Congress Is Close to Eliminating a Privacy Law

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The New York Times

WASHINGTON, Oct. 24 — Congress is poised to pass a law that would strike down groundbreaking rules in California intended to give people the power to stop banks, insurers and brokerage firms owned by the same company from swapping their financial secrets.

The effort, spurred by banking lobbyists, is part of a broader push by the financial services industry for legislation that would permanently abolish state and local laws that could give consumers greater control over their private financial information. Federal law already includes broad provisions pre-empting state and local financial-privacy regulations, but the existing law is set to expire at the end of this year unless Congress passes new legislation.

The California law was passed with wide bipartisan support in Sacramento two months ago after corporate lobbyists who had derailed similar legislation before were cowed by strong public support for a proposed referendum that would have established a tougher state law. Privacy advocates, concerned about the growth of financial institutions that operate many lines of business under one roof, had hoped other states would follow California’s lead by limiting how these companies can use personal financial information.

But legislation is expected to make it to the Senate floor as soon as next week that would pre-empt much of the California law and prevent other states from taking similar steps. The bill was approved unanimously in the Senate Banking Committee last month, but Senators Dianne Feinstein and Barbara Boxer, both California Democrats, have proposed an amendment that would adopt the California rules nationally. They also propose extending the current federal law by only one year, to give Congress more time to review the issue.

In the House last month, lawmakers voted 392 to 30 for a bill that would also pre-empt the state law.

Bankers and others who object to the California law, which takes effect next July, say it would lead to an unworkable patchwork of confusing state and local rules that would make it harder and more costly for people to obtain credit.

According to its proponents, the California law is intended to protect against one of the biggest fears of privacy advocates voiced after passage in 1999 of a federal law ending the Depression-era rules that barred banks, insurance companies and brokerage firms from entering one another’s businesses.

The concern was that big financial services conglomerates, newly freed to grow much larger and expand into new businesses, would establish giant databases of customer credit and financial information, like bank balances and incomes, that could be used for such things as setting mortgage rates and deciding whether to offer insurance coverage. The problem, privacy advocates say, is that all of this is happening out of the view of consumers — who would be powerless to correct or challenge inaccurate data — and out of reach of laws that regulate credit-reporting agencies.

In an interview, Senator Feinstein said that the banking industry was trying to make an end run to quash the new California rule and that despite strong support in California for the law it would be an “uphill fight” to win approval for her proposal in the Senate.

Her amendment, modeled on the state law, would allow people to bar financial institutions from sharing their private information with affiliates of the same company. For example, the banking subsidiary of one company could not tell its sister insurance company or brokerage firm about how much a customer had on deposit, or details of their credit card debts or mortgage payments. A narrow exemption would be allowed for companies that are in the same line of business, have the same regulator, are wholly owned subsidiaries and operate under the same brand name.

Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, based in Santa Monica, Calif., said that without the California law, “the door will be open to a lot of abuses when banks can share their information with thousands of corporate affiliates, even after consumers say no.”

But the Senate bill’s sponsor, Richard Shelby, Republican of Alabama, said his bill had strong consumer protections. “Will it satisfy everybody? No. Nothing does,” Mr. Shelby said. “But it’s a pretty good piece of legislation that will withstand scrutiny” and is a “big improvement” over the House version.

Mr. Shelby’s bill seeks to tighten credit-reporting standards, give consumers easier access to their credit reports, and make identity theft more difficult.

Edward Yingling, executive vice president of the American Bankers Association, added that allowing states to enforce their own conflicting financial-privacy rules would create a mess of regulations that would impair consumers’ ability to obtain loans. “With the way our economy works and with the mobility of our society these days, it’s an area where you need to have a national rule,” he said.

Ed Mierzwinski, consumer program director for the United States Public Interest Research Group, said he was “very disappointed” the Senate bill did not protect the California law. But he said Mr. Shelby, whom he described as generally strong on privacy rights, might have been “boxed in” politically and may have thought it impossible to pass a bill with protections similar to the California law.

Over all, Mr. Mierzwinski said, the Senate bill is stronger than the House bill.

Consumer Watchdog
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