Credit Reports
By
Keith E. Whann
The Fair Credit Reporting Act (FCRA) is a federal act that
regulates the use of credit reports.
The Act is applicable whenever a consumer is affected by
information on file with a credit bureau or a reporting agency, or when a
creditor is acting as a credit reporting agency.
The primary purpose of the Act is to promote accuracy, fairness,
and privacy of information. More
specific purposes of the Act are to:
•
Ensure that obsolete information is periodically removed from a
credit report;
•
Disclose to the consumer that he or she is being investigated for
credit reporting purposes;
• Disclose to the consumer that credit has been denied or that the
charge for credit has been increased due to a credit report;
• Provide means for the consumer to determine and to contest the
accuracy of a credit report; and
• Prevent consumers from being unjustly damaged or injured by denial
of credit, insurance or employment because of inaccurate or arbitrary
information in an investigative or credit report.
The
FCRA provides statutory requirements for consumer reporting agencies as
well as users of consumer reports. A
consumer reporting agency is defined as an agency that regularly engages
in the business of assembling consumer credit information for the purpose
of furnishing consumer reports. “Users”
of consumer reports do not assemble consumer credit information but rather
use the consumer reports to review a consumer’s credit history.
Since users of consumer reports have certain obligations imposed by
the Act in connection with use of such reports, it is important to
understand the terms “consumer reporting agency” and
“consumer report” as well as the exceptions which may apply.
The
term “credit reporting agency” and “credit report” will be broadly
applied to any person or organization that gathers and reports information
on consumers but some exceptions have been enumerated in the statute.
For instance, the term “consumer reporting agency” does not
include a business which collects its own information on consumers and
then proceeds to use reports it generates as a basis for future
transactions. In addition,
the term “consumer report” does not include any report composed
entirely of information related to transactions and first-hand experiences
between the consumer and the person making the report.
It is important to note that the exception is limited to
“transactions and experiences” between the person contacted for
information and the consumer. This
exception was designed to cover “trade experience” furnished by one
creditor to another. If a
business regularly reports information other than its own experience, that
usually will constitute a consumer report within the meaning of the FCRA. For instance, if the business gives out information gained
from other creditors, it would be functioning as a consumer reporting
agency and it must comply with the Act.
The
Act further states that a communication of a decision by the financial
institution regarding whether or not it will finance the transaction does
not constitute a “consumer report” if the retailer informs the
consumer of the name and address of the bank, finance company or other
financial institution to which the application or contract is offered and
the bank, finance company, or other institution makes the disclosures
required by the Act.
Once
a dealership understands who is considered a consumer reporting agency and
what constitutes a consumer report, it must determine whether it permitted
to obtain a report. Since one of the primary purposes of the Act is to protect
consumers’ privacy, all users of a credit report must have a permissible
purpose under the Fair Credit Reporting Act in order to obtain a credit
report. In fact, the user
must certify the permissible purpose(s) for which the report is being
obtained and must certify that the report will not be used for any other
purpose.
Although
there are a number of permissible purposes listed under the Act, generally
speaking, the three purposes which are applicable in a motor vehicle
subprime lending transaction include:
Whenever the consumer gives permission in writing; whenever the
credit is extended in response to an application for credit from a
consumer; and when there is a legitimate business need in connection with
a business transaction that is initiated by the consumer.
The first two purposes are self explanatory.
If a dealership or lending institution has the consumer’s written
permission to obtain a credit report, or if the consumer has executed an
application for the extension of credit, the user has complied with the
Act. The third purpose is
more complicated because the user must determine whether it has a
“legitimate business need” and whether the consumer has
“initiated” the transaction. Given
the procedure used throughout the motor vehicle industry to qualify
customers for motor vehicle financing, some special problems can arise in
determining whether the dealership is permitted to check the consumer’s
credit.
In
February, 1998, the Federal Trade Commission issued an opinion letter
addressing this issue. According to the Federal Trade Commission, a dealership is
not permitted to obtain a consumer report on a person who comes to a motor
vehicle dealership and merely requests information from a salesman about
one or more vehicles because a request for general information about
products and prices offered does not involve a business transaction
initiated by the consumer. When
considering the more generic question of when a business transaction is
initiated by the consumer, the FTC’s view was that a motor vehicle
dealership may obtain a report “only in those circumstances in which the
consumer clearly understands that he or she is initiating the purchase or
lease of a vehicle and the seller has a legitimate business need for the
consumer report information in order to complete the transaction.”
Based
on the standard set forth by the FTC, a consumer who is comparison
shopping or asking a dealership questions about prices and financing is
not necessarily indicating an intent to purchase or lease a vehicle.
Likewise, a request to “test drive” a vehicle does not indicate
an intent to initiate the purchase or lease of a vehicle.
In these circumstances, and similar situations, the dealership must
obtain written permission from the consumer before obtaining a consumer
report. A dealership may
obtain a report and has a legitimate business need for doing so, however,
if one is necessary to arrange financing initiated by the consumer, or if
the dealer needs to check a consumer’s credit worthiness when a consumer
presents a personal check. Therefore,
while it is important to have some sense of the consumer’s ability to
qualify for financing prior to spending a great deal of time with that
consumer throughout the sales process, the dealership must understand what
constitutes a legitimate business need and, more important, when a
consumer has initiated the transaction.
If
a dealership is permitted to use a consumer report provided by a credit
reporting agency and it takes any type of adverse action that is based, at
least in part, on information contained in the report, or if a charge for
obtaining the credit is increased either wholly or in part because of
information contained in the consumer report, the dealership is required
to notify the consumer. The
type of notice required depends on the type of entity from which the
information about the consumer is obtained.
Compliance
with this notice requirement may be done orally, by electronically or by
providing the consumer with a form letter that informs the consumer that
credit has been denied or that a charge has been increased because of
information received from a specified consumer reporting agency.
The name, address and telephone number of the credit reporting
agency and a statement that the credit reporting agency did not make the
adverse decision, and cannot explain why the decision was made, must be
included in the notice as well. Finally, the user must advise the consumer of his right to
obtain a free copy of the report from the credit reporting agency if the
consumer requests the report within 60 days of his right to dispute the
accuracy or completeness of any information provided by the credit
reporting agency. Although
the Act does not specify that disclosures must be made in writing, this
procedure is strongly recommended because it provides the user with the
best evidence that he has taken reasonable steps to comply with the
Act’s requirements. Copies
of the disclosures should be retained for two years because that is the
applicable statute of limitation in most civil liability actions arising
under the statute.
The
Act also imposes notice requirements in instances when credit for
personal, family, or household purposes is denied, or the charge for such
credit is increased, either wholly or in part, because of information
bearing upon the consumer’s credit worthiness, credit standing, credit
capacity, character, general reputation, personal characteristics, or mode
of living which is obtained from a source other than a consumer reporting
agency. The user of such
information must communicate the adverse action to the consumer and
clearly and accurately disclose the consumer’s right to make a written
request for disclosure of the information that resulted in the adverse
action within 60 days of notification.
Compliance with this requirement also may be met by a form letter.
If the consumer makes such a request within 60 days of being
notified of the adverse action, the user of the information must, within a
reasonable period of time, disclose the nature of the adverse information
to the consumer. The consumer
does not have to be told the source of the information, although he may be
told, but he must receive enough information concerning the source to
permit him to verify the accuracy of the information.
Finally,
if a dealership takes an adverse action involving credit based on
information of the type covered by the Fair Credit Reporting Act, and the
information was obtained from an entity affiliated with the user of the
information by common ownership or control, a related finance company for
example, the dealership is required to notify the consumer of the adverse
action. The notification must
inform the consumer that he may obtain a disclosure of the nature of the
information relied upon by making a written request within 60 days of
receiving the adverse decision. If
the consumer makes such a request, the user must disclose the nature of
the information no later than 30 days after receiving the request. Remember, information that is obtained directly from an
affiliated entity relating solely to its transactions or experiences with
the consumer, and information obtained in a consumer report from an
affiliate, are not covered.
Although
there are penalties for the failure to comply with the foregoing notice
requirements, the good news is that the FCRA has a “bona fide error”
type defense for users of consumer reports.
The Act states that no person shall be held liable for any
violation of the two notice requirements previously mentioned if he shows,
by a preponderance of evidence, that at the time of the alleged violation
he maintained reasonable procedures to assure compliance with the
provisions of the Act. In one
of the few FCRA cases to consider this defense, the court adopted the
requirements imposed by the Seventh Circuit in a Truth in Lending case, Mirabal
v. General Motors Acceptance Corp., in which the court stated that:
Congress
required more than just the maintenance of procedures which were designed
to provide proper disclosure calculations.
Rather, it required procedures designed to avoid and prevent errors
which might slip through procedures aimed at good faith compliance.
This means that the procedures which Congress had in mind were to
contain an extra preventive step, a safety catch or a re-checking
mechanism... It is clear,
however, that Congress required more than just a showing that a
well-trained and careful clerk made a mistake.
Therefore,
based on case law, one of the most significant compliance procedures will
be the training of new personnel and the retraining of current employees
from time to time. Isolated
instances of error should be followed up and procedures should be adjusted
to correct the cause of the error.
Finally,
the Fair Credit Reporting Act permits creditors to obtain limited consumer
report information for use in connection with unsolicited offers of
credit, or advertising, under certain circumstances.
This practices is known as “pre-screening” and typically
involves obtaining a list of consumers who meet certain pre-established
criteria from a credit reporting agency.
If a dealership intends to use pre-screened lists, that person must
(1) before the offer is made, establish the criteria that will be relied
upon to make the offer and grant credit, and (2) maintain such criteria on
file for a three-year period beginning on the date on which the offer is
made to each consumer. In
addition, any user must provide with each written solicitation a clear and
conspicuous statement that:
•
Information contained in the consumer’s file was used in
connection with the transaction.
•
The consumer received the offer because he or she satisfied the
criteria for credit worthiness used to screen for the offer.
• Credit may not be extended if, after the consumer responds, it is
determined that the consumer does not meet the criteria used for screening
or any applicable criteria bearing on credit worthiness, or the consumer
is not able to furnish required collateral.
The consumer may prohibit the use of information in his or her file
in connection with future pre-screened offers of credit by contacting the
notification system established by the credit reporting agency that
provided the report. Therefore,
the statement also must include the address and toll-free telephone number
of the appropriate notification system. |
