U.S. Bill Could Weaken State Credit Protections
A landmark consumer protection law called the Fair Credit Reporting Act may get a makeover this summer. But the news isn’t all good.
Though consumers are likely to get some new safeguards -- victims of identity theft may find it easier to clear their names, for example -- the law could supplant much stronger state laws, leaving residents of many states with less protection, consumer advocates complain.
At particular risk are residents of California and other states whose governments have provided stronger credit protections than those provided in both the existing and the proposed federal laws, said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group in Washington.
The proposed federal law could preempt these state protections, which range from greater privacy rights to the requirement that credit agencies provide free credit reports. And that rankles consumer advocates.
“We don’t think Congress should be in the business of stopping state legislatures from protecting their citizens,” said Travis Plunkett, legislative director at Consumer Federation of America. “If nothing is done to grandfather the state laws, we could see a weak federal law displace better state laws. That doesn’t protect consumers anywhere.”
Retailers, banks and credit card companies say federal law should take precedence to keep requirements uniform and make it easier for companies to operate across state lines.
But consumer advocates contend that state laws shouldn’t be preempted unless federal law provides greater protection for consumers.
Thanks to a bill passed by the state Legislature, for instance, Californians recently won the right to be promptly notified if the security of their credit data has been breached. Golden State residents also have some of the strongest opt-out laws in the country, which allow consumers to block pre-approved credit offers, among other things.
Residents of six states -- Massachusetts, New Jersey, Maryland, Vermont, Georgia and Colorado -- have the right to receive a free credit report once a year, Plunkett said. And in Massachusetts, creditors must adhere to tougher reporting standards.
Neither of these is part of federal law. The proposed revision of the federal law, however, would include the right to a free credit report.
The debate is complicated by the fact that much has happened in the world of credit since the Fair Credit Reporting Act was adopted in 1970. Among other things:
* Identity theft, in which a criminal steals personal and financial information about a person and obtains credit in his or her name, has burgeoned and is now believed to strike as many as 7 million people a year.
* “Tiered” interest rates, which provide low rates to the best credit risks and sky-high rates to people with poor credit, have become common. So, too, has the industry practice of regularly scanning consumers’ credit files to update their standing.
All sides agree that something must be done about identity theft. The most recent Fair Credit Reporting Act proposal would address identity theft by blocking credit scars caused by an identity thief from reappearing on a consumer’s credit report. It also would mandate that creditors establish some “red flag” guidelines to stop them from issuing credit that’s likely to be fraudulent.
Although consumers nationwide also would gain access to a free credit report once a year under this the proposal -- something consumer advocates long have sought -- Mierzwinski complains that the proposal does not require that the report include the consumer’s credit score, even though the score is pivotal to understanding the effect of the data on a person’s borrowing power.
But what really has industry and consumer advocates at each other’s throats are the issues of privacy and the completeness of data reported to and by credit bureaus.
Advocates believe that consumers should be given broad discretion over the sharing of their personal information, including the right to bar access to their credit files. Retailers and credit providers, who have formed an advocacy group called Partnership to Protect Consumer Credit, say this would hamper their ability to do business, stopping them from sending consumer data to affiliates to process transactions, not to mention to sell related goods and services.
The other bone of contention is whether creditors should be compelled to report complete information about every consumer. Increasingly, creditors are omitting positive credit data, information, Mierzwinski said. Because credit files are open to all creditors, omitting positive information can be a competitive advantage to companies that don’t want competitors poaching their best customers.
But this practice contributes to a high degree of inaccuracy in credit reports, which can prove costly to consumers, Plunkett said.
A recent study of 500,000 credit files found that the credit bureaus had widely differing data -- an indication of reporting inaccuracy. In about one-third of the cases, the data was so different that it caused a 50-point swing in the consumer’s credit score, a key factor in qualifying for a loan. In almost all cases, consumers had at least one piece of information missing on at least one bureau’s report, which damaged their scores, Plunkett said.
The completeness of data must be addressed in any revision of the Fair Credit Reporting Act, because even a few points on a score can tip a consumer out of the best-credit categories into the far more expensive realm of subprime borrowing, Mierzwinski said. Because credit card companies are scanning credit data regularly and throwing consumers with falling scores into higher-interest-rate “tiers,” these inaccuracies could cause consumers immediate harm, he said.
Last week the issue still was under hot debate, with both industry and consumer groups testifying in Senate Banking Committee hearings. The final resolution probably is months away, however, because more proposals are expected to be submitted over the coming month and key votes are postponed until after Labor Day.
Still, Senate Banking Committee staffers say, the proposed revision of the law is high on Congress’ priority list and is likely to move this year.
In the meantime, consumers can follow the debate -- and weigh in by e-mailing their senators and representatives -- on the Web at thomas.loc.gov, which provides a link to committees and hearings, bill progress and individual lawmakers.
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Times staff writer Kathy M. Kristof can be reached at
