WASHINGTON - An effort to allow consumers to block access to their credit reports is gaining traction among state and federal legislators, who say it could help thwart identity thieves.
Financial industry representatives oppose such measures, warning that a credit-report "freeze" interferes with the credit-granting process, faces several technical problems, and costs money. As Congress debates the idea, some state legislators have already begun implementing it and more are expected to follow.
"Over time we'll have to live with file freezing for some percentage of the population," said Stuart K. Pratt, the president of the Consumer Data Industry Association, at a Senate Banking Committee hearing on Thursday.
Gilbert T. Schwartz, a partner in the law firm of Schwartz & Ballen LLP, said a freeze would slow the credit process.
"Banks have spent years and billions of dollars to improve the credit-granting process to the speed of light - you can file an application and get your response in seconds," Mr. Schwartz said. "The credit-freeze process slows that down. Instead of speeding up the system, it throws a speed bump into the efficiency of the system."
Last week New Jersey became the 12th state to enact a credit-freeze law, and the idea has the support of the Senate Commerce Committee. It has also sparked the interest of Republicans and Democrats on the Senate Banking Committee, including its chairman, Richard Shelby.
The goal of the freeze system is to help prevent identity thieves from obtaining credit in someone else's name. Consumers could tell the credit bureaus to shield or "freeze" their credit files and scores from other parties. When the consumer is in the market for credit, he could thaw the freeze for a specific period of time.
"The security freeze prevents access to your credit report to new creditors, thereby closing the loophole that the thieves exploit," said Edmund Mierzwinski, the consumer program director at the U.S. Public Interest Research Group.
"Most businesses will not issue new credit or loans to people without first reviewing their credit report or credit score," he said. "If the credit file is frozen and an imposter applies for credit in the name of a consumer, a creditor would be very likely to deny the imposter's application, because the security freeze would prevent the prospective creditor from checking the consumer credit report or score."
But critics say such measures raise technical and logistical difficulties. For example, credit bureaus would have to develop what amounts to an on-off switch and would have to make sure a request to unfreeze the score is legitimate.
The freeze would also add another barrier to financial companies' abilities to make pre-screen credit offers. (Existing law already allows consumers to specifically block pre-screened offers).
Over all, industry representatives argue, such freezes create an unneeded extra step in a credit transaction.
Under a credit-freeze law "my ability to talk to the credit bureau from the lobby of an auto dealer, prove who I am, and then have them release the report … is more complicated than my talking to the auto dealer" directly, said Oliver Ireland, a partner in the law firm of Morrison & Foerster. "To go through a transaction, you have to add another party. … You create a triangle instead of a bilateral relationship."
At the hearing last week, Mr. Ireland said Congress should stick with the system it set up in 2003 that allows victims of identity theft to place a "fraud alert" on their credit reports to signal creditors to do extra investigation before granting credit in their names.
Mr. Schwartz said the freeze is also "an additional cost of doing business."
"You're going to have to employ a procedure to deal with situations where customers have to establish identity freezes on their accounts, and therefore you have to work around it," he said. "That costs money."
But consumer groups and some lawmakers question why the technology cannot be easily adapted.
Sen. Christopher Dodd, D-Conn., asked how an industry whose technology moves billions of dollars a day could find it cumbersome to freeze credit reports. "The industry says this is a complicated matter to turn off and on. Why is it so complicated to do that? Why is it so hard?" he asked.
Similarly, Mr. Mierzwinski said at last week's Senate Banking hearing: "We have instant credit; why can't we have an instant freeze?"
He argued that fraud alerts are helpful only "after you think you're a victim. The freeze is a preemptive measure," he said.
But it remains unclear how interested consumers are in the idea. A dozen states - including California, Connecticut, and Louisiana - have passed freeze laws, and 21 considered or are considering freeze bills this year.
California's law is the oldest, but few people have made use of it. It went into effect in 2003, but only 9,000 out of 25 million "credit-active" Californians have frozen their credit files, according to Mr. Pratt.
Sen. Shelby said that gives him some pause. He said that in thinking about whether to include a freeze in a data-security bill he may introduce this fall, he is considering how the freeze system "works, the cost of it, what it would do."
Still, he said he is open to the idea.
In July the Senate Commerce Committee unanimously approved comprehensive data security bill that, among other things, would allow consumers to place a credit freeze on their consumer report. Three other congressional committees are considering data-security bills that do not offer consumers the freeze option.
The state laws vary by scope and the mechanisms they use to implement a freeze. Some of the laws allow all consumers to turn their credit on and off; some - such as Illinois' and Texas' - give that power only to victims of identity theft.
Most of the state laws have exemptions for such business practices as monitoring the credit system for security purposes and allowing creditors to monitor the borrowing habits of existing customers.
Eight of the 12 state laws were enacted this year, and most of them will go into effect next year.
The New Jersey credit freeze law, signed Sept. 22, is the most innovative, consumer groups said. When it goes into effect Jan. 1, all Garden State residents will be able to freeze their credit reports and selectively thaw them.
Initially the credit reporting bureaus will have three days to turn the credit on or off at a consumer's request. The law directs regulators and industry to shorten that time to 15 minutes; one idea that has been floated is that credit bureaus issue personal identification numbers for consumers to control access to their credit reports.
Consumers will be able to freeze their reports for free but will have to pay $5 to thaw them.
Industry officials may have to get used to the idea of credit freezing. Mr. Pratt of the Consumer Data Industry Association predicted that with scores of bills pending in state legislatures, "more states will require it next year."
