Financial services companies entered the year in a high state of anxiety about their ability to freely share credit data and engage in some basic transactions nationwide.
That's because Congress has to renew key preemption provisions of the Fair Credit Reporting Act before the end of the year or states could start passing their own laws in the name of consumer protection. It's already March, and federal lawmakers have not introduced legislation yet, but their state counterparts are already getting active.
A California state assemblywoman has introduced legislation that would make lenders and other creditors in California do more - under the threat of monetary penalties - to ensure the accuracy of consumer information they pass along to credit bureaus.
The author of the Truth in Credit bill, San Diego assemblywoman Christine Kehoe, had support from the California Association of Realtors and the Consumers Union. Three years ago those groups co-sponsored a California bill that became law and required credit bureaus to provide customers with their credit scores.
Assemblywoman Kehoe's bill (AB 800) may be the first proposed by a state legislator that targets the Dec. 31 expiration of a 1996 amendment to the Fair Credit Reporting Act. The amendment bars states from passing legislation that would limit credit reporting and information sharing, and one thing the Kehoe bill has in common with it is that it would restrict credit providers.
Financial trade groups have warned that states' ability to pass their own credit reporting and information sharing laws could cause problems at banks that use credit-scoring models and risk management tools nationwide. Congress this year is expected to debate extending the provision under the Fair Credit law.
Pamela Martin, director of regulatory affairs for the RMA-the Risk Management Association, said the Kehoe bill's introduction "reinforces the need to have a federal preemption. You need a national standard to protect the data's integrity."
AB 800's sponsors plan to sidestep the preemption issue by attempting to get the bill passed in the current legislative session, which ends Aug. 31, and on the governor's desk for him to sign by Jan. 2. (This year bills in California can carry over into the next session.)
"We hope it will send a strong message to Congress that states are interested in passing such legislation," said Gail Hillebrand, senior attorney at the Consumers Union's West Coast regional office.
Assemblywoman Kehoe said in an interview Thursday: "We were approached by the Realtors and the Consumers Union, and thought that was an interesting matchup. As I got into it, I realized that very small mistakes can lead to significant consequences for customers."
Under current California law, creditors have to investigate a disputed credit report and report their findings to the credit bureau within 30 days of being notified of the dispute. Violators must pay the customer actual damages incurred.
The Truth in Credit bill would go further: A creditor could not pass consumer information to a credit reporting bureau unless the creditor had reason to believe it was accurate.
Moreover, the Kehoe bill would prevent creditors from confirming inaccurate information to the credit bureau, such as by stating that a bureau's information is the same as its own without determining whether the information is correct. Violators would pay at least $2,500 in statutory damages on top of actual damages.
The bill's supporters point to several studies that asserted that credit reports are frequently inaccurate, in many cases so inaccurate that the borrower has to pay higher interest. For instance, a 2000 analysis by Consumer Reports of 63 credit reports from consumers in five states found inaccuracies in more than half, "with the potential to derail a loan or deflect an offer for the lowest-interest credit card."
Alex Creel, senior vice president of governmental affairs for the California Association of Realtors, said real estate agents support faster and better-enforced correction of consumer information because erroneous credit reports often kill a home purchase at the 11th hour.
"If a buyer is coming into a transaction, and if, because of erroneous information on credit report, he/she may not be able to buy the house," that is a problem for the Realtor, Mr. Creel said.
Assemblywoman Kehoe introduced the bill Feb. 21. Last week bankers in California and elsewhere were still familiarizing themselves with it.
The California Bankers Association "was watching it" but had no position on it, spokeswoman Anissa Yates said last Tuesday.
