Substantial reforms to the Fair Credit Reporting Act provide a number of long-sought benefits for banks and consumers.
One of the most important amendments paves the way for streamlined sharing of customer information among members of the same corporate family.
The new law, part of the omnibus federal budget legislation recently signed into law by President Clinton, will provide dramatic efficiency gains - including cross-marketing and risk-control opportunities - for holding company affiliates. Consumers also stand to benefit, since these new provisions will facilitate consumer access to new products and services.
The information-sharing amendments are based on the assumption that more complete information is beneficial to both banks and consumers.
Sensitive to privacy concerns, yet alert to efficiencies emanating from enhanced access to more complete information, the amendments represent a careful policy balance. On both an individual and systemic level, the facilitation of responsible information sharing is expected to enhance the ability of the banking industry to meet the needs of consumers, while moreeffectively addressing credit risk.
Historically, federal banking agency and Federal Trade Commission interpretations of the reporting act restricted affiliated companies from capitalizing on the benefits of sharing customer information.
In particular, agencies interpreted the reporting act to treat affiliated companies - including members of the same holding company family - as if they were unrelated third parties.
Thus, banks often refrained from sharing customer information with members of their own corporate family. If a bank shared nonexperience information, such as application information, with one of its own affiliates it risked being classified as a consumer reporting agency subject to all of the restrictions and requirements imposed by the reporting act on credit bureaus.
These agency interpretations and the resulting information-sharing restrictions adopted by banks and their affiliates limited their ability to identify potential customers and cross-market products and services, as well as to control risk by obtaining and considering problem credit information already in the possession of an affiliate.
Because of the difficulty of sharing information with affiliates, members of the same bank holding company family often duplicated marketing efforts to offer products or services to the same consumer, even where that consumer was already a customer of one or both of the affiliates.
For example, a mortgage banking subsidiary or a credit card issuer may have been denied access to important risk information about a customer already in the possession of its own affiliate.
Such information-sharing restrictions also disadvantaged consumers by making it unnecessarily difficult for affiliated companies to share information to identify product offerings most suitable for particular consumers.
In addition, these restrictions placed bank holding companies at a competitive disadvantage to other businesses that are free to operate through departments or divisions of a single legal entity.
The reporting-act amendments, however, bring common sense and new opportunities to affiliate information sharing. Specifically, the new law clarifies that affiliated companies may share, without limitation, so- called experience information.
That is, an affiliate may share with another affiliate in the same corporate family any information that consists of the transactions or experiences between one of the affiliates and the consumer to whom the information relates. This information may be shared either directly between the two affiliates or through a central data base maintained by a member of the bank holding company family.
The amendments also allow affiliates to share, either directly or through a central data base, any other information, so long as it is clearly disclosed to the consumer that the information may be shared among the affiliates, and the consumer is given an opportunity to opt out of the sharing before it takes place.
For example, members of the same bank holding company family may share among themselves (but not with unrelated third parties) application information, information from demographic firms, credit reports from credit bureaus, and any other information, provided that the consumer has been notified of the organization's information-sharing practices and has been given the opportunity to opt out.
These amendments provide a more rational and flexible approach toinformation sharing. They allow members of the same corporate family to pursue a wide array of information sharing arrangements for consumer convenience, cross-marketing, and risk control purposes.
Opportunity for efficiency gains abounds as banks may now achieve ready access to key information about customers and potential customers of their affiliated companies. And yet, privacy expectations are addressed through the notice and opt-out process. Of course, banks also should take appropriate internal measures to safeguard the security of customer information, as well as to develop internal policies on the use of customer information.
As part of the political compromise on sharing, affiliated entities also must notify consumers when adverse action is taken in connection with credit, insurance, or employment based on information from an affiliate.
The notice must inform the consumer that he or she may obtain the nature of the information that led to the adverse action by requesting that information in writing within 60 days. The affiliate then has 30 days to respond by disclosing to the consumer the nature of the affiliate information used.
With respect to credit transactions, this notice requirement applies only if the consumer initiates the request for a loan or credit account, so it does not apply in prescreening or other credit cross-marketing programs initiated by the bank rather than by the consumer.
The amendments preempt completely any state law or regulation governing information sharing among affiliated companies. Thus, the preemptive effect extends beyond state statutes on fair-credit reporting to other state laws that purport to restrict information-sharing among affiliated entities.
While the reporting-act amendments do not take effect until Sept. 30, 1997, the act includes an early compliance provision. Under this provision, a bank and its affiliates may take advantage of the expanded information- sharing opportunities offered by the amendments, so long as they also comply with corresponding provisions of the act; namely, the notice and opt-out and modified adverse action disclosure requirements of the reporting act. This can be accomplished by notifying all existing customers at once, or by notifying customers on a product-byproduct basis.
The notice and opt-out opportunity can be provided to new customers by adding appropriate language to application forms and account agreements for various deposit, loan, investment, insurance, and other products. By doing so, banks can enter the new world of affiliate-information sharing.
Mr. Fischer, Mr. McEneney, and Mr. Camper are lawyers in the Washington office of Morrison & Foerster.
