“Financial Privacy, Consumer Prosperity, and the Public Good: Maintaining the Balance”

For more than thirty years, the Fair Credit Reporting Act (FCRA) has regulated the U.S. credit reporting system. In a new paper from the AEI-Brookings Joint Center on Regulatory Studies, Fred H. Cate, Robert E. Litan, Michael Staten, and Peter J. Wallison argue that when Congress reviews the law in advance of a January 2004 deadline, it should maintain the balance of provisions that allows consumers attractive benefits such as instant credit without sacrificing their privacy.

At the same time, the authors recommend several improvements to the law, most notably development of a layered privacy notice system that would help consumers understand companies’ privacy policies.

According to the paper, the 1970 law—as amended in 1996—creates a simple, powerful, and largely self-enforcing regulatory structure over credit report information. Because of the inherently national character of credit reporting, its importance in the U.S. economy, and the significant impediments and costs that state regulation could impose, Congress in 1996 preempted state laws that would alter the balance between maintaining consumer benefits while still securing their privacy, and stipulated that preemption expire on Jan. 1, 2004.

Congress is scheduled to review the FCRA to determine whether the 1996 changes yielded the intended benefits. The authors assert that despite the enormous gains in credit reporting that resulted from the amendments, policymakers should:

Maintain the 1996 FCRA Preemption. To maintain the careful balance in the 1996 legislation, Congress should eliminate the Jan. 1, 2004 sunset provision.

Avoid Unnecessary Impediments to the Use of Credit Information. Congress should avoid imposing new restrictions on the content and use of credit data without first requiring evidence that restrictions are necessary to remedy a specific harm, and that the remedy does not impose greater costs than the asserted harm.

Make Opt-Out Notices Work. The FCRA gives consumers the right to choose not to have their credit report data used for prescreening or shared across affiliated companies. Steps that would improve this opt-out system would enhance privacy protection while preserving consumer benefits. The authors say Congress should amend the law to require that opt-out notices—particularly as they relate to prescreening and affiliate sharing—be clarified.

Make Privacy Notices Work. If privacy notices are to be the cornerstone of privacy regulation, they should be clear and noticeable to consumers. The authors recommend development of a layered notice system that would provide a clear, succinct initial notice that contains the information that consumers want, and instructions on where to find an easily accessible statement of a company’s complete privacy policy. A layered system, the authors say, would make it easier for consumers to understand and act on their privacy rights than the current, cumbersome system.

The Authors

Fred H. Cate is a professor of law and the Ira C. Batman Faculty Fellow at the Indiana University School of Law, Bloomington. He is also a senior policy advisor at the Hunton & Williams Center for Information Policy Leadership and a visiting scholar at AEI.

Robert E. Litan is co-director of the AEI-Brookings Joint Center for Regulatory Studies, vice president and director of the Brookings Economic Studies Program, and Cabot Family Chair in Economics at the Brookings Institution.

Michael Staten is Distinguished Professor and director of the Credit Research Center at the McDonough School of Business, Georgetown University.

Peter J. Wallison is a resident fellow and co-director of the Program on Financial Market Deregulation at the American Enterprise Institute.