Congressman Harold Ford, Jr.
Testimony to the Subcommittee on Consumer Credit and Financial Institutions
September 21, 2000

I want to thank Chairwoman Roukema and Ranking Member Vento/ Maloney for holding this hearing. This is the first step in a process which, I hope in the end, will provide all of our constituents with the basic information they need to make smart financial decisions.

I would like to address three main points in my testimony. First, the importance of educating and empowering consumers to become better investors and borrowers. Second, the need for a consumer to understand their credit score. Third, how my legislation addresses these concerns.

Over the last decade we have seen an economic expansion that is unprecedented in our nation's history. A large part of the expansion is not from corporations or from government but from the spending and investment decisions of millions of consumers. For the first time in the history of finance, the individual consumer has almost unencumbered access to information that was once the domain of realtors, car dealers, mortgage brokers, loan officers, and portfolio managers.

With the click of mouse, or the punch of a computer key, consumers can now compare interest rates on mortgages, qualify for car loans, open bank accounts, or create stock portfolios. Consumers can now make the investment and lifestyle decisions that were once dictated to them from the board rooms of banks. Those who access more information become more likely to make the investment decisions which expand prosperity. Educated consumers are more likely to buy a home, or a car, open a business, or finance an education.

As consumers gain more information, and expand their ability to make their own financial decisions, they are relying more and more on their own credit to ensure their financial freedom. Consumers are relying on their ability to keep and maintain good credit, lenders and creditors are then basing their decisions on a murky world of credit scores.

In a credit score, years of a consumer's financial information becomes condensed into one raw number. That number determines whether a bank will offer a mortgage at 9 percent or 7 percent. It allows consumers to own a credit card with an 11% interest rate, or it penalizes them with a card which has a 20% interest rate. The score supposedly lets banks determine whether someone is a good risk. Good risks, in turn, are able to finance homes and educations, bad risks can not.

Yet consumers have very little that they can do to prepare themselves to become good credit risks. They cannot see their credit report until they have been denied credit. They can not easily access their credit history if they would like to monitor their own financial health. In addition, they can not see the most important determinant of their financial health, their credit score. That is why I have introduced H.R. 4644, which would amend the Fair Credit Reporting Act to reflect the credit realities of today's market.

The central concept of my legislation is to educate consumers, and provide them with the resources necessary to become better customers, borrowers, and investors. It will allow anyone who might apply for credit card, car loan, or mortgage to see the same information that banks have.

First, this legislation would allow consumers one free credit report annually. As of now, six states- Maryland, Colorado, New Jersey, Georgia, Massachusetts, and Vermont- allow consumers one free annual report upon the consumer's request. This allows anyone to monitor what information is on their credit report. In the six states that have this open access, it has not been a onerous burden on Credit Reporting Agencies..

Sometimes, as many of us already know, the information on our report is far from an accurate picture. Loans which have been paid in full sometimes appear as still being owed, retailers might report inaccurate billing information, names and addresses are incorrect, or bills paid are reported as being owed. All of these negatively effect a credit score, but current law only enables consumers to exam these errors in the post-mortem of a denied loan. In my opinion, consumers should be able to correct these mistakes before, not after, they apply for a loan.

Part of the argument against the disclosure laws that my colleague Congressman Cannon, Senator Schumer, and I have proposed is that banks and retailers could face additional liability if they provided full information. I disagree with this reasoning. It seems to me, that correcting mistakes through full disclosure before loan applications are made will lessen, not increase, any liability. In fact, most consumers would be grateful for the ability to correct these errors. Banks, in turn, would be able to offer these consumers a greater array of products, enhancing the financial fortunes for themselves and their customers.

The second feature of my legislation, and the focus of today's hearing, is that this legislation, like Congressman Cannon's bill, would allow for the disclosure of the credit score with the credit report. I believe that this information is vital for consumers. This raw number is what banks, creditors, and lenders use to determine the financial health of consumers. This number supposedly contains all the factors that would go into a consumer's ability to repay a loan. The fact remains, however, that consumers do not know how this number is derived, what factors weigh more heavily than others, and why their score might be different from week to week.

My legislation differs slightly on one point from the Cannon bill. My legislation would include a clear and concise summation of the risk factors which affected a consumers credit along with the consumer's credit report. Only providing a raw score to a consumer does little to help answer the questions surrounding this number. What good would it do any of us if we see on a credit report a 400, 900, or a 750? How would we know what is good, what is deficient, or what we could do to better manage our financial lives?

Consumers need to know that a late bill today, hurts their credit tomorrow. They need to know what the effect of holding too many credit cards has on their ability to get future loans. They should be able to see what they can do to control their own credit, and we, as a society, should be able to see what factors beyond a consumer's control hurt credit worthiness.

Credit scoring, as a concept, has helped to end much of the subjective discrimination which plagued the borrowing process a generation ago. It blindly condenses consumers to a raw number which does not recognize race or gender. Yet what good is a system based on a series of quantitative factors if no one knows what these factors are?

A final aspect of my bill, which I find equally important, is that it recognizes the difficulty many of the poor and the young in our communities have in establishing good credit. I have proposed a one time mitigation of debts of less than $100 if a consumer takes a class in financial management. In many of our states, our Department of Motor Vehicles allow for new drivers to erase traffic violations if they take a defensive driving course. This proposal would work on the same principle. In my district, there are literally thousands of people who are forced into sub-prime and predatory markets because their credit report contains a missed phone or cable bill.

These are people who have struggled to reach the middle class, but the ability to save and invest is hindered because they can not get a reasonable rate on a car loan or a home mortgage. They are forced to accept terms that are out of line with their ability to pay them, and thus their hard work becomes futile as they compile more debt on top of more debt. However, under my legislation, if they complete a course in financial management these small debts would be removed from their credit histories in half the time than they are now..

Mrs. Chairwoman, this hearing has significant importance. At the height of our national prosperity, it is incumbent upon us to expand the breadth of our wealth. Today personal prosperity has become inexorably linked to good credit. Credit has almost become a medium of exchange in our information economy, yet our laws do not allow consumers to access their information.

Our continued prosperity is predicated on the openness and flexibility of our markets. That means, those with the best information, and the knowledge of what that information means, are more likely to prosper. We, as policy makers, need to empower consumers to make critical and personal financial decisions. But how can we, if we continue to have a system where it is easier for a consumer to get their FBI records than it is to get their full credit report?

Thank you for giving me the opportunity to testify here today.