November 14, 2006

Cali Court Strikes Down Credit Freeze Law (UPDATE: May Likely Be Only Portions of It)

Filed under: Consumer Outrage,Corporate Outrage,Taxes & Government — Tom @ 10:22 am

This news has totally escaped the attention of absolutely everyone in the major media (there is almost nothing on Google News) and the blogosphere, except for Jeff at Credit/Debt Recovery (who appears to have the only item on Google’s Blog Search).

And it’s an outrage:

Credit Report Freeze Law Found Unconstitutional, May Set Precedent

A California court has struck down a consumer credit freeze law, the first known successful challenge to state statutes allowing consumers to “freeze” access to their credit reports.

The California District 5 Court of Appeals agreed last week with plaintiff U.D. Registry Inc., a credit reporting agency for property owners and managers, that the California freeze statute is unconstitutional because it bars reporting information that was already public record, therefore violating First Amendment rights.

“The statute was based on failed logic, and gives consumers the power of a gag order on public information, a power held not even by the government,” argues Michael Saltz, a partner at Jacobson, Russell, Saltz & Fingerman LLP, Los Angeles, in an interview Monday with CCR.

….. Saltz sees this successful appeal as a bellwether of challenges to come. “Some 25 states have enacted similar statutes,” he says. Those and federal statutes may violate the constitution, he says, by restricting free speech.

According to Saltz, California’s statue basically punished organizations that supply tools to the industry, which he likened to the state outlawing plastic baggies in order to stop drug dealers.

“If you are reporting facts on file, and they are true and accurate, the state cannot touch you. The credit reporting industry cannot be singled out” under law, he adds, especially as they don’t issue credit. The onus to prevent identity theft and fraud lies with credit grantors, he says.

I don’t get it. For those new to the topic, a credit freeze makes sure that no one can access the information in “your” credit files for any reason. Even you have to go through a procedure to “unfreeze” your credit if you wish to apply for credit somewhere. I realize that the data technically doesn’t belong to the consumer, but if state legislatures (and hopefully, eventually, the federal government) decide that the bureaus have a fiduciary duty to reasonably safeguard access to the data, how can the bureaus cry foul?

If there is any good to come out of this, it may be that the “credit freeze” idea may finally get the federal attenton it has needed for so long. National credit freeze legislation will give the whiners at the bureaus a uniform nationwide set of procedures for handling freeze and unfreeze requests. It will also hopefully be written in a way to head off legal challenges like the one above, which appears to be on the verge of nullifying every state freeze law passed during in the last few years.

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UPDATE: There are apparently more sober takes on the ruling, including this from CCH

While the California “security freeze” law was held to be unconstitutional as applied to a particular credit reporting agency, the “security freeze” law is not invalid on its face and in its entirety. The California “security freeze” law (§1785.11.2 of the California Civil Code) allows California consumers to prevent the dissemination of information from their consumer reports, including information derived from public documents. The credit reporting agency collected credit-related information from public records and then sold consumer reports reflecting the information to landowners, property managers, and others.

The credit reporting agency challenged the California law on federal and state constitutional free-speech grounds. The California appellate court ruled that, as applied only to the particular credit reporting agency, the “security freeze” statute was unconstitutional because the law was an excessive restriction on the agency, could not be reformed by the court to apply fairly to the particular agency, and was crafted more broadly than necessary to serve the government’s interest in protecting consumers from identity theft. However, in upholding the “facial” constitutionality of the statute in its entirety, the court ruled that the state of California had met its burden of showing that the “security freeze” law did not present a total and fatal conflict with constitutional prohibitions.

The California legislature still needs to rewrite or revise the law to accommodate the less-than-wonderful people at U.D Registry, but the CCH report gives more hope to folks that a freeze law can ultimately survive judicial scrutiny intact.

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Selected Previous Posts:
- June 26 — Just a Few More of the Many Reasons Congress Should Pass a Universal Credit Freeze
- June 26 — The FCC and Equifax Lose Data, Proving That We Should Get the Ability to Freeze Our Credit Files
- June 23 — Quote of the Day: on Proposed Federal Legislation Relating to Credit Freezes
- June 15, 2006– E-Mail to My Congressperson Advocating Universally Available Credit Freeze
- July 19, 2005 — Identity Theft: It’s Time for National Credit Freeze Legislation
- March 29 — Money Tip of the Day: Good Places to Freeze (Your Credit)

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