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monly used for consumer reporting purposes, but it is not collected for that purpose, but for the purpose of selling the information for unauthorized premarketing purposes, then the Act won't apply here because of this circular definition. It will not be considered a consumer report. I think we should realize that we are dealing with an amoeba-like structure here because of the circular definition.

Then as was raised earlier, I am very concerned about the fact that new subsection 604 (b)(2), which has been described as the section which provides a negative check off, is actually drafted in such a way to go beyond the prescreening situation.

Even in the context of prescreening, I would like to describe concerns beyond the general sense of offense that many consumers feel simply by, as Ms. Goldman described it, their loss of control over information about themselves.

Some of the issues involved in prescreening: One, even in the credit situation, it is possible that the profile that the third party requester provides to the credit reporting agency to elicit a certain list could be one that would identify the consumer with adverse information once that list is provided.

So there isn't necessarily just positive information about the consumer reflected in the list, but possibly negative information. And the more specific the requester is in terms of prescribing the characteristics of the profile that will then produce the list, the more the third party gets in terms of specific information about the consumer.

So I don't think it is true to say lists don't identify anything about the consumer. They can, dependent on the request made for the list, identify a great deal about the consumer. Thank you very much.

I will wind it up here and be happy to respond to any questions. [The prepared statement of Ms. Meier can be found in the appendix.]

Chairman LEHMAN. Thank you very much.
We just have a few minutes. I think I will just ask one question.

Mr. Holstein, on page 8 of your testimony you suggest that the credit bureau be notified when an account is closed. Could you explain why you think that is important?

Mr. HOLSTEIN. Certainly, Mr. Chairman, you will find attached to our testimony one or more cases of actual individuals who have written to us with this particular problem.

What happens in many credit scoring systems, which, as you know, are highly computerized and proprietary systems that take into account a wide variety of different factors, the number of trade lines—the number of accounts that consumers have available to them as well as the outstanding debt they may have on those accounts-counts heavily in those credit scoring systems.

The result is that it is harmful to a consumer's overall picture of creditworthiness in these credit scoring systems to have a large number of outstanding potential lines of credit. It is not fair, obviously, for credit reports to reflect accounts that in fact have been long since closed.

One of the problems we have found and consumers have written to us about is that the creditors have done a poor job in some cases

of bothering to let the credit bureaus know that in fact a consumer has closed an account.

So consumers are, without knowing it, walking around with credit reports that have these outstanding trade lines that the consumer believes have long since been closed.

They should be reported as an indication of the consumer's previous credit paying behavior. They should not be indicated as still open.

Chairman LEHMAN. Thank you.
Mr. Price.

Mr. PRICE. I know we are limited in time. Let me just pursue one question with regard to the prescreening which is a major aspect of the legislation we are considering.

None of you have very much good to say about the practice. You seem to be preoccupied with ways it might be restricted, ways consumers might be protected from its abuse.

Those who defend prescreening often do so in terms of consumer benefits: the reduced cost of marketing a credit product that prescreening makes possible; the avoidance of consumers receiving solicitations for products for which they do not qualify, which may in the long run mean that they are less likely to generate unfavorable credit ratings; and so forth.

Any merit to those arguments at all? Is prescreening something you think is so dangerous, such a negative technique that you mainly just want to regulate it out of existence?

Mr. Holstein.

Mr. HOLSTEIN. We think there is some merit to that argument. Much of the discussion that preceded this panel really was about what the Fair Credit Reporting Act actually says under current law about the permissibility and procedures used in prescreening, which all of us agree are not really addressed straightforwardly in the original Act.

But, yes, we do believe there are merits to the arguments that consumers can benefit from receiving a variety of different services as a result of pre-screenings. But many consumers regard prescreening as an invasion of privacy. Apart from whether there is harm in prescreening techniques, we think the issue calls for a compromise of the kind that the chairman has suggested in which consumers are given an opportunity to "opt-out" of pre-screening.

Beyond that, we have identified another potential source of harm in prescreening that we would like to see addressed. We have been engaging in a continuing series of letters back and forth with the credit bureaus. We are still in the middle of that now, ascertaining exactly what is done in prescreening.

It is a lot more complex than perhaps has been previously indicated. The key point I want to make relates to the issue of "inquiries”. Inquiries, as you may know, are notations on credit reports indicating your credit file has been accessed for some reason, whether you initiated the transactions or you did not.

When the issue came up last fall the credit bureaus reported to us that aside from a few gliches we encountered, their policy is to only report inquiries that occur, as a result of prescreening to the consumer and not to creditors.

Why? Because inquiries can hurt people in credit scoring systems. Obviously if you are a lender and you look at someone's credit report and you see they have been running all over town applying for loans, that is sign to you and it has been mathematically proven, that this person is a shaky risk and you may not want to extend credit to that person.

We would recommend that prescreening, yes, be permitted subject to the sort of "opt-out" that the chairman has described, subject to some additional conditions relating to fair advertising so the consumer knows for certain just what conditions apply, if any, to the offer of credit that they are receiving.

And then lastly, we suggest a legislative requirement that inquiries be reported to credit bureaus as a result of prescreening only if the consumer subsequently initiates or participates knowingly in the transaction. That whole principle is laid out more extensively in our recommendations.

Mr. PRICE. As you state, the chairman's bill does permit prescreening, but with that opt-out provision. I am glad to hear your endorsement of that general approach.

I gather, Ms. Meier, your feelings are considerably different? You describe that opt-out provision as a “huge exception” and testify almost entirely in a negative mode about it.

Is that the way-is that your inclination? Are your views different, in other words, from Mr. Holstein's?

Ms. MEIER. Yes. I am not sure if Mr. Holstein's view presumed whether or not the opt-out provision in H.R. 4213 overlays the current limited FTC interpretation.

I don't know.

Chairman LEHMAN. Obviously it is all open for amendment here. That would be my intention. Also, it has been brought to my attention that there is some ambiguity in the drafting here. It is my intention that we are only talking about credit as a purpose here. We are not talking about other things.

Ms. MEIER. Well, let me just say, Mr. Price, that clarification helps me a lot. I think there is a drafting problem. A lot of our language that you just quoted from is based on the various interpretations, some even extreme, but colorable interpretations that would allow disclosure of information, including the individual file way beyond the prescreening circumstances and the limited circumstances Mr. Lehman described.

If those apparently technical problems in drafting are remedied, then I would say our-we do feel much more comfortable with 4213's addressing of this issue.

Mr. PRICE. Perhaps I am misreading your testimony. It seems to me that what you are saying in this statement is that the consumer positively must opt-in, which is saying a good deal more than that he must have the opportunity to opt-out. That is a fundamental difference in your approach to this question, it seems to me.

Ms. MEIER. That is our testimony and that is our position, that we don't think that consumer report information should be disclosed unless the consumer has authorized the disclosure. However, there is not a whole lot of distance between that position and what Mr. Lehman just described as the intent of his legislation if the prescreening disclosure is limited to the credit situation where the creditor is willing to grant, to extend an offer of credit, with a negative check-off option if even in that limited circumstance the consumer would not like his name included on the list.

Mr. PRICE. Perhaps. I think the question of how this could be used is a separate question. We are talking about an extension of credit here. But to say that the consumer has to initiate the transactions, the consumer has to opt-in, that seems to me to be a fundamental contradiction to the very concept of prescreening. I don't know how that is compatible.

Ms. MEIER. Well, you are right. There is a slight variation here. We would hold that in all situations the consumer should be initiating a transaction with the credit grantor.

Frankly, in terms of policy or theory here, I don't know that there is a whole lot of distance between the two views because we are talking about such a narrow circumstance where the creditor is willing to grant credit.

However, I would raise one concern here that is consistent with the view that there should always be an initiation by the consumer, which is that I do think this whole discussion of the legitimacy and good public policy of prescreening even in this limited circumstance is premised on the erroneous presumption that the information about the consumer that is implied by the consumer appearing on the prescreened list is always going to be positive about the consumer; that if the grantor is willing to offer credit, then the person must be a good credit risk. And we are not going to be identifying consumers as poor credit risks by allowing this prescreening to occur.

There are situations where secured lines of credit could be offered to consumers consistent with the FTC regulation. These consumers are on the list because of the very fact that to a lot of other creditors they may be a poor risk. This segment of the credit market would be interested in these "poor credit risks" because they would be vulnerable to high interest rate type credit packages.

Mr. PRICE. My time has expired. Thank you, Mr. Chairman.

Chairman LEHMAN. Thank you very much. I have additional questions for each of the members individually. In the interest of time I will give you those in writing so we can move on.

Chairman LEHMAN. Our next panel will be Mr. Alan Heuer, Mr. William Bloom and Mr. Kenneth Hoerr. We will start with Alan Heuer, senior executive of the Marine Midland Bank.



Mr. HEUER. I am appearing here on behalf of the CBA and the ABA this morning. We appreciate the opportunity to testify before the subcommittee.

In addition to my oral testimony, CBA and ABA have submitted written testimony which I request be included in the hearing record. This hearing and the recently issued FTC commentary on the Fair Credit Reporting Act have generated discussion within the banking industry.

Two general themes have surfaced. First, many of the existing provisions of the Act could be communicated more effectively to consumers. There are many federal protections currently in place that consumers aren't aware of or don't understand.

CBA and ABA support the concerns of the subcommittee members who believe efforts to inform consumers of their existing rights should be enhanced. We believe that the banking industry can voluntarily develop proposed educational information for this purpose.

In addition, the banking industry can and is taking steps to enhance the effectiveness of the Fair Credit Reporting Act. For example, at Marine Midland we have formed a special task force to increase awareness of the Act and to improve further our ability to respond to inquiries regarding customer information and provide corrected information to each of the three major credit bureaus.

The banking industry also has attempted to address other areas where concerns have been expressed. For example, concerns have been voiced in the past about the use of potentially misleading solicitations. We believe that recent industry efforts have largely addressed these concerns.

We also believe that industry efforts have been successful in resolving concerns that non-consumer generated inquiries like those involved in prescreening may become a part of the consumer's credit file and thus available to subsequent creditors.

Such voluntary efforts may well eliminate the need to enact amendments to the Fair Credit Reporting Act. To the extent that misleading solicitations continue to be used or non-consumer generated inquiries continue to be reported, however, these specific concerns may need to be addressed.

The second general theme raised in industry discussions is that the FTC commentary is both complex and somewhat confusing. Indeed, many believe the commentary has raised more questions than it has answered concerning the Fair Credit Reporting Act.

As a result, CBA and ABA believe it would be premature to amend the Act until questions raised by the commentary have been answered. As to specific issues raised by the proposed legislation, CBA and ABA believe creditors should continue to be able to use prescreening as a tool for marketing their products.

As our written statement discusses in detail, prescreening does not create privacy concerns that require protection under the Fair Credit Reporting Act. Instead, prescreening benefits both consumers and creditors by reducing the cost of marketing and using credit products.

Prescreening also increases the availability of credit. Accordingly CBA and ABA opposes any outright prohibition of prescreening. We also believe any new restrictions on prescreening like those contained in H.R. 4123 are unnecessary.

CBA and ABA are concerned that imposing liability on creditors for furnishing information to credit bureaus could cause a dramatic increase in litigation against creditors.

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