[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
AN OVERVIEW OF THE
CREDIT REPORTING SYSTEM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 10, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-97
______
U.S. GOVERNMENT PUBLISHING OFFICE
91-161 PDF WASHINGTON : 2015
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
SHELLEY MOORE CAPITO, West Virginia, Chairman
SEAN P. DUFFY, Wisconsin, Vice GREGORY W. MEEKS, New York,
Chairman Ranking Member
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
GARY G. MILLER, California RUBEEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico KEITH ELLISON, Minnesota
BILL POSEY, Florida NYDIA M. VELAAZQUEZ, New York
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana DENNY HECK, Washington
ROBERT PITTENGER, North Carolina KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
C O N T E N T S
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Page
Hearing held on:
September 10, 2014........................................... 1
Appendix:
September 10, 2014........................................... 29
WITNESSES
Wednesday, September 10, 2014
Beales, J. Howard III, Professor, Strategic Management and Public
Policy, The George Washington School of Business, The George
Washington University.......................................... 8
Ikard, John, President and Chief Executive Officer, FirstBank,
Lakewood, Colorado, on behalf of the American Bankers
Association (ABA).............................................. 10
Pratt, Stuart K., President and Chief Executive Officer, Consumer
Data Industry Association (CDIA)............................... 6
Wu, Chi Chi, Staff Attorney, National Consumer Law Center (NCLC). 12
APPENDIX
Prepared statements:
Ellison, Hon. Keith.......................................... 30
Beales, J. Howard III........................................ 33
Ikard, John.................................................. 42
Pratt, Stuart K.............................................. 52
Wu, Chi Chi.................................................. 77
Additional Material Submitted for the Record
Duffy, Hon. Sean:
Letter to Thomas Oscherwitz, Office of Supervision Policy,
Consumer Financial Protection Bureau, from Paul Zurawski,
Senior Vice President, Government Relations & Regulatory
Management, Equifax, dated January 14, 2014................ 135
Ellison, Hon. Keith:
Letter from Buddy Flake, NCTUE Board President, and Michael
Gardner, Senior Vice President, Equifax, dated September 9,
2013....................................................... 137
Report of the Policy & Economic Research Council (PERC)
entitled, ``The Credit Impacts on Low-Income Americans from
Reporting Moderately Late Utility Payments,'' dated August
2012....................................................... 139
Meeks, Hon. Gregory:
Written statement of Representative Ruben Hinojosa........... 159
Waters, Hon. Maxine:
Written statement of the Consumers Union, including a report
entitled, ``ERRORS AND GOTCHAS: How Credit Report Errors
and Unreliable Credit Scores Hurt Consumers,'' dated April
9, 2014.................................................... 162
Written statement of Demos................................... 201
Written statement of the National Consumer Reporting
Association................................................ 205
Written statement of the National Patient Advocate Foundation 214
New York Times article entitled, ``Discrepancies on Medical
Bills Can Leave a Credit Stain,'' dated May 4, 2012........ 220
Written statement of Rodney Anderson, Executive Director,
Supreme Lending, Plano, Texas.............................. 224
Westmoreland, Hon. Lynn:
Letter from Buddy Flake, NCTUE Board President, and Michael
Gardner, Senior Vice President, Equifax, dated September 9,
2013....................................................... 228
AN OVERVIEW OF THE
CREDIT REPORTING SYSTEM
----------
Wednesday, September 10, 2014
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Shelley Moore
Capito [chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Duffy, Pearce,
Posey, Fitzpatrick, Westmoreland, Luetkemeyer, Stutzman,
Pittenger, Barr, Cotton, Rothfus; Meeks, Hinojosa, McCarthy of
New York, Green, Ellison, Perlmutter, and Sinema.
Ex officio present: Representatives Hensarling and Waters.
Chairwoman Capito. The Subcommittee on Financial
Institutions and Consumer Credit will come to order. Without
objection, the Chair is authorized to declare a recess of the
subcommittee at any time.
I now recognize myself for 5 minutes for the purpose of
making an opening statement.
Since the passage of the Fair Credit Reporting Act (FCRA)
in 1970, our Nation's consumer credit markets have relied on
the data compiled in a consumer's credit report. These reports
serve as a comprehensive historical view of a consumer's
financial decisions and actions. Depending on their credit
history, a consumer's credit report can have a very real impact
on their ability to access credit. One of the foundations of
the Fair Credit Reporting Act is ensuring the accuracy of the
data that appears on a consumer credit report. I think all of
us have had experiences with our own consumer credit report.
Many consumers diligently monitor their credit reports to
ensure that inaccurate data is not on their report.
Since 2003, consumers have had the right to access a free
credit report from each of the three main credit reporting
bureaus. This access to free credit reports is a critical tool
for consumers, especially in the wake of major data breaches
that have occurred in the United States in the past year.
According to the Federal Trade Commission (FTC), nearly 20
percent of Americans have errors on their credit report.
Furthermore, 5 percent of Americans have errors that could
expose them to higher interest rates or could cause them to
lose access to consumer credit through no fault of their own.
If the consumer does identify errors on their report, they
should have those errors removed as quickly as possible.
Last year, an investigation by 60 Minutes raised
significant concerns about the ability of consumers to have
their errors removed. In one case, it took 6 years for a
consumer to rectify inaccuracies on her credit report. Today,
we will learn more about the systems that credit bureaus have
in place to resolve discrepancies on a consumer credit report.
We must work together to ensure that if consumers have
legitimate discrepancies on their credit report, they can have
them removed as quickly as possible.
Another area of concern--and I am very interested in this--
is the impact that student loan debt has on young consumers
just entering the workforce. It is estimated that the average
student loan burden for the class of 2014 is approximately
$33,000. While paying off this debt on time can certainly help
improve a student's credit profile, going into default can have
a lasting negative impact on their credit profile. We must find
ways to help students find better paying jobs, but we must also
provide them with the skills necessary to better understand the
economic impact and risks associated with taking on large
amounts of student loan debt.
I would like to thank our witnesses for joining us here
today and for providing their perspectives on these issues. I
will now yield time to the ranking member of the subcommittee,
Mr. Meeks, for the purpose of making an opening statement.
Mr. Meeks. Thank you, Madam Chairwoman, for conducting this
important hearing on credit reporting. This hearing is
especially important because credit reporting is an issue that
affects most American consumers. The strength and resilience of
our economy resides in consumer spending which has been
sustained by the most effective consumer credit system of any
nation.
However, as we note the progress of our credit reporting
system in facilitating access to credit and enabling risk-based
pricing which overall lowers the cost of credit for most
Americans, we must also vigorously pursue reforms to address
errors and inappropriate use of credit information which, in
the most pervasive cases, results in denial of opportunities in
jobs to a large segment of Americans. Therefore, there is no
question that our credit reporting system needs to be reformed.
Our nationwide consumer reporting agencies receive close to
38 million disputed items for consumers every year. Millions
more experience high frustration with the difficulty of getting
errors removed. In 2013, a congressionally mandated FTC report
noted that 40 million Americans have errors in their credit
reports and that 26 million have lower scores as a result of
such errors. And research conducted by the California Labor
Federation revealed that only 25 percent of employers
researched the credit history of job applicants in 1998. This
practice had increased to 60 percent by 2011, and there is no
scientific evidence which supports the notion that credit
information can predict job performance or risk performance in
the workplace.
Exacerbating this troubling trend are the lingering effects
of the Great Recession. The foreclosure crisis and the ensuing
job crisis resulted in millions of Americans having their
credit history impaired, many through no fault of their own.
Latino and African-American households were particularly
targeted and steered into high-cost mortgages, leading to the
highest foreclosure rates and then unemployment rates.
And the problems don't stop there. Americans who have
fallen sick, even those who have fully paid their medical debt,
are being plainly being discriminated against because of their
medical debt history. I therefore applaud Ranking Member Waters
for her leadership on this issue and for coming forward with
proposals to address these many shortcomings.
And lastly, I am also troubled by the growing student loan
burden, as you mentioned, that young Americans are facing. The
Fed, in a 2013 survey of consumer finances, revealed that the
amount that families with student debt have incurred has nearly
doubled since 2001, so we must pass some legislation that would
ensure that private education loan borrowers get the same
chance to rehabilitate their credit as Federal student
borrowers. Thank you. I yield back.
Chairwoman Capito. Thank you, Mr. Meeks. I now recognize
Mr. Fitzpatrick for 2 minutes.
Mr. Fitzpatrick. Thank you, Madam Chairwoman, and I
appreciate you holding this hearing today. Congressman Ellison
and I introduced the Credit Access and Inclusion Act last year
to help those who are termed ``credit-invisibles.'' These are
individuals who have little or no traditional credit history
and are therefore unscorable. Our bill would help nearly 100
million Americans establish a credit score or raise their
existing score by removing barriers, including payment history.
While credit-invisibles have all manner of demographic and
socioeconomic backgrounds, there is a particular impact on
those who are young and those with lower incomes. Laws on the
books already allow energy, utility, and telecom services to
report payment data to credit bureaus, but those that do
report, primarily report negative payment data, so right now,
customers' credit scores are being punished for poor behavior
but not recognized for their good behavior. The purpose of this
hearing is to explore credit reporting and its impact on
consumers and those that use credit scores. We are going to be
hearing testimony about the importance of credit scores in the
economy and how it can affect quality of life.
I look forward to that testimony, and I appreciate the
opportunity to discuss the issues and to perhaps learn how
Congress can help improve the lives of American families.
Again, I appreciate the hearing, and with that, I yield back,
Madam Chairwoman.
Chairwoman Capito. The gentleman yields back. Mr.
Perlmutter for 1 minute.
Mr. Perlmutter. Thanks, Madam Chairwoman. I want to welcome
my friend John Ikard to the Financial Services Committee today.
He is a well-respected businessman and leader in the Denver
area and throughout Colorado, and under his leadership,
FirstBank, his bank has grown steadily and now has over $13
billion in assets in over 115 locations in Colorado, Arizona,
and California.
FirstBank has grown because of its financial stability and
its strong commitment to convenience, friendly and intelligent
customer service, and loyalty to its employees. John has been
with FirstBank for over 28 years and has been a great steward
of the bank. John now serves as the chairman of the American
Bankers Association, and he sits on the boards of the
Children's Hospital Colorado Foundation, the Denver Foundation,
and the Federal Reserve Bank of Kansas City. And I thank him
for being here today. I guess my only concern as it applies to
reporting, credit reporting, is it is incumbent on anybody to
get it right because this is the kind of situation where you
are guilty until proven innocent, and given that situation, you
have to get the reporting right the first time. With that, I
yield back.
Chairwoman Capito. Thank you. Mr. Duffy for 2 minutes.
Mr. Duffy. Thank you, Chairwoman Capito, for holding this
important hearing. Credit reports are valuable tools to both
consumer and lending institutions that can also be used to
determine job placement and rental agreements. As America
continues to move away from the community model where everyone
knows each other, like when you buy your first car from the
dealership that your best friend's dad owns or you get your
first loan from your aunt who is a mortgage broker, and if you
miss your payment, your mom will wring your neck, to a more
standardized means of extending credit, these credit reports
become your character assessment. That is why it is essential
that they contain factual, accurate information and that they
cannot be manipulated.
My bigger concern, however, is whether the proper
protections are in place for consumers' data that is being
collected. I am happy that we haven't heard of a data breach
yet at one of our credit reporting agencies, but we also didn't
hear of a data breach at Target until it actually happened, so
I look forward to hearing from the witnesses today on how they
are protecting consumers in their data collecting practices and
credit reporting efforts, and I appreciate all of your time
today. With that, Madam Chairwoman, I yield back.
Chairwoman Capito. Thank you. Mr. Green for 1 minute.
Mr. Green. Thank you, Madam Chairwoman. I thank you and the
ranking member for this hearing. I am also grateful to the
ranking member of the full Financial Services Committee, Ms.
Waters, for the outstanding job that she has done in addressing
this issue. It is indeed imperative that we look at this
situation with student loans. We have a good many persons who
unfortunately have loans at a time when they cannot acquire
jobs, and those who do have jobs cannot make necessary
payments. I think it is a good thing to look at the student
loans. I am also pleased that we are going to look into the
question of jobs being predicated upon a credit score. I, too,
have difficulty making the connection between the job and the
credit score.
And finally, we have language that passed the House to
allow HUD to develop an alternative credit scoring system. I
want to talk more about that at a later time. Thank you, Madam
Chairwoman, and I will yield back.
Chairwoman Capito. Thank you. Mr. Pittenger for 2 minutes.
Mr. Pittenger. Thank you, Madam Chairwoman, for having this
hearing and allowing me to make an opening statement. We are
here today to examine the credit reporting system and gain a
better understanding of how this system impacts lenders,
consumers, and the reporting agencies themselves. With recent
changes made in the Dodd-Frank Act, it is important that we
hear from those who participate directly within the system and
understand the challenges that they face facilitating access to
credit. Given the amount of authority that the Consumer
Financial Protection Bureau now has over our credit reporting
system, I am interested to hear from our panel today on how
this layer of regulation has affected reporting agencies and
all of those who participate in this system.
As credit reports gain an increasingly significant role in
the lives of the consumers, we must ensure that there are
systems that provide accurate and effective reporting on their
behalf. I do thank the panel for their participation and their
duty today, and I yield back my time. Thank you.
Chairwoman Capito. Thank you. Mr. Ellison for 1\1/2\
minutes.
Mr. Ellison. Thank you, Madam Chairwoman. I appreciate the
time, and I will be quick. For those who are looking to improve
our financial security in our country for our families and help
small businesses start up and expand and help grow our economy,
today's topic of credit reporting is vitally important. Dr.
Beales, I think, said it well when he said, ``Well-functioning
credit markets are the essential component of economic
prosperity.'' I quite agree, and I am eager to see this
Congress take action to improve our system by making it more
inclusive.
More than 50 million Americans have no credit score, are
just credit-invisible. Another 50 million have scores that are
lower than they should be because they do not have enough lines
of debt to generate a score. The solution is simple. Mr.
Fitzpatrick and I, in a bipartisan way, have a bill called the
Credit Access and Inclusion Act, and this bill clarifies that
current law does not prohibit utility and telecom firms from
reporting their customers' on-time payments. The bill has 12
cosponsors, and we are looking for more, including a lot of
people on this committee. Including alternative data such as
utility, telecom, and rent helps consumers, lenders, and small
businesses and the economy, and it is time for us to make this
no-cost change to provide greater access to affordable credit
for millions of Americans. I yield back. Thank you.
Chairwoman Capito. The gentleman yields back. I would now
like to recognize the ranking member of the full Financial
Services Committee, Ms. Waters, for 2\1/2\ minutes for an
opening statement.
Ms. Waters. Thank you very much, Chairwoman Capito. I would
like to thank you and Chairman Hensarling for granting my
request for this important meeting. Our Nation's credit
reporting system impacts almost all Americans and their
families. No longer are credit reports used exclusively by
lenders in making credit decisions. Increasingly, they are used
to determine whether a consumer is qualified to get a job, rent
a home, buy a car, or obtain auto or homeowners insurance, but
despite their growing significance, credit reports continue to
contain inaccurate information. Some estimate serious errors
affect up to 25 percent of reports. The Federal Trade
Commission estimates 1 in 5, or roughly 40 million consumers
have had an error on one of their credit reports, with 10
million facing increased costs as a result.
Sadly, the burden is too often placed on the consumers to
prove information on their reports as false rather than on the
consumer reporting agencies and furnishers. Errors on credit
reports are very difficult for consumers to dispute, and it is
even harder to have these inaccuracies actually removed from
reports, causing heartache and pain for millions across the
country. It is time to change that paradigm and ensure that a
bad credit score will no longer haunt a consumer for years on
end.
That is why this morning I released a draft proposal that
makes comprehensive and long overdue reforms that will protect
consumers and bring much-needed accountability to the credit
reporting system. My proposal would provide relief to millions
of borrowers who were victimized by predatory mortgage lenders
and servicers by removing adverse information about residential
loans that are found to be unfair, deceptive, abusive,
fraudulent, or illegal. It stops punishing consumers who pay
off their debts by removing paid or settled debt from credit
reports. It ends the unreasonably long time period that most
adverse information can remain on credit reports by shortening
such periods by 3 years.
It provides credit rehabilitation to distressed private
education loan borrowers by giving them a chance to repair
their credit, and it gives consumers the tools to truly verify
the accuracy and completeness of their credit reports by
requiring furnishers to maintain records for as long as the
information remains on a person's credit report.
Finally, the draft proposal also restricts the use of
credit reports for employment purposes. My proposal attempts to
meet our obligations to ensure that consumers who have fallen
victim or fallen on hard times are not deprived of the chance
to achieve their American dream. I look forward to hearing
feedback from my colleagues and advocates on this measure.
Thank you, Madam Chairwoman. I yield back the balance of my
time.
Chairwoman Capito. Thank you. I would like to thank the
ranking member, and we are now ready to hear from our
panelists. I do want to make Members and our witnesses aware
that we are expecting two series of votes. It is my intent to
finish this hearing before the second series would begin, so we
may have to take a timeout here. I appreciate everybody's
patience.
We welcome our panel of distinguished witnesses. Each of
you will be recognized for 5 minutes to give an oral
presentation of your testimony. And without objection, each of
your written statements will be made a part of the record.
We will begin with Mr. Stuart Pratt, who is president and
chief executive officer of the Consumer Data Industry
Association. Welcome. And I would remind the witnesses that you
need to pull the microphones close to your mouth so we can hear
you. Some have had trouble picking up the sound. Thank you.
STATEMENT OF STUART K. PRATT, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CONSUMER DATA INDUSTRY ASSOCIATION (CDIA)
Mr. Pratt. Chairwoman Capito, Ranking Member Meeks, thank
you for this opportunity to appear before you today. I am
Stuart Pratt with the Consumer Data Industry Association. So,
today, let me just summarize some key points that are drawn
from our written testimony. Thank you for including our full
testimony in the record. And first of all, just maybe some
basics about the industry.
A competitive private sector full-file nationwide credit
reporting industry empowers economic opportunity for consumers
and for the Nation as a whole. I think it was described very
well that a credit report really serves as an advocate. It is a
mechanism for a lender who doesn't know you to know you. It is
a mechanism for that lender to approve a loan and to approve it
at a price that is affordable and that makes sense for you as
the consumer and makes sense for them as the lending
institution.
Our members are the leading--decision sciences companies
around the world, we are the leading world's best credit
reporting system around the world, 200 million credit reports
per database, 3 billion updates a month. 98 percent of the
credit reports do not contain serious errors and yet our
members are working to build on that success to push that
percentage down even further. 95 percent of consumers that we
have polled express satisfaction with the consumer relations
process. That leaves us with 5 percent, and that is our
homework, to continue to push that number down as we go
forward.
Being best in class, however, hasn't caused our members to
rest on their laurels. CDIA members are consistently proactive.
They are ahead of the curve and ahead of law. For example,
standards established even as far back as the 1960s, and again
in the 1990s, preceded law, preceded amendments to law, and in
fact, framed new laws and regulations which regulate our
industry even today.
Data standards which materially contribute to the quality
of data were pioneered by our members, rolled out voluntarily
to more than 10,000 data furnishers, and it is a success story,
and it is a story that shows our partnership with the lending
community in terms of ensuring that consumer information is
accurate, precise, and complete in credit reports.
Online dispute exchanges were stood up by our members as
well. Fraud alerts and fraud alert exchanges were stood up as
well. All of this with the intention of protecting consumers,
serving consumers, simplifying the process for consumers, and
ensuring that the credit reporting industry is accessible to
consumers.
There is more work to be done. There are some actions which
we think Congress could take to help consumers and in some
cases help us help consumers as well. Let me just walk through
a couple of those, and then we have provided additional detail
in our testimony. First of all, we urge Congress to exempt
financial literacy products which help consumers learn about
and protect their credit standing from the Credit Repair
Organizations Act, often know as CROA. The Act wasn't intended
to cover these products because they didn't even exist at the
time of the enactment of CROA, which ironically was Title 2 of
the 1996 amendments to the Fair Credit Reporting Act. No State
AT has attempted to apply CROA to our members products, nor has
the Federal Trade Commission. It is unfair to consumers that
they cannot have access to an even more robust set of products
in the marketplace because of the risks posed by class action
lawsuits and opportunistic private attorneys. We urge action on
CROA reform, and we are happy to talk about that subsequent to
this hearing.
Class actions are threatening our small and medium-sized
enterprise members. Some are losing their errors and omissions
insurance coverage completely. For them, it is almost an
existential risk. E&O providers are stepping back from
providing coverage even through trade associations. Our own E&O
program for small businesses, though 95 percent of our members
in that program have not had a claim in the last 2 years, 80
percent in the last 4 years, they are going to pay 50 percent
higher premiums next year as a result of litigation risks as
perceived by the insurance industry.
We think reform in this area is important. We also urge
Congress to act now. You don't even have to vote. Urge the
financial housing finance authority to work with their GSEs and
open the door for consumers through the use of automated
alternative data sets and to credit score competition. There is
no reason for secondary markets to impede the choices of the
primary market when it comes to which score is best or which
combination of predicted data should be used.
Ultimately, consumers who are new immigrants, unbanked and
underbanked, are the beneficiaries. Even consumers who may have
adjusted their use of credit due to the Great Recession could
benefit from the use of the bills that they pay in everyday
life and the assets they own. We really believe this is now the
time to act. Let's push forward. Let's open that door today.
Finally, we believe that providing our members with access
to the SSA's database would allow us to do additional cross-
matching, validating of identifying information, and ensuring
that the right information gets into the right file at the
right time. We share those goals with all of you. We look
forward to our dialogue today. Thank you for this opportunity
to testify.
[The prepared statement of Mr. Pratt can be found on page
52 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Mr. J. Howard Beales, professor of
strategic management and public policy at George Washington
University. Welcome.
STATEMENT OF J. HOWARD BEALES III, PROFESSOR, STRATEGIC
MANAGEMENT AND PUBLIC POLICY, THE GEORGE WASHINGTON SCHOOL OF
BUSINESS, THE GEORGE WASHINGTON UNIVERSITY
Mr. Beales. Chairwoman Capito, Ranking Member Meeks, and
members of the subcommittee, thank you very much for the
opportunity to be here today. I want to make five key points.
First, credit reporting is vital. The widespread credit
availability that lubricates consumer spending and powers the
American economy depends on an efficient system for credit
reporting. Lenders can't economically make loans without
understanding the risks they face, and credit reporting is an
essential tool for objective risk assessments.
Efficient credit reporting makes possible the miracle of
instant credit which enables the consumer to visit a car dealer
and arrange financing for the transaction probably in less time
than it takes to negotiate the price. Such arrangements offer
significant benefits to both consumers and sellers, and they
facilitate economic activity.
Our credit reporting system also facilitates competition
among lenders to the benefit of consumers. Lenders can readily
identify consumers who deserve a better deal and offer credit
on terms that lenders find profitable and consumers find more
attractive. One study described credit report data as the jet
fuel for an acceleration in competition that led to declines in
annual fees and interest rates on credit cards as well as the
introduction of new card features such as rewards.
Efficient credit reporting is also important to small
businesses that are important job creators. The adoption of
commercial scoring systems based on credit report data for
evaluating small business loans led to an expanded volume of
loans and a net increase in lending to relatively risky
borrowers.
Second, risk-based pricing benefits consumers. A
fundamental principle of economic efficiency requires that
those who create cost must pay them. If not, they will create
excessive cost. That is why it is both equitable and efficient
that teenage males pay higher auto insurance premiums than
teenage females or older men. They are higher-risk drivers.
They should and do pay higher insurance premiums. The same
principles apply in credit markets. There is no reason that
good credit risk should be expected to subsidize the choices
made by those who are less likely to repay their debts. Loans
made based on objective risk assessments reduce the risk of
default by 20 to 30 percent in some studies compared to using
judgment to decide which consumers deserve a loan. Moreover,
such judgmental decisions often rely on stereotypes about which
borrowers are most likely to repay. They are, in short,
discriminatory.
Risk-based pricing based on credit scores offers two
important benefits. First, responsible borrowers, undoubtedly
the vast majority, pay less for credit, as much as 8 percentage
points less. Second, risk-based pricing substantially expanded
credit availability. In the one-size-fits-all world of
standardized plain vanilla credit products, the lender's only
choice was yes or no. For marginal borrowers, the answer was
often no.
In 1970, only 2 percent of the lowest income quintile had
any credit cards. By 1998, after the introduction of risk-based
pricing, the percentage had increased to 28 percent.
Third, more information in this system leads to better
performance. Information in the credit reporting system is
provided voluntarily by some 30,000 data furnishers in return
for access to the credit report information. Indeed, an
important dimension of competition for business among consumer
reporting agencies is the breadth and robustness of the
information about consumers in their database. Some 30 to 50
million Americans do not have sufficient credit information in
their files to qualify for affordable mainstream credit.
Instead, they are left to rely on high-cost credit sources such
as overdraft protections, short-term loans, or pawn shops.
Studies have shown that adding positive payment information
from utilities and telecommunications providers in addition to
the negative information that many now report can improve the
credit scores of those within files that otherwise do not have
sufficient information to support a reliable credit score. Such
additional information can help to further reduce the
differences in the accessibility of credit on reasonable terms.
Fourth, accuracy and completeness are both important.
Credit reporting agencies face a difficult task of matching
incoming information to the right file when identifying
information is incomplete, as it often is. It is obviously a
mistake to include information in my file if it is not in fact
about me, but it is also an error to leave out information that
should be in my file, simply because there is some ambiguity
about the match. Such errors of omission reduce the value of
credit reports to lenders because a report that does not
include all of the relevant information is less likely to be
predictive of future behavior.
To be sure, ongoing efforts to improve accuracy and
completeness are essential, and there are significant
competitive pressures on consumer reporting agencies to do so,
but all such efforts must recognize the voluntary nature of the
reporting system. Regulatory requirements that require
participation by furnishers may well be worse than the disease
they are trying to cure.
Finally, different risks are different. The best prediction
of risk depends on the particular risk involved. Different
information may be especially valuable for certain kinds of
risks. That is why there are specialized agencies that
specialize, for example, in small dollar products, otherwise
known as payday loans, because different information is
predictive, different populations lead to different risk
analytics. There are some real gains to specialization in the
particular risks that have happened in the market. Thank you
again for the opportunity to testify today, and I look forward
to your questions.
[The prepared statement of Mr. Beales can be found on page
33 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Mr. John A. Ikard, president and chief
executive officer, FirstBank, on behalf of the American Bankers
Association. Welcome.
STATEMENT OF JOHN IKARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
FIRSTBANK, LAKEWOOD, COLORADO, ON BEHALF OF THE AMERICAN
BANKERS ASSOCIATION (ABA)
Mr. Ikard. Chairwoman Capito, Ranking Member Meeks, and
members of the subcommittee, my name is John Ikard, and I am
president and CEO of FirstBank. We are based in Lakewood,
Colorado. I am also the chair-elect of the American Bankers
Association. I appreciate the opportunity to be here to
represent the ABA and discuss the importance of accurate credit
reporting and the banking industry's commitment to it. The
availability of consistent accurate credit reports provides
tremendous value to consumers and banks alike.
For consumers, credit reports provide a history of the
performance on obligations which enables them to shop around
for credit from any lender. Without these reports, consumers
would have to provide extensive documentation, lender by
lender, in order to receive credit. The credit report opened up
options for consumers and ensures that they can shop around for
the best loan or account that serves their needs. The greater
efficiency in competition means better deals and lower prices
for consumers.
For lenders, credit reports allow them to evaluate a
borrower's creditworthiness even if they have not previously
dealt with the customer. Banks benefit because an accurate
understanding of a credit applicant's history means they are
better able to predict who is likely to repay a loan. This
allows banks to make a better decision in order to grant credit
and at what price.
Accuracy within the credit reports is critical, of course,
to ensure that customers are evaluated based on their history
of their individual performance. Inaccurate reports undermine
the value of the system and could prevent a qualified borrower
from getting the credit they deserve. A report that is missing
negative information also makes a borrower eligible for credit
that they are ill-prepared to handle. Thus, accurate credit
reports ensure that credit is extended to deserving borrowers.
Because banks have a vested interest in ensuring that
accurate credit histories are available, they invest heavily in
systems and processes to ensure they can provide accurate
credit data. Although the reporting system is very accurate,
there is still the possibility of errors. That is why it is
important to have a clear process for consumers to dispute
their credit reports if they feel there are inaccuracies. There
are multiple avenues consumers can use to dispute their credit
reports. This dispute process is quick and effective with the
average dispute resolved in about 14 days, at a satisfaction
rate of over 95 percent.
Congress should be aware that this dispute process can be
taken advantage of in an attempt to eliminate accurate but
negative marks on an individual's credit history. For example,
credit report scams often charge a large up-front fee and
mislead the consumer into believing that accurate but negative
information can easily be removed. These services operate by
repeatedly sending disputes alleging the same issues in the
hope that the data supplier will drop the ball and fail to
respond within the mandated window, thereby triggering the
expungement of the contested data.
To give you an example, at my bank, our main dispute
handler handles about 100 to 150 disputes a month, many of
which are repeated claims. Of the disputes we receive, less
than 1 percent call for any type of corrective action. While
amendments to the Fair Credit Reporting Act took a step forward
in stopping this kind of abuse, that law should go further to
allow the ability to truncate repetitive unfunded disputes.
This would do nothing to prevent customers from pursuing
legitimate claims and would save money from being wasted on
these false claims.
In summary, credit reports are a public good, providing
real tangible benefits to consumers and lenders alike. Banks
invest in consumer resources to ensure that credit reporting is
consistent and is accurate. When disputes arise, banks
investigate them promptly and thoroughly. The dispute process,
while effective, is susceptible to abuses by those who want to
misrepresent past consumer credit experiences. Such abuses
undermine the value provided by credit reports and hurt all
borrowers. Thank you.
[The prepared statement of Mr. Ikard can be found on page
42 of the appendix.]
Chairwoman Capito. Thank you.
And our final witness is Ms. Chi Chi Wu, staff attorney at
the National Consumer Law Center. Welcome.
STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL CONSUMER LAW
CENTER (NCLC)
Ms. Wu. Thank you. Chairwoman Capito, Ranking Member Meeks,
and members of the subcommittee, thank you for inviting me here
today and for holding this hearing on the American credit
reporting system. Credit reports play a critical role in the
economic lives of Americans. They are the gatekeeper for
affordable credit for insurance, an apartment, and sometimes,
unfortunately, even a job. As Congress stated when it passed
the Fair Credit Reporting Act (FCRA), the banking system is
dependent upon fair and accurate credit reporting. Yet, the
credit reporting system in this country is neither fair nor
completely accurate.
One of the most outrageous flaws is the negative marks from
medical debts on the credit reports of millions of Americans.
This is a huge issue. Medical debt makes up over half of the
items on credit reports for debt collection, and one study
estimated up to 41 million Americans could be suffering from
this type of credit damage. Such negative marks are unfair
because medical debt is often the result of insurance disputes
or billing errors. A May 2014 study by the Consumer Financial
Protection Bureau (CFPB) found that medical debt unfairly
penalizes a credit score by up to 10 points, and for paid-off
medical debt up to 22 points.
Now, there have been some changes. Last month, FICO
announced that it would no longer consider paid collection
items, both medical and non-medical, and VantageScore already
had made a similar change last year. In addition, FICO has said
it will give less weight to unpaid medical debts, potentially
helping consumers up to 25 points. However, these changes will
not completely eliminate the negative impact of medical debt on
credit reports. They are voluntary, which means they can be
reversed at any time. More importantly, they won't benefit
mortgage applicants because the changes only affect
VantageScore and FICO's latest scoring model, FICO 09. And
apparently neither of these models is used by Fannie Mae or
Freddie Mac, the mortgage giants.
Finally, they won't help job applicants with medical debt
because employers generally don't use credit scores to evaluate
applicants. They review the full report and so they will see
the medical debt collection items. Thus, legislation that would
remove paid or settled medical debts from credit reports is the
effective solution to this problem.
Regarding the use of credit reports by employers, we again
urge Congress to ban this practice. It creates a Catch-22. Job
loss prevents workers from paying their bills, and the
resulting damage to a credit report prevents them from getting
a job. Yet, there is no evidence that credit history can
predict job performance. Its use in hiring discriminates
against African-American and Latino applicants. Despite these
problems, about half of employers use credit reports to screen
applicants. A Demos survey reported that 1 in 10 unemployed
workers had been informed that they would not be hired for a
job because of information in their credit report. Another
survey reported that employers are examining credit reports for
student loan debts and that two-thirds of surveyed employers
had little to no interest in job applicants with student loan
debts over $50,000.
Another problem with the credit reporting system is the
high level of errors. As you heard, the FTC found that 21
percent of consumers had verified errors in their credit
reports, 13 percent had errors that affected their credit
scores, and 5 percent had errors serious enough to be denied
credit or to be forced to pay more for credit. That 5 percent
is unacceptable. It means 10 million Americans have seriously
damaging errors in their credit reports. Yet, there are simple
commonsense measures that could reduce this error rate such as
using all of the digits in the Social Security number to match
information from a creditor to a consumer's file.
Now, one of the most important safeguards for accuracy is
the dispute system under the FCRA, yet the credit bureaus
flagrantly violate their obligations to conduct a reasonable
investigation when there is a dispute. Instead of conducting
real investigations, they do nothing more than forward the
dispute to the creditor or the provider of the information and
then blindly accept or parrot whatever the information provider
responds with, no matter how good the consumer's evidence. Now,
maybe in some cases, like Mr. Ikard's bank, the information
provider does do a good job in handling the dispute, but in
some cases, it is not true. In 30 to 40 percent of cases, the
information provider is a debt collector whose main goal is to
get paid, not to get it right, or it could be a subprime auto
lender like First Investors Financial Group against which the
CFPB took enforcement action last month for systematic
violations that harmed thousands of consumers.
So the credit bureau's automatic deference to debt
collectors and creditors is outrageous. It is like a judge who
finds in favor of the defendant in every single lawsuit. Yet,
the industry is now saying it wants to be held less accountable
by private enforcement under the FCRA for these errors and for
its failure to conduct reasonable investigation.
Beyond errors and disputes, the credit reporting systems
need reform to help the millions of consumers who lost their
jobs or their homes during the Great Recession. Foreclosures
were often not due to irresponsible borrowing but abuse by
lenders and mortgage servicers. Defaults due to job loss or bad
luck say nothing about a consumer's responsibility in handling
credit, yet these black marks last for 7 years, or 10 years in
the case of bankruptcies, shutting these consumers out of
affordable credit, insurance, jobs, and apartments. Creating a
class of consumers that are shut out of economic necessities
creates a drag on our Nation's economy. For these reasons and
others, the credit reporting system in the United States is in
need of substantial reform. The CFPB has made substantial
progress, which is great, given it has only had authority to
supervise this industry for about 2 years, but congressional
action is necessary.
I thank you for the opportunity to testify and look forward
to your questions.
[The prepared statement of Ms. Wu can be found on page 77
of the appendix.]
Chairwoman Capito. Thank you.
I want to thank all the witnesses, and I will now recognize
myself for 5 minutes for questions.
All of you addressed this issue of inaccuracies in credit
reports. I can attest to having one on mine, so I have tried to
get that undone, and sometimes it was difficult. So I would
like to ask you, Mr. Pratt, what steps are available to
consumers to remove inaccurate data from their report? How long
does it take? Mr. Ikard said 20 days, but is that what is
actually occurring, and can you tell me what your industry is
doing to help that?
Mr. Pratt. Thank you for the opportunity to do that. Our
members have done a couple of different things, even some steps
just recently to try to ensure that the system works well for
everyone. All of them have quality assurance processes, all of
them are looking for monitoring and making sure that employees
are well-trained. In fact, I will tell you that the CDIA has
launched in partnership with our largest corporate members an
entirely new training platform that will be used and that
matches up with some of the examination experience that we are
getting out of the CFPB as well, so that is a commitment we
have made to further the training of employee bases to make
sure that they are well-prepared to handle the needs that
consumers have.
Mr. Ikard mentions the e-OSCAR system. The e-OSCAR system
does allow us to resolve disputes. Going a long way back,
everything was processed by mail. I am old enough to remember
that. Not everybody is these days, but I am, and consumers
would have to dispute credit bureau by credit bureau. The e-
OSCAR system solved that problem. It is a one-stop shop. You
dispute one time, it is distributed to the lender, the lender
responds not just simply to the credit bureau that received the
dispute but it responds to other credit bureaus and the data is
corrected across-the-board one time, single stop. Fourteen days
is accurate. On average, a dispute is processed in 14 days
rather than the full 30 days that law allows. Law does--
Chairwoman Capito. Let me stop you there.
Mr. Pratt. Sure.
Chairwoman Capito. Let's say that after 14 days, the
consumer is not satisfied with the result, still believes that
it is accurate data. There is a grievance, I am sure, a
secondary appeal?
Mr. Pratt. Normally a consumer will--they will normally
call. Let's say they went online. They submitted their dispute
online, ground one, and by the way, that was another step that
the companies took voluntarily, drop-down menus, mechanisms so
that you could look at your credit report online, dispute
online, click on the dispute, submit it and get a return, but
let's say you are happy with two out of the three results but
not the third. You get another disclosure that tells you these
are the results, this is what you--and this is by law. This is
what you have, this is what we think is correct, call the toll-
free number if you have a question, and this is where the
consumer will then end up with a customer service person to
then work through in more detail what is it that you think is
wrong with this other report.
Chairwoman Capito. Out of the grievances that are filed, do
you have the data for how many have to go to the secondary, to
the toll-free line and all that, what percent is it?
Mr. Pratt. It has been awhile, but between 15 and--around
15 percent, I think, was the number that I had quite a while
ago, so most are being resolved the first time through.
One of the challenges is that when consumers call again, it
doesn't mean that they are--they may have all the right
intentions in the world, but they may have misunderstood
something. An example would be in divorce. We will have
consumers call and say, the judge made my ex-spouse pay for
that loan. That is her responsibility or his responsibility.
Actually, judges in divorce courts can't do that. They can't
abrogate a loan and sever the contract between a joint loan.
So, in other words, the lender still has a claim against both
of those consumers, and so the consumer's credit report will
still reflect that.
So that is just a matter of law, but that is the kind of
confusion. The consumer may not recognize that a retailer with
whom they chose to do business and open up a credit card
relationship, that there was a bank behind that relationship,
and on the credit report, it may be the bank that is listed,
not the name of the retailer, and so the consumer says, I don't
think I ever opened up that account, that is wrong. On the
phone, that is normally where that kind of thing is resolved.
``Did you open up an account recently with a retailer?'' ``Yes,
I did.'' ``Well, this is the bank that works for that
retailer.'' ``Ah. Okay.''
Chairwoman Capito. I am going to stop you here because I
want to get into the student loan issue with Mr. Beales. A
student loan--I talked about it in my report. Obviously, there
is a lot of national concern about increasing student debt and
then what kind of impact that is going to have on the long life
of a student, in the positive or negative. If you pay off a
student loan, does it come off your credit report? What kinds
of things are positive or negative about a student loan? I only
have 25 seconds left, so it is kind of a quick question.
Mr. Beales. Like any loan, a student loan is an opportunity
to build a history of responsible use of credit. If you make
payments on time, that experience, like any other credit
account, potentially increases your score and increases your
attractiveness to lenders. People who have too much debt,
whether it is student loan debt or any other kind of debt, and
can't pay it, that is obviously going to be bad for your score.
Students have had--certainly the amount of debt has increased,
and to the extent that it is more than students can handle,
that reduces their scores.
Chairwoman Capito. Right. I am going to stop you here
because I am sure we are going to have more student loan
discussion. I have exceeded my time, so I am going to yield to
Mr. Meeks.
Mr. Meeks. Thank you, Madam Chairwoman. Let me just start
with Ms. Wu. Ms. Wu, you wrote in a report that to solve the
credit conundrum, we need a system that can distinguish between
consumers who are truly irresponsible and those who simply fell
on hard times.
What recommendations do you have to ensure that our credit
reporting system makes this distinction, and to what extent is
it possible to do so?
Ms. Wu. Thank you for the question, Congressman Meeks. I
think one of the simplest measures in terms of trying to
address this problem is the proposal in Congresswoman Waters'
bill to shorten the amount of time that negative information
stays on a credit report from 7 years to 4 years. There is
nothing magic about the 7-year time limit in the Fair Credit
Reporting Act. There are other countries with much shorter time
periods. In Sweden, it is 3 years. In Germany, it is 4 years,
and the last I heard, the German economy is doing fairly well.
So, one thing that could help consumers is just to shorten this
time period.
Another thing is to exclude information such as medical
debts and foreclosures as a result of abuse by lenders and
servicers which Congresswoman Waters' bill also does.
Mr. Meeks. Mr. Pratt, do you have any objection to reducing
the time from 7 years to 4 years? Is there a magic formula for
you with that 7 years?
Mr. Pratt. Thank you. We do, and for some reasons that I--
and this is the beginning, probably not the end of a dialogue,
and it will extend beyond the borders of this hearing today,
but just a little bit of background: 82 percent of credit
reporting systems around the world retain data for a period of
time longer than the proposal to reduce the current 7 years to
4 years, so systems around the world are generally designed for
more data, not less.
Systems around the world are also actually expanding data,
not reducing data. For example, Australia and Brazil went to
full-file positive systems within the last few years to adopt a
system that looks very similar to ours. So, our system is often
viewed as the best-in-class system that should be emulated by
others. By the way, in Germany, if you don't pay your bill,
that stays on your credit report forever, so in other words, it
is not--
Mr. Meeks. I am just wondering, why is 7 years--
Mr. Pratt. I can't go back to 1970 and go into Bill
Proxmire's head and wonder how he came up with the 7 years at
that time, but I can tell you that at this point, here is what
I think is most important. We need data before the Great
Recession, we need data coming out of the Great Recession, and
we need data now extending from the Great Recession so that if
we are going to build risk management tools, we see the same
data cross all those tranches. If we change it now, we are
erasing data that is really important to how we manage risk and
how we make better lending decisions in the future.
Mr. Meeks. Let me take my time back, because I don't see a
magic 7-year formula or 4 years, especially with helping
consumers. But let me ask Mr. Ikard a question.
Mr. Ikard. Yes, sir.
Mr. Meeks. Really quick, going back to what Ms. Wu was
talking about, that we need to distinguish between consumers
who are truly irresponsible and those who simply fell on hard
times, I understand that--and sometimes we have--when we were
talking about, especially with small banks, that they say, and
I think you found that they found that credit officers who know
of an individual's personal circumstances provide more accurate
and detailed information for credit reporting purposes. And
that is why I am told by some members, especially small banks,
they say, well, we don't want to be restricted in this sphere.
We want some flexibility so we can make a determination as to
whether a person truly will pay this back. Do you find that to
be true?
Mr. Ikard. Absolutely. I think the credit report is just
one part of the underwriting process. The key is to sit down
with the customer and hear their story. Some customers may have
bad credit because it has been a lifelong pattern of just
acting irresponsibly. Some might have had a catastrophic event
at some point in their life, and I think it is up to us,
incumbent on us to say, okay, let's look at this person in
totality, what is their income potential, what has been their
past behavior. If this is one catastrophic event that is out of
the ordinary, I think you should have an obligation to set that
aside; this person is still a good credit risk.
So I think that as a banker, all bankers, we have the
obligation to sit down with our customers and get the complete
story, not just run somebody out the door because of a bad
credit report. You have an obligation to sit down and talk to
them about their complete financial situation.
Mr. Meeks. Now, is there a way, do you think--and I will
direct this to Mr. Ikard or Ms. Wu--that we could have a system
where you can truly determine whether someone is just not
paying, they are a bad credit risk, they just won't pay their
debt, as opposed to someone who has fallen on hard
circumstances, they were paying all of their debt, and all of a
sudden, because of the economy or because of their loss of
jobs, now they are not paying, so that they are not stuck for 7
years or 10 years once they get a job again?
Mr. Ikard. Sure. I think the way you look at that is based
on their pattern. Just talk to the customer. If they had a
history of making all their payments as agreed and all of a
sudden they have one blip, that is obviously not their normal
operating position. They have obviously had some catastrophic
event take place. Let's take a look. Ask them what happened,
explain it to me, tell me your story. If it makes sense, let's
move on. It is interesting, we have banks down in Arizona, and
Arizona had--
Mr. Duffy. Mr. Ikard, if I could just--
Mr. Ikard. --a huge problem with real estate, and what
happened was is that we--
Mr. Duffy [presiding]. Mr. Ikard, I am going to cut you
off. The gentleman's time has expired. I am sure you will get
more questions on that and have further opportunity to answer
those questions. The Chair now recognizes himself for 5
minutes.
The Fair Credit Reporting Act requires consumer reporting
agencies to provide credit reports to child support agencies to
ascertain the ability of a father or mother's ability to pay
child support, and it is required to give 10 days notice to
that mother or father before their credit report is pulled. Mr.
Pratt, do you believe that there are any issues with that 10-
day notice requirement?
Mr. Pratt. That is probably a better question on the side
of the child support enforcement agencies themselves. My
understanding is some of them have concerns with that 10-day
period because it might be the heads-up that some noncustodial
parent needs to push and move some assets around to make sure
that those don't show up and they either pay less or they don't
pay child support that they might otherwise owe. I think that
is the concern.
That was a set of language that was pushed into the FCRA
2003 maybe.
Mr. Duffy. I am all about notice and making sure people
understand when their credit is being pulled, but listen, I am
going to look out for kids and make sure that children are
being treated fairly, and if someone has a 10-day notice, they
can liquidate assets, is that fair to say, or max out credit
cords that could have an impact on their credit score?
Mr. Pratt. Clearly, that is going to have an impact on the
financial profile of the consumer who is being evaluated in
terms of the ability to then make child support payments.
Mr. Duffy. And I believe in California there was a case
that I found where the child support enforcement process was
considered debt settlement and that 10-day notice wasn't
required, but that is only for California. Do you think that
the CFPB could or should give new guidance and extend it not
just to California, but around the rest of the country?
Mr. Pratt. I guess first, I have to go look at the
California law to see what that looks like. I think some
dialogue post-hearing to figure this out, to make sure we
understand in detail what it is that you think ought to be done
and what it is that we think current law permits us to do would
be a good dialogue to have.
Mr. Duffy. I would ask for unanimous consent to insert a
letter into the record from one of the consumer reporting
agencies asking that the CFPB actually back this guidance
change. Without objection, it is so ordered.
I guess maybe I would ask the panel, what steps are taken
to protect the millions of bits of information that are
collected in regard to people's credit history and personal
information?
Mr. Pratt. I probably should start since we are the
industry. CDIA's members, even before the enactment of the
Gramm-Leach-Bliley Act, understood their obligation to secure
the information and make sure that it was protected. Our
members are--have the same risks posed for them that you would
see with any U.S. business that has a valuable data set. We
employ entire data security teams and audit processes, and I
can tell you that the audit processes in the oversight includes
on-site inspections of downstream users and on-site inspections
of resellers in the process. I have had resellers sometimes
complain about how robust those on-site inspections can be. We
have IP address monitoring systems to make sure we understand
when a company is in the normal cycle.
So, for example, if we have a bank in Colorado that
normally orders credit reports during its normal business day,
but that bank code seems to now be tied to orders that are
showing up at 3 a.m., and oh, by the way, it is a Russian IP
address and it is not one that is U.S.-based, those are the
kinds of red flags that we are going to use to shut down that
access, go back to that bank, and talk about it and find out
what is going on.
I can tell you that we have gone to some very small users.
One small financial institution had the codes for accessing the
credit bureau's systems on a bulletin board. We suggested that
wasn't a great idea. That is the kind of outreach we have on a
regular basis, and we have remote learning information security
training that we make available to customers as well as our
members.
Mr. Duffy. In regard to the information that you collect,
do you collect information on--just to get a good read on
someone's credit history--do you collect information on their
religion?
Mr. Pratt. No.
Mr. Duffy. How about the number of children they have?
Mr. Pratt. No.
Mr. Duffy. How about the ages of their children?
Mr. Pratt. No.
Mr. Duffy. How about the GPS coordinates of their home?
Mr. Pratt. No.
Mr. Duffy. Okay. I am just checking to make sure.
Ms. Wu, listen, I share a concern about what happens with
reporting of medical debt, but one concern that I have is if it
isn't reported and maybe even weighted properly, do you have a
concern that individuals may put that at the bottom of their
payment list, there may be more delinquencies in regard to, or
less incentive to pay off medical debt which rises costs for
hospitals, clinics, and in turn, creates higher healthcare
costs for the rest of us at a time when we are trying to reduce
healthcare costs?
Ms. Wu. One important thing to note about medical debt on
credit reports is the vast majority are for small amounts. A
2003 Federal Reserve study found something like over 80 percent
of medical debt collection items were under $500 or $644 in
today's dollars, so these are usually things like copays, the
ambulance bill that--
Mr. Duffy. I am sorry for asking you a question when my
time had expired, so my time has expired. And with that, I now
recognize Mrs. McCarthy for 5 minutes.
Mrs. McCarthy of New York. Thank you, Mr. Chairman.
Ms. Wu, I am going to let you finish the answer only
because I am curious about it. Last year, unfortunately, I was
ill and my medical expenses certainly were high, and then I had
to have surgery at the beginning of this year, and had a great
doctor. I have no complaints about the care I got, but I have
to say that my medical bills were extraordinary, where I took
money out of my savings account, and from my retirement to pay
the bills, so they are way over $500, believe me.
What we are seeing with the, now looking at how we are
going to be handling those who are in debt from medical bills
that there is going to be a certain time where they are not
going to count that against--am I correct in the legislation--
not legislation, but the decision from FICO in August of 2014
that they are going to look at medical debt and not put it onto
their FICO score?
Ms. Wu. First of all, my sympathies toward your situation,
Congresswoman McCarthy. Medical debt shows up on credit reports
solely as a result of debt collection. Something like 97
percent of medical debts on credit reports are because they are
referred to a debt collector, and often the reason it is
referred to a debt collector is because there is an insurance
dispute, a billing error, the provider doesn't get paid, and
then it is automatically referred to a debt collector and they
put it on a consumer's credit report. The CFPB's research found
that kind of debt collection item unfairly penalized consumers'
credit reports.
And so I think partly as a result of that research, and
partly as a result of complaints, VantageScore, which is the
other scoring provider, had already stopped counting paid
collection items. FICO also did, and so this helps consumers
not be unfairly penalized by medical debt that has been paid
off, or if it is the only item on their credit report. But it
is not going to help mortgage applicants because Fannie Mae and
Freddie Mac won't use these changes.
Mrs. McCarthy of New York. I agree with you, because the
surgery was in January, and I am certainly working with the
insurance company to readjust the amount that they paid back to
the doctor was over 4 months before it was able to be worked
out. I was still left with a heavy bill but at least we got it
cleared up to a certain extent, but I want to go back to Mr.
Ikard. When someone comes to you in the bank and he is a
customer and you know him, and you started to talk about that a
little bit earlier, that he comes in whether it is a medical
bill or maybe he just got laid off, and he might need a bridge
loan, but he can't make the payments on what probably is more
money than he has usually put down to pay off, you work with
him, how often does that actually happen?
Mr. Ikard. It actually happens quite a bit because we see a
lot of these small medical charge-offs Ms. Wu was talking
about. And if the customer has relatively clean credit, and
there is nothing in their behavior that would lead you to
believe they had problems paying their debt, just give us a
reasonable explanation of what surrounds that issue. And we'll
say fine, and move on. For us, that is not a deal breaker
because we do see that quite a bit.
Ms. McCarthy of New York. Do a lot of consumers do that, or
do they even know that--most of them are usually afraid to talk
to the bankers, not because of the bankers, but they don't want
anybody to know that financially they might be getting a little
bit behind.
Mr. Ikard. I think that is a part of the process. I think a
lot of the time, the first time they find out about it is when
we run a credit report when they come in and ask for a mortgage
loan. A lot of times they don't even know it is there. So we
ask them to come in and just give us an explanation. If their
whole credit report is bad, then we would assume that is
probably just the way they do their business. But if they have
clean credit and they have a good work history and they have a
history of paying their bills, and they have this one medical
charge-off, explain it to us, and we will document it, and we
will move on. I think that is the reasonable way to do it.
Ms. McCarthy of New York. I know, during the financial
crisis, we saw an awful lot of people with their mortgages, and
we offered to have seminars, brought in the experts. And hardly
anybody ever showed up because they didn't want anybody to know
that they were going under. It is very, very difficult. So I
can understand where they might prefer going to the bank, or
now that we have somewhere for our constituents to go to make a
complaint and it is going to be hidden to a certain extent, but
they can get the help they need, so I appreciate that part.
Going back to the student loans, that is a real problem. We
actually talked about that this morning in the Education
Committee and how we can do financial literacy to educate our
young students on how to use their debit card, how to use a
credit card. I think that is important, and I hope that we can
do that because these young people don't understand that you
just can't do it. And I have to say I do love, even on my own
bills, if I don't pay a certain amount, this is how long it is
going to take for me to pay off, and it is a real eye-opener.
Mr. Duffy. The gentlelady's time has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
Mr. Pratt, in light of the Dodd-Frank Act, I would just
like to know, from your perspective, has this changed the
credit reporting system? Are there any conflicts at all with
that being the new governing body with the FTC? Have there been
any differences in terms of mixed signals or different
guidances that have been sent out or enforcement orders that
have been in conflict? Have they worked together?
Mr. Pratt. It is a little early to get too deep into that
question. I can tell you that we have had members who have been
concurrently subject to an examination process and also a FTC
CID, and they have had to negotiate between the two agencies to
try to decide whether they had to produce the same data or
different data and what the costs might be relative to one
versus the other, and there are varying degrees of cooperation
around that sort of thing. That is really anecdotal, though.
Overall, the CFPB has ruled out a larger participant rule.
Many of our largest corporate members at CDIA are, in fact,
larger participants. And they are subject to examination, and
we are really in the middle of it, member by member, in terms
of what these exams look like. And ultimately, the examination
process will result in, in some cases, direction by the CFPB to
make changes. A lot of that is still kind of forward-looking
and not immediately in front of us, so it is hard to measure.
So we are kind of midstream.
Mr. Pittenger. Sure. Thank you. From your initial
observation, do you feel like this is good prudent oversight
and good management by the CFPB that they are providing?
Mr. Pratt. The examiners that my members report to me have
been professional and have been on point, and it has been a
dialogue, so I can't tell you that it is not an issue of the
relationship. Measuring results, that is a harder thing, and I
can't tell you yet whether all the money that is being spent to
match the CFPB examination requirement is necessarily going to
get you to where you want to be. That is kind of an opportunity
cost. It is a sunk cost that is now being built into the
companies. It is how they will do business going forward, and I
just can't tell you yet.
Mr. Pittenger. The compliance and reporting costs, it is
just another burden for these reporting institutions. Is it
warranted? Do you feel like they are headed in the right
direction, that this is good, prudent management?
Mr. Pratt. If you look at our testimony, we feel like we
were out in front on a lot of different issues without a
regulator necessarily showing up at the door to tell us there
was something else we ought to focus on. I don't think our
culture has changed. We are never troubled by a dialogue about
compliance and about getting it right, and to Chairwoman
Capito's point, making sure the consumers are served properly.
That is not a problem. It is really just a question of whether,
at the end of the day, direction given by the CFPB is going to
result in a change which just imposes more costs but very, very
small, if any, benefits. We just don't know.
Mr. Pittenger. Mr. Beales, you have spoken a little bit to
this, but speak relative to the credit reporting system of the
United States vis-a-vis other countries in the world and why
you believe this is a better credit reporting system. Is there
any way to improve it?
Mr. Beales. There are some studies actually that go a long
way towards proving it. And what they really focus on is the
positive information that is in the U.S. credit reporting
system, as opposed to negative-only systems in a number of
other countries. That has been the primary focal point of the
academic research, and it is clear you get better risk
predictions and better credit availability out of the U.S.
full-file system than you do out of those other countries'
negative information systems.
Mr. Pittenger. Sure. Mr. Ikard, in the banking industry--
and I was on a bank board for a decade, so I appreciate your
good work--are there any existing areas of uncertainty that you
found in attempting to comply with the Fair Credit Reporting
Act that have become challenging?
Mr. Ikard. I think there are always issues about how credit
should be reported, I think some of the enhanced reporting. I
think, for us, we want to see a very accurate, predictive
model. In order to do that, you need to get as much information
as possible into the system that is relevant and that can
actually be used to help a consumer actually reflect a proper
score. So I think sometimes, Congressman, we are not always
sure exactly what we should report.
The real challenge for us is bankruptcies. There are
different stages of bankruptcies or foreclosures. At what point
do we report? Is there a deed-in-lieu? Is there a short sale?
Those type of things that might have an impact on a customer's
credit score or at least allow the customer to tell a better
story down the road. We are not exactly sure how those should
be reported. Sometimes, we get confused on that.
Mr. Pittenger. Thank you.
I yield back.
Mr. Duffy. The gentleman yields back.
The Chair recognizes Mr. Meeks for a unanimous consent
request.
Mr. Meeks. I would like to ask unanimous consent to place
in the record the opening statement from Representative Ruben
Hinojosa.
Mr. Duffy. Without objection, it is so ordered.
Mr. Duffy. The Chair now recognizes the gentleman from
Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you so much, Mr. Chairman. It is good to
be in your company again, and you are doing quite a job today.
And I appreciate this hearing very much. I want to thank all
the witnesses for appearing today, and I always have to give
some credit to the staff for the outstanding work that they do
in compiling intelligence for us.
I have information indicating that approximately 32 million
people have files that are too thin to score, and 22 million
people have no credit at all to be scored. I am concerned about
persons who pay their light bills, their gas bills, their water
bills, their phone bills, cable bills, tuition, and insurance,
but they don't get scored, generally speaking. Perhaps they are
scored sometimes when someone will make a special request and
someone would bother to look.
And I know that there is the argument being made to be
careful with this, because if a person fails to pay a utility
payment timely for a couple of months but still maintains the
lights, gas, water, and then continues to pay, that could be
harmful. I understand that argument. But that argument aside,
why would we not allow these portions of a person's credit
history to become a part of the scoring process so that persons
who don't have other opportunities will at least have the
opportunity to be scored based upon this part of their credit
history? Who would like to be the first to respond?
Ms. Wu, I know you have something to say on the topic, so I
will start with you.
Ms. Wu. Thank you, Congressman Green.
Yes, this is an issue on which we have testified before,
before this very subcommittee. We do have concerns about
promoting the practice of what is called full-file utility
credit reporting. It is because of the unique nature of utility
bills, for example, in Massachusetts, it kind of gets cold very
often. We just came through the polar vortex, and so people had
really high heating bills, but they catch up. They catch up in
May. That is why, in Massachusetts, there is a winter
moratorium. You can't shut off somebody's heat if they have an
elder or infant in the house or they are sick between the
months of November and May. People know that, and they rely on
that. And so, we are concerned that full-file reporting might
undermine those protections or that it might hurt the consumers
who are late for 1 or 2 months but then do catch up.
Also just to make clear, there is nothing in the Fair
Credit Reporting Act right now that prohibits a utility from
engaging in full-file reporting. There is a bill filed, and
some of our concerns over that bill actually have to do with
the way it is written and the way it impacts the Fair Credit
Reporting Act apart from utility credit reporting.
Mr. Green. Would anyone else care to comment?
Mr. Ikard. Congressman, one of the things that we look at
is, our philosophy is that bad credit will hurt you, but no
credit is neutral. So if you have no credit, we would like for
you to sit down with one of our loan officers and just explain,
what is going on in your life, where are you working, what
bills have you been paying? We don't necessarily see that as a
negative. Obviously, you can't get a credit score, but you are
correct; that score means a lot. But in our world, bad credit
is an obstacle, but no credit is simply an opportunity to start
this discussion.
Mr. Green. I appreciate your willingness to sit and have
that conversation, but on the large scale, when we look at the
macro, it becomes very difficult.
Mr. Ikard. That is true.
Mr. Green. An automated process would be a much more viable
means of getting a person's credit properly before you. We, in
2008, had language in the Housing and Economic Recovery Act
that called for an automated process. HUD was to develop a
pilot program. I think that an automated process could factor
in some of the things that Ms. Wu has called to our attention
and still allow persons to be scored. I just know of too many
circumstances where persons can afford to pay rent that exceeds
a mortgage payment, and given the opportunity to have a
mortgage, they would become homeowners and develop equity,
build their equity. There must be some middle ground here for
us so that we can help people who do pay their light bills, gas
bills, and water bills timely, and don't have the opportunity
to be scored in an automated fashion. To do it on a case-by-
case basis probably is helpful to persons on a case-by-case
basis but not to all of the persons we want to serve.
Thank you, Mr. Chairman. I yield back.
Mr. Duffy. The gentleman's time has expired.
As we have all heard the magic bells ring, we do have a
vote series which we do anticipate coming back after. So with
that, the committee stands in recess subject to the call of the
Chair, and the call of the Chair will be right after votes.
[recess].
Chairwoman Capito. The committee will come back to order.
And I will call on Mr. Fitzpatrick for 5 minutes for
questions.
Mr. Fitzpatrick. I thank the Chair for calling the hearing,
and I want to direct most of my questions to Professor Beales.
Professor, in his opening statement Representative Ellison
referred to a bill that he and I have co-sponsored and
introduced together, called the Credit Access and Inclusion
Act. The substance of the bill pretty much comports with what
you referred to in the third section of your remarks, that more
information in the system leads to better performance. You said
in your statement that an estimated 30 million to 50 million
consumers do not have sufficient credit information in their
files to qualify for affordable mainstream credit. Are you
familiar, Professor, with the Act that Representative Ellison
and I have introduced?
Mr. Beales. I know about it as a general concept. I haven't
actually read it, but I am familiar with it in general.
Mr. Fitzpatrick. The bills clarifies existing law under the
Fair Credit Reporting Act to demonstrate or prevent utility and
telecomm firms, current law prevents them, I think, from
reporting accurate and enough information out of fear that it
is not specifically authorized. So it specifically authorizes
that utility payments, rent payments and the like can be
reported without fear of being in violation of the Credit
Reporting Act and without fear of the kind of lawsuits that
might result. So, so-called thin file customers would have more
robust information in their file and theoretically more access
to credit. Would that be a good thing, in your view?
Mr. Beales. Absolutely, that would be a good thing. That is
what the academic research shows, is that it improves the
predictiveness of who is a good risk and who is not, and by and
large makes some people who look like really thin files, makes
it clear that they are pretty responsible about managing their
money. I think that would be a good thing. And it makes sense
to remove anything that might be a statutory or regulatory
barrier to letting that happen. I don't know whether the most
efficient way for that information to get into the system is
through the main credit reporting agencies as opposed to
through specialized agencies that specialize in that kind of
information and are supplemental information sources. I think
that is something the market would pretty clearly sort out if
it is clear to everybody that they can provide the information.
Mr. Fitzpatrick. And there is nothing in the bill as it is
written that would mandate the reporting of such information,
so in other words, it would be instructive or permissive. Is
that--
Mr. Beales. I think that is the right way to go is to be
permissive rather than mandatory, because it is, the whole
structure of credit reporting is a voluntary furnisher system,
and I think there is a lot at stake if you try to change that.
Mr. Fitzpatrick. Is there anything in particular you would
like to add? What do you understand about the bill, because I
am going to be asking--as Representative Ellison said, we have
a good selection of co-sponsors already, but we are going to be
asking other Members of Congress to co-sponsor this. Would you
make any recommendations?
Mr. Beales. Not without reading it in detail, no. I think
the approach of removing barriers and leaving it voluntary, I
think that is exactly the right way to go.
Mr. Fitzpatrick. Professor, there is a graph up on the
screens on either side of the room, and I am not sure if you
can see it, but it is a 2012 FERC report, and it seems to
indicate credit score along the bottom and percentage of thinly
filed or thinly reported consumers, what their credit score
would be. And it seems to indicate that if you have more
reporting of the kind of reporting that Representative Ellison
and I are suggesting would be helpful and appropriate, that
those who are helped, it goes from about 5 percent of the so-
called credit-invisibles are able to get anything on the credit
reporting scoring system, 2, 3, 4, maybe as much as 5 percent,
but with more information, it goes up as high as 35 percent,
interestingly enough, in an area of the credit graph which is
really beneficial to some of these potential consumers. And I
would think that these individuals who are currently credit-
invisible, who currently don't have a credit score, if they are
getting not only a credit score, but a pretty good credit
score, when they go out to buy their first vehicle or whatever
their consumer purchasing may be, they are going to be getting
better rates. They are going to be able to purchase more and,
frankly, have a better future for themselves. So I am not sure
if you are familiar with that graph, but in your view, is that
graph accurate?
Mr. Beales. It is. That graph and the work behind it are
the basis for--and I think I cited them in the testimony--
saying more information is better. This is one of the primary
pieces of evidence for that proposition. There is no piece of
information that is good for everybody. We know that because
risk assessment doesn't work like that. The idea is to better
separate good risks from bad risks, but I think what this graph
makes clear is that for this group of people as a whole, they
are better off with this information in the system than not.
Mr. Fitzpatrick. I am sure there is another view. What is
the downside of more robust reporting? Is there anybody in the
system who would be hurt?
Ms. Wu. We are concerned that a lot of consumers would be
hurt if you started reporting every single late utility
payment. There is data showing that sometimes 20 to 30 percent
of energy consumers, especially consumers who receive low-
income heating and energy assistance, do have 30- or 60-day
late payments, and so you would end up adding a lot of negative
data.
Mr. Fitzpatrick. I appreciate that. The question was
actually to Professor Beales.
Mr. Beales. And I think the question is, what is the
predictive value of that information? It is going to be good
information for some people. It is going to indicate problems
for some other people, but that is why information is useful,
is to sort between those good risks and bad risks.
And what I think you are seeing in the graph here is a much
better sorting and a substantial benefit to most of the people,
not everybody, because some people's bill paying history isn't
so good, just like some people's credit history isn't so good,
but where that information is more positive than not for this
group of people.
Mr. Fitzpatrick. Thank you for the answer. I yield back.
Chairwoman Capito. I believe we are waiting for one more
Member, Congressman Ellison. I don't know if he has questions.
So while we are waiting--I guess we will wait a couple of
minutes, and if he doesn't show, we will ring it down.
Is there anything that you all would like to add in the
line of questioning that we have had that you think might be
good to have on the record or any clarifications that anybody
would like to make?
Ms. Wu. I would like to address a couple of issues that
came up earlier regarding data security breaches. Certainly,
our organization is concerned about data security breaches and
consumers' information being out there. Consumers should know
that the good news is there are currently protections under
Federal law when your existing credit card or bank account is
used by a thief, and that for things like the Target data
breach, we had said the most important thing is to monitor your
existing bank or credit card accounts. And the thing not to do
is to go out and buy credit monitoring products. These are
expensive products, $15 to $20 a month, and they do nothing to
prevent ID theft. They just detect it after it happens. For
consumers who are actually concerned about identity theft, the
most effective thing is the security freezes mandated by State
law.
But we have great concerns about the way credit monitoring
has been offered to consumers. And, in fact, three or four of
CFPB's actions against credit card issues have been over the
sale of products such as credit monitoring.
Chairwoman Capito. Yes, Mr. Pratt?
Mr. Pratt. I want to respond to that thought that credit
monitoring is essentially useless, and I can't tell you how
much we disagree with that idea. There are a whole range of
financial literacy products that are out there today in the
marketplace. Even the CFPB's report about the credit reporting
ecosystem talks about the fact that not only do consumers get
free file disclosures, which is important, through
annualcreditreport.com. That is the free Web site. That is how
you go and get it and exercise your right under law. But an
additional 30 million to 40 million file disclosures are in the
hands of 30 million to 40 million consumers as a result of
these products. The idea that I shouldn't, that it is not
valuable for me to have a product that may notify me when
changes to my file take place, the idea that I shouldn't be
able to look at changes to my credit report and understand how
that might affect a score, the idea that learning process is
not valuable is just ludicrous.
So it is a significant disagreement between us and certain
advocacy organizations, but I just want to make that point for
the record, that this is a really important product. That is
one of the reasons why we believe it should be exempted from
CROA. That is why we believe that the Credit Repair
Organizations Act, which was never written to regulate these
products, is wrong. These products are regulated under the
FTC's Section 5, the unfair, deceptive acts or practices. They
are regulated under specific rules for advertising practices.
It is a safe and sound product. Millions and millions and
millions of consumers buy it, and they are okay with it.
Chairwoman Capito. With that, I am going to have extended a
couple of minutes courtesy to Mr. Ellison, who has obviously
gotten hung up. I don't want to be rude to my witnesses here
because you all had to have a disruption, so he can submit
questions for the record, and we can ask for your response.
The Chair notes that some 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 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Without objection, the hearing is adjourned, and again, I
thank you for your patience.
[Whereupon, at 4:21 p.m., the hearing was adjourned.]
A P P E N D I X
September 10, 2014
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