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Back from a month-long summer vacation and ready for more blogging.
Once again, California goes its own way, regardless of the cost to financial institutions and other businesses. The Fair Credit Reporting Act, as amended in 1996 and 2003 (the “FCRA”), imposes certain restrictions and requirements on business organizations in order for information on “consumers” to be shared with the organization’s affiliates without the information sharing being considered the providing of a “consumer report” under the FCRA. Also, the FCRA clearly and specifically preempts states form enacting any laws that would restrict the "sharing of information" among affiliates. This preemption of state law by the FCRA has been assumed to be a “given” among banking practitioners, and by the Federal Trade Commission, the federal agency with primary responsibility for interpreting the FCRA.
Effective July 1, 2004, a California statute commonly known as “SB1,” imposed notice and “opt-out” requirements on financial institutions in order to share “nonpublic personal information” about “consumers” with their affiliates, which are more restrictive than those imposed by the FCRA. In a decision by a federal district court in California, rendered on June 30, 2004, the court found that the preemption provisions of the FCRA applied only to “consumer reports,” and that SB1 was not preempted by the FCRA.
The case is on appeal. The FTC and the federal banking agencies have joined the appeals process on behalf of the plaintiffs, and filed a brief last month that supports federal preemption of SB1 by the FCRA. In harsh words, the FTC and banking agencies have stated that the court’s “perception of the framework established by the FCRA is flatly wrong.” To those of us who work in this area, that is an understatement. We’re confident that the decision will be overturned, eventually.
So here we go again with California. Under the guise of protecting its citizens from harm that has been carefully considered at the national level and found to be necessary to be governed by a uniform national standard, California makes it more expensive to do business in California. Moreover, as astutely observed by L. Richard Fischer and Oliver I. Ireland of Morrison & Foerster LLP, in their excellent article on the matter in the August 20, 2004 issue of the American Banker,
“The consumer protection policies of a single state will disrupt the economies of scope and scale that have efficiently provided consumers throughout the country with more competitive prices and terms for financial services.”
As the authors also note, consumers will ultimately pay “the costs of disruption.”
The cost of doing business in California just keeps going up and up. “Business-friendly,” it’s not.
---Kevin Funnell
