STATEMENT OF STUART K. PRATT

ASSOCIATED CREDIT BUREAUS, INC.

WASHINGTON, D.C.

HEARING ON

CREDIT SCORING

 Before the Subcommittee on Financial Institutions and Consumer Credit

of the

Committee on Banking and Financial Services

of the

United States House of Representatives

Washington, D.C.

Thursday, September 21, 2000

Chairwoman Roukema and members of the Committee, my name is Stuart Pratt and I am vice president, government relations for the Associated Credit Bureaus, headquartered here in Washington, D.C. ACB, as we are commonly known, is the international trade association representing over 500 consumer information companies that provide fraud prevention and risk management products, credit and mortgage reports, tenant and employment screening services, check fraud and verification services, and collection services.

Our members are the information infrastructure that contributes to the safety and soundness of our banking and retail credit systems; which:

• allows for the efficiencies of a secondary mortgage securities marketplace that saves consumers an average of 2 percentage points on the cost of a mortgage.
• helps e-commerce and bricks-and-mortar businesses to authenticate applicant data thus reducing the incidence of fraud.
• gives child support enforcement agencies the information tools necessary to meet their mission.
• allows states to reduce many forms of entitlement fraud.

We want to commend you for choosing to hold this hearing on credit scoring. Credit score technology is a success story here in this country. As an example, through the use of scores, money supply for consumer loans is tied with capital markets, which ensures primary lending markets have sufficient funds necessary for consumer lending. Score technologies have created greater confidence in securitized consumer loans offered in these capital markets and in the end, the greater availability of a money supply reduces costs for consumers.

Before I discuss our industry's views on credit scores, I have found it helpful to provide a short review of what a consumer reporting agency is, what is contained in a consumer report, and the law that governs our industry.

Consumer reporting agencies maintain information on individual consumer payment patterns associated with various types of credit obligations.¹ The data compiled by these agencies is used by creditors and others permitted under the strict prescription of the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) to review the consumer's file.

Consumer credit histories are derived from, among other sources, the voluntary provision of information about consumer payments on various types of credit accounts or other debts from thousands of data furnishers such as credit grantors, student loan guarantee and child support enforcement agencies. A consumer's file may also include public record items, such as a bankruptcy filing, judgment or lien. Note that these types of data sources often contain SSNs, as well.

For purposes of data accuracy and proper identification, generally our members maintain information such as a consumer's full name, current and previous addresses, Social Security Number, and places of employment. This data is loaded into the system on a regular basis to ensure the completeness and accuracy of data.²

It is interesting to note that the vast majority of data in our members' systems simply confirms what most of you would expect; that consumers pay their bills on time and are responsible, good credit risks. This contrasts with the majority of systems maintained in other countries, such as Japan or Italy, which store only negative data and do not give consumers recognition for the responsible management of their finances.

As important as knowing what we have in our files is also knowing what types of information our members do not maintain in files used to produce consumer reports. Our members do not know what consumers have purchased using credit (e.g., a refrigerator, clothing, etc.) or where they used a particular bank card (e.g., which stores a consumer frequents). They also don't have a record of when consumers have been declined for credit or another benefit based on the use of a consumer report. Medical treatment data isn't a part of the databases and no bank account information is available in a consumer report.

In addition to our general discussion of the industry, we believe it is important for your Subcommittee to have a baseline understanding of the law which regulates our industry. 
Enacted in 1970, the Fair Credit Reporting Act was significantly amended in the 104th Congress with the passage of the Credit Reporting Reform Act.³

Congress, our Association's members, creditors and consumer groups spent over six years working through the modernization of what was the first privacy law enacted in this country (1970). This amendatory process resulted in a complete, current and forwarding-looking statute. The FCRA serves as an example of successfully balancing the rights of the individual with the economic benefits of maintaining a competitive consumer reporting system so necessary to a market-oriented economy.

The FCRA is an effective privacy statute, which protects the consumer by narrowly limiting the appropriate uses of a consumer report (often we call this a credit report) under Section 604 (15 U.S.C. 1681b), entitled "Permissible Purposes of Reports."

Some of the more common uses of a consumer's file are in the issuance of credit, subsequent account review and collection processes. Reports are also, for example, permitted to be used by child support enforcement agencies when establishing levels of support.

Beyond protecting the privacy of the information contained in consumer reports, the FCRA also provides consumers with certain rights such as the right of access; the right to dispute any inaccurate information and have it corrected or removed; and the right to prosecute any person who accesses their information for an impermissible purpose. The law also includes a shared liability for data accuracy between consumer reporting agencies and furnishers of information to the system.

Let me turn to the subject of credit scores and our industry.

Credit scores have been used by various segments of the credit industry for decades. In fact, there is no one "credit score" in the marketplace today. At its core, scoring technology is designed to predict future outcomes based on historical data. This risk management tool is used for safety and soundness in our banking systems, for example, and is based on statistical analyses of various relationships found in a consumer's credit history. For scores used in the credit marketplace, the historical data comes from our members' systems which are used to produce what is often referred to as a credit report. It is important to note that some of our largest members are not only the repositories for historical data on credit performance, but are also some of the dominant score developers competing in the marketplace for these risk management tools.

Credit scores are a decision and risk management tool used by creditors and others. The lenders themselves still control their own threshold for risk and decide ultimately who is approved for a loan and who is not. Said differently, an acceptable score for one lender may be too much of a risk for another lender.

Scores are developed for a wide range of purposes. Scoring models are tailored to predict likelihood of bankruptcy, risk of slow payment behavior, and so on. They help lenders manage large portfolios of loans to determine whether or not loan quality is maintained. Mortgage lenders use scores to help speed up the loan decision process in partnership with their secondary markets. Scores, when used properly, can help lenders standardize lending decisions and avoid uneven treatment of applicants.

Having described the nature of credit scores and the competitive market that exists for these products, let me turn to the question of how these scores are delivered to creditors.

Often our members, which produce mortgage reports or traditional credit reports, are the channel of distribution for credit scores. Thus, whether our member has developed the score or not, the score is delivered to the creditor along with the credit report via our members' systems. Alternatively, creditors can choose to order a credit report and then maintain their own proprietary score. In this case the credit bureau is not delivering the score at all.

Where an ACB member is delivering a credit score developed by another company, it is important to keep in mind that our member does not own the intellectual property and thus is very limited in terms of providing consumers with detailed descriptions of how that particular score analyzes a credit report. This is nearly always the case for our members which produce mortgage reports.

This hearing is not merely to provide background on credit scores and as you point out in your press release, Chairwoman Roukema, "…the debate over credit score disclosure has intensified as consumers learn of the critical role of scores in credit decisions." Clearly consumers today are far more aware of credit scores and are looking for answers.

This year has been a watershed for the marketplace in responding to this consumer need for more information about scores, and a better understanding of what goes into a score. Consider the following announcements we've seen during the first three quarters of this year.

• Fannie Mae and Freddie Mac both announce they will provide consumers with a transparent description of how they evaluate loans they purchase.
• Several of ACB's largest members have indicated or formally announced commitments to provide consumers with access to scores that will help them understand how these technologies analyze credit reports.
• Fair, Isaac announces its intentions to provide consumers with direct access to scores.
• Even this month a company called Truelink announced online access to what they describe as an analysis tool for consumers which will be offered to millions of consumers via The Motley Fool web site.

Beyond the marketplace, ACB formed its own Risk Score Task Force in the first quarter of this year to help guide the Association's policy position in the context of the many changes, some of which are reflected in the announcements listed above. Our industry is seeking to ensure that if a score is disclosed, our members have sound guidance in terms of how a disclosure is structured to ensure consumers will truly net the intended benefits through a greater understanding of how score technologies work. We are committed to completing our work on this guidance before the end of the year.

As you requested, we do offer the following comments on H.R. 2856.

H.R. 2856 was introduced prior to any of the market responses we've discussed here today. The intention to ensure consumers have access to a clear understanding of how credit decisions are made is on-point. We believe, however, in its current form the likely unintended result of the bill is confusion, not clarity.

ACB represents a range of companies, most of which produce products which are governed as consumer reports under the Fair Credit Reporting Act. It is important to keep in mind that the FCRA is not a law governing "credit bureaus." It is a very broadly construed law that governs employment screening, check verification services, mortgage reporting, and tenant screening, to name a few. We have members in all of these areas of business. In light of the FCRA's breadth, we don't believe that a broad score disclosure amendment applied to all consumer reporting agencies in all circumstances is workable.

For some, this bill would require the disclosure of scores used to prevent fraud and which have no relevance to credit lending decisions. In these cases, the disclosure simply puts into the hands of criminals a primer on how to avoid the technologies used to detect the crime. As an example, this point is particularly true for our members, which produce products designed to detect check fraud. It is estimated that 1.2 million fraudulent checks are written each day in this country. We must preserve the integrity of scoring systems designed to prevent fraud.

We are also concerned about the current proposal because it presents a complex and perhaps, nearly impossible compliance requirement. As proposed, consumer reporting agencies of all types would have to disclose scores. Does this mean all scores which might be used during some period of time? Does this mean all scores which were used to analyze the file during some period of time? Does this mean disclosing the intellectual property of other companies?

These questions are valid for any compliance officer in our membership. But this isn't just about compliance with law and structuring a law accordingly. Most importantly, we don't believe the goal of score disclosure is to display a confusing array of scores, scales and explanations, but rather, disclosure should foster a better general understanding of how credit scores analyze a consumer's specific file at a given point in time, giving him or her a deeper understanding of where he or she stands in the credit marketplace.

As you can see, the marketplace and the ACB, through its own task force, have not been standing on the sidelines of this issue. We believe the marketplace is stepping in to assist consumers as never before and it should be given the opportunity to continue in these efforts. Consumers must have the information they need to understand how best to shop for credit in our highly competitive credit marketplace. We believe consumers are better situated today then ever before to do this.

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