Privacy and FCRA Are Top
Legislative Priorities for 2003

Back in 1996, financial services firms won the right to pool credit history information collected from affiliates into a central database, so long as consumers were given the right to opt-out of such aggregation. The amendments to the Fair Credit Reporting Act (FCRA) which made this possible also preempted state legislation which would affect either the content of credit reports or the sharing of information across affiliates for permissible purposes. The FCRA amendments took effect on September 30, 1997 but were also slated to expire on December 31, 2003. Suddenly, the sunset date for federal preemption of state-level tinkering with FCRA looms large.

Consequently, the financial services industry has put FCRA legislation at the top of its government affairs priorities for 2003. However, obtaining an extension or permanent federal preemption on FCRA will not come easily. Complicating the politics will be a strong push from privacy advocates to tighten the restrictions on sharing of personal information under the Gramm-Leach-Blilely Act (GLBA). Broadly speaking, GLBA allows companies to share personally identifiable information about customers with third parties provided the consumer has been given a chance to opt-out (sharing of credit histories is protected under FCRA and can't be undertaken without a permissible purpose as defined in FCRA). Sharing among corporate affiliates is not restricted under GLBA. However, GLBA did not prohibit states from passing even tougher restrictions in these areas. Privacy advocates want to move toward a more restrictive opt-in environment for both third-party and affiliate sharing, in which a company would have to get explicit consent from customers prior to sharing any personally identifiable information. Their proposals have been making some headway in various states, but advocates would like to get tougher federal legislation enacted. The financial services industry will likely have to concede some ground on the GLBA front in order to win the preemption they need for FCRA.

The FCRA preemption is critical. In recent years, states have aggressively adopted privacy laws (where permissible) that were stricter than federal rules. States have also been quite willing to pass more restrictive consumer protection laws in other areas (e.g., predatory lending) than those passed at the federal level. There is little doubt that states would move to adopt their own versions of FCRA if the federal preemption expires. So, for example, a state could mandate that only serious delinquencies could be reported on credit files for consumers residing in that state, perhaps 90 days delinquent or more. Lesser delinquencies would go unreported. A state that decides consumers deserve a faster fresh start could accelerate the deletion date of derogatory information on credit reports, so that bankruptcies might disappear in 3 years instead of 10, or delinquencies in 2 years instead of 7. Still another possibility that worries lenders is that states could impose increased liability on creditors for errors in reporting. Since the credit reporting system is strictly voluntary, greater liability raises the costs of participating in the system. This could lead to a decline in reporting, either because firms drop out altogether, or stop reporting negative information (where their liability for damages due to errors would likely be greatest).

If any of these scenarios play out, then the reliability of credit reports will be compromised, and the effectiveness of credit scoring models will be seriously impaired. Stuart Pratt, the incoming president of the Consumer Data Industry Association, told the American Banker that, as a result, a consumer's apparent creditworthiness "would be more contingent on where they lived than on their payment history."

Getting legislation passed that preserves the federal preemption will be a tough fight, given that it is generally easier to block legislation than to pass it. But the alternative will be worse. Providian's senior vice-president and chief public policy officer, Konrad Alt, told the American Banker, "My worst-case scenario isn't really a trade-off. My worst-case scenario is no legislation at all." He added, however, "in the scramble for trade-offs and deals, I worry that this legislation just gets so big and complex that it can't move."