[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
WHAT BORROWERS NEED TO
KNOW ABOUT CREDIT SCORING
MODELS AND CREDIT SCORES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JULY 29, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-133
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44-906 PDF WASHINGTON DC: 2008
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois KENNY MARCHANT, Texas
ANDRE CARSON, Indiana THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Oversight and Investigations
MELVIN L. WATT, North Carolina, Chairman
LUIS V. GUTIERREZ, Illinois GARY G. MILLER, California
MAXINE WATERS, California PATRICK T. McHENRY, North Carolina
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
EMANUEL CLEAVER, Missouri RON PAUL, Texas
MICHAEL E. CAPUANO, Massachusetts STEVEN C. LaTOURETTE, Ohio
AL GREEN, Texas J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida MICHELE BACHMANN, Minnesota
TIM MAHONEY, Florida PETER J. ROSKAM, Illinois
ED PERLMUTTER, Colorado KEVIN McCARTHY, California
JACKIE SPEIER, California
C O N T E N T S
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Page
Hearing held on:
July 29, 2008................................................ 1
Appendix:
July 29, 2008................................................ 57
WITNESSES
Tuesday, July 29, 2008
Abrahams, Clark, Chief Financial Architect, SAS Institute, Inc... 36
Goerss, Richard G., Chief Privacy Officer and Regulatory Counsel,
Equifax, Inc................................................... 11
Hendricks, Evan, Publisher and Editor, Privacy Times............. 41
Oliai, Stan, Senior Vice President, Experian Decision Analytics,
Experian PLC................................................... 9
Quinn, Thomas J., Vice President, Fair Isaac Corporation......... 7
Staten, Dr. Michael, Professor, University of Arizona............ 37
Turner, Dr. Michael, President and Senior Scholar, Political and
Economic Research Council (PERC)............................... 39
Wiermanski, Chet, Group Vice President, Global Analytical and
Decision Systems, TransUnion LLC............................... 13
APPENDIX
Prepared statements:
Abrahams, Clark.............................................. 58
Goerss, Richard G............................................ 82
Hendricks, Evan.............................................. 119
Oliai, Stan.................................................. 126
Quinn, Thomas J.............................................. 136
Staten, Dr. Michael.......................................... 140
Turner, Dr. Michael.......................................... 153
Wiermanski, Chet............................................. 173
Additional Material Submitted for the Record
Watt, Hon. Melvin L.:
Letter to Federal Reserve Chairman Ben Bernanke from Chairman
Watt, dated July 24, 2008.................................. 184
Letter to Federal Trade Commission Chairman William Kovacic
from Chairman Watt, dated July 24, 2008.................... 185
Letter to Mr. Jack Forestell, Capital One, from Chairman
Watt, dated July 24, 2008.................................. 186
Written statement of Jack Forestell, Capital One............. 188
Response letter from Federal Trade Commission Chairman
William Kovacic, dated July 28, 2008....................... 195
Written statement of Sandra F. Braunstein, Board of Governors
of the Federal Reserve System.............................. 203
Consumer Federation of America press release, dated July 10,
2008....................................................... 217
Written statement of Payment Reporting Builds Credit......... 222
Responses to questions submitted to Clark Abrahams........... 231
Responses to questions submitted to Richard Goerss........... 235
Responses to questions submitted to Stan Oliai............... 242
Responses to questions submitted to Thomas J. Quinn.......... 251
WHAT BORROWERS NEED TO
KNOW ABOUT CREDIT SCORING
MODELS AND CREDIT SCORES
----------
Tuesday, July 29, 2008
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2128, Rayburn House Office Building, Hon. Melvin L. Watt
[chairman of the subcommittee] presiding.
Members present: Representatives Watt, Cleaver, Green,
Speier; Royce, and Barrett.
Chairman Watt. This hearing of the Oversight and
Investigations Subcommittee of the Financial Services Committee
will come to order. Without objection, all members' opening
statements will be made a part of the record, and I will
recognize those who wish to make an opening statement in order
of seniority. I will now recognize myself for 5 minutes for an
opening statement to kind of frame what we are here about.
I welcome all of you here. Credit reports and credit scores
have become important instruments in evaluating whether to
extend credit to borrowers. Surveys taken by the Consumer
Federation of America indicate that most individuals do not
understand credit scores even when they think they are
knowledgeable about credit. Perhaps I am the best example of
that. I probably know more about credit reports and credit
scores today than I ever have before because, for the first
time ever in my entire life, in preparation for this hearing, I
actually got a copy of my credit report and my credit score;
and even tried to get three of them, but I didn't have enough
information to get into the machine to do all of that.
As the economy has slowed and credit is becoming harder to
get, it has become even more important for consumers to
understand credit reports, credit scores, and what it takes to
improve them.
Today's hearing will focus on credit scores and credit
scoring models, consumer access to credit scores, and proposals
to use alternative data in assessing the creditworthiness of
consumers. We are fortunate to have with us today
representatives of all three of the nationwide credit reporting
agencies, Experian, Equifax, and TransUnion, as well as a
representative of Fair Isaac Corporation, which is widely
credited with developing the first credit scoring model that
became widely used in evaluating credit. These witnesses are
very knowledgeable and will help us to understand the process
by which credit scores are calculated.
While we do not have a user of credit scores with us today,
we do have a written statement from Capital One, one of the
largest users of credit scores, explaining how they use both
external and internally developed credit scores. Including this
information in the hearing record will assist us in
understanding how credit scores are developed and how they are
evaluated by lenders when making credit decisions.
So I ask unanimous consent to insert the written statement
of Capital One into today's hearing record at this point.
Without objection, it is so ordered.
We will also explore at today's hearing the use of so-
called ``alternative credit data,'' such as rent and utility
payments, in evaluating an individual's creditworthiness. This
issue has a particular importance to individuals who have
little or no credit history, commonly referred to as consumers
with what are called ``thin files.'' Some believe that
increased reporting and consideration of this type of data
could help to improve access to credit by consumers, especially
those with thin files or those who have no payment histories
currently being collected by the credit reporting agencies.
Others have raised concerns, however, about the collection
and use of alternative credit data in evaluating an
individual's creditworthiness. Concerns about accuracy, volume,
and verifiability of this information have been raised by some
people about alternative data.
We look forward to hearing more about this issue from our
witnesses; and that is a segment of our hearing, which I hope
those who raised it and wanted me to include it as part of the
hearing will show up to talk about.
In addition to the written statement I have submitted for
the record from Capital One, I also request unanimous consent
to submit written statements from the Federal Trade Commission
and Payment Reporting Builds Credit. We have requested a
written statement from the Federal Reserve, and we will submit
that for the record when we receive it, although it is not here
today.
The Equal Credit Opportunity Act provides that a creditor
may consider age in a credit scoring model as long as it is not
assigned a negative value and is empirically derived and
statistically sound in accordance with the Federal Reserve
Board's regulations. And that is what we expect the Federal
Reserve's written statement to explain, how they have been
implementing this requirement.
The Federal Trade Commission, under the Fair and Accurate
Credit Transactions Act, is charged with establishing the fair
and reasonable fee that consumer reporting agencies may charge
for disclosure of a consumer's credit score and their written
statement, and the FCC's written statement explains how they
have implemented this requirement. Payment Reporting Builds
Credit, a consumer reporting agency that allows consumers to
enroll and self-report on-time alternative credit information
has also submitted a written statement describing their unique
process. And without objection, I would submit for the record
the FTC's statement and the statement of Payment Reporting
Builds Credit. It is so ordered.
I thank all of our witnesses for being here today and look
forward to an informative and useful hearing. And with that, I
will recognize the gentleman from South Carolina, Mr. Barrett,
who is substituting for our ranking member, who couldn't be
with us today. You are recognized for 5 minutes.
Mr. Barrett. Thank you, Mr. Chairman. I appreciate it.
Gentlemen, thank you for coming today.
Mr. Chairman, I want to thank you for holding this timely
hearing on what borrowers need to know about credit scoring
models and credit scores. Given the influence of credit scores
on the financial lives of Americans, this hearing is
appropriate and much needed.
Credit scores are not just numbers. The scores affect many
parts of Americans' lives, including the terms and rates of
their credit cards, what they pay on their mortgages, and even
their job searches.
Unfortunately, credit scores are often misunderstood, and I
hope this hearing will help clear up some misconceptions about
these seemingly mystical numbers, which I believe allow credit
to be extended more effectively and efficiently.
Before coming to Congress, I ran a small furniture store in
the town of Westminster, Barrett's Furniture--Your First Choice
for Quality and Value, gentlemen, by the way. We are not in
business anymore, so no more deals.
Because I knew most of the people who came in my store--I
knew where they worked, I knew their families, I knew their
character--I was able to determine the credit risk readily
available and often extended credit to those who might look a
little risky on paper. Even if my customers might have to
stretch a bit to make payments, they would make them; and
because they would have to see me in the grocery store, walking
around town, they felt obliged to do so in many cases. The
system worked for me at Barrett's Furniture.
However, larger businesses or ones that are online need a
way to determine the creditworthiness of a much bigger group of
people, and credit scores provide a valuable tool to compare
the credit risks of borrowers. Credit scores are simple,
inexpensive, and effective predictors of risk that a business
owner can use to make sound business decisions.
Generally, as policymakers, we want to create an
environment where lenders can price risk as accurately and
efficiently as possible, and the market will encourage and
improve tools that help lenders make these risk calculations
more accurate. Because of competition, lenders will choose to
price risk as accurately and competitively as possible. Lenders
want to ensure that their rates are competitive so they can
attract borrowers.
At the same time, a lender who makes a practice of lending
money that never gets repaid will probably not be in business
too long. If credit scores are a valuable tool for predicting
risk, they will apply them to lending decisions; but if credit
scores don't accurately predict risk of late payments or
default, they won't use them anymore. In short, the free market
should help ensure the validity of credit scoring.
We have seen in the mortgage markets what can happen
without proper lending discipline. While credit scores are only
one tool that lenders can use to determine who gets a loan and
the terms of a loan, I think it is a valuable tool in the way
they are standardized, inexpensive, unbiased, and, most
importantly, predictive of risk.
I would be very concerned about curtailing or banning the
use of any impartial measure that helps companies better
determine risk. I would also be concerned about any efforts
that would make this number less predictive of risk. If we did
any of these things, we would drive up the cost of credit for
lower-risk borrowers, and we would essentially be subsidizing
the risk for high-risk borrowers.
While availability of credit can be a benefit for those who
can repay, we have seen in the housing market what happens when
credit is widely available for those who cannot pay. Credit
scores are not only a market-based method of allowing
businesses to better estimate risk; they also reward sound
financial decisions by borrowers. Credit scores are based on
objective numbers and patterns of behaviors, and the very acts
that lead to high credit scores basically constitute sound
financial behavior.
Simply paying bills on time and not overextending oneself
with debt tends to lead to better financial health; I think
that is pretty much a given. At the same time, borrowers should
know that credit scores are accurate measures of financial
behavior; and I applaud Congress for passing the Fair Credit
Act and the FACT Act so that consumers know their personal
information is protected and that their credit reports contain
accurate information.
Americans should also be familiar with what they should be
doing for a good credit score, which should then also help
improve financial behavior. I plan to hold a TeleTown Hall
meeting for my constituents on financial literacy, because I
believe this is an important skill for Americans. We should
have the proper tools to make sound financial decisions, and I
hope that this hearing will reinforce that, Mr. Chairman.
Once again, I would like to thank you for holding this
hearing, Mr. Chairman, and I am confident that the findings
will be very informative. I yield back.
Chairman Watt. I thank the gentleman for being here and for
substituting for the ranking member.
Mr. Cleaver, do you wish to make an opening statement?
Mr. Cleaver. Yes, Mr. Chairman.
Chairman Watt. You are recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman, and Acting Ranking
Member Barrett.
To the witnesses, we appreciate very much your presence and
participation in this subcommittee hearing. I am very anxious
to hear your testimony and to become involved dialogically with
you, because I have some understandable concern about this
issue.
The timing of this hearing, Mr. Chairman, I think is very,
very appropriate, maybe fortuitously because of the current
challenges facing the American public with the housing value
dropping almost daily. And with almost all of the financial
indicators suggesting that this may be one of the toughest
financial periods that the people in our country have faced, at
least this generation, credit becomes extremely important.
Recent news reports and congressional intervention have
indicated that the impact of mortgage defaults has extremely
damaged or decreased the availability of credit. Banks just a
few years ago were making loans through the drive-out/drive-in
window. You would just drive by and wave, and you got a loan.
And, of course, today it is very difficult, as you know, to
get loans; the banks are closing their wallets. So the
information that is gained for purposes of attaining credit and
the vehicle by which credit is issued is of utmost importance
right now.
A few years ago, I brought my grandmother, my maternal
grandmother, from Waxahachie, Texas, to Wichita Falls, Texas.
She was unable to care for herself, so we brought her up to
give her a chance to spend her sunset years with two of her
four grandchildren.
My grandmother eventually died, and as my sister and I
began to put the pieces together, we discovered that not only
did our grandmother not have a checking account, we could find
no evidence that she had ever had one. We found no evidence
that she ever had a savings account. She did have some money
that she had sewn into a pillow. That was her savings. And you
could see where she had restitched many, many times where she
made deposits.
So I came to the conclusion--and she had an insurance
policy, which needs to be discussed at another hearing, where
she was paying 50 cents a week. And on the day she died--she
had been paying it since I was a little boy; I remember when
the insurance man used to come by with a little leather bag to
collect his 50 cents every week, and when she died, she had
$350 in life insurance. But that is another hearing.
The point I want to make is that my grandmother had no
credit, but she paid all her bills. If she was out of town and
her water bill became due, she would go back home to pay $3.50
for a water bill.
I am very interested in some of the uncommon ways that the
En Bancs are functioning today. The Missouri Department of
Insurance filed a report which suggested that the average
credit scores were 12.8 percent lower in the inner cities of
Kansas City and St. Louis in what is called the Boothill, the
southern part of the State of Missouri--12.8 points lower. It
also reported that certain ZIP codes could be looked at to see
the low credit scores.
I am interested in discussing all of these issues with you,
and I appreciate Chairman Watt calling this hearing. I look
forward to your testimony.
Thank you, Mr. Chairman.
Chairman Watt. I thank the gentleman for his opening
statement. And as usual, he brings a real-world perspective to
these issues, so we need that.
The gentleman from California, Mr. Royce, is recognized for
5 minutes.
Mr. Royce. Mr. Chairman, thank you. I would just like to
briefly welcome Mr. Stan Oliai here from Costa Mesa, which is
in Orange County, California. He is the senior vice president
of decision sciences for Experian Decision Analytics. Experian
is here, along with Equifax and TransUnion; they are the three
major credit reporting agencies that provide useful information
to both consumers and to lenders in the United States.
I think the ability of lenders to properly assess the risk
posed by potential borrowers through risk-based pricing is one
of the most fundamental tools necessary for our financial
services sector to function properly here in the country.
Additionally, a consumer's ability to track their credit report
through credit monitoring services allows them to understand
what is impacting their credit score. It helps protect them
against identity theft, and it limits the damage following
security breaches.
So, again, I would like to welcome Stan Oliai here and all
of our other witnesses testifying today. I yield back the
balance of my time, Mr. Chairman.
Chairman Watt. I thank the gentleman for being here.
The gentlelady from California is recognized for 5 minutes.
Ms. Speier. Mr. Chairman, thank you for providing us the
opportunity to have this hearing. I think the consumers of this
country would be well-served to listen in on what we are going
to be talking about this afternoon.
I want to welcome Mr. Quinn from Fair Isaac--which is
located in northern California--a company that, over the years,
I interacted with when I was in the State legislature.
I would just like to say in my opening comments that there
is an incredible mystique associated with one's FICO score. And
when I have reviewed this in the past, I am reminded of its
being like a black box. We really don't know what goes into the
Fair Isaac formula to come up with the FICO score, and in many
respects it is guarded more rigorously than Fort Knox.
Having said that, I would just like to say to all of you
who will be participating in this first panel, the biggest
problem is with the errors in credit reports; and when there
are errors in credit reports that are then transmitted to Fair
Isaac and then incorporated into a FICO score, it is virtually
impossible to undo it.
I was part of an exercise with a local TV station in
Sacramento a couple of years ago where we took my credit
information and looked at my FICO score and looked at the
errors associated with my credit reports. And, Mr. Chairman, I
would think it would be an interesting experiment if all the
members who are on the committee this afternoon were given an
opportunity to look at their FICO scores and then their credit
reports to see how much misinformation there is in one's credit
report. Because the credit report, from a historical
perspective, has looked at 40 percent error rates associated
with what is in the credit report. When that is then factored
into a FICO score, you can see how many consumers across this
country would be dismayed at a credit score that was not, in
fact, reflective of their credit behavior.
I yield back my time.
Chairman Watt. I thank the gentlelady for being here. And
we also were surprised at the interest in this hearing today.
We welcome the presence of C-SPAN 3 that is covering this
hearing. I think the topic has kind of taken on a life of its
own in this credit environment, in this mortgage environment.
So we are anticipating an extremely interesting,
informative, and educational hearing. It is not just for
legislative purposes, but hopefully, people will look in and
become more informed about their own individual credit. And if
they do that, I think we will have achieved a nonlegislative
objective also.
I am going to proceed with introducing the witnesses. Their
full biographies will be put into the record, so I am going to
do a very, very abbreviated--with your permission--introduction
of the witnesses.
Our first witness will be Mr. Thomas J. Quinn, who is the
vice president at Fair Isaac Corporation, the corporation that
I described briefly in my opening statement.
Our second witness has been informally introduced by his
Member of Congress, Mr. Royce. He is Mr. Stan Oliai--I think I
got it right--senior vice president, Experian Decision
Analytics, Experian PLC.
Our third witness on this panel will be Mr. Richard G.
Goerss, chief privacy officer and regulatory counsel at
Equifax, Inc.
And our final witness on the first panel will be Mr. Chet
Wiermanski, group vice president, global analytical and
decision systems, TransUnion LLC.
Without objection, each of your written statements will be
made a part of the record in their entirety, and each of you
will be recognized for 5 minutes or thereabouts to summarize
your testimony.
You have a lighting system in front of you. It starts off
green, goes to yellow at 4 minutes and to red at 5 minutes. We
don't expect you to stop in the middle of a sentence; just sum
up as quickly as you can. I have not been accused of being all
that tough on the gavel in opening statements because we are
here to learn what you have to tell us. But your full
statements will be made a part of the record, and so we hope
that you will summarize within approximately 5 minutes.
Mr. Quinn, you are recognized for 5 minutes.
STATEMENT OF THOMAS J. QUINN, VICE PRESIDENT, FAIR ISAAC
CORPORATION
Mr. Quinn. Mr. Chairman, and members of the subcommittee,
my name is Tom Quinn, and I am vice president of global scoring
solutions for Fair Isaac Corporation. Thank you for the
opportunity to testify before you today regarding consumer
education issues involving credit scores.
Founded in 1956, Fair Isaac Corporation is the leading
provider of analytics and decision-making technology. We are
not a credit reporting agency, but partner with the national
credit reporting agencies to implement and distribute the FICO
scores we develop to the thousands of U.S. lenders who use this
score in their decision process.
A FICO store is a three-digit number ranging from 300 to
850, where the higher the score, the lower the risk. Lenders
use the score, along with other information, to decision the
request for credit and set the credit line and pricing terms.
Creating the FICO score model requires two samples of
credit reports, 2 years apart, for the same randomly selected
depersonalized set of consumers provided by one of the national
credit reporting agencies. Those credit factors found to be
most powerful and consistent in predicting credit performance
individually and in combination form the basis for the complex
mathematical algorithm which becomes the score.
The traditional FICO score model evaluates five broad types
of data elements from the consumer credit report. These
include, listed in order of importance: Previous credit payment
history, about 35 percent contribution; level of outstanding
debts, about 30 percent contribution; length of credit history,
15 percent contribution; pursuit of new credit, 10 percent
contribution; and mix of type of credit, about 10 percent
contribution.
FICO scores were first introduced to the marketplace in
1989 and have been consistently redeveloped and updated
throughout the years to ensure their predictive strength. Since
it was first introduced, authorized user credit account
information present on the credit report has been considered in
the FICO score calculation.
Last year, Fair Isaac announced that with our new model
update, which is referenced as FICO '08, authorized user
accounts would no longer be included in the calculation of the
scores. Fair Isaac was trying to protect lenders and consumers
from a new type of credit repair practice known as
``piggybacking.'' Piggybacking is an attempt to artificially
and deliberately misrepresent consumers' credit histories to
potential lenders by paying consumers with good credit scores
to add strangers with poor credit scores to their credit card
account as an authorized user.
After consulting with the Federal Reserve Board and the
Federal Trade Commission earlier this year, we have now decided
to continue considering authorized user account tradeline
information in the FICO '08 models. Our scientists have devised
a method to consider these trades while materially reducing the
negative impact that could arise from the piggybacking
practice.
Fair Isaac also pioneered the use of alternative data to
assist in credit decisions for the 30 to 50 million consumers
with thin credit files or no credit files. Our FICO expansion
score service evaluates nontraditional credit history
information provided by specialized credit bureaus, including
payment performance records for purchases such as furniture
bought on layaway, verified bill payment information,
membership account performance at retail lenders, and selected
performance involving bank deposit accounts such as the
propensity to overdraw checking accounts.
Fair Isaac has been a pioneer in consumer education about
credit scores. On March 19, 2001, Fair Isaac, in partnership
with Equifax, launched its score explanation Web site for
consumers called myFICO.com. At myFICO.com the consumer obtains
their FICO score, the underlying credit report on which it was
generated, as well as a detailed explanation of the score and
the reasons why their score was not higher.
The price of the product was $12.95 in 2001, when first
introduced, and has increased over 7 years to, currently,
$15.95, for an average annual rate of increase of 3.3 percent.
During the past 7 years, Fair Isaac has introduced additional
products to help consumers with their credit management
objectives.
To date, approximately 20 million FICO scores have been
delivered to consumers from myFICO.com and Equifax.com via
affiliates. By using myFICO, consumers have taken the step to
control their credit lives and help improve and protect their
overall financial health.
There also is an abundant amount of educational materials
about credit scoring on myFICO.com; myFICO has also partnered
with consumer outreach entities such as the Consumer Federation
of America on creation of credit score educational materials
which have been distributed to thousands and thousands of
consumers nationwide by both organizations.
Fair Isaac is regulated at the Federal level by the Federal
Trade Commission. We have a regular, ongoing dialogue with the
FTC in which we explain our products and practices. In
addition, we frequently interact with and conduct education
programs on FICO scores for the FTC, the OCC, the OTS, the FHA,
the FDIC, and the Federal Reserve. We also regularly speak with
many State attorneys general and other government officials.
I thank you for the opportunity to share with you Fair
Isaac's expertise and experience in this important area.
[The prepared statement of Mr. Quinn can be found on page
136 of the appendix.]
Chairman Watt. Thank you so much for your testimony.
Mr. Oliai.
STATEMENT OF STAN OLIAI, SENIOR VICE PRESIDENT, EXPERIAN
DECISION ANALYTICS, EXPERIAN PLC
Mr. Oliai. Good afternoon, Chairman Watt, Representative
Barrett, and members of the subcommittee.
My name is Stan Oliai, and I am senior vice president for
Experian Decision Analytics. I would like to thank the
committee for the opportunity to testify here today and provide
the information that will describe how credit scores are
developed and used. I will summarize the longer statement that
I have submitted for the record.
In starting, I would like to go over a brief background of
Experian. With our North American headquarters in Costa Mesa,
California, Experian currently operates in 65 countries with
more than 15,000 employees worldwide. Experian is well known in
the United States as one of the three national credit reporting
agencies; however, Experian is also a global leader in
providing information, analytical tools, and marketing services
to organizations and consumers to help manage the risk and
reward of commercial and financial services. My business unit,
Decision Analytics, serves as one of the world's largest
providers of software for credit scoring, fraud detection, and
risk-based pricing.
Most lenders use a credit score to estimate the relative
risk that a consumer presents in repayment of a loan, and use
the score as part of a process to price the product
accordingly. The use of scores for risk-based pricing has led
to significant increases in efficiencies in the market that
provides tremendous benefit to both businesses and consumers.
Some of the tangible consumer benefits include less cross-
subsidization of risk, lower prices, more available capital,
and real-time lending decisions.
Despite these benefits, the process is often not fully
understood or appreciated. One thing that is sometimes
misunderstood is the role of the credit reporting agency in the
lending process.
I want to emphasize that neither the company that developed
scores nor the credit reporting agency that delivered the
information to scoring models participate in the actual lending
decisions. We simply are not in a position to testify as to how
scores are weighted or what other information, besides the
scores, is considered when a lending decision is made. The
lender is the entity that makes those decisions.
Credit reporting agencies do, however, provide credit
reports and can generate a credit score from a model chosen by
a lender. These credit scores are then used in the lenders' own
proprietary underwriting process which would likely use
information from multiple internal and external sources when
making such a decision.
It is worth noting that each lender is different. An
acceptable risk level for one lender may not represent an
acceptable risk level for another. For example, one lender may
see one recent 60-day late payment as acceptable while another
may not.
I would like to briefly describe what a credit score is and
how it is calculated.
A credit score is a numerical expression of risk of default
based on a credit report. The score is produced by a
mathematical formula created from a statistical analysis of a
large representative sample of credit reports. The formula is
typically called a ``model.''
The credit score is calculated by the model, using only
information in the credit report. These reports include the
following types of information: The credit account history,
such as was the account paid, was it paid on time, how long has
the account been open, and what is the outstanding balance; the
type of account, is it a mortgage, is it an installment, is it
revolving; the public record information, liens, judgments,
bankruptcies, for example; and inquiries in the credit file
that represent applications for new credit and other consumer-
initiated transactions.
A credit report does not include information such as income
or assets. It also does not include demographic information
such as race or ethnicity. Demographic factors are not used in
the calculation of a credit score.
Regulation B allows lenders to use models that are
empirically derived and demonstrably and statistically sound.
Regulatory oversight of credit scores is accomplished
through routine bank examinations for compliance with a number
of laws that govern fair lending, such as the Equal Credit
Opportunity Act. This makes sense because the lender chooses
the scoring model to assist in this proprietary underwriting
process. The lender is ultimately responsible for demonstrating
to regulators that the scoring model it has chosen complies
with the lending laws.
Next, I would like to describe how consumers can obtain
their credit scores, as well as maintain a good credit score.
A consumer can obtain a free disclosure of the credit
report once a year from www.annualcreditreport.com. While
obtaining an Experian credit report through that Web site or at
any time through Experian.com, a consumer can obtain their
VantageScore for $5.95. Since Experian believes it is in the
consumer's best interest to acquire the credit report and the
score at the same time, we also offer a combined package of
both for $15. This way, consumers are able to see how the score
and the accompanying reason codes actually relate to the
information in the credit report itself.
The committee has asked about the total number of scores
and consumer disclosures Experian has made to consumers since
the FACT Act was enacted. We are pleased to provide an
aggregate of those numbers to the committee through our trade
association, the Consumer Data Industry Association, or CDIA,
that is compiling this information across the industry, and
will provide it to the committee as soon as possible.
I would also like to describe the benefits of credit
scoring. Credit scores provide a marked improvement over manual
review. Their use allows for lending decisions to be made
accurately, efficiently, and in a timeframe convenient for
consumers. Since a credit score is calculated on the
information in the credit file, the potential subjectivity on
the part of a lender is limited. Credit scores form consistency
in decisions as the same formula is applied evenly across a
lender's portfolio. In fact, automated credit scoring leaves
much less opportunity for discrimination in a potentially
subjective assessment by a lender.
Credit scores are blind to the factors protected by the
Equal Credit Opportunity Act, which include race, color,
religion, national origin, sex, marital status, and age.
In conclusion, credit scores remain one of the great
advancements in consumer lending and represent enormous
opportunity for both consumers and lenders. Experian works hard
to ensure that we have accurate and up-to-date credit
information. We do this so that consumers are assured that
their credit scores will serve as a useful tool in helping them
to obtain the credit for which they are eligible.
Thank you for the opportunity to express Experian's views
on this important issue.
[The prepared statement of Mr. Oliai can be found on page
126 of the appendix.]
Chairman Watt. Thank you for your testimony.
Mr. Goerss of Equifax, you are recognized for 5 minutes.
STATEMENT OF RICHARD G. GOERSS, CHIEF PRIVACY OFFICER AND
REGULATORY COUNSEL, EQUIFAX, INC.
Mr. Goerss. Mr. Chairman, and members of the subcommittee,
I am Richard Goerss, chief privacy officer and regulatory
counsel for Equifax Inc. We have filed written testimony for
the record, and with your permission, I would like to take just
a few moments to highlight that testimony.
I want to thank you for this opportunity to testify
regarding what borrowers need to know about credit scoring
models and credit scoring. My oral testimony is primarily
focused on the information that Equifax provides to consumers
about credit scores, and how consumers can obtain credit scores
from Equifax.
Founded in 1899, Equifax Inc. is the oldest, the largest,
and the only U.S. publicly traded of the national companies
that provide consumer information for credit and other risk
assessment decisions. As one of the three national credit
reporting agencies, the activities of Equifax are highly
regulated under the Fair Credit Reporting Act and other related
Federal and State statutes. Equifax is a highly responsible
steward of sensitive consumer information, and as such, we are
committed to fairness and privacy protection for consumers.
My written testimony describes what a credit score is,
discusses the benefits which credit scoring provides to both
consumers and lenders, discusses Equifax's scoring models and
scores, explains how consumers can obtain their credit score
directly from Equifax, and identifies some steps that consumers
can take to improve their creditworthiness and, by extension,
their credit scores.
Even more of that information is available on the Equifax
Web site. For $7.95, consumers can obtain a disclosure of the
Equifax FICO, or Beacon score, which is the credit scoring
model most commonly distributed by Equifax to lenders.
Consumers can request a credit score disclosure by itself,
that is, without a copy of their credit file, a credit
monitoring product, or any other ongoing scoring products, by
sending a written request with proof of identity to Equifax,
Post Office Box 105252, Atlanta, Georgia 30374, or by calling
us toll free at 1-877-SCORE-11 or 1-800-685-1111.
Consumers calling these toll free numbers also have the
option to order their credit score disclosure together with a
copy of their Equifax credit file, and if they choose to, just
order a copy of their Equifax credit file without, in fact, the
score disclosure.
In addition to the consumer's score, the Equifax score
disclosure package includes the key scoring factors that
affected the consumer's credit score, the FTC's summary of
consumer rights under the Fair Credit Reporting Act and other
information.
Additionally, consumers who obtain their free FACT Act
annual file disclosure from Equifax through the
annualcreditreport.com Web site can also obtain credit score
disclosure along with their free annual credit file disclosure,
if they wish to do so.
Further, consumers entitled to free credit file disclosures
for other reasons under the Fair Credit Reporting Act or State
law can request free disclosure, free file disclosure at
www.Equifax.com/FCRA where these consumers are also offered the
opportunity to obtain their credit score disclosure.
Additionally, at our Web site, www.Equifax.com, consumers can
obtain, at no cost, general but helpful information about
credit scores.
Let me close by saying a word about the critical and
positive role played by credit scores.
These scores promote fairness in consumer lending
decisions, help to make credit available to a broad range of
consumers, and help to increase efficiency and cost
effectiveness in our consumer credit markets. Increasingly, the
emphasis on credit scores is helping consumers to better
understand their underlying credit reports and the financial
literacy elements of consumer credit.
At Equifax, we are proud of the early and pivotal role we
have played in developing credit scores and working with
lenders and consumers to meet their lending and borrowing
needs, but more needs to be done in this very dynamic
marketplace. Equifax, for example, is continuing to look at
alternative data and other sources and means for credit scores
and for credit decisions.
Thank you again for the opportunity to testify on this
important issue. Equifax looks forward to continuing to work
with the Congress on scoring issues and on educating consumers
as to what they need to know as borrowers about credit scoring
models and credit scores. Thank you.
[The prepared statement of Mr. Goerss can be found on page
82 of the appendix.]
Chairman Watt. Thank you for your testimony.
Mr. Wiermanski, you are recognized for 5 minutes.
STATEMENT OF CHET WIERMANSKI, GROUP VICE PRESIDENT, GLOBAL
ANALYTICAL AND DECISION SYSTEMS, TRANSUNION LLC
Mr. Wiermanski. Chairman Watt, Congressman Barrett, and
committee members, thank you for your invitation to TransUnion
to testify today on the important subject of what borrowers
need to know about credit scoring models and credit scores.
At TransUnion we are proud of our contribution to the
continuing development of credit scoring models which have
fostered the availability of financial services to American
consumers. TransUnion provides our customers in the financial
services industry with scoring models which help financial
institutions increase the breadth of their services to
consumers. We provide individual consumers with educational
information about credit scores, and we have for many years
encouraged full-file reporting by utilities and
telecommunication firms as, if practiced, benefits in
particular those consumers with thin credit files.
Mr. Chairman, without any doubt, the use of credit scoring
has produced significant consumer benefits. The growth of
consumer credit scoring has allowed lenders to more accurately
predict risk exposure at multiple levels. This has allowed the
implementation of more granular, risk-based pricing strategies
which, in turn, has led to decreased cost and increased
availability of consumer credit. The same phenomenon has
occurred in the property and casualty insurance marketplace.
It is important to explain what a credit score is. A credit
score is simply a numeric reflection of a consumer's predicted
behavior, such as creditworthiness, based upon an evaluation of
several different factors. Prior to credit scoring, lenders
relied on individual loan officers to eyeball a credit
application and determine whether the consumer was a good
credit risk. Credit scoring standardizes that process within a
lender's company and allows for a more objective and uniform
review of applications.
It is important to note that there is not one credit score
for a consumer. Credit scoring models vary among lenders,
consumer reporting agencies, and credit score providers. Credit
scoring models can vary within the same lender, such as if a
lender uses one scoring model for approving credit card
applicants, but a different model for mortgage underwriting.
We believe that a credit score such as the TransRisk or
VantageScore a consumer can buy from TransUnion is very useful
in giving the consumer a general understanding of how a lender
may evaluate the consumer's creditworthiness. Although these
credit scores are used by lenders and insurers, they also allow
consumers to have a general understanding of credit scores.
I should also note that a consumer need not even buy a
credit score to understand the key factors considered in most
credit scores. This type of information is available from us at
no cost. Although understanding the credit scoring process has
clear consumer benefits, in our experience it is more important
for the consumer to verify the accuracy of the information in
his or her credit file at a consumer reporting agency.
At TransUnion, we believe that a consumer's first priority
on this issue should be to exercise the right to obtain a free
annual disclosure of his or her credit report and to ensure
that the information is complete and accurate.
There are hundreds of credit scoring models used by
creditors and insurers, but there are presently just three
nationwide consumer reporting agencies which maintain a central
Web site, annualcreditreport.com, from which each American can
obtain a free annual credit report from either TransUnion,
Equifax, or Experian.
Credit scoring models depend on the accuracy, completeness,
and integrity of the underlying information in the credit
report; as such, that deserves priority.
Finally, I want to touch briefly on the issue of
alternative data. There is strong evidence to suggest that
consumers would benefit from the increased reporting of
nontraditional credit information. For example, consumers with
thin credit files and, in particular, minorities, immigrants,
young and old, all experience a net benefit from full-file
reporting by energy companies and telecommunication providers.
Consumers with impaired credit histories also obtain a net
benefit from full-file reporting by these companies.
We are presently engaged in a follow-up study to learn more
about the impediments to full-file reporting faced by the
utilities and telecommunication industry. It may be very well
that Congress may have a role to play in removing roadblocks to
encourage voluntary full-file reporting.
Thank you again, Chairman Watt and Ranking Member Barrett,
for this opportunity to present our views. I look forward to
answering any questions you may have.
[The prepared statement of Mr. Wiermanski can be found on
page 173 of the appendix.]
Chairman Watt. Thank you so much.
I would like to thank all of these witnesses for being with
us.
We will now recognize each member of the subcommittee for 5
minutes each to ask questions of this panel. And, as usual, I
have a whole file full of questions. That is what happens when
you learn more and more about what is going on in a particular
area.
I would say as a general statement, just to set you at
ease, that I have become more and more convinced of the value
of having some form of credit reporting and credit scoring.
There are a couple of concerns about things, though.
Number one, I noticed when I got my credit report that
because I had gone into a department store, for example, where
they told me, okay, if you open our department store credit
card we will give you a 10 percent discount on your purchase.
It sounded like a no-brainer to me--I mean, 10 percent off the
top. But I didn't realize until today, when I started reviewing
my credit report, that by doing that, I was actually worsening
my credit. On each of those three occasions where I did that, I
got the 10 percent or 15 percent discount; on at least two of
the three occasions, I have never used the credit card again.
So the first question I have is, you mentioned that debt is
obviously one of the factors that you consider in your
modeling. But in that case, debt was not the amount that they
required me to charge on that first transaction, but the $5,000
credit limit that they gave me that I never went back or used.
So I am concerned that either we ought to be making
retailers disclose that opening those accounts could have an
adverse impact on credit or that the definition of debt when
you are doing your modeling perhaps should take into account
only what somebody has incurred as opposed to some limit that
they quite often never use.
In fact, I don't think on any of the credit cards that I
had reported on, I have ever gotten anywhere close to the
maximum credit that they have authorized me, yet it seemed to
me that you were taking into account the maximum credit that
really never got used. How can this be addressed?
Now, the second question I have is--and I am going to let
you answer both of these together because I know I am going to
run out of time; and this is happening with a bunch of students
now, apparently. They are shopping around for the lowest rate
that they can get on a student loan.
I noticed on my credit report, when I went shopping for
alternative credit to find the best available credit, the
inquiries count against my credit rating. That seems to
indicate to me I am a better shopper, I am a better consumer or
to be a positive that I am shopping around, rather than a
negative that I am shopping around; yet, it seems to me in the
models that are being used, that becomes a negative factor in
evaluating my credit.
In fact, all three of your companies will be getting a
letter from a number of us about these student loan issues
soon. So if you are not prepared to answer that one today, we
are going to try to get you to answer it at a later date.
But give me your responses on both of those two issues that
I have raised.
Mr. Oliai, do you want to go first?
Mr. Oliai. I would like to.
On the first question regarding applying for a retail card
at point of sale to get a discount, that is actually a very
common practice and, frankly, like you say, a no-brainer by and
large. While it does post an inquiry to your account, which
generally the more inquiries you have, the higher--the
relationship is towards a higher level of risk, that occurs
when there is a good amount of new inquiries. One, two, or
three generally don't move the dial that much. And I am using
some general terms.
If I were to take your example even that much further,
there are multiple ingredients in a credit score. And so, while
having the additional retail inquiries may have taken a few
points off of it, opening up a new account for which you have
so much available credit, the difference between what you
actually used versus the line that was assigned actually works
in your favor. This shows the more available credit you have,
the better your credit standing in general.
So we can't look at these kind of on a one-attribute-by-
one-attribute basis, as it is a combination of factors that
come into and feed the score.
It would be interesting to look at your case in particular.
My gut feeling tells me your score probably would have
increased over time because of that tradeoff between the one
inquiry and the increased amount of available credit.
Chairman Watt. I confess I did have a pretty good credit
score, but it wasn't 850. I understand that there is a zero
probability that somebody can get an 850 score. That is another
thing I learned in this process.
Mr. Goerss.
Mr. Goerss. Well, I am not the--the gentlemen here are the
statisticians and model developers. But for the Equifax models,
the combination of inquiries, our models that we develop don't
take inquiries into much account at all. So that addresses
either--
Chairman Watt. Into much account or into no account?
Mr. Goerss. Four of our models take them into no account,
one or two of our models use it to less than 1 percent. So most
of our models--
Chairman Watt. So in your model, students who are shopping
around for student loans, making inquiries, that is not going
to count against them?
Mr. Goerss. That is correct, it would not. Nor--
Chairman Watt. What about you, Mr. Wiermanski?
I am going to get it right at some point. That is what you
get for accusing me of being Polish. I am just going to butcher
your name the rest of the day.
Mr. Wiermanski. Just to add to what Stan had mentioned,
inquiries are included in the model because they prove
statistically that they do rank-order the risk. So that is why
any components in a credit scoring system find their way into
the score. The amount--
Chairman Watt. Say that one more time.
Mr. Wiermanski. The inquiries find their way into a credit
scoring system based upon empirical and statistically valid
data, and that is how they find their way into being included
as a component of a credit scoring model.
The weights that are assigned--
Chairman Watt. So you are saying, by and large, the more
inquiries you have, generally the worse your credit is going to
be. But for somebody where that is not the case, it ends up
working against them because on a general level, statistical
level, it is predicted.
Mr. Wiermanski. And as Stan had mentioned, as the number of
inquiries increase over a period of time, they become more
severe in terms of how you might be penalized on your credit
score.
I do want to note that in one of our models, developed
specifically for consumers with past credit delinquencies, the
presence of the first inquiry actually is treated positively.
So consumers who may have had delinquent information posted to
their credit file, when they go shopping after a period of time
and if that is one inquiry, they actually are rewarded for
shopping responsibly. If there are a number of inquiries
quickly afterwards, then they do become penalized. So
inquiries, by nature, are not always treated negatively.
And then the last piece on student shopping, there is a
practice in the industry, which varies across scoring systems,
which is called ``inquiry de-duping,'' where inquiries within a
period of time from the same type of institution--and this is
particularly implemented for auto loans and mortgages; they
group the inquiries from banks, finance companies and mortgage
companies and treat them as one. And at TransUnion we have
looked at this student shopping phenomenon; and the way that
our de-duping process works, we believe that consumers would
not be adversely impacted by shopping for student loans because
the way we go about de-duping the inquiries, reduced--minimizes
that shopping behavior.
Chairman Watt. Okay. My time has expired. We will do
follow-up on the student side of this in particular because I
think, more and more, people are raising this as a concern. And
it may not be a real concern based on what you have testified,
but I think we need to get that verified.
Mr. Barrett is recognized for 5 minutes for questions.
Mr. Barrett. Thank you, Mr. Chairman.
Mr. Goerss, you mentioned alternative sources rather than,
I guess, your standardized. And there are a lot of different
things. Talk to me a little bit about alternative sources and
what other issues or what other scoring methods we can use.
Mr. Goerss. There are a number of different alternative
sources. I think probably a definition of alternative data
would be data that is not currently used in the credit file.
We, at Equifax, have experience working with utility companies,
have developed and managed utility exchanges. They contain a
limited amount of telco and utility information accounts that
are used by the members of that exchange in limited roles at
this point, but they are used to help the members determine if
a credit deposit needs to be assessed or not.
And so we are working with them and will continue to work
in that area. We are also looking at different sources for
rental-type accounts, such as landlord-tenant, are there other
rental-type accounts that can be used.
For all of the information that can be used, that is
alternative data, it is important to analyze what it brings to
a credit-reporting decision. Are the data furnishers or would
the data furnishers be in a position to meet all of the FCRA
requirements for data furnishers, in terms of making sure the
information is accurate, making sure that they participate in
the reinvestigation process as needed? But we feel that there
are certainly a lot of opportunities in that area that we
continue to pursue.
Mr. Barrett. Okay. Let me move along a little bit.
Now, Mr. Oliai, you talked about an automatic credit
system. I guess when I thought about somebody's credit score, I
thought about a person coming in and somebody taking a look and
saying, ``That is Gresham Barrett,'' yada, yada, yada.
Do you plug all this stuff into a machine and the machine
just factors all of this data? Tell me a little bit about an
automatic credit score.
Mr. Oliai. Sure. First of all, there are so many different
types of credit scores. But, typically, they are implemented
electronically, so that when a lender or credit granter of any
kind pulls a credit report, the score is returned straight
away, either calculated and returned by one of the bureaus or
calculated in their own environment with their own application
processing and decisioning software.
So that score is, just as we mentioned before, one element
of the overall credit decision that is then plugged into some
sort of decision framework, that proprietary decision framework
that a lender or credit granter would have. So it is done very
much on the fly, real-time, with respect to credit
applications.
Mr. Barrett. Okay. Mr. Wiermanski, I know when I was in the
furniture business, when we pulled somebody's credit report,
there was hardly anybody who didn't have some type of medical
bill in some shape, form or fashion. Tell me how that affects
credit scores, some type of medical bill, because we had people
who had excellent credit with the exception of medical bills,
and they always paid their bills. So, kind of factor that into
it.
I am a big proponent of the free market. I think everybody
needs to use their own formula. But would there be an
advantage--two questions: about medical bills; and the
possibility of some standardized form that everybody used, just
one, rather than several different ones. If you would take
those two.
Mr. Wiermanski. The way that medical bills would find their
way into a credit bureau typically would be from a bad debt
collection opportunity. So my understanding is that most of the
generic models that are offered, whether they are developed by
TransUnion and other third parties, typically do include those
medical items when they surpass a certain threshold. And, at
this point, I don't know what that threshold is; I believe it
might be $100.
At TransUnion, we have just introduced our new versions of
our TransRisk scores, the 3.0 versions. They do not take
medical collection items into consideration in the score
calculation. So we have engineered those where we cannot
include them for credit scoring.
So I think in terms of how we might be able to standardize
our approach, it would be worthwhile to have the debt
collection agencies have some type of standardized nomenclature
returned to the bureaus to identify medical debt so that they
can be considered in the scoring systems, or not.
Mr. Barrett. Okay. Thank you.
Mr. Quinn, say I am a high school student getting ready to
go to college. How do I build my credit history, number one?
And, number two, we as leaders, how do we do a better job of
educating individuals on financial situations, how to keep
their rear end out of debt? That is a South Carolina term;
sorry about that.
Mr. Quinn. I think we can all understand that term.
I think one of the best ways to help young adults establish
credit is through the family interaction, parents educating the
young adults about how to manage their credit in their day-to-
day examples in household debt management.
And there is a variety of different institutions out there
that have programs set up to help young people establish
credit. Sometimes it requires a cosigning, for example, with a
parent. Credit card issuers do have the authorized user
approach as one way to help younger consumers get established
with credit.
So I think there is a variety of different options out
there to help young people get established with credit. I
think, again, the challenge is, are they aware of that, and if
they are not, how can we collectively make them more aware of
those opportunities?
Mr. Barrett. Thank you, gentlemen.
My time is up, Mr. Chairman.
Chairman Watt. I thank the gentleman.
Mr. Cleaver is recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
I was sufficiently depressed listening to you talking about
what you learned about your credit score and the inquiries. I
have a lot of questions, so I am hoping you can give some
succinct responses.
Let us say I have a credit card, the ``Sink You'' credit
card, and I have a $20,000 limit, and someone inquires about my
credit, and my highest monthly balance has been $10,000. But,
as the reporting comes in, the software suggests that my
highest balance is also my credit limit, so that the $10,000
represents an exhaustion of my credit, that I have gone to the
top.
Does that negatively impact my credit score?
Mr. Quinn. No. With FICO scores, the way we look at credit
card information in calculating the scores is we first look at
the limit field to see if there is information that has been
supplied by the credit card issuer in terms of the line, so the
$20,000 in your example, if that is available, that is the
figure that we would use in trying to calculate a revolving
utilization calculation, for example.
If it is missing, then we default to the highest balance
field and use that as the limit in default, if it is not
provided in the limit field, because the data in our analysis
shows that is predictive.
If that information is missing, then we bypass that credit
card in any of our utilization calculation characteristics in
the score.
Mr. Cleaver. Thank you.
I am probably more interested in the three rating agencies.
Mr. Oliai. I will take the first crack.
With the VantageScore, we actually do not include the
trades without a limit reported.
Mr. Cleaver. Say that again, please.
Mr. Oliai. In VantageScore--let me take a step back.
Typically where credit limit becomes an issue, or the reporting
of credit limits becomes an issue, is when you are calculating
utilization or the relation between the balance on the card
over the limit. So--
Mr. Cleaver. And when you do this, this is not taking into
any account the credit limit?
Mr. Oliai. Well, more often than not, the limit is reported
to us. And so we are getting the actual limit from the card
issuer. There are some models, and you just heard Mr. Quinn
talk about one in which there is some logic built in that will
go to high balance if limit is not available.
As an alternative, with VantageScore, we do not let that
particular trade line come into the utilization calculation
where we have no limit. So it wouldn't adversely impact a
consumer because an issuer hasn't reported the limit
information.
Mr. Cleaver. But if a person appears on the credit report
to utilize his or her credit limit, that impacts negatively; is
that right?
Mr. Oliai. Well, in general, the more available credit that
you have that is used up and therefore not that much available
credit left, that will point in the direction of a higher level
of risk on its own.
As I mentioned before, there are multiple ingredients in a
credit score.
Mr. Cleaver. Okay. In your opening statement, which I
appreciated, you essentially said that the credit rating
agencies, and let me use a Biblical term--there is no respect
of persons, right?
Mr. Oliai. I am sorry?
Mr. Cleaver. ``No respect,'' it is a biblical term, means
that nobody gets preferential ratings, that everything is
equal, that you mentioned there is no consideration given to
race or gender. In the Bible--I don't want to do a Bible study,
but the quote is, ``For there is no respect of persons with
God.'' Anyway, and now turn, please, to the New Testament.
[Laughter]
But I have a report here which would suggest the opposite
from the Missouri Department of Insurance, which I made
reference to earlier. It suggests that regions and ZIP codes
suggest credit ratings.
Mr. Oliai. One is not necessarily tied to the other. The
data that we use in the credit scores is what is available on
the credit report, and we are completely blind to issues of any
kind of ZIP preference or redlining or race or ethnicity.
The fact that there are correlations doesn't necessarily
imply cause and effect. So we have done extensive studies, as I
am sure other groups have done, that show that these models
work very well irrespective of what geography or segment of the
population you are looking at.
Mr. Cleaver. Well, I don't think it is racial. I mean, the
Bootheel of Missouri is essentially all white, and the report
suggests that their credit scores are lower than the wealthier
regions. But it also suggests that if you go to the ZIP codes,
the minority communities then pop up as having lower ratings.
When you are giving out information--this is a question--
when you are giving out information, you do not use any
information other than the actual score? I mean, you are not
extracting any information that would give the lender any clue
or indication about the geography of the person seeking that
credit?
Mr. Oliai. That is correct; the geography will not play
into a credit score.
I would add, though, that if you were to take it and
dissect it a little bit further, you might look at certain
geographies and see a higher incidence of delinquency or
default that has nothing to do with the geography in general,
just that you have like-minded consumers living closer
together. And that is probably more what is driving the score
result than anything else.
Mr. Cleaver. Okay. One final question, Mr. Chairman,
please, sir?
Chairman Watt. Go ahead. It looks like we are going to have
to give people an opportunity to come back. So if the gentleman
doesn't mind holding his question, we will do another round,
because I have about 15 more questions that the staff has given
me since I used up my 5 minutes.
Mr. Cleaver. Well, thank you, Mr. Chairman. I yield back
the balance of my time.
Chairman Watt. Okay. Which you didn't have.
[Laughter]
Mr. Green is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
And I thank the Reverend for introducing, I believe it was
the New Testament where you left off. So I will move us from
the New Testament to the Now Testament, if I may, and the Book
of Credit.
Mr. Quinn, my suspicion is that you may be picked on more
than your colleagues simply because of the difficulty of
pronouncing their names. So if it seems as though I am leaning
toward you, it may have something to do with this difficulty.
But let's start with the comment that was made about on-
the-fly, real-time, automated results. I believe that this is a
question that would go to Mr. Oliai.
And am I pronouncing your name correctly, sir?
Mr. Oliai. ``Oliai.''
Mr. Green. ``Oliai,'' all right. Mr. Oliai, you said real-
time results; what does that mean in terms of actual time? Is
it seconds, minutes? What is it, please?
Mr. Oliai. It is typically subsecond.
Mr. Green. Subsecond?
Mr. Oliai. Yes.
Mr. Green. Meaning you can make the inquiry, press some
key, and within as much time as it takes to print, you have the
results?
Mr. Oliai. That is a fair statement. Probably an easy
example of that is Chairman Watt's experience getting the 10
percent discount on a card. That a real-time decision, and the
discount was offered right there on the spot.
Mr. Green. And I would assume that this is then full-file
traditional credit?
Mr. Oliai. This would apply to any applicant.
Mr. Green. Any applicant? All right, well, let's talk about
an applicant who does not have traditional credit but may have
what we will call alternative credit--light bill, gas bill,
water bill, phone bill, and maybe some other nontraditional
things. Will those be factored into the file that you currently
have?
Mr. Oliai. Those sources of data don't currently feed the
credit file, but there are multiple offerings. It really
depends upon which ones the lenders choose to employ.
Mr. Green. Is it safe to say then, when we have this
nontraditional applicant, that we move from real-time to some
time more? Is that a fair statement, if you are going to assess
and use the alternative credit?
Mr. Oliai. It is fair to a degree. It really does depend on
the situation and how the lenders make their decision.
Technically speaking, if you are going to now go to another
alternative source, that is another transaction, another data
transmission. That would add to the transaction time. Would it
add so measurably or significantly? Probably not. If the lender
had--
Mr. Green. Are you equipped, are you established, are you
set up to go to alternative credit scores immediately upon
realizing their file is thin?
Mr. Oliai. Experian is not set up to do that automatically
today. We do have a third-party partnership in which, if the
lenders choose to go that route, we can help them set that up.
Mr. Green. And that is time-consuming, I assume.
What I am trying to do is get a handle on how long, what
does the process require in terms of time, when you move from
traditional full file to alternative thin file? Can you help me
with this, please?
Mr. Oliai. You know, there is no rule of thumb per se,
because it all is relatively new, and it really is dependent
upon the lending criteria.
The data is available--well, to the degree that the data is
available and pertinent to the decision, it can be brought in.
And then it is incumbent upon the lender to determine how to
base their decision on it.
Mr. Green. In every case, can you move to an alternative
thin file if the applicant wants you to do so in every case?
Mr. Oliai. That would be a function of what the lender or
credit granter wanted to set up, as opposed to the applicant.
Mr. Green. So you are prepared to give us a traditional
full-file result, and if we want something in the alternative,
the lender has to give some judgment as to whether or not it is
appropriate to do so. Is that a fair statement?
Mr. Oliai. I believe that is a fair statement.
``Appropriate'' in the context of is it relevant to the
decision, does it help align with their business strategies,
etc.
Mr. Green. Do you agree that persons with alternative
credit can pay bills and can perform to the same extent as
persons who have the traditional full files--not all, but a
good many can? It is just that you don't have the means of
measuring them to the same extent that you do the persons with
full files. Is that a fair statement?
Mr. Oliai. I believe that is a fair statement.
Mr. Green. Okay. See, my concern relates to something that
Mr. Wiermanski--and is that a fair way of pronouncing your
name, sir?
Mr. Wiermanski. Yes, it is.
Chairman Watt. You just designated yourself as Polish.
Mr. Green. Believe me, folks have been trying to figure out
what I am for years. Now I know. This hearing has been a
blessing for me.
But, sir, you seem to indicate that people with thin files,
they don't get the same benefits as persons with full files,
and that some of these people may be minorities and women. Is
that a fair statement?
Mr. Wiermanski. Yes, that is.
Mr. Green. Would you say that a good many of them are
minorities and women?
Mr. Wiermanski. No, I would say that it--you are looking at
a thin file right here. One of the few times I could be called
thin is my credit report. So it really does encompass all walks
of life.
Mr. Green. But, as is the case with most things, they
impact some more than others. Do they seem to impact minorities
and women more than others?
Mr. Wiermanski. I would say that, yes, minorities in
particular and lower-income individuals would benefit more from
full-file reporting from other--
Mr. Green. Or would they also benefit from an automated
alternative credit scoring system comparable to the full-file
traditional credit scoring system?
Mr. Wiermanski. From our perspective and based upon our
analysis, TransUnion does accept utility information and other
alternative data into our credit reporting system. So from our
perspective, that information being added to a traditional
credit report, not set outside as a different database, would
actually make the credit processing quicker, more efficient, by
having all the data in one repository.
Mr. Green. So you would recommend your system to those that
do not have a system comparable to yours?
Mr. Wiermanski. That is correct.
Mr. Green. All right, my time is up. I will wait for the
second round. Thank you, Mr. Chairman. I yield back the time
that I do not have.
Chairman Watt. Ms. Speier, you are recognized for 5
minutes.
Ms. Speier. Thank you, Mr. Chairman.
Let me first start out by asking all of you if you are
privately owned enterprises.
Mr. Quinn. No.
Mr. Oliai. No.
Mr. Goerss. No, we are not. We are publicly traded.
Mr. Wiermanski. TransUnion is privately held.
Ms. Speier. All right. And as publicly traded--none of you
are Government-owned or -operated, correct?
Mr. Quinn. Yes, we are not Government-operated.
Mr. Oliai. We are not Government-operated.
Mr. Goerss. That is correct.
Ms. Speier. Okay. Each of you is required, of the credit
reporting firms, are required to offer consumers one free
credit report a year, is that correct?
Mr. Oliai. That is correct.
Mr. Goerss. Yes, that is correct.
Mr. Wiermanski. Yes, that is correct.
Ms. Speier. And how much do you charge for a credit score
report?
Mr. Oliai. At Experian, a score only, for VantageScore we
charge $5.95.
Mr. Goerss. At Equifax, for FICO's Equifax score, we charge
$7.95.
Mr. Wiermanski. I apologize. I don't know that information,
but I know it is included in our written testimony.
Ms. Speier. All right. And the FICO score that you would
get from Fair Isaac, how much is that?
Mr. Quinn. Currently, $15.95 for the score and the credit
report. We don't deliver score only to the consumer.
Ms. Speier. Mr. Chairman, I raise that because it is kind
of interesting. At least back in December 2004 when I went
through this exercise, what I found was that many of these
scores are what are called ``FAKO scores,'' not FICO scores,
because they are not the scores that are provided to the
lending institutions. So consumers may be purchasing something
that they think is their FICO score but, in fact, is not their
FICO score.
I will just read you very quickly the example of my credit
scores at that time. From Equifax, I got a credit report plus a
FICO score of 750. From Experian, I got a credit report and a
PlusScore of 761. From TransUnion, I got a credit report plus a
consumer score of 782. And then from FICO, I guess through Fair
Isaac, I got a score of 731. So it actually varied by as much
as 30 points.
I raise this, in part, because I think the consumers of
America should be getting a straight score. And if, in fact,
the score that is being offered by the credit reporting
companies is not the score that is then given to a lending
institution, then the consumer is paying for something that is
of little or no value.
So I guess my question now is to you, as credit reporting
companies, do you provide a different score to lenders?
Mr. Oliai. There are so many scores that lenders use to
underwrite a credit decision.
Ms. Speier. If you would, sir, just answer the question. Is
the score that the consumer gets the same score that is offered
to the lender?
Mr. Oliai. In the case of the VantageScore, it is.
Ms. Speier. The VantageScore being?
Mr. Oliai. Being a commercially available score that
Experian sells.
Ms. Speier. You understand my question and are not evading
it, I trust?
Mr. Oliai. No. In the case of the VantageScore, it is. We
also offer the PlusScore, as you pulled in your own experience,
which is more of an educational score.
Ms. Speier. So the consumer typically is going to get a
PlusScore and not the VantageScore?
Mr. Oliai. It depends how the consumer comes in. It is
pretty clear on the site which one to order, whether it is the
Plus or the VantageScore.
Ms. Speier. And what is the difference in the pricing of
the two?
Mr. Oliai. The same price, as far as I know. I would have
to check it, but I believe it is the same price.
Ms. Speier. All right.
Next?
Mr. Goerss. For Equifax, we deliver the FICO score, which
is a score that is used by lenders. We also advise consumers in
the disclosure package that lenders do use a variety of scores
and that the score we are providing may or may not be the score
a particular lender uses in connection with their specific
credit decision.
Mr. Wiermanski. TransUnion provides two scores to
consumers, two different types of scores, both of which are
used by hundreds of lenders making millions of decisions.
Ms. Speier. In California, there is a requirement that for
employers who access credit scores or credit reports, that
information must be made available to the prospective employee
and that the company, the credit reporting companies, must
communicate with the prospective employee, so that if, in fact,
they do have a credit report that is erroneous, they can at
least make their case to the prospective employer when they
have their interview.
Is that the case across the country?
Mr. Goerss. Yes. For Equifax, when that was passed in
California, we set up procedures to do that.
And one point for Equifax is also that we do not use or
sell credit scores with the intention that they be used in
employment decisions. We have a credit file that is called our
Persona Report, which is intended for employment purposes. It
does not have age, it does not have account number information
and other information which we feel is not relevant or
appropriate in the employment decision.
Also, as you know, the Fair Credit Reporting Act was
amended to specifically change the procedures for employers
using consumer reports. And we obtained certification from
users of consumer reports or credit files for employment
purposes that they do tell the consumer that they are ordering
a credit report. If they are going to be taking an adverse
action decision or there is a possibility that they might, that
they, in fact, provide the prospective employee with a copy of
that credit file so they can review it to make sure that it is
accurate and, if they have any questions about it, can go back
to the consumer reporting agency to have that information in it
reinvestigated and changed, as appropriate, before any
employment decision is made.
Ms. Speier. Is this the policy of Experian and not Federal
law then?
Mr. Goerss. This is Equifax.
Ms. Speier. I am sorry.
Mr. Goerss. And it is both policy and a requirement of the
Federal law, as well as California law.
Ms. Speier. All right.
Mr. Oliai. I believe our answer is that your statement is
correct the way you said it. I would have to verify that for
the record, but I believe that to be a true statement.
Mr. Wiermanski. This area is outside my area of expertise,
but I believe that is TransUnion's approach. But I would
certainly want to get back to you with the correct and full
answer.
Ms. Speier. Thank you, Mr. Chairman. I yield back my time.
Chairman Watt. I am going to recognize myself for another
round here.
The one legislative possibility that is being discussed,
has been bandied around some, was touched on, I think, by all
three of the reporting agencies, or at least two of the three.
You are required under the FACT Act to provide one free credit
report annually. And I think both Mr. Oliai and Mr. Goerss
suggested that it probably is not all that helpful without a
score. And there is a proposal floating around to require a
free annual credit score, too.
The question is, what would be the public policy
implications of that? And which score would you provide if you
did? I am actually more interested in the first part of that,
because I can get to the second question through a different
question.
So how would you all react, the three of you, to a
requirement that an annual score be provided? Or, actually, all
four of you, since it would be a FICO score, too, I guess.
Mr. Goerss. That is a point I wanted to clarify. I did not
mean to leave the impression, if I did, that a credit file
disclosure is not important for consumers, because--
Chairman Watt. Oh, yes, I am sure of that. But you did
leave the impression that it would be helpful or that, for most
people, really, it is helpful to them to have both at the same
time. Isn't that right?
Mr. Goerss. Yes, it is. I mean, as we know, the credit file
is the information on which a score is based, so it is very
important for consumers to review their credit file, make sure
it is correct, and raise any questions about it so it can be
reinvestigated and addressed as necessary.
Chairman Watt. Is there some reason we should not be
considering doing that?
Mr. Goerss. It was considered, as you know, by the Congress
when it passed the FACT Act in 2003. And by a bipartisan margin
at that time, Congress established the free annual credit file
report. It considered score disclosure. It made score
disclosure--
Chairman Watt. That is not a good reason, that a prior
Congress didn't do it. Is there a good policy reason not to do
it? What are the arguments against it? This is not a trick
question. I am just--
Mr. Goerss. I understand. I am not trying to give you a
trick answer.
Chairman Watt. I am just trying to get some solid
information here.
Mr. Goerss. One of the things that we know is that, because
consumer scores--in our score disclosure, we provide a
telephone number that consumers can call and speak to live
representatives--that credit scoring, because consumers are
learning about that, it is a time of education.
Chairman Watt. So you are saying when you give a free
credit report under the FACT Act, somebody can call and get a
verbal score and have that explained to them for free?
Mr. Goerss. Under the free credit file disclosure, we have
a telephone number that consumers can call and speak to a live
representative. When we provide score disclosure, either along
with credit file disclosure, there is also a telephone number
that consumers can call to speak with a live representative to
get their questions that they may have--
Chairman Watt. You are not answering my question. I get my
annual free report. Can I then call your company and say, ``I
want my score,'' and have you give it to me verbally, free,
with an explanation? Is what you are saying, or is that not
what you are saying?
Mr. Goerss. At this time, no. Because we do have the score
that is disclosed--the score disclosure provides a telephone
number that consumers can call and speak with a representative.
Chairman Watt. I am going to run out of time again. Let me
ask a couple of other questions here.
My VantageScore, interestingly enough, is the maximum you
can get, 990. My Equifax score doesn't even begin to approach
850, which is the maximum. I mean, how do you explain that? I
am having trouble reconciling that.
And then, second, Mr. Wiermanski, in particular, I was very
interested to hear you say, ``I am a thin-file guy.'' That is
kind of counterintuitive for a guy who is here testifying on
behalf of a credit reporting agency. There has to be more to
the story. What is the reason that you have elected to be a
thin-file guy?
Okay, answer those two questions. I won't ask any more.
Mr. Wiermanski. If I can answer the first question, what is
important in looking at and evaluating your credit score is not
only understanding what that score is, but also the relative
risk associated with that score. So for a VantageScore of 990--
and I presume your other credit score from Equifax was a Fair
Isaac score--what is used are odds of performance or a
projected bad rate that is associated with the score.
And the scores themselves are kind of like you can think of
Fair Isaac being Fahrenheit and VantageScore being Celsius.
They are scored differently to reflect the risk, so you will
see differences in the absolute value of the score itself. What
is relative is to understand what is the risk associated with
any given score or where you stack up in the random
distribution of the country. Think of it as what percentile.
Chairman Watt. As you know, the problem I have with what
you just said is I never have understood what Celsius meant. I
know what it feels like when it is 60 or 70 degrees outside,
but I don't have a clue what that translates into in Celsius.
And if you came to me on a regular basis and reported to me in
Celsius, I guess I would learn it. But the problem here is that
there is no understanding that people have when they get these
two things. I mean, I got a VantageScore, I kind of stuck my
chest out and said, ``Hey, I am doing all right. I have the
maximum possible score that Vantage could give me.'' And then I
got a Celsius score, and I said, I don't like that. It is the
same temperature outside, I presume, but I don't understand it.
Mr. Wiermanski. Just to reiterate, there are different
scoring systems out there. They vary by the developer. The
scoring systems vary by the credit bureau. So if you were to
get a score from the same developer from all three credit
bureaus, you are going to see differences in scores because the
information is different and the algorithms may be different.
So that is a concern.
Chairman Watt. My time is up. I am dying to know why you
are a thin-file guy.
Mr. Wiermanski. I am thin-file person because I paid cash
for my automobiles. I have the benefit of having a working
spouse, and so I could pay off my mortgage early. And I only
use one credit card.
Chairman Watt. Have you made those decisions because you
understand the intricacies and nuances of credit reporting, or
have you made them for a whole different set of reasons?
Mr. Wiermanski. I made them from a standpoint of keeping my
life simple and just having one credit obligation.
Chairman Watt. Okay. I appreciate your straightforwardness.
Mr. Barrett, you are recognized for 5 minutes.
Mr. Barrett. Thank you, Mr. Chairman. I have found out one
thing, Mr. Chairman. You have good credit. And I have a couple
of used cars in South Carolina that I would love to talk to you
about.
[Laughter]
Just one follow-up question.
Chairman Watt. I can't make any inquiries, though, because
it might mess up my credit.
Mr. Barrett. One question, Mr. Chairman, that I want to
talk about.
The chairman makes a good point, gentlemen, when he talks
about Celsius, that he doesn't know anything about it. Let me
read you something. Last month's issue of the Journal of
Financial Planning said that young adults under the age of 25
are now the fastest-growing age group for filing bankruptcy. In
addition, less than 10 percent--10 percent--of our high school
graduates take any course on money management.
I think that boils down to what the chairman--I mean, he
was kind of joking about Celsius, but he makes a good point.
You can read your credit scores, you can have this information,
you can talk about it verbally, but unless you know how to keep
your life in order, like Mr. Wiermanski, you are going to get
in trouble.
So my question to you gentlemen is, what do we do as a
Congress, what do we do as a society, to help this? There is so
much information available out there, but yet when you talk to
people on the street--I have town hall meetings--nobody knows
how to access it, how to get this information that is free,
that is readily available.
Tell me what we need to do, how do we fashion something so
this subprime problem does not turn into an ongoing problem?
Any suggestions, gentlemen, please.
Mr. Oliai. For starters, the regular encouragement for
consumers to take advantage of their annual free credit report
I think is a great spot to begin. There is so much content and
so much education out there on the Web that is available with
that. Really, I can't think of a time in which there has been
more transparency along the lines of tips for how to manage
your credit. And I think that is at least a good starting
point.
Beyond that, you know, encouraging broader outreach and
education, whether it be on the part of lenders or, frankly, in
the family, around how best to teach your youngsters how to
keep things simple and keep things in check and not let things
get out of hand. It really just strikes me as a bit of a back-
to-the-basics approach.
Mr. Quinn. I think one of the things that we have tried to
do is change the medium for how we disseminate the information.
So there is a plethora of information out there on the
Internet, but not everybody learns through reading a pamphlet
or going to the Internet and reading text. So, more visually
oriented educational materials--we have recently created CD-
ROMs and DVDs to try to help spread the message of how credit
scoring works. If you search the word ``FICO'' on YouTube,
there are actually rap videos that are out there on YouTube
about FICO scores.
But I think it is a good idea to explore different types of
media that will resonate with the young population, for
example. And it is not going to be a piece of paper with a
bunch of statistical mumbo-jumbo. It has to be something that
they want to watch or read or see.
Mr. Barrett. In our high schools, in our 2-year
institutions and in our 4-year institutions, we require math,
English, you know, a whole myriad of issues. Is that
something--I am not saying mandate--but is that something we
certainly need to encourage with our K-12 and our higher-ed
institutions, that maybe this is something that we need to
strongly suggest that our incoming freshmen, our seniors in
high school take, Real World 101, how to pay your bills, what
debt-to-income ratios are, yada, yada?
Mr. Wiermanski. I would agree with that. I personally speak
at my daughters' high schools. I have two daughters, at two
different high schools, and I speak there twice a year at each.
And I am amazed as to the lack of understanding just about the
whole gamut of financial services. I personally believe that is
something that would help.
Mr. Barrett. Thank you.
I yield back, Mr. Chairman.
Chairman Watt. Thank you.
Mr. Cleaver, you are recognized.
Mr. Cleaver. Thank you, Mr. Chairman.
I am not going to talk about the class action lawsuits
against the three majors, because I am sure you have all been
told that you are supposed to say, ``We can't talk about that
because it is in court.''
What I want to find out, though, is has there ever been a
lawsuit filed on the other side? In other words, have you been
sued on the other side by lenders for giving data that was
ultimately seen as inaccurate and so some credit was rendered
based on an inaccurate or inadequate information?
Mr. Wiermanski. At TransUnion, to my knowledge, and I
certainly could be wrong on this, but we have never been sued
about the information, the content of the information provided
to a lender. We have been sued by lenders for other reasons,
but not for the quality of the data.
Mr. Goerss. For Equifax, it is not to my knowledge that we
have been sued on that issue.
Mr. Oliai. I don't know of a situation where that has
happened, but it is not my area of expertise.
Mr. Cleaver. Well, the point I am trying to get to, and
perhaps poorly, is, are you overly cautious in the information
you pass on to lenders in order to protect, if not yourselves
from class action suits, from criticism from the people who
ultimately pay for your existence?
Mr. Oliai. At Experian, we take every protection to
safeguard our core data. It is really our core asset, so we
tend to operate very conservatively in that regard.
So that is a roundabout way of saying it is something we
take very seriously. It is part of our culture to safeguard
that asset and to be a steward of the data.
Mr. Goerss. For Equifax, we want to, and feel we do, report
accurate information that is fair both to the consumer as well
as our customers. And if our information wasn't helpful to both
consumers and customers, we wouldn't be here today.
Mr. Cleaver. Okay.
You are going to say the same thing probably.
Mr. Wiermanski. Only with more emphasis on the consumer.
Mr. Cleaver. Okay.
I want to talk about Zoe Alexander. That is my maternal
grandmother, who was obsessed with paying bills. But based on
everything I have read, she would have access to no credit,
because she didn't use the traditional system of doing her
business.
And there are, believe it or not, people, particularly in
the urban core, who do that today. There are not a lot of banks
in the urban core, which is why Charlie's Quick Check-Cashing
rip-off company exists, because there are no banks. And so a
lot of people just take care of their bills with cashier's
checks and money orders.
I mean, what is taken into account, or is there anything
taken into account, for Zoe Alexander?
Mr. Wiermanski. When we talk about the reporting of utility
information and telecommunication information, that is one
approach where your grandmother could have been assisted.
At TransUnion, about 5 percent of our credit database has
this type of nontraditional credit information being reported
into it. And if utility companies and telecommunication
providers, in particular, were encouraged to voluntarily
contribute that data, I think that would make a big difference
to the lives of many Americans.
Mr. Cleaver. But it would have to be voluntary. I mean,
that doesn't happen currently.
Mr. Wiermanski. Today's credit reporting system is a
voluntary approach.
Mr. Cleaver. Yes. What I am asking is, how often are the
utilities factored in in a credit score?
Mr. Wiermanski. At TransUnion, if the utility information
is reported, it is taken into consideration into the score.
Mr. Cleaver. Yes. How often is it reported? That is the
point.
Mr. Wiermanski. Approximately 5 percent of the consumers in
our database have some type of information.
Mr. Cleaver. Okay.
Anyone else?
Mr. Goerss. And for Equifax, as I indicated previously, we
have an exchange database with utility companies, so that
information is used in a limited way in connection with telco
and utility account and application processes.
Mr. Cleaver. Of course, if that is all you have, you are
still not going to be creditworthy. Even if you pay everything
you have on time, but you simply have not gone out and had
enough credit, you have not gone out and spent enough money on
credit, you still are going to have a problem. Isn't that
right?
Mr. Goerss. We also have, in addition to this utility data
that we use in a limited way, as was mentioned previously, we
also have an arrangement with an outside third company, which
is called RiskWise, that provides some information for
individuals who have a thin file in the main credit reporting
database or no file in that, and that RiskWise information is
made available and can be used.
Now, to the extent that it would address all consumers, I
am not prepared to speak to that at this point, at this time.
Mr. Cleaver. Of course I would like to have a thin file
because it also means that I have a rich file. I mean, you
know, the thinner my file, the richer I am.
Mr. Goerss. It certainly could mean that.
Mr. Cleaver. Yes.
Thank you, Mr. Chairman.
Chairman Watt. Mr. Wiermanski is taking issue with what you
just said. He says he has a thin file and he is not rich.
Mr. Green, you are recognized.
Mr. Green. Thank you, Mr. Chairman.
Some folks have thin files by choice and others because
they don't have any choice, is my assumption. Is that a fair
statement, Mr. Wiermanski?
Mr. Wiermanski. I would agree.
Mr. Green. Here is what I am concerned with. I would like
to see a system, one system, it can have these various
different captions on it, but that brings in the alternative
credit as well as the traditional credit.
Is that something that each of you would like to see, as
well? Would you like to have a world where we could have light
bills, gas bills, water bills, phone bills, and rental payments
all included in the one system?
If you differ with me on this, would you kindly extend your
hand into the air so that I don't have to ask everyone?
Okay, let's let the record reflect that everyone would like
to have a system wherein we can have all of the credit
available included in the system.
Chairman Watt. I just want the record to show that the
chairman raised his hand and he has some concerns with what is
being proposed.
Mr. Goerss. And I didn't raise my hand, but--
Mr. Green. Mr. Chairman, I think you started something.
Mr. Goerss. I would say that we would provide some
additional information on our thoughts on that.
Mr. Green. Well, I would like to hear your thoughts now,
because I suppose that would give me the chance to do the
follow-up right now. If we start exchanging letters, that could
take us a while.
Mr. Goerss. Well, as I indicated previously, there is a
variety of information that we are looking at, that all of the
credit reporting agencies are looking at, and they need to
continue to study and determine what is the best use of that
information. It could well be to put that in the one file
system, as you suggest, but there may also be other approaches
to it. And I am just saying I am not prepared--
Mr. Green. Well, right now it seems to me we have one
company that tries to get as much of it as possible. Your
company gets it, but you also have another way of evaluating
it, and my suspicion is that is the same with the third
company.
But what I am trying to find out is whether we can have all
of the information available to you so that you can use
whatever formula you use, whatever standards you use, whatever
asset test, but come to a conclusion with the information
immediately available. Because with the alternative credit
scoring, that is a two-step process, it seems. And I am trying
to see if there is a way for us to have a one-step process.
So is a one-step process beyond the realm of probability,
possibility? Is it doable? If you think that a one-step process
is not doable, would you raise your hand, please?
Okay. Now let's let the record reflect that everybody
thinks a one-step process is doable and that the chairman
didn't raise his hand so far.
You are raising your hand?
Mr. Oliai. Well, it is a mini-raise. It is not all the way,
but it is halfway.
I think it is really an aspiration, a one-step process that
you describe is an aspiration. And there are multiple
perspectives that need to be explored.
You know, coming from a background of one of the guys who
likes to build the models, the statisticians, the math geeks,
the more data you have, the better. You can never have enough
data to try all the different quantitative approaches to
predicting consumer behavior. So that one-step process appeals
to my nature in that regard.
Mr. Green. Now, one step, as I have defined it, means just
acquiring all of the intelligence available, get the empirical
evidence, and then you sort through it however you choose. But
is there something inherently wrong with that kind of thinking,
just have all of the empirical evidence and then come up with
your own asset test for sifting the sand and finding the
pearls?
Mr. Oliai. I think it is a great aspiration. I think there
are some practical hurdles to get over, not so much on the part
of a company like Experian, but more so on the part of the
providers of that information.
Mr. Green. I understand, but you would not oppose having
the utility companies send you their information, would you?
Mr. Oliai. Absolutely not.
Mr. Green. You would not oppose the landlord sending you
his or her information, would you?
Mr. Oliai. No.
Mr. Green. Okay. And if you had that information, would you
place it into your asset test?
Mr. Oliai. We would look to. We would do a compliance
review and make sure that we are covered by issues of
compliance and consumer privacy. But--
Mr. Green. Assuming it is done in the same fashion that you
get your information from the auto dealership, that you get it
from the mortgage company, assuming you have the same
reliability standards, would you use the information?
Mr. Oliai. Conceivably, yes.
Mr. Green. Well, why is it that you are reluctant to say
``absolutely yes,'' for my edification, please?
Mr. Oliai. Absolutely, yes.
Mr. Green. Okay. Thank you.
Mr. Oliai. But, again, for the record--
Mr. Green. Absolutely, however.
[Laughter]
Mr. Oliai. I am only here overnight.
[Laughter]
Mr. Green. You are only here overnight, but you have your
boss forever, hopefully.
Mr. Oliai. Again, there are some practical hurdles that
aren't trivial to get over on the part of all involved. I think
it is a great aspiration to manage to.
Mr. Green. Okay, the final question is this, and you may
have to give me the answer in writing. I would like for you to
tell me how we can best achieve what is a vision, that the
notion that we would have all of this information available to
you, how can we best achieve it, or get as close to achieving
it as possible, assuming that it can't be done to the 100
percent standard. But I would like to know how we can best to
achieve it. Because that really is what this is all about,
trying to give everybody a fair opportunity to have a thin file
if they choose to, but get the use of credit if they don't
choose to and they still pay their bills.
Thank you, Mr. Chairman. I yield back.
Chairman Watt. Were you expecting a response?
I can give you a response. The problems are not necessarily
on the reporting side; it is on the other side. Because with
utility companies, for example, they are not normal users of
the information, so their interest in making sure that credit
scores are reliable--they almost have to give you a utility,
right? They have a lot more vested interest in giving negative
information than they do in giving accurate information, so you
would have to deal with that. And a lot of these are much, much
smaller providers of credit who are not in the habit of doing
anything other than reporting negative credit information. So
the problems are not so much--and the volume of it, if you
mandated everybody to do it correctly, could be overwhelming.
I raised some of those concerns in the opening statement
that I made just before you got here. It is a great vision, but
it has some practical concerns associated with it that are not
necessarily concerns about the modeling of it, which is what
these gentlemen do in their companies, as much as it is some of
the practical concerns from the providers of the information.
Because they are only as good as the information that they are
provided, even if their model is impeccable. If the information
they get is not correct, it can be a negative for consumers as
well as a positive.
So that was the concern I was raising my hand to express to
you.
The gentlelady from California?
Ms. Speier. Thank you, Mr. Chairman.
To all of you at the credit reporting firms, how many free
credit reports are actually requested per year as a percentage?
Mr. Oliai. I don't have the specific number. It is
something that the CBIA, our trade association, is compiling on
behalf of the industry to provide to the committee, but I don't
have the exact number with me today.
Ms. Speier. Well, my sense is it is probably a very small
percentage. Is that a fair assumption?
Mr. Oliai. I really dare not speculate.
Ms. Speier. Next?
Mr. Goerss. Similarly, we are working with our trade
association to provide the information. In terms of your
question, you said a large percent, I am not sure that I am
following your question. You said a large percentage of?
Ms. Speier. No, I am suggesting that it is probably a small
percentage of American consumers who actually request their
credit reports on a yearly basis for free.
Mr. Goerss. Okay. Again, I don't have that specific
information today.
Ms. Speier. All right.
Mr. Wiermanski. Again, I know that TransUnion produces tens
of millions of free reports. We are working with our industry
organization to provide that information.
Ms. Speier. All right. Both Consumer Reports and U.S. PIRG,
last year and in 2005, did studies on the number of credit
reports that had erroneous material in them. And U.S. PIRG, in
a 2005 report, suggested that 79 percent of credit reports
contained errors, and 25 percent contained mistakes serious
enough to prevent the individual from obtaining credit.
So my question to all of you is, how quickly do you correct
erroneous credit reports? How long does it take the average
consumer to have their credit report corrected? And do you
actually correct it, or do you put a note in the credit report
that the consumer is disputing that information.
Mr. Goerss. In terms of--it depends on the--to go through
the reinvestigation process, the Fair Credit Reporting Act
allows 30 days for that process to take place and for the
reinvestigation to be completed and responded to the consumer.
On average, I believe our reinvestigation completion times are
in the 10-to-15-day range, and depending on the circumstances,
depending on what the specific information is that is disputed,
we may be able to correct it or address it at the time when the
consumer is on the phone with our representative.
Mr. Wiermanski. This is an area outside of my area of
expertise, but I would believe that TransUnion provides a
similar type of turnaround time to correct this information as
Equifax has stated--certainly within the guidelines provided in
the Fair Credit Reporting Act.
Mr. Oliai. I believe the same holds true for Experian.
Ms. Speier. So it certainly would make the case that
consumers in America should feel very confident that if they
have an erroneous credit report and they submit a correction,
that that is corrected within a very short period of time.
It makes it seem like we have no problems. Excuse me for
being a little cynical about that.
Let me ask you about identity theft. On average, how long
does it take an individual who has had their identity stolen to
be in a position where their credit report is then rectified to
reflect legitimately their credit?
Mr. Oliai. It is an area that I would have to look into and
provide information back to the committee. I came more prepared
to talk to credit scoring, per se, but we can get that
information to you.
Ms. Speier. All right. Thank you.
Mr. Goerss. I think part of it is, that is a very--there
are a lot of different activities that a consumer can do to
protect themselves if they feel they are victims or might be
victims of identity theft.
Certainly one of the things that they can do is put a fraud
alert on their credit file. They can receive a free disclosure
of their credit file to see if there has been any inappropriate
activity or inquiry to their credit file. They can provide an
identity theft report and identify the account information that
they feel, or that they say, was opened fraudulently. And under
the requirements of the FACT Act, the consumer reporting
agencies are going to delete that information; and the consumer
reporting agency that receives that identity theft with
information removal request is going to refer it to the other
two consumer reporting agencies who are also going to remove
that information.
So beyond, I think that whole process can move relatively
quickly.
In terms of the specific timeframes, I am not prepared to
address it. We would have to look back into that.
Ms. Speier. All right. Thank you.
I yield back.
Chairman Watt. I thank the gentlelady for her questions.
The Chair notes that some members have today asked and may
hereafter have additional questions for this panel, which they
may wish to submit in writing. Without objection, the hearing
record will remain open for 30 days for members to submit
written questions to these witnesses and to place their
responses in the record. There are a number of things that have
already been put out, but it would be good to get follow-up,
and we will follow up specifically on the percentage of people
who are asking for their credit reports, the free credit
reports.
This has been an absolutely fascinating and informative
panel. I am sure it has helped to inform the members of the
subcommittee, and the record will help to inform the members of
the full committee. And the panel has informed the members of
the public who have been watching on C-SPAN 3.
So it is extremely important that we educate the public
about some of these issues, and we thank you so much for being
here today and helping to inform us. This panel is excused, and
we will call forward the second panel.
I thank these witnesses for being here today, and I will
proceed with the brief introductions. The full, more complete
information from your bios will be inserted into the record.
The first witness on this panel is Mr. Clark Abrahams,
chief financial architect at SAS Institute Inc., a North
Carolina-based company, I understand, so I need to give a
little shout-out to the home folks.
The second witness is Dr. Michael Staten, a professor at
the University of Arizona.
The third witness is Dr. Michael Turner, president and
senior scholar at the Political and Economic Research Council.
And our final witness on this panel is Mr. Evan Hendricks,
the publisher and editor of Privacy Times.
We thank all of you for being here. As we indicated to the
earlier panel, without objection, your entire written
statements will be made a part of the record, and each of you
will be recognized for a 5-minute summary of your testimony.
There is a lighting system in front of you. It goes to
green initially, yellow at 4 minutes, and red at 5 minutes. Try
to wrap up as quickly as you can after the red light goes on if
you haven't completed your testimony, but we are not trying to
cut anybody off here.
So, Mr. Abrahams, we thank you for being here and you are
recognized for 5 minutes.
STATEMENT OF CLARK ABRAHAMS, CHIEF FINANCIAL ARCHITECT, SAS
INSTITUTE, INC.
Mr. Abrahams. Good afternoon, Chairman Watt, Ranking Member
Barrett, and members of the subcommittee. I am Clark Abrahams,
chief financial architect at SAS, a leading provider of
business intelligence and analytical software. I appreciate the
opportunity to provide my views on ways that we might improve
our existing credit granting system.
Credit markets are influenced by what information is made
available and tools that are used to manage and analyze that
set of available information. I acknowledge today's ready
access to historical information provided by the credit bureaus
and the pioneering work by Fair Isaac. I have been privileged
to work with all of them in my career.
The road to improving the current credit system is paved
with greater information, illuminated by proper context, and
built through collaboration. The comprehensive credit
assessment framework, or CCAF, which I developed in the course
of other risk research, integrates the positives from proven
lending principles and the current system of credit scoring.
This integrated approach capitalizes on the strengths that both
proven judgment and best science offer to provide a
comprehensive and complete view of risk.
CCAF treats a multifaceted decision-making process as
exactly that, one that involves many factors that are
interrelated. We build on the five ``C's'' of credit, namely,
character, capacity, capital, collateral, and conditions. Each
of these primary factors is comprised of several rating
categories that are generically termed, such as ``strong,''
``moderate,'' ``weak,'' or ``poor.''
A loan applicant is rated according to objective criteria.
For capacity, these criteria might include the borrower's debt
ratio and savings rate. This is not an exhaustive list, but is
meant to demonstrate the objectivity of the factors.
Once the borrower is classified, he is assigned a segment
number and that number can easily be deciphered to reveal
exactly where he stands relative to primary qualifications.
Depending upon the borrower's primary givens, secondary factors
or policy rules may be brought into play to render a final
decision.
The CCAF is also adaptive by nature, it becomes more
predictive over time, and from the day it becomes operational,
the data set is constantly being increased and refreshed. As
such, it does not need to be replaced at regular intervals.
We need to step back a bit from asking who is a predictable
risk based on select historical facts or a lack thereof, and
broaden the object of the exercise to ask, ``Who is
creditworthy and who is not?'' This question will drive other
questions like, ``Based on what?'' One answer has been,
``Whatever is in your credit file.''
Similarly, should creditworthiness depend on how often we
seek credit? Why should seeking credit cause greater risk? A
model may indicate so. With any observed phenomenon, there are
many supporting theories that can be posed. But theories are
theories, and when we are trying to convince ourselves that a
model is correct, then the theory can become all too
compelling.
If consumers make other choices such as not using
installment credit to make major purchases, does that or should
that affect their credit standing? Why is a ratio of revolving
to installment credit indicative of a borrower's willingness or
ability to repay? Similarly, does the fact that the borrower
lacks a history with credit truly suggest that such a borrower
is less creditworthy?
An obvious question for consumers is, how can they know
what impact any particular choice they make will have? To open
or close a credit account, or apply for a loan, or decide to
pay cash rather than finance a purchase, or how much they
utilize their credit? Even with full disclosure, are we to tell
consumers that being financially responsible means that they
need to modify their behavior so as to maximize their credit
score? The point is that an individual's creditworthiness
should depend upon their ability and willingness to repay an
obligation.
CCAF primary factors guarantee that all relevant
information is considered versus giving that power to models.
Touching on the issue of borrowers with little or no credit
history, there is data available that can be used to make
reasonable estimates of their credit worthiness. This data is
referred to as ``alternative data,'' and it will be addressed
in depth by my colleague, Dr. Turner.
Alternative data is crying out; we must allow it to speak.
In the beginning, we had guiding principles in lending that
related creditworthiness directly to the borrower's ability to
repay the loan. Then science came along and we determined that
our models could find substitutes. CCAF revisits that fork in
the road, and it retains reliable guiding principles while
incorporating comprehensive information, including alternative
data, in a single, overarching context with the best that
science has to offer.
I appreciate the opportunity to be here today and I am
happy to take questions.
[The prepared statement of Mr. Abrahams can be found on
page 58 of the appendix.]
Chairman Watt. Thank you for your testimony.
Dr. Staten, you are recognized for 5 minutes.
STATEMENT OF DR. MICHAEL STATEN, PROFESSOR, UNIVERSITY OF
ARIZONA
Mr. Staten. Thank you, Mr. Chairman, and members of the
committee. My name is Michael Staten, and I am a professor in
the Norton School of Family and Consumer Sciences at the
University of Arizona and Director of the Take Charge America
Institute for Consumer Financial Education and Research.
I have had the privilege of testifying before this
committee previously over about 10 years when I was at
Georgetown University. I am pleased to be able to join you
again this afternoon.
From the consumer standpoint, maintaining a good credit
score is more important now than it has ever been. We know that
the rapid escalation in loan delinquencies and foreclosures has
caused lenders to pull back, in some cases sharply, from
granting credit to higher-risk applicants. The widespread
adoption of risk-based pricing and consumer lending means that
a low credit score will cost you money, possibly big money in
the case of mortgage and auto loans.
In addition to tightening lending standards, lenders have
also raised the bar for qualifying for the best interest rates.
And we know, as has been pointed out earlier today, the credit
score increasingly impacts consumers outside the loan markets
as well. Landlords routinely pull credit reports and may reject
apartment rental applications or require a higher deposit or
cosigner to compensate for a lower credit score. Cell phone
providers certainly pull credit reports on a routine basis, as
do many utility companies. Some insurance companies and many
employers do, as well.
Consumer awareness of credit reports and the importance of
credit scores has improved in recent years, but much education
remains to be done. Again as has been mentioned earlier this
afternoon, the Consumer Federation of America partnered with
Providian and Washington Mutual Bank to sponsor a series of
surveys since 2005 to track consumer knowledge of credit
scores. The latest edition of that survey released earlier this
month found that only half of U.S. adults had obtained their
credit score within the past 2 years.
Answers to other questions in the survey indicate a
significant gap in the knowledge of how scores are used between
those who have viewed their scores and those who have not.
Overall, the survey indicates that a large portion of the
population has yet to focus on management of their credit
history and their credit score as part of their personal
financial affairs.
In my submitted testimony today, I have tried to make two
main points. First, business reliance on credit reports and
credit scoring to make decisions about financial transactions
is here to stay. Credit scoring has proved overwhelmingly
superior to manual, judgmental loan evaluation systems of a
generation ago. Widespread adoption of credit scoring is a
decision tool that has generated significant benefits for
consumers and has transformed the U.S. consumer financial
markets into the most competitive in the world. Because they
are so useful, scoring models have been constantly improving
and will continue to do so as long as financial institutions
compete for new customers.
My second point springs from the first. Because the use of
scoring is so commonplace in financial transactions, consumers
need to develop a better understanding of the importance of
their credit histories and their credit scores and better
awareness of their power to manage the components to obtain
more favorable offers in the financial marketplace.
Credit scoring is no longer the impenetrable black box that
it may have appeared to consumers as recently as 2001. Even
prior to the FACT Act in 2003, the major consumer reporting
agencies and scoring model vendors had recognized a marketing
opportunity and began to view consumers as customers of scoring
information products, including a host of credit score
monitoring and ID theft alert services.
Today, numerous Web sites, originated in both the public
and public sectors, provide consumers advice on how to
understand their credit reports and what goes into determining
their credit scores. Managing a FICO score, for example, into
the 700 Club has gained a bit of a cult following with advice
flying around the Internet regarding how to manipulate account
balances and manage existing accounts to tweak a score to a
higher level. Yet, according to the Consumer Federation of
America surveys, a large portion of U.S. borrowers still don't
understand what a credit score represents or the factors that
determine a score.
Far more important than coaching consumers to tweak their
scores, it seems to me that the bigger policy challenge is to
make a large proportion of American borrowers aware of the
following points:
First, failing to properly manage a credit score costs you
money and, again, sometimes big money. Fair Isaac's myFICO.com
Web site provides ready examples of loan rates that correspond
to various score ranges. The cost differential between low
scores and higher scores can easily translate into hundreds of
dollars per month in additional finance charges for larger
loans such as home mortgages. It can also cost you
opportunities for apartments, jobs, insurance, and similar
services. Credit scores really matter.
Second, your credit score can be managed. You don't have to
accept it passively. Your credit score reflects your decisions.
Consumers have the ability to raise and lower their scores.
Because credit scores reflect a consumer's own past payment
history and current use of credit, consumers can control their
own score to a large degree, especially over time. This makes a
credit score an important, but underappreciated personal
financial management tool.
Third, I would say to consumers, knowing your own score and
knowing what lenders consider to be a good score and a poor
score helps you shop and recognize a good offer from a bad one.
And lastly, a consumer's FICO and VantageScore credit
scores are based solely on information in their credit report.
So I would say to consumers, check your credit report
periodically to see what is there and be sure what is there is
correct.
Thank you for the opportunity to contribute to the
discussion.
[The prepared statement of Dr. Staten can be found on page
140 of the appendix.]
Chairman Watt. Thank you for your testimony, Dr. Staten.
Dr. Turner, you are recognized for 5 minutes.
STATEMENT OF DR. MICHAEL TURNER, PRESIDENT AND SENIOR SCHOLAR,
POLITICAL AND ECONOMIC RESEARCH COUNCIL (PERC)
Mr. Turner. Good afternoon, Chairman Watt, and
Representative Barrett. Thank you both for the invitation to
testify.
My name is Michael Turner, and I am the president of the
Political and Economic Research Council based in Chapel Hill,
North Carolina. PERC is a nonprofit, nonpartisan policy
research organization that focuses on market-based economic
development both in the United States and globally.
As highlighted in an earlier PERC study that was presented
to Congress in 2003, the pervasive use of automated
underwriting solutions and consumer credit has yielded
considerable social and economic benefits. However, the system
is not perfect.
Specifically, it is often difficult for consumers to enter
the credit market. To start down that path, you can't get
credit because you don't already have credit and you don't
already have credit because you don't have any credit history.
This is the credit catch-22 confronting many potential first-
time borrowers.
Several recent developments have started to ease that
transition for millions of Americans. Specifically, because of
the increasing availability and acceptance of so-called
``alternative data,'' millions of Americans are now facing a
shortened path to entering the credit mainstream.
Traditional consumer credit files generally include records
of credit and payment obligations between individuals and
creditors, typically financial organizations or retailers.
``Alternative data'' are other payment organizations from
nonfinancial institutions that are generally not reported at
all to credit bureaus or are underreported. Some of the more
prominent alternative data sets include energy utility,
telecoms, rental remittance, and insurance payment data.
While tremendous strides have been made in making credit
access both fairer and more affordable, there remain an
estimated 35 to 54 million Americans who are outside the credit
mainstream owing to insufficient credit information about them.
Because of this information gap, many Americans still cannot be
scored.
Without a score, the two primary means by which most
Americans build assets and create wealth, homeownership, and
ownership of a small business, are not attainable. In this
context the lack of sufficient data in a credit file acts as a
barrier to wealth creation, opportunity, and social and
economic advancement.
The good news, however, is that the world is changing and
changing rapidly. The tens of millions who might otherwise have
been left outside the mainstream are finding that payment data
reported by nonfinancial organizations is thickening their
files and increasing their attractiveness to lenders. Rigorous
empirical testing by PERC and the Brookings Urban Markets
Initiative yielded irrefutable evidence that energy and
telecoms payment data are predictive of an individual's credit
risk.
PERC and Brookings UMI examined a sample of over 8 million
TransUnion credit files that contained one or more fully
reported utility and telecoms payment tradelines. The key
findings of the PERC Brooking UMI report are compelling. Those
with thin files have similar risk profiles as those in the
mainstream.
Fully reporting alternative data broadens and deepens
access to affordable mainstream sources of credit, especially
for thin file and no file borrowers. Fully reporting energy
utility and telecoms payment data reduces bad loans. More
comprehensive data can improve scoring models. The problem that
remains is that this data is not yet widely reported.
Energy utility and telecom firms have two primary direct
incentives to report accurate data. The first pertains to
operating costs. As the rate of inaccuracy rises, customer
service and administrative costs to the furnisher providing the
inaccurate data will also rise. Firms have a compelling market
incentive to control costs, making it unlikely that any firm
with a higher error rate in the payment data reported to a
credit bureau would continue to report without improving
accuracy.
The second direct incentive concerns improved cash flow.
According to PERC's recent survey, energy utility and telecoms
firms fully reporting to a credit bureau witnessed a decline in
delinquencies and charge-offs. This reduction has a positive
cash flow impact. Respondents to the forthcoming PERC survey
also indicated that the perceived benefits from reporting
outweighed costs. Reporting inaccurate data would fundamentally
alter this cost-benefit equation.
Just yesterday, PERC released a new empirical study
entitled, ``You Score, You Win'' at the National Press Club
that specifically addresses concerns about alternative
reporting data. The key findings are, there is no evidence that
those who open new accounts after having only nonfinancial
accounts become overextended. There is no evidence of
deteriorations of credit score over time for those with
nonfinancial payment data in credit files. No empirical
evidence supports the notion that chronic late payers would be
harmed by fully reporting energy utility and other payment
data. And all evidence suggests that reporting payment data
serves both as a consumer protection and as a wide protection.
Congress can play a role in helping achieve this socially
and economically optimal outcome. They can work to help remove
statutory barriers, including the perceived prohibition on
sharing positive data contained in section 222 of the
Telecommunications Act of 1996 that some telecom firms have
unfortunately interpreted as permitting the reporting of only
negative payment data, but not positive payment data.
Congress could consider passing a law permitting energy
utility and telecoms companies to choose to report their
customer payment data. This would remove the most significant
barrier identified by NARUC in a State, that of regulatory
uncertainty.
Finally, Congress could use their bully pulpit to act and
to exhort and incentivize energy utility companies to fully
report.
Thank you for this opportunity to testify.
[The prepared statement of Dr. Turner can be found on page
153 of the appendix.]
Chairman Watt. Thank you for your testimony. I didn't
realize that you were based in North Carolina, too. I should
have given you a shout-out, as well.
Mr. Hendricks, you are recognized for 5 minutes.
STATEMENT OF EVAN HENDRICKS, PUBLISHER AND EDITOR, PRIVACY
TIMES
Mr. Hendricks. Thanks you, Chairman Watt, Ranking Member
Barrett, and members of the committee for the invitation. My
name is Evan Hendricks, and I am in my 28th year of publishing
a newsletter called Privacy Times.
I have been in Washington a long time. And I am also the
author of a book called, ``Credit Scores and Credit Reports:
How This System Really Works, What You Can Do.'' And in the
spirit of the book, I will try and speak on behalf of the
millions of consumers who all have credit reports, either full
files or thin files.
Mr. Chairman, you have planted a very powerful seed today,
and that is the idea that we should be entitled to one free
credit score per year. I think the answer to your question, is
there a policy reason not to do that, is, no, there is no good
reason not to do it. We should do it. To do it right, we have
to seriously understand how the system works, and we have to
talk about what I am calling the ``secret sauce,'' and we will
get to that in a minute; but to make this a meaningful score
for consumers, there is a secret sauce in the system that we
have to deal with.
Now, right now, you take it for granted that we know about
credit scores. But you have to remember what it was like 12
years ago in the mid-1990's when credit scores started being
widely used. They were a complete secret; the industry did not
even acknowledge their existence. Then, when they found out
about it and reporters like Michelle Singletary of the
Washington Post started reporting on it, then they would not
disclose the score to you.
Then California led the way with a State law, and now we
have the FACT Act, which means that you can get one, you can
buy a credit score for a fair and reasonable price.
Mr. Chairman and Congresswoman Speier put their finger on
some very important problems, first, the problem that they are
selling knock-off scores, or FAKO scores, ones that are not
used by lenders. And so consumers are paying for scores. And we
have lots of anecdotal situations where this consumer tries to
be educated, they buy their score, they go out there; and then
when they apply for credit, they find their score is much lower
and so they are in a very disadvantaged situation.
And, Mr. Chairman, the Fahrenheit versus Celsius problem is
a very real problem because the industry has created a very
confusing situation here because we have the standard FICO
score, which is used by about 75 percent of the lenders, that
is the one most widely used. And then they sell you the PLUS
score, and the TrueCredit, or TransRisk score, has a range that
goes up to 950; the VantageScore, which all three have created,
goes up to 990. And there is very little evidence of market
penetration by those scores, and I hope that they produce some
numbers on that.
But I think maybe, probably the most profound problem is
that as far as we have come, consumers cannot buy or get access
to the actual score on which they are judged.
Let's use the mortgage setting as an example of this. When
you apply for a mortgage, the broker, the lender, goes to a
reseller, they pull a Tri-Merge report--your TransUnion, your
Equifax, and your Experian--and they merge them into one
report, and you get three FICO scores, one from each bureau.
And those are the ones you are really judged on. So even when
you are buying a FICO score from Equifax, the one you are being
judged on is probably based on a different model. The ones you
buy for yourself can give you a good idea, but there can also
be significant differences.
So when we are talking about consumers really understanding
where they stand, we need consumers to have access to those
scores and also access to those Tri-merge reports.
Now, the reasons that those are a subscriber version of the
reports, those are the most meaningful version of the reports;
and I will explain a difference here in the minute that I have
left.
Right now, consumers cannot get access to those reports
because the resellers that compile them are barred by contracts
from showing them to the consumer. Now, in the FACT Act it used
to be they could not show the consumer anything after the fact.
The FACT Act already changed that, so after the fact they can
show you.
Now we need to make it so consumers can see this
information before they apply for credit. The reason this is
important is that they also use algorithms to decide what
information goes in your report when you apply for credit
versus when you get your own. When you ask for your own report,
they use very precise algorithms to make sure that information
really deals with you. But when they are selling a report about
you to a creditor, they use looser, partial-matching
algorithms, so if something might relate to you, they are going
to make sure it is included on that report because they don't
want to miss out on anything.
Instead of maximum possible information--or accuracy really
is maximum possible information--those are the reports that
consumers need to get access to; and these resellers, the
network of resellers, is a wonderful place to start. Including
getting scores that are meaningful, we just have to override
those contracts through national policy and bring more
transparency and fairness to the system.
Thank you. I yield back the rest of my time that I don't
have either.
[The prepared statement of Mr. Hendricks can be found on
page 119 of the appendix.]
Chairman Watt. Thank you so much.
And I thank all of the witnesses.
The members of the subcommittee who have been here have
been absolutely diligent, and they have been here throughout.
So I am going to reward them by going last in my questions to
this panel, since I have to be here anyway, and some of them
may, because we went two rounds, have other competing
appointments.
So, Mr. Cleaver, I am going to recognize you first for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
I want to go back to the issues I raised with the previous
panel. And one of the questions that I raised--I am just
curious as to whether or not any of you would have a different
response--and that is, is there a correlation between the place
of residence and credit scores?
And, specifically, I think my question is, in areas of high
minority concentration, the study I have suggests that they
have worst-ever scores. And if credit scores have a
disproportionate impact on residents in communities with high
minority concentrations, what other socioeconomic factors might
account for this reality?
Mr. Hendricks. Well, I am familiar with the Missouri study,
and I think it is a very useful study, though its
controversial. Industry doesn't like it.
Mr. Cleaver. Well, yes.
Mr. Hendricks. But it showed that there was disadvantaged
credit scores in disadvantaged communities. And I think that
is--you know, I compare credit scoring--I agree with Professor
Staten, it is something that is here to stay, so I think we
have to understand and deal with it.
But it is a lot like SAT scores. SAT scores are sort of a
test created by a circle of people which is meant to measure a
certain kind of skill. And the credit scoring system is kind of
the same way.
And so there are people who are extremely responsible in
paying their bills, but if they are not plugged into our
surveillance system of credit, then they don't get the credit
in terms of a good credit history and good score.
And so if you have a thin file and then you also have a
late payment on top of it, then it is a double whammy that
sends your score down more because part of your score is based
on good news, and if you are a disadvantaged community, it is
much harder to build up the history of good news that will give
you a buffer in case the bad news comes.
So that is why I think it is a useful study.
Mr. Cleaver. Do minorities and poor folks have worse credit
scores regardless of the geography?
Mr. Hendricks. I don't know. I think the actual research
shows that there are people from disadvantaged communities who
have good credit scores, too. But that means that they
basically play by the rules of that system of building credit,
avoiding late payments, not maxing out their credit cards.
That is kind of a tall order in today's society, though;
and so I think you are going to see falling median levels of
the population's credit scores.
But I think clearly we need especially targeted presence in
programs and education. Because now getting credit is going to
be imperative to any sort of social mobility, and so people
have to understand how the system works and how they can use it
or find the alternative system that will give them a chance.
Mr. Cleaver. Well, ``alternative system,'' I am glad you
mentioned those words. Why do we have, essentially, three
credit rating agencies?
Mr. Hendricks. That was a result of business evolution. We
used to have five major ones, and merger and acquisition made
it so we have the three that we have today.
Mr. Cleaver. Do we need more than three, or is there a
reason to make some adjustments in the three we have that would
allow the underserved communities to have greater access to
credit?
Mr. Turner. If I could respond to that, the national credit
reporting system certainly is an evolving system; and as I
mentioned in my oral statement and in my written prepared
statement, the phenomenon of automated underwriting has
absolutely, by every measure, made lending broader and deeper
and fairer. And as I also mentioned, it is not perfect.
And, of course, I was asked to speak about the promise of
nontraditional or alternative data; and I actually agree
wholeheartedly with Evan's observation that having this data
reported in greater volumes would actually help mitigate the
adverse consequences of a negative in a delinquency or default
for thin and--well, for thin file, particularly, individuals.
So the system is evolving. You have seen niche players move
into this market. Four years ago you could probably count the
number of them on one hand. PRBC was a pioneer. Now we have
link-to-credit, Experian, Equifax--or Experian and TransUnion
are certainly making great strides in this. But it is a slow
process.
We have worked on the demand side. The study that PERC
provided actually brought lenders and the bureaus together to
understand the payoff for using alternative data for risk
assessment. The issue now is that we have to make a business
value proposition to energy utility and telecoms firms to
report the data because they absorb very real costs under the
Fair Credit Reporting Act in terms of data furnisher
obligations.
We have a forthcoming study. We have surveyed a large
number of energy utility and telecoms companies with the
American Gas Association, the Edison Electric Institute,
TransUnion, and Experian. We will be providing those results in
the next quarter.
But it is a challenge. Our hope is to realize that
aspiration. So it is an evolving system, and I think strides
are being made.
Mr. Hendricks. And I think the answer to your question too
is, the credit reporting system is basically built to collect
the information behind your back and then the information
surfaces when you try and make a credit move. In other words,
it is sort of a ``gotcha'' system.
So one policy or goal would be to have one credit reporting
agency that would be more a consumer-facing reporting agency.
And I think Dr. Turner has cited pay rent--you know, PRBC is
one where it is an opt-in approach--and others. So I think we
do need alternatives, and we need to have it so consumers are
plugged into their own information as much as all those
thousands of creditors are plugged into it.
Mr. Cleaver. Mr. Chairman, one of my hopes is that some
time later we will have another hearing. But I certainly would
love to have an opportunity to read the study that Dr. Turner
spoke of that will come out in the next quarter.
Mr. Turner. We would also be happy to provide, if you are
interested for the record, our report from just yesterday that
empirically speaks to some of these questions as well.
Mr. Cleaver. Yes, I am very interested.
Thank you, Mr. Chairman.
Chairman Watt. We certainly would welcome that report.
And for the gentleman's information, I don't think there is
any anticipation that there will be any legislative moves on
this issue this year. So we have a period of time to get
forward-looking information that is in process now.
Mr. Barrett is recognized for 5 minutes.
Mr. Barrett. Thank you, Mr. Chairman. Drs. Staten and
Turner, can you kind of elaborate on the effect of credit
scores on our senior citizen population?
Mr. Staten. Well, it basically has the same effect as it
does for the rest of the population. It is built on past
experience, experience with credit, repayment of credit. There
isn't any particular bias in the credit scoring models with
respect to senior citizens; and in fact, if anything, the
Federal Reserve Board's study last year suggested that if there
is an age bias at all built into the standard scoring models,
it tends to look at files and take time on file as an
indication of or a proxy for age. Senior citizens who have used
credit in the past probably have a very long time on file, and
it probably counts very much to their advantage.
Mr. Abrahams. I would offer that actually in cases where
there is loss of a loved one and the major spouse who had the
credit history passes on, then the widow or widower may
experience some issue there. So that would be a factor.
Mr. Turner. And I would add to that, in fact, one of the
key findings from our previous studies with Brookings UMI was,
a significant number of above-66 individuals who had a thin
file. And so we see, actually, great promise in having the
energy utility and telecoms payment data in assisting elderly
individuals who, in fact, as Clark notes, we have an increased
incidence of late-stage divorce and the widow-widower effect.
And our actual numbers were corroborated by another study
done by one of our supporters for that study, which was GE
Money, and they came up with almost the exact same percentage.
So there is an issue that we think alternative data reporting
can actually help resolve.
Mr. Barrett. And, Dr. Turner, while I have you on the line
here, I know that we have talked about credit scores, and there
is a lot of hemming and hawing about whether it is the right
thing, or factors we take into it. But out of all the findings
that we have seen, would you agree that, using some type of
scoring system, you get the most accurate predictor of risk,
fairness, affordability, the whole 9 yards of any system that
is out there today?
Mr. Turner. Well, again, we have advocated as part of our
alternative data initiative having data reported directly to
credit bureaus and consumer reporting agencies.
I think--and if I understood correctly the one system that
Representative Green alluded to--that has been our stated
objective. We think that is very efficient.
TransUnion has been on that path for a long time.
Certainly, Experian and all the bureaus are looking at that at
this point.
Mr. Barrett. And the last thing I want to--Mr. Chairman, we
have talked about--Mr. Hendricks brings up some very wonderful
points, but isn't the key for the consumer education--I mean,
didn't he or she need to know all there is no know about the
scores, how they are obtained, how it affects them?
And again, let me pose this same question to you guys. I
know you all heard it all from the first panel, how, as much as
is out there, so many people still don't understand what is
going on. How do we impart that information to the average
citizen?
Mr. Hendricks. Well, it has to be a multifront attack, and
I have written a book; you are holding a hearing, you passed
the FACT Act. All these things have contributed to it.
Again, in my 30 years following this, I am still optimistic
because, again, 12 years ago, they weren't even acknowledging
there were credit scores. Now we are deciding between which
color is best and which best serves consumers.
So I think the idea that--like the State attorneys general
have gone around their State holding identity theft things
which relate to credit scores, the 13-Town Tour. You are
talking about going to your community at teleconferences with
your community. I think it is like giving it every chance we
get and, you know, a concerted push.
There is supposed to be a financial literacy push as part
of the 2003 FACT Act. I don't think that has the aspirations
that it is supposed to. But I think, now it is not just
interesting, it is vital for people.
So I think in terms it is worth public policy, it is worth
resources to go into our communities, starting with the high
schools, and really make a concerted effort that this is
pocketbook stuff and people need to understand it.
Mr. Barrett. Absolutely. Thank you gentlemen.
I yield back, Mr. Chairman.
Chairman Watt. I thank the gentleman. I am going to report
to my ranking member that he should have a substitute for him
all the time.
The gentleman from Texas, Mr. Green, is recognized.
Mr. Green. Thank you again, Mr. Chairman. Let's start with
Mr. Abrahams.
Sir, you have seemed to intimate, if not state, that a
comprehensive system, while not necessarily perfect, is still a
better system on balance than what we have currently if you
want to extend credit fairly to everyone.
Is that a fair statement?
Mr. Abrahams. I would say that is a fair statement, yes.
Mr. Green. And you have heard some of the indications about
information collected about utilities and landlords and persons
who are without what we will call the ``traditional reporting
system.''
How is it that your standard or your asset test, this
equation that you have developed, how is it that it can tweak
the process such that you get results that are consistent?
Mr. Abrahams. It would first classify the borrower or the
loan applicant. So we talked about the Celsius and the
Fahrenheit. That is because the credit score is an odds quote.
That is what a credit score is. We are not giving the
consumer--we are not giving the consumer the scale, but we are
giving him the odds, if you will.
I am advocating a system where we would have a
classification to the consumer that would be decipherable, so
you would know precisely what your position was relative to the
primary factors of the loan decision. And it is much more
difficult and challenging for score card developers to provide
that kind of information because of the secret recipe.
Mr. Green. And, Mr. Turner, you gave some information
concerning this as well. It seems to me that you are of the
opinion that reporting all of this information as much as
possible makes sense.
Is that a fair statement?
Mr. Turner. It is a fair statement, but I would recognize
the chairman's caveat that there are certainly going to be road
bumps along the way.
Mr. Green. Is there a means, a methodology, by which the
road bumps, while they are there, they can still be factored
into the equation and you can still service people who have
only nontraditional credit?
Mr. Turner. Well, I think the market is responding. I think
you are seeing, in fact, a number of models that rely heavily
on nontraditional data for credit positioning purposes. And
certainly to the extent that the volume increases--
Mr. Green. I am going to take it from your answer, that is
``yes.''
Mr. Turner. Yes.
Mr. Green. Okay. Just so that I can move on, must you
report to the agency to benefit from the information that the
agency has? For example, if I am a landlord and I would like to
use credit information, do I have to report information to the
agency to use the information that I can receive?
Is there reciprocity involved in this process, is what I am
asking.
Mr. Turner. Well, there are a number of alternatives
available right now, and some emerging.
Actually, we are working currently with TransUnion's rental
screening services and testing the validity of using rental
payment data and credit risk assessment. Similarly, with a
group in Atlanta, a rent bureau. This data is just being
collected now; it just really didn't exist in numbers before.
But also pay rental credit has an opportunity for
individuals to work through lenders to have lenders report
payment data to a third party to make credit decisions as well.
So there are a number of different alternatives.
Mr. Green. You indicated earlier that more and more
landlords and nontraditional users are now starting to use
these scores, correct?
Mr. Turner. That is correct.
Mr. Green. If they are using the scores, is that a means by
which we can induce them to also present information that is
accurate?
I am trying to find a means by which we can inculcate them
into the process without making it mandatory. If you want to
benefit from it, let's have some reciprocity of participation
from you is what I am leaning toward.
Mr. Turner. I would suggest--again, I think that TransUnion
would be better situated to talk about their standards on this.
But clearly, all the bureaus have data quality standards for
taking in new data.
It is not just that you may report and the bureaus have to
take it. There are certain standards for quality that are in
place already. And I think that there are a number of low-
hanging fruit, particularly among the energy utility and
telecoms firms that are very large, have sophisticated
databases and billing cycles and can report very high quality
data that is verifiably accurate.
Mr. Green. I understand.
It seems to me--and I will come to you in just a moment,
Mr. Hendricks, because I am interested in what you have to say.
But it seems to me that if more and more companies are moving
toward these scores and they are utilizing these scores, if we
can encourage them to not only benefit from the score, but also
to have reason to participate in the process by virtue of
benefiting from the score, we can inculcate them.
Is there something in that logic that I need to better
understand?
Mr. Turner. No. I agree, and that is what we are trying to
show. We are trying to basically show the business value to
prospective furnishers from reporting; and that is what will
get the buy-in into the system and why they will report
accurate data.
Mr. Green. Mr. Hendricks.
Mr. Hendricks. I wanted to answer your question.
Right now, there is not really reciprocity. Even the Act
defines that there are furnishers of information to the credit
reporting agencies, and then there are users; and you don't
have to be a furnisher to be a user.
I think the way to go is to let this be a consumer-driven
thing to the extent that to have--let's say, as an example, the
utility company--they can tell their customers, we can report
data about you to consumer reporting agencies if you opt into
this. If you do, these are the benefits that are going to be.
The problem, if we did this en masse, top down, is that we
have gone decades and decades where people don't expect
information on utilities to be reported to credit reporting
agencies. So if there are people who generally pay on time, but
had a few late payments, but had a thin file, then all of a
sudden that is going to hurt them rather than help them.
Mr. Green. Because my time is up, let me share this. I
think I comprehend what you are saying. You are saying that
this is an evolutionary process, and it may metamorphose into
something comparable to what we are talking about.
But, listen, one more thing before we leave this. I am
concerned about those who are left out of the process, and that
is what all my questions have been leading to.
How do I get them, those who really do pay bills, but don't
have this traditional credit, how can they benefit from credit?
Because you made it transpicuously clear that it pays to have
good credit. I mean, you save money, you can then have wealth-
building by some other means. That is the concern that I am
trying as best as I can to extract from you: How do we get to
this point where we can do this?
And I think I am hearing you say ``comprehensive''--that is
the term you used--comprehensive reporting makes a difference.
You can't compel it, but there may be a way to entice it. Is
that a fair statement? Does anybody differ with me on that,
don't compel but entice?
And before I yield back, what do you perceive to be the
most efficacious methodology for enticement?
Mr. Turner. We would encourage clarification on section 222
of TA-96 and permit--pass a law that permits utility companies
and telecoms firms to report payment data to bureaus and CRAs.
There is a lot of regulatory uncertainty in the States.
There are utility companies that want to report that have been
told ``no'' by their PUC or PSC despite the fact that there is
no statutory prohibition. And we found out that many regulators
believe that this data will be used for marketing, which is
incorrect because the FCRA explicitly prohibits that. So there
is an issue of regulator uncertainty.
There are States right now--we are working in California
and we are working in Illinois--there is a great interest in
California and a great interest in Illinois in doing something
legislatively or regulatorily that will promote this reporting.
Mr. Green. Mr. Chairman, I don't know if this is something
that is already being reviewed by a committee member or someone
else. But if it is appropriate, perhaps my office can work with
the good offices of Mr. Turner and try to craft some language.
Now, I am not sure that we are the committee of
jurisdiction for that.
Chairman Watt. We are not the committee of jurisdiction.
And the gentleman may be surprised to know that he is the
leader on this issue. You really are. I mean, I think perhaps
you and Mr. Castle have probably taken more leadership on the
issue of alternative data than anybody else on the committee or
the subcommittee.
So it was through your efforts that we made that a part of
the hearing today, in fact, at your urging and Mr. Castle's
urging. And I am glad we did because my initial inclination was
not to, because I thought it was a sufficiently different
subject that would just confuse people.
I think it has really been an enlightening discussion, and
I would encourage you, as we develop questions, follow-up
questions, to submit in writing to this panel and the earlier
panel to aggressively think through some of the issues that you
have put out there; and let's build a record on it. We won't be
the legislating subcommittee, but our whole purpose is to build
a legislative record for the committee of jurisdiction, the
subcommittee of jurisdiction, or the full committee, to act on
this.
So this is the place to do it, and you are the leader on
it, whether you know it or not. Whether you like it or not, you
are the leader on it.
Mr. Green. Thank you, Mr. Chairman. Sometimes I am better
than I realize I am. Thank you.
Chairman Watt. You just don't know what your power is.
Mr. Green. Mr. Chairman, if I may ask unanimous consent to
give a quick response?
I am more concerned about--section 222 of the Telecom Act
of 1996 is what I think was referred to. I am not sure that
Financial Services is the committee of jurisdiction to deal
with an amendment.
Chairman Watt. It sounds like, from Dr. Turner's response,
that there is no real--that the problem is a lack of clarity.
There is not a directive that says they cannot do it; it is
just that a number of them have found it in their interest not
to do it, and they are using the lack of clarity to hide
behind, as I understand it.
Is that correct, Dr. Turner?
Mr. Turner. Actually, in this case, there was a major
telecom firm that did fully report to all three bureaus. But
internal counsel conservatively interpreted the FCRA carve-out
in section 222, because the prevailing practice at the time was
reporting only negative data, and they felt they could be
exposing themselves to class action litigation for being in
violation of Federal law.
Chairman Watt. And that is one of the concerns that has
been raised about it. Unless you put some parameters around it,
only the negative data that will adversely impact people's
credit, not the positive data that will enhance their ability
to get credit, will be reported.
And in response to Mr. Hendricks' comment, one concern
about an opt-in or opt-out approach has been if you opt out,
certain lenders will view that as an indication that you are
admitting that your credit was bad, and they will use that
against you. So I mean, you kind of meet yourself here coming
and going.
But I think you have to pursue it because you and Mr.
Castle are the--I am not just humoring you publicly here--you
are the leaders on this issue.
Mr. Green. Thank you, Mr. Chairman.
Chairman Watt. The gentlelady from California is recognized
for 5 minutes.
Ms. Speier. Thank you, Mr. Chairman.
And thank you to our panel, and a special hello to Evan
Hendricks with whom I have had the pleasure of working over a
number of years.
I am going to share, Mr. Chairman, my bias. We call these
credit reporting agencies or credit bureaus, which gives the
average consumer the impression that they are dealing with some
Federal entity, when in fact they are not. We heard this
afternoon they are privately or publicly traded companies.
And yet this information is so critical, and to Mr.
Barrett's comments, who suggested that the consumer needs to be
educated, needs to know what goes into their FICO score and
what they can do to improve their FICO score, we can't give
those kinds of answers because, for all intents and purposes,
it is a proprietary formula. It is sort of like a secret sauce;
we don't know what it is.
Now, there is something wrong when the government can't
articulate what should be considered in a FICO score. I mean,
the fact that we are talking about enticing these bureaus or
agencies to include alternative information is, I think, pretty
weak. And I hope, Mr. Green, you will make it compulsory,
because I think that is part of what we should be looking at, a
complete picture.
Based on what has been said here, more companies are coming
into the market, which means we will have more FICO numbers,
not fewer; that consumers are going to be buying numbers that
may or may not be the numbers that are being used by their
lenders; that, in effect, over the long-term we are going to
have more subjectivity as to who gets what premium or who gets
what mortgage at what interest rate because these numbers
aren't the same for everyone based on a specific set of indices
that are used.
So here is my question, and let me start with Professor
Staten.
We will have, it is anticipated, 5 million Americans who
will be foreclosed on in a very short period of time. What are
we going to say to them if, in fact, they were lured into a
loan that was a subprime loan when they were really eligible
for a more traditional loan and they are upside down? What are
we going to tell them? What are all of us going to tell them in
terms of how they are going to improve their FICO score?
Second scenario--and this will be a question to you to
start off with and then to everyone else, because the second
scenario is why I am particularly talking to you. I have a son
who is about to be a junior in college, he goes to a great
university, and is a smart kid. Literally last week, he sent me
an e-mail, ``Mom, I just found out that I have a FICO score of
600.'' And it was because when he opened up his checking
account at a very prominent national bank they automatically
gave him a credit card. He didn't know it was a credit card
because kids mostly deal in debit cards. So he is using his
debit card and, I guess, used this credit card in addition; and
over the course of 3 months, he didn't pay in a timely manner
and he now has a 600 FICO score.
What are we doing about all these young people who are
lured into all kinds of products on the college campuses and
who start out in life with lousy credit scores, because we are
complicit in creating an environment where they exceed what
they should be entering into?
So that is kind of a two-part question. I will start with
you, Mr. Staten, and then I would like all of you to answer.
Mr. Staten. Sure. I think we start by teaching them to pay
their bills.
I am going to trade you another story. I taught a class in
retail financial services at the University of Arizona this
last semester. I asked all my students, as a matter of course,
to pull their credit report.
I had one student who apparently didn't. At the end of the
semester, he got a job, went to California, and was trying to
look for an apartment. At that point, the landlord pulled the
credit report and found that he has, despite having three bank
cards, that by his admission that he has paid very well, he had
a FICO score of about 560. Reason? He had collection activity
that came from the Tucson Police Department because he had
gotten several traffic violations that he had failed to pay--
just ignored them, swept them under the rug.
I suspect that is not an uncommon thing that happens to
young people.
It doesn't matter what the bill is, whether it is a credit
card bill or a loan payment or a utility bill or a cable bill
or a traffic ticket, young people have to understand that when
they don't pay, there is a consequence; and that consequence
comes forward in a lender's evaluation of their past payment
history. Whether it is through their credit score or whether it
is through pulling the credit report without the score, the
lender is going to see that, to the extent that it is reflected
in the credit report.
And I don't think young people fully appreciate how sloppy
payment in the past has major implications for them, not just
in getting credit and pricing credit, but in finding an
apartment and doing other things.
It is a matter of education. We have to teach them that it
matters, that it is important, that it can cost them; and then
how to manage it.
Ms. Speier. And the answer to the first question?
Mr. Staten. I have forgotten now what the first question
was.
Ms. Speier. The 5 million Americans--
Mr. Staten. I think you have raised another issue there in
terms of the suggestion that some of them were duped into
mortgages they couldn't afford. The fact is, now they are in a
mess and they are stuck with a foreclosure on their record.
It will go away over time; we do know that after 7 years
the thing drops off, and in fact more quickly than that, it has
less impact on the credit score. How much impact it has is
going to be a function of how much other credit they actually
have, how much positive experience that they have been able to
amass.
But that is about the best answer I can give you on that
point.
Mr. Abrahams. If I could go next, I would like to say that
I think, from some of the statistics that I have heard, it
takes them 11 years for, I think, a white non-Hispanic and
maybe 14 years for an African-American borrower who has had to
go through the foreclosure process before they can get on their
feet again. So--there is a period of time before one has the
capital to recover to approach homeownership, so it is a pretty
severe problem.
The system that I am advocating would have determined from
the get-go vulnerability that there was a product that would
put at risk the affordability. And, secondly, just the
concentrations, that the amount of concentration and the degree
of concentration in certain borrower segments would be surfaced
immediately, we are doing a lot of this product of people who
are living paycheck-to-paycheck, have no savings, bought a home
that was 3 times their annual salary, had 10 percent down. It
is the perfect storm that you don't see when you are looking at
all these things individually, but when you put them all
together it paints a pretty compelling picture.
So I am not suggesting that CCAF would have prevented a
subprime crisis. There are a lot of factors that went into
that. But I do believe that a comprehensive approach would have
been more helpful.
And as for the student, I was a student. I remember when I
was at Stanford, I got my first Bank of America card back in
1974. And I was encouraged to get some credit, use it, let it
revolve, don't pay it all off, let it revolve a little bit and
then pay it and get established.
My point would be, if we have alternative data, if we could
also track savings records--and we have to be creative about
it, but other means of sourcing information outside of just
credit usage, that one can be qualified, I think that would be
helpful.
Mr. Turner. In terms of your first question, we are
actually in discussions right now with the Governor's office in
the State of Ohio to analyze the efficacy of the Ohio Compact,
which is an agreement between nine large lenders in Ohio, in
the State of Ohio, about certain practices designed to
effectively minimize the probability of moving folks from
homeownership to foreclosure. And this model is being
considered in other States. We want to operate in fact and know
whether or not this is making a difference. So we would be
happy to report those results.
I don't know what I would tell consumers who have been
foreclosed or are facing foreclosure. But certainly, we would
like to look at solutions and viable solutions.
That is what I will offer.
Mr. Hendricks. And I think, Congresswoman Speier, that
where this committee can start is people have to know where
they stand; and right now we are only halfway there in terms of
seeing the actual scores on which they are judged and seeing
the actual data that is in their subscriber version reports. We
have to start there, because until you know where you stand,
you don't know what you need to do next to get there.
But this goes back to our discussion with Congressman
Barrett that we need a massive effort going into the
communities to get people more financially literate on these
issues because now it is not just interesting, it is crucial.
Chairman Watt. The gentlelady's time has expired.
I will just make one point as a reminder to the members who
participated in the insurance scoring hearing that this is not
unconnected, because once you get a 500 score on your FICO for
credit purposes, you also have driven up your insurance rates
because, remember, we were all troubled by that.
So this is not only credit, this is insurance. There is a
transferability here.
The second point I would make, and I know you all want to,
there is a big caucus that is getting ready to convene very
shortly, the Democratic Caucus, so the members have to leave.
It seems to me, with these 5 million people, Representative
Speier, we may end up having to grade on the curve at some
point. Otherwise, I don't know how you are going to go forward
extending credit to people who, but for having gotten into
these kind of mortgages that they really couldn't afford, would
have reasonably good credit.
So, anyway, I didn't get a chance to ask questions. I am
concerned--well, I am going to stay long enough to ask my
questions, but you all feel free to leave, which is why I
decided to go last, because I knew you all had given at the
office today, beyond the call of commitment, and I definitely
appreciate it.
Mr. Abrahams, the concern I have about your approach--and I
want you to convince me that I am wrong about it--is that it
seems to inject more subjectivity into it. There will be a
category of people for whom your approach would be a lot
fairer, but I think there would be some concern about the level
of subjectivity that is injected into the process.
And that would be a concern that I think Representative
Cleaver would have. So if you can address that quickly, that
would be helpful, I think, to him and to me.
Mr. Abrahams. Thank you, Chairman Watt.
What we are advocating is not going back to the old method
of every loan officer is a system. We are talking about
systematic policy application, proven principles that are
understandable, that are the basis for how people would want to
responsibly handle their financial affairs.
I am talking absolutely connected to, that we didn't
reinvent the wheel of the five ``C's'' of credit. And the
character part deals more with just your payment history, which
are capacity and your capital. And so the idea is that this
would not be anything like pulling out of the air; it would be
proven and it would be accepted and it would be well-documented
and consistently applied. It would be more consistent than
credit scoring because credit scoring today has overrides after
the fact, anywhere from 5 to 10 percent overrides on the low
side and sometimes 10 to 15 percent on the high side. So we say
we have this great score but then other things come into play.
I don't dispute that those are not correct decisions, but
this method brings all that together in one at the same time
and renders a decision without first creating a score. It first
classifies, then risk rates; it doesn't risk rate and then
classifies. So I think we have that a little bit turned around
in the way we are doing things today.
I hope that is helpful. But the idea is that the judgment
is systematically applied. And it is not an individual's
judgment; this would be a corporate judgment.
Chairman Watt. I think I am going to withhold the rest of
my questions, and just submit them in writing.
Let me, while I have somebody here who could object if they
chose to, ask unanimous consent to submit for the record the
Federal Reserve's response to a list of questions that we asked
them to address, that we thought we would have at the beginning
of the hearing. It hadn't gotten here, but it came during the
course of the hearing today.
And the Federal Reserve also released a report in August of
2007 that was required under section 215 of the FACT Act. I ask
unanimous consent to submit that for the record.
[The Federal Reserve report can be accessed at http://
federalreserve.gov/boarddocs/rptcongress/creditscore/
default.htm]
And I also ask unanimous consent to submit for the record
the Consumer Federation survey that I referred to in my opening
statement. I am just trying to get a full record here so that
anybody who wants to go and really, really delve into this
subject will have the information they need to do it.
It has been wonderful. I am sorry that we backed you into a
timeframe where we couldn't explore as extensively with you as
we did with the first panel. I can tell you that one of the
questions I am going to want you all to be addressing in
writing is whether the credit reporting agencies can,
consistent with the FACT Act obligation, which requires
complete and accurate consumer reports, base their numbers on
maximum available credit as opposed to credit that is actually
outstanding. It would be interesting to get your reaction to
that. That was one of the questions that I asked in the earlier
panel and didn't seem to get as forthcoming an answer as I
thought I might.
We thank the members for being here, and this is an
extremely important subject. We hope that people have flocked
to their televisions to watch C-SPAN 3. And if they did, that
they learned a lot about credit scores, credit reports,
alternative data, and the pitfalls that are out there. I would
tell them that it is not only out there for credit decisions;
it is out there for insurance decisions, too, because of the
way this thing is structured now.
So, with that, I will note that the members may have
additional questions for this panel which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for members to submit written questions
to these witnesses and to place their responses in the record.
And with that, thank you all for being here. The hearing is
adjourned.
[Whereupon, at 5:15 p.m., the hearing was adjourned.]
A P P E N D I X
July 29, 2008
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