Regulating the credit reporters.

States are aggressively regulating credit reporting agencies, but the federal government is threatening pre-emption.

Robert J. Corbey has a horror story. On June 8, 1991, Corbey signed a contract with a home improvement firm for installation of vinyl siding on his house. He paid $500 down and sought to finance the remainder of the $2,000 cost.

Corbey says that on June 12, 1991, a representative of Commercial Credit Corporation called and questioned him about an IRS lien filed at Fairfax City Courthouse in Virginia on property that he allegedly owned with his wife Ann. He was also questioned about a $1,000 monthly mortgage and his residence in two locations in Virginia.

According to Corbey, "I have no wife since I've been a widower for over 17 years and never had an IRS lien anywhere, anytime. I have not had any mortgage payments since my house was paid in full years ago. I never lived anywhere in Virginia, but have lived for 34 years in one house in Rockville, Maryland."

Despite his protests, Corbey's loan application was rejected, he says, because of an erroneous credit report furnished to the lender by Equifax, one of the big three credit reporting firms.

Corbey tried to correct the errors in his credit report. "Three months after my request I received a form memo (unsigned) including my credit report. It was replete with errors and 90 percent false. I contacted the creditors and organizations listed on 'my' report and determined that all information except for three items were not mine and belonged to someone else."

Corbey wrote Equifax, requesting that the errors be corrected. But according to Corbey, "Equifax prepared and sent me three more erroneous credit reports under my name, and each had a different social security number. One of the reports had my social security number correct but all three had someone else's credit history."

Corbey then wrote Jack Roberts, the president of Equifax, and talked by phone with Labat R. Yancey, vice president of consumer affairs. Yancey later wrote to say that Corbey's credit history had been corrected. Corbey confirmed that the credit history was now correct but his social security number was wrong. After five more reports, the social security number is still wrong. "They took almost a year to straighten out my credit record," says Corbey. "It was a horrible experience, extremely frustrating. I felt like I was fighting Goliath."

Robert Corbey's story is not unusual, says Michelle Meier of Consumers Union (CU). She regularly receives complaints from consumers who say they lost money, were denied credit or lost a job because of erroneous credit reports. In fact, credit report errors are the most frequent form of consumer complaint received by CU.

State legislatures and state attorneys general have responded rapidly to such reports. Twenty states now have laws that regulate credit reporting bureaus, according to CU. In 1992, CU reports, at least 30 states considered legislation related to credit reporting. Over the past two years, state attorneys general have settled major lawsuits against credit reporting agencies in return for consent decrees to ensure the accuracy and privacy of information in credit reports.

The federal Fair Credit Reporting Act (FCRA), passed in 1970, regulates credit reporting agencies. While it gives consumers the right to inquire about "the nature and substance" of information reported by an agency, FCRA also allows agencies to report credit information for legitimate business needs, such as a credit check or a background check by employers or insurance companies. Several legislatures have concluded that FCRA does not go far enough and have adopted stricter state standards.

One state that passed a strong law in 1992 was Vermont, in part as a response to a particularly egregious incident. TRW, another of the three major credit reporting firms, reported 1,500 residents of the small Vermont town of Norwich as delinquent in paying their taxes. TRW had mixed up a list of the town's residents with a list of those residents who had tax liens against them.

The new Vermont law provides basic privacy protections. Consumers now have a right in Vermont to a free copy of their credit report each year. The law generally prohibits a person from looking at a consumer's credit report unless the consumer has consented to the disclosure. And a consumer can recover damages from a credit bureau or creditor who violates the law.

Representative Ruth Joseph says that her state of Maine passed a "strong consumer law" in response to constituent complaints about incorrect credit reports.

Ed Mierzwinski of the U.S. Public Interest Research Group says many other states also have tough laws. Maryland, like Vermont, guarantees consumers the right to see a free copy of their credit report. Under California law, employers are required to notify a consumer when requesting a credit report. New York requires that paid judgments must be removed from a consumer's report within five years, bars reports of information derived from polygraphs and bars reports of arrests, unless the case is pending or there is a conviction. New York also prohibits reports on a consumer's race, religion, color or ethnic origin.

Barry Connelly, executive vice president of the Associated Credit Bureaus, worries that well-intentioned state legislation could backfire on consumers. "Credit information," he says, "is indeed the fuel that keeps the credit system going. It translates into jobs because it helps to sell goods. Consumers have the expectation of an instant line of credit. Thirty thousand autos are purchased every day. Decisions are made on the spot. Somebody walks out of the showroom with a car."

According to Connelly, 1.5 million credit reports are issued every day, and 2 billion pieces of information are processed into the credit system every month. Some mistakes will occur, he concedes, despite an industry policy of "zero tolerance of errors." The need for accuracy, he concludes, must be balanced against the need for accessible credit information.

State attorneys general, by contrast, do not appear as worried about overregulation. They have been aggressive in enforcing state and federal law. On July 8, 1991, Texas Attorney General Dan Morales and 10 other state AGs filed a suit in Texas state court against TRW. According to the National Association of Attorneys General, the Texas suit alleged that "TRW failed to correct numerous errors in consumer credit reports, and damaged the credit standing and invaded the privacy of thousands of consumers across the country." Morales reported that he had received over a two-year period more than 700 complaints regarding TRW's practices.

On the same day the Texas suit was filed, New York Attorney General Bob Abrams sued TRW in New York court for violating the state's credit reporting law. Abrams claimed that one out of three TRW credit reports were inaccurate and one out of six contained serious errors.

TRW, in turn, sued Morales, alleging that state laws were pre-empted by the federal Fair Credit Reporting Act. TRW further alleged that state law enforcement constituted an unconstitutional burden on interstate commerce, and violated TRW's rights of free speech and equal protection of the laws.

In late 1991, however, TRW and the state attorneys general reached a settlement. A consent decree filed in federal district court in Dallas requires TRW to adopt new procedures to ensure the accuracy of credit reports and to pay costs to the states. Among other provisions, the decree requires TRW to establish a toll-free telephone line for consumer complaints, to furnish consumers with copies of their credit report within four days of a request and to complete reinvestigation of alleged errors within 30 days.

In July of 1992, Equifax, another of the big three credit reporting agencies, also settled a suit brought by state attorneys general by agreeing to similar terms. Still outstanding is a Federal Trade Commission action alleging that credit reporting bureaus provide names and information about consumers to direct marketing firms, such as catalog sellers, in violation of the federal law.

Now Congress is getting into the picture. In 1992, California Congressman Esteban Torres introduced a bill, H.R. 3596, to strengthen the federal Fair Credit Reporting Act. Similar legislation was introduced in the Senate by Senators Kit Bond (Mo.) and Richard Bryan (Nev.).

As originally drafted, the Torres bill would require credit bureaus to give a consumer at least one free copy of his credit report each year. It would require the big three credit bureaus to provide a toll free "800" number for consumer complaints. It would set strict verification rules for bureaus to follow when consumers allege that information is inaccurate. It would prohibit banks from reporting information that they know or should know to be incorrect. Businesses would be required to get a consumer's permission before looking at a credit report for employment purposes. And a mechanism would be created to allow consumers to opt out of so-called prescreening and similar forms of direct marketing. (Prescreening is a computer run on credit reports made by a credit bureau to identify consumers who are good risks for targeted "pre-approved" credit offers--usually by credit card companies. Despite an FTC prohibition, prescreening also is said to be used by direct marketers of retail catalogs, vacation packages and so forth.)

H.R. 3596, however, was substantially watered down in committee mark-up in response to complaints from banks and credit reporting firms. Particularly damaging to states was language inserted over the sponsors' objections that would broadly pre-empt state authority to regulate credit bureaus for purposes of protecting an individual's privacy and reputation.

According to Congressman Torres and consumer groups, the inclusion of language pre-empting state laws in combination with the weakening of its standards turned a pro-consumer bill into an anti-consumer bill. Congressmen Joe Kennedy and Torres are reintroducing FCRA reform legislation in 1993, and pre-emption again is expected to be the major issue.

The tactic of seeking federal regulation as a means of pre-empting state laws has been picked up by "special interests," says Representative Joseph. In an area such as credit reporting where the states have taken the lead in protecting consumers by passing protection measures or initiating lawsuits, it may make sense for the affected industry to actually seek out federal regulation, in return for federal pre-emption or nullification of state law. This bargain is logical for the regulated industry if federal standards are relatively weak and federal resources for law enforcement are limited. Weak federal regulation supersedes effective state action.

Representative Jeff Teitz of Rhode Island says the classic example of this tactic is the repeated attempt in Congress to pass a bill providing for federal pre-emption of state product liability law. And there are many other examples in the bank and insurance areas, says Representative Joseph.

Janlori Goldman, an attorney with the American Civil Liberties Union, deplores the tactic. She says the pre-emption provision being pushed by the credit reporting industry is unprecedented. "Without exception, there is no federal privacy law that pre-empts state law. Congress has continually affirmed the ability of state legislatures to act above federally created floors in all areas of privacy. Congress has continually emphasized the rights of states to extend the protection afforded to citizens." Goldman also notes that the great majority of national consumer protection laws passed in the last 25 years similarly eschew pre-emption and explicitly or implicitly contemplate an active state role.

"Traditionally and today," says Goldman, "the long-standing principle is that states serve as the 'laboratories of change' and a breeding ground for effective social policies, particularly in the area of individual rights."

Phillip S. Corwin, director of retail banking for the American Bankers Association, has a different viewpoint. The banking industry, he says, will not negotiate with sponsors of federal credit reporting legislation until they agree as a "precondition" to accept federal pre-emption of state laws.

"If there is to be federal legislation, then there must be pre-emption," he says. "We see no point in negotiating a provision in federal law and then have the states gut it. Multistate standards are impossible. There is a nationwide credit reporting system."

Barry Connelly concurs that pre-emption of state law is necessary if Congress tightens FCRA. "We are a mobile society. Consumers should know that they can expect the same level of service in Montana and New York. Credit information is transmitted across state lines. To have differing standards for the collection or reinvestigation of information is simply not good for consumers."

Connelly is concerned not only about the multiple state standards but also about overzealous regulation by a few states. Consumers could be denied credit cards, he says, absent adequate reports of credit history. "We don't think it's good for business."

Jeri Benner, a victim of credit reporting errors from Frederick, Md., disagrees. She says both the states and the federal government have responsibilities, and has lobbied Congress to pass FCRA legislation without pre-emption.

Her activism springs from a personal experience. Ms. Benner applied for a mortgage in February 1992 and her credit report came up clean. Then she switched lenders. The day before her settlement, Citicorp called her and inquired about four loans totalling over $100,000. The credit report of these debts was in error, but correcting the errors resulted in a delayed settlement. Benner had to pay an extra point when she bought her house because of the delay. It cost her several thousand dollars.

"I recommend," says Benner, "that Congress and state legislatures make credit bureaus adhere to stricter standards. You can lose jobs, mortgages and homes because of erroneous credit reports. I hope legislators will hold them accountable."

Representative Ruth Joseph has a similar view and takes exception to the idea that pre-emption of state law is an appropriate "precondition" for the passage of new federal legislation. She says that the Maine law was crafted with a great deal of thought and for the federal government to supersede it would not be well received in Augusta. Maryland Delegate Ken Montague Jr. says that the traditional pattern of concurrent state and federal regulation of individual privacy and consumer credit issues should be preserved.

Federal and state governments share responsibility for protecting consumers of financial services, he says. "State legislatures should not be barred by a special interest provision in federal legislation from acting to protect the good reputation of our citizens." Representative Joseph says simply, "We have to do what is best for the people of our state."

William T. Waren is federal affairs counsel for NCSL.