California Credit Freeze Law Declared Unconstitutional

By Colleen Morgan Svelnis, J.D., Writer Analyst, CCH Financial Privacy Law Guide.

The California state credit freeze law has been declared unconstitutional by a state appellate court. California Civil Code Sec. 1785.11.2 known as the “security freeze” law, allows a consumer to place a notice on his or her credit report to prevent credit reporting agencies from releasing credit information without affirmative permission. The plaintiff credit reporting agency prepares credit reports drawn in “material” part from public records, including court documents. The law violates the First Amendment because it precludes the reporting of information contained in public records.

The security freeze statute was enacted as part of legislation intended to protect consumers from identity theft in three principal ways:

• allowing consumers to place fraud alerts on their credit reports;
• permitting them to prevent or control the release of their credit reports; and
• prohibiting specified government and business uses of Social Security numbers.

The trial court had determined the law unconstitutional with respect to information included in the consumer credit reports that is culled from public records. The trial court enjoined the credit reporting agency from disclosing information contained in or obtained from matters of public record. The appellate court concluded that the statute was unconstitutional and could not be judicially reformed as applied to the credit reporting agency; however, the law was not invalid on its face and in its entirety.

The credit reporting agency provides landlords and property managers with reports about prospective tenants. The public records consist of:

• unlawful detainer court cases;
• judicial foreclosure cases;
• non-judicial foreclosures;
• federal bankruptcy cases;
• federal and state tax liens from the County Recorder's office;
• criminal court matters; and
• other federal and state civil court cases related to real estate issues.

Credit reports obtained from the credit reporting agencies typically include “identification and employment information and credit history, including the creditor's name, payment history and nature and limit of credit.”

Test for Commercial Speech

The appellate court applied the Central Hudson test for commercial speech to the law and determined that the legislation did not survive the scrutiny. Thus, the law also would not survive the strict scrutiny standard applicable to noncommercial speech. Additionally, the court found that the statute could not be reformed to conform it to constitutional requirements. Legislative history was such that the court could not confidently say that the trial court's proposed re-writing of the statute, or any other redrafting, would “closely effectuate policy judgments clearly articulated” by the Legislature. The California Legislature intended to allow consumers to prevent disclosure of any information in a credit reporting agency report; not merely the data “contained in and/or obtained from public records” as the trial court's reformation order permits. There was no evidence the legislature intended to enact a statute that permitted a consumer to freeze disclosure of everything except information from public records.

U.D. Registry v. California (CalAppCt)