---

Prepared for Visa U.S.A. Inc. by Morrison & Foerster LLP

---

The Fair Credit Reporting Act ("FCRA") establishes a uniform national standard for a number of important matters. This document addresses the potential consequences if Congress fails to amend the FCRA to extend or eliminate the expiration date for the national uniformity provision in the FCRA, which is scheduled to expire on January 1, 2004.

Overview of FCRA National Uniformity/Preemption Provisions

There are two preemption provisions in the current FCRA: a narrow provision stating that a state law is preempted only to the extent that law is inconsistent with the FCRA; [fn1] and a broad provision that preempts any state law that purports to regulate certain subjects specified in the FCRA itself.[fn2] Under the narrow standard, state laws are preempted by the FCRA only if such laws are inconsistent with the federal law, and then only to the extent of the inconsistency. The Federal Trade Commission ("FTC") has interpreted this preemption provision narrowly; specifically, the FTC's FCRA Commentary states that a state law is preempted only when compliance with the state law would result in a violation of the FCRA. [fn3] Thus, under the narrow preemption standard, at least as interpreted by the FTC, states have wide latitude to regulate FCRA matters, not only for consumer reporting agencies, but also for financial institutions that use consumer reports. Since the application of the narrow preemption standard typically would not restrict the ability of states to regulate the collection, distribution, or use of information about consumers, relatively few state laws would be preempted by the FCRA under this narrow standard.

The broad preemption provision states that no requirement or prohibition may be imposed under the laws of any state with regard to matters specifically identified in the FCRA as being the subject of preemption.[fn4] Thus, the broad preemption provision prohibits states from enacting laws that attempt to address in any manner the areas specified in this FCRA preemption provision. There are several important aspects of this broad preemption provision. First and foremost, this preemption provision will expire on January 1, 2004.[fn5] That is, unless Congress amends the FCRA to extend or eliminate the January 1, 2004 expiration date applicable to the broad preemption provision, states will be able to regulate all matters covered by the FCRA without regard to the preemption provision, since it will no longer exist. Thus, in the absence of congressional action extending or eliminating the expiration date for the broad preemption provision, the provision automatically will sunset; hence states will be free to enact laws that regulate or prohibit activities regarding the use of consumer reports, including imposing new obligations on users of consumer reports and furnishers of information, subject only to the narrow preemption standard.

If Congress does not extend or eliminate the expiration date for the broad preemption standard, laws enacted by a state regarding the matters identified in the FCRA, such as the information in consumer reports, will become effective if three conditions are met. First, the state law must be enacted after January 1, 2004. Second, there must be an explicit statement accompanying the state law indicating that the law is intended to supplement the FCRA; that is, there must be a statement that clearly indicates that the state intends the particular law to add to the requirements of the FCRA. Third, the state law must provide greater protection to consumers than that provided under the FCRA. If a state does not meet all three of these conditions, the state law would be subject to the broad preemption provision with regard to the subject matters specified in the FCRA. However, because these conditions are technical in nature, the failure of Congress to extend or eliminate the expiration date for the broad preemption provision likely would mean that a state law relating to this subject enacted after January 1, 2004 would be preempted only if the law is inconsistent with the FCRA within the meaning of the narrow preemption provision.

Specific Preemption Subjects

The existing broad preemption standard applies to seven subjects identified in the FCRA. That is, there are seven areas that states currently are prohibited from regulating due to the broad preemption provision.

First, the broad preemption provision prohibits states from regulating the information that may be included in consumer reports, including the time periods during which consumer reporting agencies are permitted to report adverse information, such as for charged-off accounts. [fn6] In the absence of congressional action, states could preclude consumer reporting agencies from including certain information in consumer reports, shorten the time periods during which such information could be included in reports, or otherwise regulate the information maintained in consumer reports. Thus, the information available on consumers could vary by state, adversely affecting the creation and use of credit scoring models.

Second, the broad preemption provision prohibits a state from regulating the responsibilities of persons who furnish information to consumer reporting agencies.[fn7] Thus, any state law that attempts to regulate the duty of a person who furnishes information to credit bureaus, such as the duty to correct and update information or investigate disputed information, is preempted under the broad standard. Failure to maintain the broad preemption standard, however, would allow states to regulate furnisher obligations. This could include imposing liability under state law if a furnisher fails to comply with its duty to provide complete or accurate information to a consumer reporting agency. Removal of this preemption provision also would allow states to add to the duties of furnishers, including the duty to investigate consumer claims that information reported to credit bureaus is not complete and the manner and timing of such investigations.

Third, the broad preemption provision prohibits states from regulating the duties of persons to provide adverse action notices to consumers in connection with the use of consumer reports, the duties of persons to provide adverse action notices when information has been obtained from persons other than consumer reporting agencies, and the duties of persons to provide notices when action has been taken based on information provided by an affiliate. [fn8] In the absence of the broad preemption provision, states could require users of consumer reports to provide additional information in adverse action notices given to consumers, require institutions to provide notices within a specific time period, and/or impose additional duties on persons that receive and use information from affiliates. Thus, such state legislative activity could require the use of multiple state-specific adverse action notices by creditors.

Fourth, the broad preemption standard applies to the procedures a consumer reporting agency must use if a consumer disputes the accuracy of information.[fn9] Thus, in the absence of congressional action, states would be able to shorten the time periods applicable to investigations and/or impose new duties on consumer reporting agencies to investigate disputed information. Any such action also could impact the duty of furnishers to investigate consumer dispute claims, as well as the timing and manner in which such investigations are conducted.

Fifth, states currently are not permitted to regulate prescreening activities involving the use of consumer reports for credit or insurance transactions not initiated by consumers. [fn10] If Congress does not extend or eliminate the expiration date for the broad preemption standard, however, states would be able to enact laws that restrict the ability of institutions to engage in prescreening activities, place additional conditions on prescreenings, require users to provide additional disclosures to consumers in connection with prescreenings, require consumers to "opt in" to prescreenings, or prohibit prescreening activities altogether.

Sixth, the broad preemption provision prohibits a state from regulating the exchange of information among affiliated institutions.[fn11] In the absence of congressional action, states would be able to regulate, restrict, or even prohibit the ability of institutions to share information with their affiliates. For example, states could require "opt-in" notices before either experience information or qualification information can be shared among affiliates, or require additional disclosures to be provided to consumers before affiliated institutions can share information.

Finally, the preemption provision prohibits a state from regulating the form or content of the summary of rights required to be provided by a consumer reporting agency to a consumer (such as the consumer's right to dispute information) when a consumer reporting agency provides the consumer with information in the consumer's credit file. [fn12] Thus, in the absence of congressional action, states could enact laws that create inconsistent and confusing state-specific notices.

Impact of State Laws on Specific Areas

Information in Consumer Reports

Standards for Content of Consumer Reports Need to be Uniform to Ensure Comprehensive Information

The market for consumer credit has become a competitive national market. Credit on competitive prices and terms is available to consumers throughout the country. The national credit reporting system is the foundation that supports this market. States currently cannot restrict information that consumer reporting agencies may include in consumer reports, shorten the time periods for which information may be reported, or otherwise regulate the content of consumer reports. National uniformity is essential to ensuring that creditors have access to consistent information about consumers that can be used to make credit decisions. For example, the national uniformity provisions ensure that states cannot directly prohibit consumer reporting agencies from including in a consumer report the fact that a credit card issuer has "charged off" a consumer's credit card account because the consumer has failed to repay the balance on the account. Similarly, these provisions ensure that states do not enact laws that require consumer reporting agencies to delete information in a consumer's report, such as late payments on an account that are more than two years old.

The Duties of Furnishers Need to be Uniform to Ensure the Quality of Consumer Reports

The information in consumer reports could be dramatically affected if states can regulate the duties of furnishers of information to consumer reporting agencies. If states enact laws that impose greater obligations on furnishers of information to consumer reporting agencies, those furnishers will face increased risks of litigation if they fail to meet these duties and, as a result, furnishers may simply stop reporting information because the risks may far exceed the benefits of reporting. States already have begun considering such legislation. One version of a bill that was recently introduced in California (Assembly Bill 800) would have required 100% accuracy when furnishing information to consumer reporting agencies. State laws similar to A.B. 800 would lead to inconsistent and incomplete information in consumer reports. Many furnishers would be reluctant to provide information to consumer reporting agencies, in light of the significant legal risks that would be associated with erroneous reporting of that information.

Moreover, if states regulate furnisher obligations or the information about consumers that consumer reporting agencies can retain, the resulting incomplete and inconsistent information in consumer reports is likely to impair the reliability of the credit scoring models that are used today to make reliable, objective, and quick decisions. Reducing the reliability of credit scoring models would result in delays in making credit decisions, impose increased costs on credit transactions, and reduce the availability of credit. As Federal Reserve Chairman Alan Greenspan has noted, "Credit-scoring technologies have served as the foundation for the development of our national markets for consumer and mortgage credit, allowing lenders to build highly diversified loan portfolios that substantially mitigate credit risk. [Credit scoring has] played a major role in promoting the efficiency and expanding the scope of our credit-delivery systems and allowing lenders to broaden the populations they are willing and able to serve profitably."

A Lack of Uniformity Will Hurt Consumer Spending

Consistent information about consumer transactions is essential to ensure that institutions can continue to rely on consumer report information to make decisions. In the absence of uniform national standards, some consumers will not receive credit for which they are qualified due to incomplete credit report information, and some consumers who are not qualified will get credit. The costs of consumer credit will increase, leading to a reduction in borrowing and therefore a reduction in consumer spending. At the same time, lenders will become more cautious, curtailing credit, particularly to low and moderate income borrowers, and thus further reducing consumer spending in the economy.

Prescreening

The FCRA permits creditors to prescreen potential customers in order to provide them with firm offers of credit that they actually are qualified to receive. Prescreening provides consumers with options for choosing among credit offers, thereby increasing competition, reducing prices, and fostering innovation. Prescreening also reduces costs for creditors, and reduces the volume of mail to consumers. A consumer who does not want to receive prescreened offers can opt out.

In prescreening for a firm offer of credit, a creditor can obtain from a consumer reporting agency a list of consumers that meets criteria established in advance by the creditor. The information is limited to name, address, and other identification information, together with a risk score or range, and certain other information, but does not include information that identifies the consumer's experience with other parties. Based on this information, the creditor must extend a firm offer of credit to every consumer on the list.

A firm offer of credit is an offer that will be honored if the consumer continues to meet the criteria for the offer. This enables the creditor to verify that the consumer's qualifications have not changed since the original offer was extended.

Prescreening Helps Consumers Shop

Because the consumer knows that there is a high likelihood that he or she will qualify for prescreened credit offers, the consumer can compare the prices and other features and terms of offers and then select the offer that he or she believes best fits his or her needs. Without prescreening, the consumer would be far less certain about whether or not he or she can qualify for various credit products available in the marketplace.

Without prescreening, less qualified consumers are likely to apply for credit which may have attractive rates or terms, but for which they do not qualify. Although these consumers will receive adverse action notices under the FCRA and the Equal Credit Opportunity Act, determining those financial products that they can actually obtain will necessarily be a process of trial and error, and the rejected credit applications can hurt their prospects for future credit. Thus, from the standpoint of the consumer, prescreening greatly facilitates the consumer's ability to shop for credit and can help to protect the consumer's credit record. In classic economic terms, prescreening increases market transparency for the consumer and the consumer enjoys all of the benefits that increased transparency implies, including lower prices and more favorable terms than he or she would otherwise obtain on a trial and error basis.

Prescreening Fosters Competition

Increased transparency for the consumer also translates into more competition between suppliers of credit. Creditors that know consumers can compare offers effectively must make their offers as attractive as possible in order to meet the competition. This competition leads to low rates and innovative ways to attract consumers. Vigorous competition in the credit card market, due in large part to prescreened offers, has resulted in literally tens of thousands of credit card products targeted at consumers of all economic strata and with widely divergent interests. Current credit card products range from the popular airline miles rewards cards, e.g., Southwest Airlines Rapid Rewards Platinum Visa® Card, to cards that respond to consumers' interests in being identified with colleges and universities, e.g., University of Virginia Alumni Association Visa® Card, sports teams, e.g., Portland Trail Blazers Platinum Visa® Card, and popular philanthropic causes, e.g., ASPCA Platinum Visa® Card.

Prescreening also has been a highly effective tool in delivering credit cards and other loan products. Although the benefits to consumers from prescreening can be difficult to quantify in objective terms, Federal Reserve statistics suggest that, during the five-year period from 1997 through 2001, as many as 150 million credit cards may have been issued to consumers in response to prescreened direct mail solicitations, and this does not include accounts opened in response to prescreened offers made to consumers orally, such as in person or by telephone. These statistics suggest that a very substantial portion, if not of a majority, of all credit cards currently held by consumers were initially obtained through prescreening. In addition, Federal Reserve statistics show a long-term trend of decreasing credit card interest rates, reflecting the highly competitive nature of the credit card market due to prescreening.

Prescreening Reduces Costs

In addition to improving market transparency and fostering competition, prescreening reduces marketing costs for creditors. By using prescreened lists, creditors avoid the costs of sending solicitations to large numbers of consumers who ultimately would not qualify for the credit product being offered. At the same time, prescreening reduces the number of responses that the creditor must reject and the attendant costs of providing adverse action notices and dealing with dissatisfied applicants. Reduced costs in the competitive environment fostered by prescreening lead to lower prices for consumers.

Prescreening Reduces Unwanted Mail

Prescreening reduces the unwanted mail that consumers receive. Creditors can make more targeted solicitations with the assistance of prescreening. Without prescreening, creditors must solicit consumers more broadly because they are unable to identify the subset of consumers that will likely qualify for their products. The result would be that consumers would receive more, rather than fewer, solicitations.

Prescreening Does Not Lead to Identity Theft

Contrary to some assertions, prescreening does not increase the potential for identity theft. Some have argued that prescreening facilitates identity theft because a thief merely has to send in a stolen response form with a new address and the request will be approved and a credit card sent to the thief. This argument assumes that credit requests in response to prescreening are not put though the same security processes as other applications. This assumption is incorrect. The concept of a firm offer of credit for prescreening recognizes that a creditor will verify information and obtain a current credit report when a prescreened response form is received. In practice, creditors use the same types of security procedures to verify the identities of consumers responding to prescreened offers as they use for other applications.

State Actions on Prescreening Would Harm Consumers

If the FCRA prohibition against state laws on prescreening lapses, states will be free to enact laws that limit prescreening. For example, a state might require that consumers opt in to receiving prescreened offers. Such a requirement would make it more difficult for consumers to shop for credit. A consumer wishing to shop for credit cards would have to apply for a number of cards so that he or she could be assured of qualifying for at least one card or in order to receive pricing information from multiple creditors. Alternatively, a consumer would have to contact a number of credit card companies in order to opt in to receiving prescreened offers.

As a result of these additional communications, the creditor's cost would increase, forcing it to charge higher rates or fees in that state or to spread these higher rates or fees across customers in a number of states. National marketing programs would have to provide special treatment for each state enacting special requirements for prescreening, further increasing costs for all consumers. More fundamentally, the transparency associated with today's national products would be lost, leading to less effective competition, higher prices, and less tailored credit services.

Affiliate Sharing

Financial services companies have increasingly relied on the provision in the FCRA that permits information sharing among affiliates. This national uniformity extends beyond consumer reports to other state laws that purport to restrict information sharing among affiliated entities.

Currently, the privacy provisions of Title V of the Gramm-Leach-Bliley Act ("GLB Act") and the FCRA both govern the sharing of customer information by financial institutions. Under the FCRA, financial institutions (as well as other entities) are free to share information about their customers with their affiliates with only limited restrictions. This sharing includes four categories of information: (1) identification information; (2) experience information; (3) eligibility information; and (4) other information. Under the FCRA, institutions are permitted to share identification information (such as name, address, and social security number), experience information (such as information about payments and account balances), and other information freely with their affiliates.

Under the FCRA, financial institutions also may share eligibility information with affiliates without regard to the FCRA's limitations on the uses of consumer reports, provided that the consumer has been notified of this possibility and has not opted out of the sharing of this information. Eligibility information includes information from consumer applications and information from third parties, such as credit bureaus, that is used to evaluate a consumer's eligibility for products or services, such as loans or insurance. Title V of the GLB Act ("Title V") limits the sharing of nonpublic personal information about customers with nonaffiliated third parties, including information that could be shared freely under the FCRA, such as identification and experience information. However, Title V does not limit the sharing of nonpublic personal information among affiliates.

Affiliate Sharing is Efficient

Without a uniform national rule permitting affiliate sharing, institutions will find it increasingly costly and inefficient to operate national programs because of the operational problems institutions would face through inconsistent state requirements. More restrictive affiliate sharing rules are inefficient in themselves and requirements to adhere to different rules on a state-by-state basis impose additional costs and burdens. For these simple reasons, affiliate sharing is critical to the operations of financial services companies.

Regulatory Structures Create the Need For, and Recognize the Benefits Of, Affiliate Sharing

Federal laws encourage, and often require, that certain financial services be conducted in entities that are legally separate from other entities in order to limit the operations and risks of the regulated entities. In addition, this separation serves to foster more efficient supervision of regulated entities. For example, bank deposits are insured by the Federal Deposit Insurance Corporation to reduce the likelihood of bank runs and to protect the savings of bank customers. The limitations on the activities that can be conducted in banks limitations that were reinforced by the passage of the GLB Act limit the risks that the performance of higher risk non-banking activities will lead to the failure of the bank, and thereby threaten the federally backed deposit insurance fund. Outside the area of banking, other regulatory regimes also mandate or encourage activities to be conducted in separate corporate entities. For example, investment companies, subject to supervision and regulation by the Securities and Exchange Commission, must be established as entities that can be liquidated separately in order to reflect appropriately investors' risks and rewards.

Although federal laws may require that certain functions be performed in separate entities, federal laws also recognize the benefits of affiliations with other companies. For example, many regulated financial institutions are permitted to affiliate freely with other companies. Even where such affiliations have been limited, as in the case of commercial banks, the Bank Holding Company Act ("BHCA") has long recognized the synergies that result from affiliations between banks and other companies. Historically, the BHCA has permitted banks to affiliate with companies engaged in activities that are closely related to banking. These benefits were recognized further in the GLB Act, which removed the barriers that limited a bank holding company's ability to provide securities and insurance services. These benefits include transactions with affiliates, economies of scale in delivering financial services, including the processing of customer information, and the ability to cross-market financial products and services. The cross-marketing of financial products and services allows financial institutions to tailor their offerings more effectively to the needs of individual customers.

Although the synergies between affiliates in bank and financial service holding companies have long been recognized, transactions between insured banks and their affiliates have been limited in order to protect the bank. The limitation on interaffiliate transactions means that the principal benefits of affiliations among financial services companies are economies of scale, largely in data processing, and cross-marketing. However, in the case of retail financial services, even these benefits are seriously undermined by limits on affiliate sharing. Restrictions on affiliate sharing require information in databases to be separated, or tagged to indicate the permissible uses, thereby reducing the efficiency of these databases. Similarly, restrictions on affiliate sharing will significantly impair cross-marketing and the provision of consumer services, such as consolidated statements.

Affiliate Sharing Is Increasingly Important To Financial Institutions and Their Customers

Although the benefits of affiliate sharing of customer information have been apparent for decades, the evolution of financial products and services that has occurred over the past few years has increased the importance of affiliate sharing. For example, banks and their affiliates increasingly are addressing customers on a holding company wide basis, identifying customers on the basis of their overall financial needs, rather than the individual institution or institutions with which those customers already have established relationships. The sharing of information among affiliates enables those affiliates to identify products or services that may meet the customers' needs and in which the customers may be interested, and allows customers to access these products and services through a single point of contact.

Affiliate Sharing Is Consistent With Customer Expectations

Finally, the sharing of customer information among the affiliates in a holding company family is fully consistent with customer expectations. Holding companies generally brand their products and services so that consumers will understand that the holding company stands behind those products and services. In selecting a bank or financial firm to do business with, most consumers do not understand that the various holding company activities actually are conducted in affiliated companies, instead of in a single company. Typically, consumers expect that the branded entities are part of a single entity or, to the extent that they are separate, they are operating jointly. Accordingly, consumers expect that the information about them will be available for use and will be used throughout their "bank" or their "financial institution," without regard to the existence of a legally required holding company structure.

"Adverse Action" Notices

Notices Are a Focus of FCRA Litigation

The notice requirements of the FCRA have proved to be fertile ground for class action litigation, a problem that can only increase if states adopt differing notice requirements. There are currently several cases being litigated, which deal with alleged violations of the FCRA adverse action notice requirements. For example, one lawsuit asserts that the notice provided to consumers did not sufficiently advise consumers that the decision was "adverse."

Lack of Uniformity of Adverse Action Notices Will Increase Costs

If Congress does not amend the FCRA to reauthorize the national uniformity provisions, states are likely to regulate the duties of persons to provide adverse action notices. For example, states may regulate the timing, format, and content of adverse action notices. States also may regulate the circumstances in which notices must be given -- that is, they could require notices in circumstances when they are not required under the FCRA. State regulation of notices would require lenders to develop different notices depending on the state in which those consumers reside, creating significant and costly operational problems that will increase the cost of credit. The adoption of state adverse action notice requirements also would increase the likelihood of costly litigation because multiple state-specific forms would have to be created and provided to consumers residing in those states.

States already have begun considering legislation that would require additional information to be provided with adverse action notices. For example, Oregon Senate Bill 280 would require insurance companies to provide notices to consumers in connection with insurance underwriting decisions, and to disclose the significant factors of a person's credit history that resulted in adverse action. While state adverse action bills have focused on insurance companies, there is little reason to believe that states will limit such requirements to insurers, and states likely will impose additional adverse action duties on other financial institutions, such as credit card issuers. Furthermore, if states adopt a broader definition of adverse action, it could expand the circumstances in which FCRA adverse action notices must be provided. A creditor could be required to provide FCRA adverse action notices to consumers even if the creditor has granted credit. Such a requirement likely would result in significant consumer confusion.

Lack of Uniformity of Adverse Action Notices Based on Third-Party Information Can Discourage Use of Information

The FCRA national uniformity provisions also apply if an institution obtains information from a third party other than a consumer reporting agency, such as information about a consumer's rental payment history obtained from a consumer's landlord, and uses that information to make an adverse credit decision. Without the uniformity provisions, states may impose additional duties and change the circumstances, time period, and type of information that must be provided if an institution uses information from a third party in connection with a credit decision. If states impose new and burdensome adverse action duties on institutions that use third-party information, lenders and other users of that information may be reluctant to seek out such information and may simply make decisions based on less complete information.

---

Footnotes

1: 15 U.S.C. § 1681t(a).

2: 15 U.S.C. § 1681t(b).

3: 16 C.F.R. pt. 600, app., 622(1).

4: 15 U.S.C. § 1681t(b).

5: Technically, the broad preemption standard will continue to apply to state laws after January 1, 2004, unless states meet certain conditions. However, because these conditions are technical in nature, the broad preemption provision likely will have no impact on state laws enacted after January 1, 2004, unless Congress extends the effective date of the preemption provision.

6: 15 U.S.C. § 1681t(b)(1)(E). This provision does not preempt any state law in effect on September 30, 1996.

7: 15 U.S.C. § 1681t(b)(1)(F). This provision does not preempt the California and Massachusetts laws referenced in § 1681t(b)(1)(F) of the FCRA.

8: 15 U.S.C. § 1681t(b)(1)(C).

9: 15 U.S.C. § 1681t(b)(1)(B).

10: 15 U.S.C. §§ 1681t(b)(1)(A), 1681t(b)(1)(D), 1681t(c).

11: 15 U.S.C. § 1681t(b)(2). This provision does not preempt the Vermont law referenced in § 1681t(b)(2) of the FCRA.

12: 15 U.S.C. § 1681t(b)(3).