On a Federal Plan for Financial Privacy

Can there be such a thing as too much privacy from snoopers who want to know how much you earn and how much you owe? Does it ever make sense to bar states from erecting new barriers to those prying corporate computers?

These questions are now front and center in the public debate. In August, California passed tough new rules restricting access to individuals' financial records. Now Congress is debating bills that would gut the new California law as well as other, similar state laws in the making. But there's more to this story than keeping Mammon at bay. Without easy exchange of personal financial data, the revolution that opened credit to most Americans in the last three decades would not have been possible. And without uniform rules governing the exchange--uniformity assured by broad federal pre-emption of state laws.

Americans would not have benefited from truly national competition in mortgages and consumer loans.

The collection and commercial use of personal financial information has been largely regulated by Washington since Congress passed the Fair Credit Reporting Act of 1970. That law liberally defined the data that credit agencies could collect and the terms under which they could share it. The task of determining creditworthiness was effectively transferred from local banks to computers running credit-scoring programs. And credit scoring dramatically increased the efficiency of consumer lending, creating national markets in which dozens of lenders vie for an individual's business and institutional investors around the globe share the risk.

By no coincidence, the 1970s also marked the beginning of the rapid expansion of access to personal credit. The number of families with at least one general purpose credit card grew from 16 percent in 1970 to 73 percent in 2001. Nor is it a coincidence that the proportion of African American households with credit cards increased from 23 percent to 55 percent in the same period: The anonymity of credit-scoring reduced the chances that racial bias could cloud lending decisions.

Congress fine-tuned the FCRA in 1996. On the one hand, the amendments explicitly authorized the sharing of data with corporate affiliates--say checking account data with a bank's mortgage-lending arm. It also let data collectors furnish information to unaffiliated companies for the purpose of marketing credit and insurance. On the other hand, the amendments also made it much easier for individuals to gain access to their credit reports and to challenge their accuracy. Arguably most important, the 1996 law prohibited states from enforcing new credit-reporting laws that were inconsistent with the FCRA. But this pre-emption rule is slated to sunset at the end of 2003 unless it is renewed. In September, the House passed a bill that would make pre-emption permanent. That leaves it up to the Senate, where the fate of the pre-emption rule--and thus the fate of California's new privacy law--is being debated.

There is no magic formula for deciding how much financial privacy is too much. For example, one provision of the new California law requires banks to obtain customers' consent before sharing information with "non-affiliated" companies--a common practice that leads to all those offers for pre- approved credit, insurance and the like. But such "opt-in" consent is extremely difficult to obtain. Think how often you've discarded proxy requests from mutual funds because it doesn't seem worth the trouble to fill them out.

The opt-in rule would thus raise the cost of obtaining the information. Raising the cost barrier to mass mailings would lead to less competition. That would be no problem for affluent individuals now bombarded with mail offers. But a major benefit of the credit revolution has been its inclusiveness. And higher solicitation costs would inevitably cut deepest into offers to the less creditworthy.

States have considerable discretion in setting policy on issues ranging from education to criminal justice. Why, then, pre-empt their rights to regulate financial privacy? Why, because the torrid competition in consumer credit depends on the existence of a single national market with easy access to financial information. In practice, national lenders would be forced to operate as if all states had the most restrictive rules because it would not pay to operate under multiple rules. The FCRA has proved enormously successful in democratizing consumer credit. It is unclear whether there is much to gain in altering the rules, but there certainly is much to lose.

Robert W. Hahn is executive director of the AEI-Brookings Joint Center, which focuses on regulatory policy.

Also Visit
AEIdeas Blog The American Magazine

What's new on AEI

To secure southern border, US must lead international effort to stabilize Central America
image The Ryan pro-work, anti-poverty plan: Thomas Aquinas 1, Ayn Rand 0
image Does SNAP support work? Yes and no
image Obama Democrats lose their big bet on health exchanges
AEI on Facebook
Events Calendar
  • 21
  • 22
  • 23
  • 24
  • 25
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.