Credit Reporting Act Would Null Tough State Laws

The Fair Credit Reporting Act is about to get a controversial makeover, thanks to a last-minute compromise reached by Congress this month.

The compromise legislation, which is all but certain to be signed into law by President Bush, affects an array of consumer activities -- from getting credit reports to what information can be gathered by investigators who do background checks on prospective employees.

“There is a lot of good in it,� said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group in Washington. “But we are also discovering more and more little bombs.�

The main complaint about the legislation, known as the Fair and Accurate Credit Transactions Act, is that it specifically preempts some tougher state laws, such as those passed in California in recent years.

“If you are from a state where there are no protections from identity theft, the federal law is good news,� said California state Sen. Debra Bowen (D-Marina del Rey). “But if you are from California, where there are a lot of protections from identity theft, it’s not good news.

“This is preemption, not prevention, and it’s a giant step backward for every Californian who cares about protecting their financial information,� she said.

Here’s a look at some of the areas covered by the reform legislation:

Identity Theft

Identity theft occurs when sensitive information, such as credit card numbers, bank statements or Social Security numbers, is stolen and used to establish fraudulent credit in the victim’s name.

The federal reform bill would attempt to prevent identity theft by:

* Allowing consumers to report credit fraud with one call. The three major credit reporting companies (Equifax Inc., Experian Information Solutions Inc. and Trans Union) would be required to communicate with one another so that a consumer has to call only one of the firms to get the fraud-reporting process started and create a posting to that effect in all credit files.

The posting is meant to alert other credit grantors and thus prevent thieves from opening new accounts in a victim’s name.

* Requiring that fraud alerts be maintained on a consumer’s files for no fewer than 90 days, unless the consumer requests they be removed sooner.

* Establishing an “extended fraud alert� that can last for as many as seven years at the consumer’s request. During the first five years of that period, credit reporting firms must exclude the defrauded consumer from any list provided to third parties that offer credit or insurance, unless the victim asks to be included.

* Entitling consumers who have been victimized by credit fraud to two free copies of their credit report during the year the theft occurs so they can ensure that the fraud alert has been listed and check for any new incidents of fraud.

* Requiring credit grantors such as credit card companies and banks to verify the consumer’s identity by either calling the person or taking other “reasonable steps� before issuing new credit, if the consumer’s file is flagged with a fraud alert.

Bowen said this was a step backward for Californians because state law requires that the credit grantor call the consumer before issuing new credit; there is no reasonable-steps allowance in the state law.

* Blocking credit reporting firms from distributing adverse credit information that resulted from a case of identity theft. In addition, credit reporting companies could not “re-pollute� consumer credit files with fraudulent charges that were previously wiped off a report.

In the past, consumers complained that they would painstakingly clear their records only to find that the same charges had reappeared months later.

Insurance and Health Care

In most states, credit data can be used to set insurance rates. The reform bill would let that practice continue, but it would mandate a study to determine the effect of using credit scores on the availability and affordability of insurance.

Credit scores are not used to set insurance rates in California, and the federal reform bill wouldn’t change that.

The bill would restrict the dissemination of medical information without the patient’s permission. In general, medical information could be provided to both credit companies and insurers only when the information is pertinent to the credit or insurance application.

Employment Data

Employers wanting a prospective employee’s credit information generally must get the applicant’s permission before they can get a credit file. That has been interpreted to mean that an employee or job applicant can’t be investigated for any wrongdoing -- including sexual harassment -- without the target’s permission, Mierzwinski said.

The bill would exempt certain employee investigations from the prior-approval requirement, including those that involve employee misconduct and violations of state or federal laws. However, if adverse actions are taken based on the investigation, the worker is entitled to a summary of the findings.

General Protections

The bill also would:

* Entitle all consumers to one free copy of their credit report each year, removing the need for costly credit monitoring services.

* Entitle consumers to information about their credit scores and an explanation of what the scores mean.

* Give consumers the right to opt out of pre-screened marketing lists.

* Bar retailers from printing more than the last five digits of a credit card number on any receipt provided to the cardholder. These receipts are sometimes used by thieves to order goods using the defrauded consumer’s credit card number.

Many retailers in California already delete most of a credit card number on receipts. A state law that would have gone into effect in January would have made the practice mandatory. The federal bill would give retailers until 2007 to comply nationwide.

* Allow consumers to demand that credit reporting companies truncate the consumer’s Social Security number in credit files.

Times staff writer Kathy M. Kristof, author of “Investing 101� and “Taming the Tuition Tiger,� welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes .com. For past Personal Finance columns on the Web, go to www.latimes.com/perfin.