Opposition to Credit Act May Prove Costly

As goes California, so goes the nation?

No, Washington is not about to imitate the Golden State's penchant for replacing commanders in chief in mid-term. But California's two senators, Barbara Boxer and Dianne Feinstein, are threatening to block the renewal of key provisions in the Fair Credit Reporting Act unless the rest of the country follows California's lead on rules for collecting and sharing personal financial information.

Their brinksmanship puts at risk a system that has revolutionized lending over the last three decades, assuring middle- and even low-income Americans access to credit on competitive terms.

The act's provisions can be as hard to decipher as the Helsinki Yellow Pages, but the law's consequences are pretty straightforward. Before its passage in 1970, local bankers decided whether you were worthy of a mortgage. Today, computers that are immune to whim or prejudice "score" your credit, and hundreds of lenders compete for your business on the basis of objective standards. By no coincidence, the proportion of African Americans who own their own homes has increased by 40%.

In 1970, charge cards were largely toys for business executives and the ladies who lunched; just one in six Americans possessed a card. Today, three in four carry cards, paying for everything from groceries to income taxes with plastic.

However, one key provision of the Fair Credit Reporting Act -- preemption of state financial laws that conflict with federal rules and thus have the potential to balkanize the national credit market -- will expire at the end of this year unless it is renewed. And, not surprisingly, the debate over renewal has become an occasion for amending the law.

That's not necessarily a bad thing: The act was due for a tuneup to reflect changing circumstances ranging from the rise of the Internet to the growing risk of identity theft. What is a bad thing, though, is Sens. Boxer's and Feinstein's threat to boycott the reconciliation process between House and Senate bills unless the Senate passes a version that conforms to California's own financial privacy law, signed by Gov. Gray Davis in the eleventh hour of his administration. Meeting the terms of that law could break the fragile coalition supporting the national credit market.

Ordinarily, two senators from the minority party would be in no position to derail financial legislation that has substantial bipartisan support and was endorsed by Federal Reserve Chairman Alan Greenspan. But the threat posed by the senators is real because a boycott would slow the House-Senate reconciliation process, and time could run out in this session of Congress.

If the preemption provision of the act is allowed to expire Dec. 31, there is good reason to believe that the proverbial genie will not be easily returned to the bottle. Half a dozen states are expected to follow California in passing financial privacy laws that do not conform to the federal standard. The truly national market for credit, which is the act's triumph, will fragment.

Banks, charge card companies and other lenders will adjust -- there will still be ways to make a buck in credit. But the resulting inefficiencies and reduction in competition will come at the expense of the people Boxer and Feinstein claim to be defending: middle-income consumers.

Robert Hahn is executive director of the American Enterprise Institute-Brookings Joint Center, which focuses on regulatory policy.

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