State Sale of Income Data Raises Concerns
California soon will begin selling confidential income information about its residents to private information companies, mortgage lenders, car dealers and other creditors seeking to verify a person’s annual pay.
A little-noticed law passed last summer cleared the way for the state Employment Development Department to begin disclosing the private income data it collects on about 14 million Californians.
Banks and lenders, who pushed for the legislation, say the pay data will enable them to process loan applications faster and reduce fraud. Proponents stress that the law permits disclosure of income information only if individuals give their written permission, but critics say the rule will depend on an honor system that is open to abuse.
Consumer groups say the electronic disclosure of individuals’ income--which many Americans consider a closely guarded secret--is further evidence that the privacy of U.S. consumers is being chipped away by the surge of personal information now available online.
“This violates a basic principle of privacy,” said Robert Ellis Smith, publisher of Privacy Journal, a monthly newsletter covering the effect of technology on personal privacy. Smith said that because the state pay data were collected to calculate unemployment taxes and benefits, it is improper to start using the information for a different purpose.
Privacy advocates also warned that once the information is available electronically, it could fall into the wrong hands or be misused. For example, retailers and marketing firms would find it useful in directing offers to wealthy consumers. Debt collectors, employers and charities also might want to get the data.
State officials stressed that pay information would be furnished only to qualified creditors, primarily mortgage lenders, and that no data would be shared without the written permission of the individual. But questions of how to protect the data from misuse have yet to be resolved.
“The key issue is how do we implement this program while giving a priority to privacy rights,” said Michael Bernick, the newly appointed director of the Employment Development Department. After analyzing how similar programs have worked in a few other states, department officials say that California’s program--which could bring the state $15 million over the next 10 years--could be launched later this year or in early 2000.
The department is getting help in setting up the program from Poway-based Verification of Income and Employment, a joint venture of Santa Ana-based First American Financial Corp. and Norwest Mortgage.
The company fought for three years to win approval of the California legislation and now administers similar programs in Iowa, Minnesota, North Carolina, Pennsylvania and Texas.
Company officials said the income information would be distributed in a similar manner to the handling of individual credit reports. Qualifying private companies, ranging from lenders to mortgage brokers to landlords, first would have to obtain the borrower’s permission in advance, and promise to use the income information only as part of a credit application. Then, after paying a fee of $5 to $10 per request, users would get immediate access to an online database operated by the company.
“We realize that this information is private,” said William Skowronnek, company president. “We don’t give it to everyone. We turn a lot of people away.”
Since the company’s users are not required to show proof of the individual’s written permission before accessing the information, it is an honor system. But to ensure that written permissions are obtained, the company conducts random audits and hires an outside accounting firm to do the same. Pay information may not be downloaded to a user’s computer and can only be requested in small batches of one to five names. This, Skowronnek said, discourages users from reselling the information or using the database to create, for example, a list of individuals earning more than $100,000 a year.
Laws Limit Sale of Data
Though the company has been approached by several marketers and retailers seeking the income data, Skowronnek said state and federal laws limit the sale of the information to credit providers only.
But privacy experts say laws can always change.
“They are making precisely the same promises today that they made years ago when states starting collecting the wage data, [when they told] employers it would remain private,” said Smith of Privacy Journal.
Company officials noted that the law only gives creditors a new method of accessing the same information they now collect as part of most loan applications. Today, banks and mortgage lenders typically use the mail or telephone to verify employment and income, and require applicants to provide written documentation, such as pay stubs, W-2 forms and tax returns.
Leaders in the mortgage industry, who have been eagerly awaiting the addition of California to the company’s system, say online access to income information may eventually enable them to complete loan applications in days, rather than weeks, particularly as the loan business moves online.
“This is going to cut down on time, reduce fraud and bring savings to consumers,” said Gulshan Garg, who heads the mortgage Web site for Pasadena-based IndyMac Mortgage Holdings. “This is one less step that consumers will have to do in the mortgage process.”
In Iowa--which in 1995 became the first state to sell its income data--mortgage lenders have cut processing time by about two weeks and employers say they spend less time processing income-verification paperwork for their workers, said Joe Bervid, attorney for the Iowa Workforce Development Department.
He said the state has experienced no significant problems with fraud or misuse, although it has terminated a few accounts for security reasons.
In one instance, a bank employee gave her company password to a loan officer, who accessed the system without authorization to locate a customer who was delinquent on a loan, according to an audit by the inspector general of the U.S. Department of Labor. The bank received only a warning. Only after auditors discovered that the unauthorized use was continuing did they terminate the bank’s access to the system.
In California, the bill allowing the Employment Development Department to sell the income data had backing from the California Bankers Assn., Bank of America and California Mortgage Brokers Assn. It was passed with so little fanfare that several privacy experts and professional information collectors in California were unaware of the new law until it was brought to their attention by The Times.
The department’s income information covers about 85% of all state residents. Federal employees and the self-employed are not covered. The data has been available on a limited basis to other government agencies, where it is sometimes used to determine child support or verify eligibility for welfare.
