The first problem with the proposed changes to Section 615 is the obvious lack of clarity in the use of the term "adverse action." The present provisions of the FCRA are clear and unambiguous. We believe the introduction of such terms as "adverse action" leads to confusion and lays the foundation for broad over-interpretation by the Federal Trade Commission.

Proposed Section 614 (a) (2) would require the user to furnish the consumer with a copy of the report if "adverse action" is taken. We object to this change in existing law because it unnecessarily puts the bank between the consumer and the agency which prepared the report. Moreover, the duty of explaining the information contained in the report is with the consumer reporting agency, not the user. One of the principal reasons why the FCRA has worked is that it gets the consumer and the agency together to talk over their disagreements and iron out misunderstandings. We feel that this particular amendment would impede this vital aspect of the Act.

To require the user of the report to furnish a copy to the consumer or to summarize an oral report is tantamount to requiring the user to explain the report in full to a consumer who may be seeing such a report for the first time. After being thoroughly overwhelmed and confused by the various credit reporting agency codes and abbreviations, the consumer may well be in the position to object to the information that appears therein. There is precious little the creditor could do to explain an error or obsolete item to the satisfaction of the consumer. At best, the creditor could only hope to be able to retain a cordial relationship with the consumer. We do not seek nor should we be expected to accept the function of the credit reporting agencies in this area.

With respect to proposed Section 615(b), we object to the requirement that if a user obtains, from a person other than a consumer reporting agency, information which results in "adverse action" to the consumer, it must disclose such fact in writing to the consumer at the time the adverse action is taken and disclose the nature, substance and sources of the information. This section would prove very costly to banks. For example, when a bank takes a credit applicant is asked to list several credit references. The credit references are then contacted to determine the applicant's credit performance with that firm. Under normal operating conditions, this exchange of information is invaluable in determining an applicant's ability to handle his debts. If a bank is forced to comply with the requirements of this proposed section, then it obviously would be quite costly and very burdensome to make the required disclosures to the applicant each time we contacted a credit reference. The requirement of this proposed amendment is simply unnecessary. The credit applicant knows that the bank will contact listed credit references. We feel this section only places additional red tape on users and provides no added benefit or protection to the consumer.

SECTIONS 13 AND 14. SECTION 616-WILLFUL NONCOMPLIANCE AND SECTION 617

NEGLIGENCE

Sections 13 and 14 of S. 1840 propose to amend Sections 616 and 617 of the Fair Credit Reporting Act, the civil liability sections.

The proposed amendment to Section 616, found in Section 13 of the bill, would impose a minimum punitive damage of $1,000 for each willful and knowing noncompliance with the Act. Such damages would be in addition to any actual damages and, if the action proved successful, costs of the action with reasonable attorney's fees as determined by the court. We can see no need for allowing, or perhaps encouraging, suits by either individuals or classes of consumers by imposing a minimum award of $1,000 for willful violations of the provisions of the Act. In this era of class action suits, whether meritorious or spurious, we believe such a proposal to establish minimum damages of $1,000 per violation would be untenable. Although the statute has been in effect for more than four years, we are unaware of any gross violations by credit reporting agencies or users of credit reports which would justify amending the law to make the agencies or banks such attractive targets for plaintiff's attorneys. Indeed, our experience is to the contrary and we know of only isolated instances of suit for violation of the provisions of the statute. We cannot detect any basic shift in public policy within the past four years which would mandate such a dramatie shift in the civil penalty provisions of the statute.

In Section 617, the measure of damages allowable in any individual action for negligent noncompliance would be the actual damages, special damages as the court may allow but not less than $100 for each item of erroneously reported

information and, in a successful action, costs of the suit with reasonable attorney's fees as determined by the court. In addition, a proposed Section 617(d) saves consumer reporting agencies and users of consumer reports from liability if they show up a preponderance of the evidence that, at the time of the violation, the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of reasonable procedures to assure compliance and avoidance of error.

The savings clause of Sections 606 (c), 610(e) and 615(c) have been deleted and, apparently, are now incorporated under S. 1840 in Section 617. We would not object to such an incorporation provided we were not exposed to any increased liability by such a change. But it is quite clear to us that our exposure would be greatly increased notwithstanding whatever steps were taken to make certain that the information received in credit reports was accurate since the present limitations on liability found in Sections 606 (c) and 615(c) prevents liability for violation of the Section if the defendant can show by a preponderance of the evidence that at the time of the violation, he maintained reasonable procedures to assure compliance.

We believe that the language of the bill may very well result in allowing class action suits for establishing civil liability for negligent noncompliance. Since the possibility of class action suits is not specifically precluded in Section 617, we believe it could be easily interpreted as allowing both individual and class action suits for negligent noncompliance as well as for willful noncompliance under Section 616. The experience of the banking industry with the plaintiff's bar is less than favorable since many large institutions have been singled out for what amounts to nuisance suits. We urge this Subcommittee to give due consideration to the balance needed in this area and not to enact legislation that results in making certain institutions attractive targets for litigation.

SECTION 15. SECTION 621-ADMINISTRATIVE ENFORCEMENT

Section 15 of S. 1840 proposes to amend the administrative enforcement provisions of Section 621 of the FCRA by vesting in the Federal Trade Commission the authority to issue regulations to carry out the purposes of the FCRA. We find no apparent reason for proposing to give the F.T.C. regulatory authority under the Fair Credit Reporting Act.

The proposed language vesting F.T.C. with regulatory powers seems to trace the language appearing in the Truth in Lending Act wherein the Board of Governors of the Federal Reserve System were given unprecedented powers with respect to the rule-making authority. We believe the vesting of the Board with such broad powers was desirable under that Act due to the complexity of the subject matter which called for a great deal of flexibility in the regulatory agency. However, the FCRA is not so complex that an administrative body is needed to interpret its provisions. It is simple, straightforward, unencumbered and self-executing. We believe it should remain so and would urge against vesting any agency with rule-making authority.

In addition to our belief that any need for a regulatory body is unnecessary, we are strongly opposed to vesting the Commission with any regulatory power over any segment of the business of banking. In the proposed amendment to Section 621, the F.T.C. would be empowered to regulate both the consumer reporting agencies and users of consumer reports. Basing our judgment on our experience with the Commission, we are of the opinion that the F.T.C. would use the area of regulatory control of banks as users of consumer reports as a fulcrum to obtain broader control over aspects of the banking business which are only indirectly related to the use of consumer reports. Specifically, we refer to our experience (when) with the Commission in its proposed Trade Regulation Rule concerning Preservation of Buyers' Claims and Defenses which was intended to abolish the concept of Holder in Due Course by imposing certain rules on merchants. By our reading of the rule, the Commission proposed to make it imposisble to determin whether or not a check was negotiable from the face of the instrument. The Commission proposed to destroy this unique banking tool through indirect regulation. The retailer would have borne the burden of the regulation but the retailer's compliance with the F.T.C. proposal would have created chaos for our industry. We are at a loss to understand how the F.T.C. could be given rule-making authority over the Fair Credit Reporting Act in light of the statements in the Findings and Purpose provisions appearing in Sectoin 602 of the Act. Indeed, "the banking system is dependent upon fair and accurate credit reporting." Since

that is the case, if a regulatory agency is needed to promote that purpose (and we do not believe any regulatory agency is needed), it seems only logical that one of the principal bank regulatory agencies be given the regulatory responsibility to write rules interpreting the Act.

The costs of complying with S. 1840 to the credit bureaus and other consumer reporting agencies will be significant. The ultimate burden of these costs will be borne by the consumer. Does the consumer really want more protection than is presently afforded by the Fair Credit Reporting Act? When Senator Proxmire introduced this legislation he said that "the Federal Trade Commission had received more than 20,000 complaints since the original act went into effect in 1971." (I understand the 20,000 figure was challenged by major consumer reporting agencies which resulted in a reduction of this number to less than 600 bona fide complaints.) The Senator also stated that "major reporting agencies supply more than 100 million reports annually." By my calculation that comes to over 400 million consumer reports generating less than 600 formal complaints over a four-year period. This is not to say that only 600 consumers had grievances against reporting agencies; we are not so naive as to assume that. However, it does indicate that the FCRA as it now exists is working and working effectively. We believe it is not necessary to amend a law which will result in added costs to the overwhelming majority of consumers who simply do not feel a need for this extra protection.

In conclusion. I will attempt to portray what really goes on in the world of consumer banking.

To begin with, as bankers we value our customers above all other business opportunities. They provide more deposits and their demands for financial assistance exceed all requests from the government or the private business sector. Once the customer requests a loan the process of developing relevant information to determine his qualifications begins. In some cases, the customer has established a solid record of reliability with the lender through past performance so that the loan officer merely obtains a signature on the promissory note and funds the loan. In most cases, however, the loan officer asks for the completion of a loan application which outlines the customer's stability and capacity to service the debt. The application does not identify or describe the customer's character. The loan officer's primary sources of information for determining character happen to be consumer reporting agencies or other lenders listed on the loan application as credit references. The depth of investigation by the loan officer varies according to the customer's stability, disposable income, and amount of credit requested.

This search for information is not a vicarious trip into the customer's private life. The customer expects to be investigated and he very, very rarely ever suffers from the procedure. The question of relevant information gathering by the loan officers is difficult to address because of the variety of circumstances presented by loan applications. What may be relevant in one loan situation may not be relevant in another. This is one more reason why this Subcommittee should not attempt to write into the FCRA a standard of relevancy which we believe is unwarranted under any circumstances. It will only serve to hinder the consumer and the banking industry.

Consumer reporting agencies develop as much meaningful information as they can on a customer, such as residency, employment, habits of honoring obligations, and recent trade inquiries. This information is disseminated to users without prejudice or subjective comment. As bankers we must then evaluate this infor mation. In most cases a confirmation of residency, employment and paying babits is sufficient. Unfortunately, in our society we have people seeking credit who have no intention of paying. Fraudulent loan applications are not uncommon.

In 1974, the Bank of California credit card division lost $134,000 in fraud and in 1975, through October 31, the figure is $83,000. This occurred despite preinvestigation by a full-time expert trained to spot such activity. The credit card industry will lost over $60 million this year in fraud-much of it intentional by organized rings.

Obviously then, there are times when the investigation of an applicant for credit must go beyond the normal process and the question of relevant information becomes clouded. Identifying a fraudulent applicant or declining an irre sponsible would-be customer is a challenge frequently faced by loan officers.

As bankers we depend completely on the trust of our depositors for without them we have nothing. These depositors are our customers. They rightfully

assume that we will not haphazardly handle their deposits. To avoid this we must have the capabilities to develop adequate information within reasonable constraints. S. 1840 seems aimed at thwarting this effort.

It seems that on the one hand we have the regulatory agencies, such as National and State Bank Examiners, telling us to exercise prudence in lending while at the same time we have Congress considering legislation which diminishes our opportunities to develop the necessary background information to make prudent decisions.

A final point. What are the motivations for change of policy by management or for change in the law by Congress? Speaking for management, the presidents of banks receive occasional verbal and written communication challenging bank policy. In almost all cases the complaints are handled to the customer's satisfaction. Occasionally, an employee is reprimanded or even terminated for failure to propertly interpret or implement policy but very rarely is policy changed because of challenges raised by an extreme minority.

We cannot design policy to satisfy everyone nor can we design policy to totally control the judgments, emotions or work habits of our people.

The solutions are not always new policies or new laws or changes in existing policies or laws. S. 1840 is an attempt to amend a law which has been in effect for almost five years; it seems to be working to the satisfaction of the vast majority. Why change it?

Thank you for allowing me this opportunity to express our views.

[An additional letter was received from Mr. Selberg. It may be found at p. 987.]

Senator PROXMIRE. Mr. Vaughan.

STATEMENT OF WALTER W. VAUGHAN, VICE PRESIDENT, AMERICAN SECURITY & TRUST CO., WASHINGTON, D.C., ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

Mr. VAUGHAN. Senator, I'm Walter Vaughan. I am vice president of the American Security & Trust Co. of Washington, D.C., and I am vice chairman of the installment lending division of the American Bankers Association. I appear today on behalf of that association.

I would ask that our statement be made a part of the record. Senator PROXMIRE. Yes. Without objection, it will be printed in full. Mr. VAUGHAN. My intention today in the interest of time is to summarize quite quickly our concerns.

I had the opportunity to appear before this subcommittee in October of 1973 on S. 2360, and I am not aware of any significant evidence that would prove that any changes to this legislation are necessary at this time which is the same position I took on behalf of the Association in 1973.

The Fair Credit Reporting Act was enacted to aid the consumer in his efforts to successfully obtain credit and we do submit that the act is working in the manner in which it was originally intended.

I'm in complete support of my colleague, Mr. Selberg, that we do not feel that any change is in the best interest of the consumer or the banks which would result in a classifying of banks as credit reporting agencies or which may result in the restriction of the availability of credit information from sources other than credit reporting agencies, or which may result in costly exposure to unjustified civil litigation or which may subject the banking industry to either the direct or indirect control of the Federal Trade Commission.

We are also concerned by the requirements in 615 that notices should be in writing. In 1973, at the request of the committee, we did submit some additional data which would indicate that banks for the most part do use a form letter in those cases where we cannot personally

discuss the decision to decline with the customer. We frankly encourage the applicant and we encourage our loan officers to discuss the reason for the decline, so that we may counsel the prospective applicant and make him better equipped in the credit community in the future. We believe that good business practice requires an explanation of the denial of the extension of credit. Sometimes it is not possible to discuss these declines with the customer and in these cases, we do use a form letter.

I have a copy of such a letter which is very similar to the one I submitted in our previous testimony that outlines under item 1 the name of the credit reporting agency where we state, "You may, if you wish, communicate directly with these agencies. They are required by law to disclose to you the information about you contained in their files." Under item 2, "Information was received from a source other than the consumer reporting agency. If you send a written request to the undersigned within the next 60 days, we will disclose to you the nature of the information we received."

A poll of my contemporaries would indicate that that type of form letter is still in use by banks where they are unable to contact the customer directly or personally.

We are concerned by the elimination of any of the sections which would disallow the evidence of reasonable procedures to assure compliance and avoidance of error. It seems to us that the evidence of reasonable procedures to assure compliance and avoidance of error would be essential to show that the violation resulted from a bona fide error. We find no reason for proposing that the Federal Trade Commission be given regulatory control because we feel that the act as it stands now is rather clear and unambiguous.

We, as a banking industry, and more particularly from the installment lenders or consumer lenders viewpoint, are deeply concerned by the additional costs that could be incurred by this type of legislation if enacted, which as a practical matter may benefit a very small class to the detriment of a significant majority.

Consider how much legislation which imposes additional cost requirements on consumer lenders can be borne before reassessment of lending principles will have to be made. I can assure you that our management and the management of many of our banks is closely evaluating the installment lending operations because of the very narrow profit margin brought on not only by the increased cost of funds, the increased operating costs, but the legal limitations on interest rates. This is not to say that the installment lending community would not be involved or that the banks would withdraw from installment lending, but I frankly feel that it could result in the restriction of the availability of credit to many of the customers that we are now dealing with.

I don't feel that those customers would be denied credit in the overall consumer lending field, but they may, and I am sure that some of them may have to go to higher rate lenders.

If our operating costs continue to rise as they have been we will have a great deal of difficulty with our management in the placing of funds into the consumer credit divisions. That's not an opinion of my own. It's one I share. It is a subject of discussion and has been a subject of discussion over the last year and a half in meetings with