consumers' credit histories when underwriting homeowners and auto insurance policies.

Second, we are seeing new types of consumer credit providers and products in the marketplace. For example, the growing use of prescreened offers for the marketing of credit cards has led to the development of credit card banks that rely almost entirely on prescreening to sell their cards. Prescreening has also led to the widespread availability of credit cards with no annual fee and other attractive benefits, and has enhanced competition.

Third, businesses increasingly are using consumer reports to undertake risk-based pricing of products or services. Many creditors and other businesses no longer merely approve or deny applications, but, rather, they use credit report data to finely calibrate the terms of their offer. Consumers benefit from the more efficient consumer credit market that is made possible by these developments. Any reference to the consumer reporting system should recognize the problem of identity theft. The range, accuracy, and timeliness of information in consumer reporting data bases makes them unique resources. They are, therefore, simultaneously a target for identity thieves and a valuable resources for combatting identity theft. Identity theft threatens the fair and efficient functioning of consumer credit markets by undermining the accuracy and credibility of the information flow that supports these markets.

As I recently detailed before the House Financial Services Committee, the Commission is working actively to combat identity theft in a number of areas. We will continue to explore avenues for combatting identity theft and assisting victims.

In conclusion, the 33 years since passage of the Act have fully demonstrated the wisdom of Congress in enacting the FCRA.

The FCRA makes possible the vitality of modern consumer credit markets. The consumer reporting industry, furnishers, and users can all rely on the uniform framework of the FCRA in what has become a complex, nationwide business of making consumer credit available to a diverse and mobile American public.

The 1970 Act, along with the 1996 Amendments, provided a carefully balanced framework, making possible the benefits that result from the free, fair, and accurate flow of consumer data. All of these benefits depend on the consumer reporting system functioning as intended. That is why the FTC continues to emphasize the importance of educating consumers and businesses, and of enforcing the law to assure compliance by all who have a role in making the system work.

Thank you for this opportunity to present the Commission's views, and I would be happy to respond to your questions.

Chairman SHELBY. Thank you. I believe at this point would be a good time-Senator Dole, we are having a vote at 2:20 p.m., unless it has been vitiated.

Does anybody know? It hasn't hit yet.

[Pause.]

I believe I will recess the hearing-Senator Dole, do you have an opening statement or any comments?

COMMENTS OF SENATOR ELIZABETH DOLE

Senator DOLE. No. In the interest of time, I will submit my statement for the record.

Chairman SHELBY. It will be made a part of the record in its entirety.

Senator DOLE. But I welcome you. As a former Member of the Federal Trade Commission, I am delighted to have your testimony today and look forward to the questions.

Chairman SHELBY. Thank you, Senator Dole. Your opening statement will be made a part of the record.

Senator DOLE. Thank you, Mr. Chairman.

Chairman SHELBY. We will recess the Committee until we get back from the vote.

[Recess.]

Chairman SHELBY. The Committee will come to order.

Mr. Beales, starting at the most basic level, just for the recordthis is our first hearing regarding the Fair Credit Reporting Act, as you know—I want to establish for the record what is covered by the Fair Credit Reporting Act.

The law identifies certain kinds of personal information and it establishes how and by whom such information can be collected, transferred, and used.

Is that correct?

Mr. BEALES. Yes, sir.

Chairman SHELBY. What would be an example of the kind of information that is covered under the statutory scheme?

Mr. BEALES. It could be any information if it bears on eligibility for credit or employment. That is the basic definitional constraint. Chairman SHELBY. Give us an example.

Mr. BEALES. The typical example is how well you repay your bills, so your repayment history.

Chairman SHELBY. Sure. It certainly does has probative value, doesn't it?

Mr. BEALES. It certainly does. It is ultimately what the creditor is interested in.

Chairman SHELBY. Right. And should be.

Mr. BEALES. Right. It may also include, and typically does, public record information, like mortgages and liens against your property. Chairman SHELBY. Tax liens, if any.

Mr. BEALES. Tax liens, any other kind of information, bankruptcy information.

Chairman SHELBY. Lawsuits?

Mr. BEALES. Lawsuits that may be picked up from public records, yes, any of that might be there.

Chairman SHELBY. The law restricts, as I understand it, who can access and use the contents of a consumer report. In other words, not just anyone can use it for any reason.

Could you elaborate on that, about how use of such information or report is restricted, for the record?

Mr. BEALES. The fundamental restriction is that you have to have a permissible purpose under the statute to access the report. Chairman SHELBY. Is permissible purpose defined in the statute? Mr. BEALES. There is a definition. A permissible purpose would be to assess your eligibility for credit.

Chairman SHELBY. Okay.

Mr. BEALES. Or for insurance purposes. Or for employment. Probably the broadest of the permissible purposes is in connection with a business transaction initiated by the consumer.

Any of those would be permissible purposes under the statute.
Chairman SHELBY. Not a fishing expedition.

Mr. BEALES. Not a fishing expedition. Not idle curiosity.
Chairman SHELBY. That is prohibited, is it not?

Mr. BEALES. That is prohibited. From the beginning, it has been prohibited for a credit reporting agency to provide information to somebody without a permissible purpose.

The 1996 Amendments also prohibited obtaining, the act of obtaining a report without a permissible purpose.

Chairman SHELBY. So that begs the question-why do you think access to credit reports was limited to those with permissible purposes?

Mr. BEALES. I think this is sensitive information.

Chairman SHELBY. Sensitive information. Basically, private information.

Mr. BEALES. Basically, private information. And in order to protect the consumer's privacy interests, and to balance the consumer's privacy interests against the legitimate needs of creditors in trying to assess whether or not to grant credit, Congress made the decision to enumerate the kinds of purposes for which this was a worthwhile use and an acceptable invasion of privacy, and eliminate the kinds of uses where there is less benefit, but the same invasion of privacy.

Chairman SHELBY. Is target marketing generally considered a permissible use?

And if so, why?

Mr. BEALES. The only circumstance in which target marketing is a permissible use is prescreened offers of credit or insurance.

Other than that, target marketing is not a permissible use. Chairman SHELBY. The structure of the Fair Credit Reporting Act reflects decisions of earlier Congresses what weighed and balanced-tried to balance-various factors, such as privacy, accuracy, and commercial need for credit information.

Could you revisit the portions of your testimony where you identified these considerations and discuss them just for the record a bit further?

Privacy, accuracy, and the commercial need for credit information.

Mr. BEALES. The fundamental restriction to protect privacy is to restrict the use of information to people who have a permissible purpose. Without a permissible purpose, you cannot get access to information in credit reports because of the concern about privacy. To preserve accuracy of the information, the Act has two basic provisions, two basic mechanisms. One that requires the credit reporting agency to use reasonable procedures to assure maximum possible accuracy.

And two, and maybe more important, it has a notification mechanism to consumers. If an adverse decision is based on information in a credit report, the consumer, who is in the best position to know whether that information is accurate or not, is given a notice

and is given the opportunity to get access to their report in order to determine whether or not there are errors that need to be corrected.

Chairman SHELBY. In your written testimony, you cite a 1996 D.C. Circuit Court case where the court held that a major purpose of the Fair Credit Reporting Act, and I will quote: "Is the privacy of a consumer's credit-related data."

Do you believe that this is an accurate characterization? Is privacy a critical concern underlying the Fair Credit Reporting Act? Mr. BEALES. Absolutely.

Chairman SHELBY. Okay.

Mr. BEALES. To balance the privacy interests against the legitimate needs for credit reporting and to assure that the information is accurate.

Chairman SHELBY. In your written testimony, you point out that the 1996 Amendments that you alluded to earlier permitted greater sharing of consumer report information by affiliated companies.

To what degree was information-sharing occurring before the amendments were passed? And why were the 1996 affiliate-sharing amendments needed?

If you go back prior to 1996, and then after, post-1996.

Mr. BEALES. I think around 1996, and I do not know precisely what is before or what is after

Chairman SHELBY. Okay.

Mr. BEALES. -but it seems to me that the structure of the financial services industry was undergoing a lot of change and a lot more change was anticipated.

Those changes in structure led to a lot more affiliation relationships where there is common ownership or control of different parts of the same, but separate, corporation.

Chairman SHELBY. Also, national in scope, too, wouldn't it be? Mr. BEALES. Absolutely. A lot more national in scope and a lot more combinations of what had previously been unrelated businesses or businesses that were separated by regulatory requirements.

I think it was that greater combination that led to more sharing among affiliates because, from one perspective, there is no distinction between being an affiliate and being different divisions of the same company.

In the different divisions case, there is no restriction on sharing. Chairman SHELBY. A legal distinction?

Mr. BEALES. Excuse me?

Chairman SHELBY. A legal distinction?

Mr. BEALES. Sure. There is a legal and organizational distinction and it is useful for regulatory purposes like confining risks from a particular kind of business or limiting the scope of deposit insurance, for example, to the deposit base in a bank.

It is very useful for that purpose.

Chairman SHELBY. What new powers did affiliates obtain under the 1996 Amendments that did not exist previous to the 1996 Amendments?

Just off the top of your head.

Mr. BEALES. Previous to the 1996 Amendments, if you shared information among affiliates, and the information was enough to

amount to a credit report, then the affiliate that was the source would itself be a credit reporting agency and would have to comply with the full panoply of requirements of the statute.

So if the banking arm shared an application with the subprime lending arm of the same company, it would itself be a consumer reporting agency and subject to all of the other requirements of the FCRA.

After the 1996 Amendments, that kind of information sharing was exempted as long as the consumer has the right to say no and prevent the information sharing.

It was exempted from the definition of a consumer report. Chairman SHELBY. How does that work? You say the consumer, as long as the consumer has the right to say no to the sharing. Is that at the outset or is it when something comes up?

Mr. BEALES. It could be at either point. What the statutory requirement is, is that the consumer be given the right to opt out and that opt out or that giving of the right either occur up front at the time the relationship is initiated, or it could occur at any subsequent point.

What has happened with Gramm-Leach-Bliley, since GrammLeach-Bliley, is that many companies have provided the notice and the opt out for the Fair Credit Reporting Act as part of the annual Gramm-Leach-Bliley notice.

Chairman SHELBY. I will get back in another round.
Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thank you, Mr. Chairman.

And to our witness-do you pronounce your name "beals"?
Mr. BEALES. Yes, sir.

Senator CARPER. Welcome aboard. As you know, probably better than us, when the FCRA was passed by Congress, there was a sunset provision that causes us to come back and to revisit the issue. That sunset gives us the opportunity to do so.

I missed your testimony. And I am just going to ask, if you will, just to take maybe one minute and say, if there is nothing else that you walk out of here remembering that I have said, this would be the one or two or three things.

Can you start with that?

Mr. BEALES. I think this is an important decision. I think the way the credit reporting system functions is really vital to the functioning of credit markets. And that, in turn, is vital to the functioning of the American economy. Consumer spending is a huge chunk of the economy.

I think that this is an important statute that struck a very reasonable and time-tested balance between the conflicting interests of consumer privacy and the legitimate needs of businesses for information. I think it is a balance that has stood the test of time since the statute was originally enacted. I think the accuracy provisions of the statute are a key component. That has been a crucial aspect of our

Senator CARPER. Could you talk a little bit about that, please?