Experts Discuss Merits, Pitfalls of FACT Act

By Catherine Hubbard, CCH Washington Staff Writer

The Fair and Accurate Credit Transactions Act, signed into law in early December 2003, contains many provisions that will help consumers keep tabs on their credit scores and protect their records from information tainted by identity theft, according to experts who spoke to CCH during recent interviews.

"The bill contains something for everyone," L. Richard Fischer, a partner at Morrison and Foerster, Washington, D.C. said on December 15.

However, by preempting state laws, the statute prevents states from experimenting with tougher restrictions on financial information sharing, said Chris Hoofnagle associate director of the Electronic Privacy Information Center, also in Washington, D.C. "The law provides new protections, but those protections comes at a very high price," he said, during a December 18 interview.

The ID theft provisions provide tremendous opportunity for consumers to prevent credit reporting agencies (CRAs) from entering information on credit reports that results from ID theft, said Fischer. "The bureaus have to block any information that occurs as a result of the theft and to alert lenders," he said.

Moreover, the statute developed a one-call approach where victims have to file a fraud alert only with one CRA, which then is required to coordinate with the other two CRAs and with lenders. "One call allows for an initial block for 90 days," said Fischer, noting that before the law it took many calls. "The number one consumer complaint is that ID theft occurs and then it takes two to three years to correct the record," he noted. Currently, there are three CRAs--Experian, TransUnion and Equifax.

Once the victim confirms ID theft occurred, obtains a police report (within 90 days) and provides it to a CRA, the agency will place an extended alert on all files, Fischer said. "Getting the police report is essential, otherwise the credit repair clinics would abuse this so badly that it would defeat the whole purpose." Without the police report, he said, the clinics "would use the block to stop reporting of information that is very true, but that is not very favorable."

The fraud alerts help both consumers and financial institutions, by warning lenders that they have to take an extra hard look at these files before approving a line of credit or a loan, according to Fischer. The law also protects people serving abroad in the military by allowing them to place a special fraud alert notifying creditors that they are out of the country. "Then they don't have to worry about ID theft on their account when they're in Iraq, for example, because their file would say this is someone on active duty in some other country, so they can't be applying for a loan here," he explained.

In contrast, Hoofnagle said most of the provisions for ID theft in the law are only remedial. "They won't prevent ID theft, but will help people once their IDs have been stolen." He said he still would like to see restrictions on Social Security Number use, such as truncation of the number on credit card receipts.

Federal Preemption

Fischer also praised the federal preemption provisions of the law. "The statue does away with the interlocking web of federal preemptions, so that financial institutions don't have a multitude of inconsistent laws to deal with," Fischer said. "That's essential," he said. "You can't have 50 different ways to file fraud alerts and 50 different sets of rules on how you respond to them."

The new affiliate sharing provisions, which preempt state laws, don't restrict the sharing of information. Instead they state that once an affiliate receives information, it can't use it to send marketing solicitations without giving a notice, Fischer said. In addition, the rules won't apply until the final regulations are issued in 2005, he said. "That's far enough out in the future that people can prepare for it," he said.

But Hoofnagle said that by preempting state laws, the statute fails to protect consumers enough. For instance, the law allows financial institutions to share information, such as bank account balances, as long as they don't send marketing solicitations, he said. "This bill is part of an overall trend of industry running to Washington to preempt state law that's stronger," he said, citing similarities between the extensive business lobbying for the FACT Act and for the CAN-SPAM Act of 2003. "Congress is serving as a protector of big business rather than individuals," he said.

In addition, people will have greater access to their credit reports, since they have access to at least one free copy each year. Providing reports free of charge will be expensive for the CRAs, but the costs will be passed on to consumers through higher loan fees, Fischer said. He added that the free reports will increase awareness of the factors that go into the credit rating, reminding consumers to pay their bills on time and close unused credit card accounts.

Fischer said rules will trickle out over the next year and into 2005. "This is unlike most statutes, where there is regulatory fine tuning," he said. "This is an enormous statute that envisions lots of rulemaking, with much of the detail in the rulemaking." The legislation is only a start, he added, predicting there will be specific rules developed over the next 12 to 15 months. "It's the gift that keeps on giving."

Related items:

Suspect ID Theft? What to Do Next

Fair and Accurate Credit Transactions Act Signed into Law

Senate Votes to Reauthorize Fair Credit Reporting Act

Legislation to Amend Fair Credit Reporting Act Clears House

Congress Likely To Reform National Credit Reporting Systems

Lawmakers Debate Extension of Fair Credit Reporting Act Preemption Provisions

''Identity Theft Has Exploded'': Gov't Review

Posted December 29, 2003.