAN. Thank you very much. Let me ask you another question. Why are you recommending that credit grantors be required to notify consumers on what information is provided to credit bureaus?

Dr. GUITON. Because credit bureaus would not exist without the information they receive from credit grantors. They serve credit grantors. Credit grantors provide them the information.

At the same time they are in touch with their customers monthly through their billings and they can provide other solicitations such as special purchases. We think it would be far easier for the credit grantors to make known that they submit information to the credit bureaus. They can do it annually. It is not something we think needs to be done continually.

As long as consumers are aware of the information sent to bureaus and how frequently creditors send it, I think it would be very useful. On the other hand, it would be very cumbersome and costly for credit bureaus themselves to try to communicate with each con

sumer.

Chairman LEHMAN. Do you think that can be done in a monthly billing statement?

Dr. GUITON. Yes. They seem to be having pretty good success in Utah with a similar law there.

Chairman LEHMAN. Why don't you elaborate on that?

Dr. GUITON. In Utah they submit a blanket statement letting consumers know what information is simply sent to credit bureaus. This is done before any negative information can be sent. Consumers are aware of the practices of the creditors from the beginning.

Chairman LEHMAN. Ms. Noonan, on the subject of pre-screening, I am very concerned about the language that is frequently used in solicitations that result from those pre-screenings, specifically, the use of the word "pre-approved". Hardly two weeks go by without me getting something pre-approved. It is used over and over again in those solicitations when in fact we have learned that the offer is contingent upon an examination of that person's credit.

Often that is done in very small print as a notification somewhere else in the solicitation. I am going to pursue that when we have the creditors up later. I want to ask you if there are laws already in existence that prohibit such misleading communications to consumers? If there are, why do we continue to see such a proliferation of this?

Ms. NOONAN. Certainly, as to the creditors under the Federal Trade Commission's jurisdiction, the Federal Trade Commission Act itself prohibits any deceptive or misleading statement. To call something pre-approved when it is not, could well be considered deceptive term.

I would say that in our experience the folks outside our jurisdiction, that is banks and other financial institutions, are somewhat more likely to engage in subsequent evaluation than are retailers.