BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 1220 (Skinner)
As Amended May 20, 2013
Hearing Date: June 18, 2013
Fiscal: Yes
Urgency: No
TH
SUBJECT
Consumer Credit Reporting: Adverse Action
DESCRIPTION
This bill would make it unlawful for a consumer credit reporting
agency to prohibit, dissuade, or attempt to dissuade, the user
of a credit report generated by a credit reporting agency from
providing a copy of the report to a consumer upon request, if
the user has taken adverse action against the consumer based on
the report. This bill would also authorize the Attorney General
and other specified public prosecutors to bring an action for a
civil penalty not to exceed $5,000 against any credit reporting
agency that violates the above provision.
BACKGROUND
Credit reports play an increasingly important role in the lives
of California's consumers. Most, if not all, decisions to grant
consumer credit rely on information contained in these reports.
Generally, users of credit reports analyze the information they
contain to assess the financial risk posed by individual credit
applicants, and often transform this information using
sophisticated predictive models into individualized "credit
scores." For some consumers, the acceptance or rejection of an
application for a mortgage, auto loan, credit card, or student
loan may be decided on the basis of a credit score. For others,
the terms or pricing of a credit or insurance product may be set
according to one's credit rating through a practice known as
"risk-based pricing." (Federal Trade Commission, December 2012
Report to Congress Under Section 319 of the Fair and Accurate
Credit Transactions Act of 2003
(more)
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[as of June
10, 2013] p. 5 [hereinafter "December 2012 FTC Report"].) Yet
for others still, a decision to extend an offer of employment
could depend on the contents of a credit report. Given their
extensive use in the marketplace, the accuracy and completeness
of the information contained in a credit report is important to
both California's consumers and to the functioning of the
State's economy.
At their core, credit reports provide lenders with detailed
information about a particular borrower's credit history so they
can more precisely estimate the risk that a borrower will
default, allowing lenders to tailor interest rates and other
loan terms according to a borrower's risk. Yet despite their
importance in assessing creditworthiness, a number of studies
have highlighted the high rates of errors contained in consumer
credit reports. A recent study published by the Federal Trade
Commission found that 26 percent of the consumers studied
identified at least one potentially material error on their
credit report, and that after going through a dispute process
with a consumer credit reporting agency, 13 percent of the
consumers studied had modifications made to at least one credit
report that resulted in a change to their credit score.
(December 2012 FTC Report, pp. 35, 42.) For over five percent
of the consumers studied, the resulting increase in credit score
was of such significance that their assigned credit risk tier
decreased (using FICO Auto Loan thresholds), meaning that the
consumer was more likely to be offered a lower interest rate on
an automobile loan. (December 2012 FTC Report, p. 47.) The
Federal Trade Commission estimates that for individuals with
credit histories, "at least 24 [percent] of credit reports
potentially contain errors and approximately 19 [percent] of
reports may contain errors that are material." (December 2012
FTC Report, p. 63.)
Existing law includes several safeguards designed to protect the
integrity of the data contained in a consumer credit report.
The California Consumer Credit Reporting Agencies Act (Civ. Code
Sec. 1785.1 et seq.) and the Federal Fair Credit Reporting Act
(15 U.S.C. Sec. 1681 et seq.) both impose an affirmative duty on
consumer credit reporting agencies to "follow reasonable
procedures to assure maximum possible accuracy" when preparing a
consumer credit report. (Civ. Code Sec. 1785.14(b); 15 U.S.C.
1681e(b).) The Consumer Credit Reporting Agencies Act also
provides that consumer credit reporting agencies shall, upon a
consumer's request, make available for inspection by the
consumer all files maintained regarding that consumer, and shall
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supply either a decoded written version or a written copy of the
file maintained regarding that consumer. (Civ. Code Secs.
1785.10(a), 1785.15(a)(1).) Both acts restrict a consumer
credit reporting agency from prohibiting the user of a credit
report, such as a bank considering whether to approve a mortgage
application, from disclosing the contents of the report to the
consumer who is the subject of the report when adverse action is
taken against the consumer on the basis of the report. (See Civ.
Code Sec. 1785.14(c); 15 U.S.C. 1681e(c).)
These safeguards - and particularly the requirement against
prohibiting access to a credit report in the wake of adverse
action - ensure that California consumers have access to
collected credit information pertaining to them, allowing the
consumer to confirm its authenticity and accuracy. Despite
these statutory safeguards, the author has found instances where
contracts entered into between consumer credit reporting
agencies and their clients have contained restrictive language
that could be interpreted as discouraging or restricting the
ability of users to share credit information with adversely
affected California consumers.
This bill would expand existing law by making it unlawful not
only to prohibit credit report users from providing copies of
the report to adversely affected consumers, but also for a
consumer credit reporting agency to dissuade or attempt to
dissuade a user from furnishing a copy of the report upon a
consumer's request when the user takes adverse action against
the consumer based upon the report. This bill would also create
a new civil penalty provision authorizing the Attorney General,
among others, to seek a penalty of up to $5,000 for a violation
of the above provision.
CHANGES TO EXISTING LAW
Existing law , the California Consumer Credit Reporting Agencies
Act (Civ. Code Sec. 1785.1 et seq.) and the Federal Fair Credit
Reporting Act (15 U.S.C. Sec. 1681 et seq.), require consumer
credit reporting agencies to adopt reasonable procedures for
meeting the needs of commerce for consumer credit, personnel,
insurance, hiring of a dwelling unit, and other information in a
manner which is fair and equitable to the consumer, with regard
to the confidentiality, accuracy, relevancy, and proper
utilization of such information. (Civ. Code Sec. 1785.1(d); 15
U.S.C. Sec. 1681(b).)
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Existing law states that whenever a consumer credit reporting
agency prepares a consumer report, it shall follow reasonable
procedures to assure maximum possible accuracy of the
information concerning the individual about whom the report
relates. (Civ. Code Sec. 1785.14(b); 15 U.S.C. 1681e(b).)
Existing law provides that consumer credit reporting agencies
shall, upon a consumer's request, make available for inspection
by the consumer all files maintained regarding that consumer at
the time of the request. (Civ. Code Sec. 1785.10(a), (b); 15
U.S.C. Sec. 1681g.)
Existing law provides that a consumer's credit file shall
include, as specified, the names and addresses of all sources of
the information in the file, the names (or, if applicable, the
fictitious business names) of the recipients of the information,
the names of any party making a credit inquiry about the
consumer, and, if requested by the consumer, the addresses of
the recipients and the parties making inquiry. (Civ. Code Secs.
1785.10(b)-(e); 15 U.S.C. 1681g.)
Existing law further provides that a consumer credit reporting
agency shall supply either a decoded written version or a
written copy of the file maintained regarding that consumer,
including all information in the file at the time of the
request, with an explanation of any code used. (Civ. Code Sec.
1785.15(a)(1).)
Existing law states that no consumer credit reporting agency may
prohibit any user of any consumer credit report furnished by the
consumer credit reporting agency from disclosing the contents of
the consumer credit report to the consumer who is the subject of
the report if adverse action may be taken by the user based in
whole or in part on the consumer credit report. (Civ. Code Sec.
1785.14(c); 15 U.S.C. 1681e(c).)
This bill would make it unlawful for a consumer credit reporting
agency to prohibit in any manner, including, but not limited to,
in the terms of a contract enforceable in the state, or to
dissuade or attempt to dissuade, a user of a consumer credit
report furnished by the credit reporting agency from providing a
copy of the consumer's credit report to the consumer, upon the
consumer's request, if the user has taken adverse action against
the consumer based in whole or in part upon information in the
report.
This bill would also authorize the Attorney General and other
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specified public prosecutors to bring an action for a civil
penalty not to exceed $5,000 against any credit reporting agency
that violates the above provision.
COMMENT
1. Stated need for the bill
The author writes:
Credit reports describe consumers' credit worthiness and
detail their credit history. These reports are requested
by banks when consumers apply for loans, by credit card
companies when consumers apply for credit cards, by
landlords when consumer apply for housing, and by employers
when consumer apply for jobs. Due to the scope and
significance of credit reports, it is vital that reports
are accurate and that consumers see complete versions of
their credit reports to verify their accuracy.
Regrettably, according to a recent study by the Federal
Trade Commission, 40 million Americans report inaccuracies
on their credit reports.
There are three nationwide credit reporting agencies:
Equifax, Experian, and TransUnion. Each agency is
required, by federal law, to provide one free credit report
to a consumer, upon request, every 12 months. While the
right of a consumer to obtain a copy of his or her credit
report from a credit reporting agency goes a long way to
ensuring the accuracy of credit reports, it may not give
the consumer a complete picture about his or her credit
history. The reports that users receive sometimes contain
information about the credit history of other consumers. A
2002 study by the Consumer Federation of America . . .
found that approximately 10 [percent] of the 1,545 files
they reviewed included records of "the wrong person." When
an adverse decision is based upon such information, the
consumer may not know about it, and therefore would not be
able to correct it.
Federal law allows a user of consumer credit reports to
provide its copy of a report about a consumer to the
consumer, upon request, after taking an adverse action
against the consumer based on information in the report.
It also prohibits credit reporting agencies from
interfering with the ability of users to provide reports to
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consumers under these circumstances. However, credit
reporting agencies nevertheless discourage users from
complying with consumer requests in their contracts with
users.
The right of consumers to obtain copies of their credit
files goes a long [way] to ensuring the accuracy of credit
reports. According to the federal Consumer and Financial
Protection Bureau (CFPB), "[c]onsumers' right to dispute
information contained in their credit reports under the
FCRA - and furnishers' and the NCRAs' obligation to respond
- provide important checks on inaccurate credit reports."
Current federal law gives consumers the right to obtain one
copy of their credit file each year and to receive notice
of adverse actions involving credit reports with a
resultant right to a free disclosure. The CFPB estimates
that at least 40,000,000 consumers obtain a copy of their
credit files each year from one or more of the NCRAs.
. . .
Inaccuracies can enter into credit reports in a number of
ways. Inaccuracies can occur if consumers provide
inaccurate data when applying for a loan or if the creditor
who furnishes data to the credit bureau inputs consumer
information to its systems inaccurately. Inaccuracies can
occur when the bureaus match information about a consumer
from a particular data furnisher to the wrong individual
consumer's file. Inaccuracies can also come from errors or
the lack of identifying information in government records.
Finally and importantly, inaccuracies occur when consumers
are victims of identity fraud or identity theft.
AB 1220 makes it unlawful for a consumer credit reporting
agency to prohibit, or to dissuade or attempt to dissuade,
a user of a consumer credit report furnished by the credit
reporting agency from providing a copy of the consumer's
credit report to the consumer, upon the consumer's request,
if the user has taken adverse action against the consumer
based upon the report.
2. Consumer access to credit reports
The extensive use of consumer credit reports in modern commerce,
and the benefits or consequences that flow from decisions based
on their content, make their accuracy and reliability matters of
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high public importance. As noted above, a Federal Trade
Commission (FTC) study of the U.S. credit reporting industry
found that "one in five consumers had an error on at least one
of their three credit reports," and for five percent of
consumers the errors on their credit reports were of such
significance that the errors "could lead to them paying more for
products such as auto loans and insurance." (Federal Trade
Commission, In FTC Study, Five Percent of Consumers Had Errors
on Their Credit Reports That Could Result in Less Favorable
Terms for Loans < http://www.ftc.gov/
opa/2013/02/creditreport.shtm> [as of June 10, 2013].) Existing
law contains a number of safeguards to ensure the integrity of
information contained in consumer credit reports, including
mechanisms allowing consumers to access and review this
information. This bill builds upon those provisions by
prohibiting consumer credit reporting agencies from dissuading
or attempting to dissuade end users of credit reports, such as
financial institutions, from disclosing the contents of these
reports to consumers who are adversely affected in reliance on
the information they contain.
In practice, this bill would likely restrict the ability of
credit reporting agencies to enter into use contracts that
contain overly restrictive confidentiality provisions. Credit
report information is a commodity that is bought and sold on the
information marketplace. According to the FTC, "[t]here are
roughly 30,000 data furnishers" that provide a "wide range of
information on approximately 200 million consumers" in the
United States. (December 2012 FTC Report, p. 2.) In order to
maintain the value of the commodity being bought and sold,
credit reporting agencies license their aggregated credit report
information to both resellers of this information and end users
or "subscribers." (December 2012 FTC Report, p. 3.) The author
has produced an example of one such license agreement, and the
confidentiality provisions it contains could be construed as
discouraging the end user from sharing credit report information
with an adversely affected consumer, despite restrictions in
existing law that arguably prohibit such conduct. This bill
would likely force credit reporting agencies to abandon
restrictive covenants of this sort in their license agreements
with end users of credit reports, thereby ensuring greater
consumer access to the information contained within these
reports.
3. Proposed amendment from San Diego County Apartment Association
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The San Diego County Apartment Association (SDCAA), who employs
tenant screening companies that use credit reports as part of
their screening process, has suggested the adoption of certain
grandfathering amendments to "provide protection to companies
whose existing contracts contain consumer-protection language
which they fear, with the bill's enactment, would inadvertently
expose them to new liability." Specifically, SDCAA recommends
that the author add a clause to the bill that would restrict its
applicability to contracts that are either "new or renewed on or
after January 1, 2014." Despite SDCAA's concern, it does not
appear that this bill would expose signatories to existing
credit reporting contracts to any new civil liability.
Civil Code Section 1667 renders unlawful any contract that is
"[c]ontrary to an express provision of law," "[c]ontrary to the
policy of express law, though not expressly prohibited," or
"[o]therwise contrary to good morals." (Civ. Code Sec. 1667.)
Plainly, if this bill becomes law, contracts entered into after
the bill's entry into force would be unlawful, and likely void
(at least in part) under state law, if they included restrictive
covenants that dissuade or attempt to dissuade a user of a
consumer credit report from providing a copy of the report to
the consumer upon request when adverse action has been taken
based upon the report. Equally plain, however, is the fact that
under California law, contracts that were valid when made cannot
be rendered invalid through subsequent acts of the Legislature.
(Stephens v. Southern Pac. Co., 109 Cal. 86, 95 (1895) ["if the
contract was valid when made, no subsequent act of the
legislature can render it invalid"].) Similarly, if a contract
conforms to the policy of express law at the time it was made, a
subsequent change in policy will not void the contract. (Moran
v. Harris (1982) 130 Cal.App.3d 872, 918 ["In determining
whether the subject of a given contract violates public policy,
courts must rely on the state of the law as it existed at the
time the contract was made."].)
Applied to the context cited by SDCAA, the addition of a
grandfathering amendment appears unnecessary. To the extent
that contracts entered into by the tenant screening companies
highlighted by SDCAA comply with the policy and express terms of
existing law, the provisions in this bill would not
retroactively expose them to new liability.
4. Prior opposition
Staff notes that several entities that were opposed to this
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measure have removed their opposition and adopted a neutral
stance toward it. Earlier versions of this bill would have
provided significantly broader protections to consumers,
including requiring mandatory disclosures in certain contracts
pertaining to the prohibitions created under the bill, as well
as other notifications concerning the rights of consumers.
Earlier versions would have also affirmatively required the user
of a consumer credit report to inform a consumer of the reasons
why the user took adverse action if adverse action was taken
wholly or in part because of the information contained in the
report. This earlier version of AB 1220 was opposed by:
American Financial Services Association; California Bankers
Association; California Chamber of Commerce; California
Financial Services Association; California Manufactures and
Technology Association; California Mortgage Bankers Association;
California Retailers Association; Consumer Data Industry
Association; Equifax; Experian; Internet Alliance; and
TransUnion.
This bill was substantively amended into its present form on May
20, 2013, and following those amendments, the entities noted
above withdrew their opposition and have taken a "no position"
position on the bill.
Support : California Association of Realtors; California Public
Interest Research Group (CALPIRG); California Senior
Legislature; Consumer Federation of California; Consumers Union;
Mari J. Frank & Associates; Privacy Rights Clearinghouse
Opposition : San Diego County Apartment Association (neutral if
amended)
HISTORY
Source : Author
Related Pending Legislation : AB 1169 (Daly) would make an
escrow agent rating service subject to certain requirements
applicable to the resellers of credit information under the
Consumer Credit Reporting Agencies Act. This bill is pending in
the Senate Banking and Financial Institutions Committee.
Prior Legislation :
AB 488 (Kehoe, Chapter 236, Statutes of 2001) requires a
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consumer credit reporting agency to disclose, upon request of
the consumer, the addresses and, if provided by the sources and
recipients of the consumer's credit information, telephone
numbers identified for customer services for the sources and
recipients.
SB 168 (Bowen, Chapter 720, Statutes of 2001) gave California
consumers the right to place a freeze on their credit reports,
which prohibits a credit reporting agency from releasing the
consumer's credit report without the express authorization of
the consumer.
SB 1607 (Figueroa, Chapter 978, Statutes of 2000) requires a
consumer credit reporting agency to disclose specified
information, including the consumer's credit score and an
explanation of the credit score, under specified circumstances.
This bill further provides that any contractual provisions that
prohibit the disclosure of a credit score by a person who makes
or arranges loans or by a consumer credit reporting agency are
void, and that a lender shall not have liability for disclosure
of credit scores under any contractual provision.
AB 453 (Havice, 1999) would have required a consumer credit
reporting agency to include all of the consumer's credit scores
and any other predictors relating to the consumer in any
disclosure to the consumer of the consumer's file. This bill
failed passage in the Assembly Banking and Finance Committee.
SB 71 (Murray, 1998) would have, among other things, required a
consumer credit reporting agency to disclose specified
information, including the consumer's credit score and an
explanation of the credit score, under specified circumstances.
This bill would further provide that any contractual provisions
that prohibit the disclosure of a credit score by a person who
makes or arranges loans or by a consumer credit reporting agency
are void, and that a lender shall not have liability for
disclosure of credit scores under any contractual provision.
This bill died in the Assembly Judiciary Committee.
AB 1629 (Peace, Chapter 1194, Statutes of 1992) provides that
consumers have a right to visually inspect all information in a
consumer credit reporting agency's files maintained regarding
that consumer upon request. This bill also specifies that no
consumer credit reporting agency may prohibit a user of a report
from disclosing the report to the consumer if the report could
be the basis of adverse action, as defined.
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Prior Vote :
Assembly Banking and Finance Committee (Ayes 7, Noes 2)
Assembly Appropriations Committee (Ayes 12, Noes 0)
Assembly Floor (Ayes 55, Noes 21)
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