Privacy Concerns Cloud Senate Identity-Theft Bill

Congressional legislation that is designed to combat the growing crime of identity theft -- but that would strike down provisions of more stringent state financial privacy laws, including a California law touted as the nation’s toughest -- moved closer to final passage Tuesday.

The bill before the Senate would permanently bar states from going further than Washington in regulating how financial institutions share consumers’ financial information with their corporate affiliates. Similar legislation has already passed the House.

The federal legislation comes on the heels of other consumer-protection measures that have moved through Congress, such as an anti-spam bill and a measure upholding the telemarketing “do-not-call” registry.

But consumer activists were far less enthusiastic about the federal financial privacy measure, saying that it offered some substantial steps forward in fighting identity theft but that it would scuttle a provision of the California law that would, for instance, prohibit a bank’s credit card unit from sharing a customer’s financial information with its insurance unit if a customer objected.

An effort by Democratic Sens. Barbara Boxer and Dianne Feinstein of California to write key provisions of the state’s law into the federal legislation was rejected Tuesday by a 70-24 vote. A final vote on the Senate measure is expected today.

Shelley Curran, legislative analyst for Consumers Union, said it was possible the California law could be fully preserved, but that the issue would likely have to be settled in the courts.

The federal legislation is designed to update the three-decades-old federal Fair Credit Reporting Act to address growing concerns about identity theft, which last year victimized 10 million Americans and cost consumers and businesses more than $50 billion.

“Honest citizens who are victims of identity theft incur very high costs in money, in time, in anxiety, in an effort to restore their spoiled credit histories and good names,” said Sen. Paul S. Sarbanes (D-Md.). “Someone steals their identity ... and their whole credit record is destroyed, and then it’s almost impossible for them to function in a normal economic way in our society.”

California’s senators and consumer activists objected that the legislation would leave people vulnerable to fraud and unwanted marketing.

“What we have before the Senate is a very weak privacy standard -- built for businesses at the expense of consumers -- which legislatures in all 50 states are forever barred from improving,” Feinstein objected.

Feinstein and Boxer complained that many financial industry lobbyists in Sacramento earlier this year hailed passage of the California law as a reasonable compromise, but then traveled to Washington to push for a federal preemption.

Feinstein complained that the federal legislation would allow companies, with limited restrictions on marketing, to share consumers’ sensitive financial data -- including information mined from check and credit card payments, such as political contributions and liquor purchases -- with other companies under the same ownership.

Business groups and the Bush administration argued that a patchwork of state laws could slow consumer credit approvals, putting a drag on the economy. “Without uniform standards, it would be hard to judge with any confidence the credit-worthiness of each individual customer, slowing the credit approval process and leading to higher lending costs,” said Steve Pfister of the National Retail Federation, a Washington-based trade association for the retail industry. “A more fragmented approval process for credit would negatively impact consumers and, as a consequence, retail sales -- ultimately costing jobs and harming the economy as a whole.”

Sen. Richard C. Shelby (R-Ala.), chairman of the Senate Banking Committee and a coauthor of the Senate bill, said the legislation reflected a “careful balance between ensuring efficient operation of our markets and protecting the rights of consumers.”

The Senate bill still must be reconciled with the House measure approved in September. A bill must be sent to the president’s desk before the end of the year or the prohibition on states adopting tougher rules will expire.

The Senate and House bills have many similarities, including giving consumers the right to obtain a free copy of credit reports once a year so they can check their accuracy; attempting to increase the effectiveness of “fraud alerts” filed by consumers to credit bureaus; and requiring businesses to delete the last five digits of a credit card number from receipts.

Critics of the Senate measure contend that sharing consumers’ private financial information among affiliates can lead to higher rates and denial of financial services, such as credit and insurance.

But Sarbanes argued that the legislation would put new limits on sharing of information for marketing, which he asserted was the biggest consumer complaint.

Under the Senate measure, companies whose affiliates swap customers’ financial information would be required to notify consumers and give them the option to say “don’t mail me information,” “don’t call me” and “don’t e-mail me,” said an aide to Shelby. The requirement would not apply if the customer had a business relationship with the affiliate in the prior 18 months.

The Senate measure also would increase the penalty for identity theft from three to five years in prison. And it would establish a national commission, headed by the Treasury secretary, to develop within one year a strategy to “promote financial literacy and education among all Americans.”

State Sen. Jackie Speier (D-Hillsborough), who sponsored the state law, said the “good news” was that much of the California law would still go into effect next July, including stronger measures to prevent financial institutions from sharing customers’ financial information with outside companies without customers’ permission.

“I really do believe there’s a privacy revolution,” she said. “It took some of my colleagues in the Legislature three years to figure that out. While our senators obviously get it, the rest of Congress is probably a couple of years away from understanding how important this is to the average American.”

Curran, of Consumers Union, added: “This issue is not going away.”

The legislation is one of several measures moving through Congress that would block actions being taken by California and other states. The Senate is considering a measure that would block California from imposing tougher pollution rules on engines used in lawn mowers, pushed by Midwest senators whose states are home to mower manufacturers.