Don’t Let Congress Freeze Your Credit This Holiday Season

Now, many—probably most—of these purchases are done on credit, which is an essential part of how money flows in developed economies. (Most of our money doesn’t physically exist, of course.) When credit freezes up, that can frustrate the entire economy. And that could happen if one well-intentioned but misguided piece of legislation becomes law.

In September, a cyber-attack breached the data 143 million Americans had with Equifax, one of the three major US credit-reporting companies (along with Experian and TransUnion) that evaluates consumers’ financial history.

In response to this, many lawmakers want to protect consumers (which is good) through tougher regulations of the credit industry (which can be not so good). Sen. Elizabeth Warren (D-Mass.) and Brian Schatz (D-Hawaii) came up with a solution—the Freedom from Equifax Exploitation or FREE Act (hah). Banking Committee Chairman Mike Crapo (R-Idaho) included it in the bill that just left his committee.

The FREE Act would—in lawmakers’ own words—revise fraud alert provisions and establish a process whereby a consumer reporting agency must place a free credit freeze on the consumer’s file upon their request. All of this would be done under the authority of the Consumer Financial Protection Bureau.

But when you look at it closer, the FREE Act is a panicked over-reaction that will prompt more credit freezes than the market can bear. FREE would open the door to harmful regulation of an industry that provides a critical service to markets.

Under this credit freeze system, consumers could be hit with higher costs and delays in getting credit. Even worse, according to a Wall Street Journal article by credit experts, freezes could create market disruptions that can harm both businesses and consumers.

One of these experts calls freezes as “restrictive and cumbersome” and advises clients to consider other steps like changing passwords and self-monitoring. Another expert noted that a credit freeze can give consumers a false sense of safety, causing them to neglect important precautions, like monitoring their monthly statements.

(What? Personal responsibility can do more than a government over-reach?!?!?)

Freezing and unfreezing a person’s credit shouldn’t that big of a deal, under the best of circumstances. But when a website or phone service is overwhelmed—say for example in the case of a data hack affecting 143 million people—it could take several days to unfreeze one’s credit. And a credit freeze could come back to bite consumers if they forget to unfreeze their credit.

Furthermore, credit freezes don’t protect you from fraud. They won’t stop somebody from running up a balance on an existing credit card, draining a bank account, or even filing a fake tax return in your name.

University of Alabama statistics professor James Cochran went even further, saying that less credit means less demand that means lower prices and potentially more unemployment. “In the worst-case scenario, this cycle repeats and leads to an economic downturn,” he said.

Moreover, giving any more power to the Consumer Financial Protection Bureau (CFPB) is moving the needle on democracy the wrong way.

Set up after the financial crisis, the CFPB was designed to protect consumers from exploitation by bad financial actors like predatory lenders. A good goal, but the implementation would scare George Orwell.

The CFPB operates outside of traditional government authority, with broad powers and no accountability. It receives its funding from the Fed, not Congress with – get this – zero budget transparency. (Remember when Obama said he had “the most transparent Administration in history?” It was not.)

CFPB has plenty of critics. The Congressional Research Service described the “great deal of uncertainty” around its “broad and flexible authorities.” The appeals judge who ruled CFPB unconstitutional last year said its director “is the single most powerful official in the entire United States Government” after the president. Sen. Mike Lee (R-Utah) and Sen. Ben Sasse (R-Neb.) described the group as “the single-most egregious example” of a “headless fourth branch.”

Rather than burdening the credit market with unnecessary regulation, a better alternative to the FREE Act is legislation cooked up in one of our laboratories of democracy: Pennsylvania House Bill 1847. Sponsored by state Reps. Brian Ellis (R-Butler) and Mike Driscoll (D-Phila.), it takes a balanced approach that Washington should follow.

It requires credit companies to notify customers in the event of a breach, in plain language, and report it to the Bureau of Consumer Protection. It would waive any fee attached to credit freeze, which charges up to $10 per account, in the event it’s necessary.

Better monitoring, enforcement of existing laws, and cybersecurity measures could protect consumers from another breach like Equifax. But it’s less fun for critics to say something restrained than something as overblown as a “whole industry should be completely transformed!” (which, I’m sad to report, Warren actually said).

Warren and Schatz’s over-reach is like shooting your horse if he stumbles when what he really needs is just a new pair of horse-shoes. TransUnion and Experian are both doing fine (their stock dipped after the breach but have both recovered) and have an extra incentive to outperform their shamed rival. Congress should scrap this plan and replace it with something like Pennsylvania’s HB 1847.