The Fair Credit Reporting Act Made Simple
By: Keith E. Whann
The Fair Credit Reporting Act (FCRA) was enacted to promote accuracy,
fairness and privacy of consumer credit information. The main purposes
of the FCRA are to disclose to consumers that they are being investigated
for credit reporting purposes and to prevent them from being unjustly
damaged because of inaccurate or arbitrary information. Naturally, any
dealership that deals with the financing of a motor vehicle purchase
must comply with the FCRA. Since the FCRA imposes different obligations
on consumer reporting agencies and those who use the consumer reports
to evaluate consumer credit, the first step toward compliance is understanding
what these terms mean.
The FCRA does not define the term “user” of a consumer report, but courts
have held that anyone receiving a consumer report and applying it to
a consumer is a user, whether the user obtains a credit report directly
or indirectly from a reporting agency. A “consumer reporting agency”
is the entity that assembles the credit information for the purpose of
furnishing it to others. This definition is construed broadly to encompass
any person or organization that gathers and reports information on consumers,
but there are some exceptions. For example, a company that collects information
and generates reports based solely on “transactions and experiences”
between itself and its consumers is not considered a “consumer reporting
agency,” nor is the report it generates deemed a “consumer report” for
purposes of the FCRA. The FCRA further states that the communication
of a decision regarding whether or not a company will finance a transaction
does not constitute a “consumer report,” so long as the consumer is given
the name and address of the financing source to which the application
or contract is offered and that source makes the disclosures required
by the FCRA.
Once a dealer understands the definition of a consumer reporting agency
and what constitutes a credit report, the next step is to recognize that
there are limitations on its ability to obtain a credit report. All users
of a credit report must have a “permissible purpose” under the FCRA in
order to obtain a credit report. Although there are a number of permissible
purposes listed under the FCRA, generally speaking, the three purposes
that apply when a consumer is financing the purchase of a motor vehicle
include: Whenever the consumer gives permission in writing; whenever
credit is extended in response to an application for credit submitted
by the 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 financing source
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 FCRA. 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 methodology that has been used in the past throughout the
motor vehicle industry in qualifying consumers for motor vehicle financing,
some special problems can arise in this area. While it is naturally important
to have some sense of the consumer’s ability to qualify for financing
prior to spending a great deal of time with that customer throughout
the sales process, the dealership must understand what constitutes a
legitimate business need and, more importantly, the consumer’s initiation
of the transaction.
Five years ago, merely considering extending credit to a consumer in
connection with the sale of a motor vehicle would, in many cases, have
been enough to satisfy the requirement for a legitimate business need.
In 1998, the Federal Trade Commission (FTC) opined on this issue and
stated that a consumer merely asking questions about prices and financing
is not necessarily indicating intent to purchase a vehicle from that
particular dealership. Accordingly, the dealership does not have a legitimate
business need for a credit report in this situation. If the consumer
were simply comparison-shopping or test driving a vehicle, the dealership
would have to obtain written permission from the consumer prior to obtaining
a credit report. Only in those circumstances where it is clear to both
the consumer and the dealership that the consumer is initiating the purchase
of a specific vehicle and the dealership has a legitimate business need
for the credit report may the dealership obtain a report without written
permission. A dealership may, of course, obtain a credit report if one
is necessary to obtain financing initiated by the consumer.
If a dealership is permitted to obtain a credit report and it takes
any type of adverse action or increases a charge in connection with the
extension of credit based on the information it receives, it may be obligated
to provide the applicant with an “adverse action” notice. These notice
requirements apply to both consumer and business credit applicants and
all types of credit, including loans, credit sales and any other request
to put off a payment. As defined in the FCRA, an adverse action occurs
when a user refuses to grant credit in substantially the amount or terms
requested. In addition, there is a sweeping catchall clause that includes
any action adverse to the interests of the consumer in connection with
an application or transaction initiated by the consumer.
Because of the number of terms involved in a credit transaction, questions
often arise as to when credit “as requested” has been denied. Clearly,
adverse action notices are required when financing is denied outright,
when less credit is provided than requested, when an increase in the
amount of credit is denied, or when a charge in connection with financing
is increased. This would include cases where a larger down payment, a
shorter term, or a cosigner or guarantor is required as a condition of
financing and if a seller of goods rejects a consumer’s attempt to condition
a purchase on the consumer finding suitable financing based on information
from a credit report or third party. An adverse action notice should
be provided even if financing is not denied for any specific reason,
but because the consumer’s score on a credit scoring system was below
the financing source’s minimum standards, as long as a credit report
had some relevance to the establishment of the consumer’s score. Remember,
when a consumer applies for financing, there is no denial if a counter
offer is made and it is accepted by the consumer.
The type of information that must be included in an adverse action notice
depends upon the basis for the action. In general, a consumer is entitled
to know the reasons for the adverse action, whether or not a reporting
agency is involved and/or whether information from a third party other
than a reporting agency was at least partially responsible for the action,
and how to obtain more details about the source of information that resulted
in the adverse action. In certain situations, an affiliate of the dealership
must notify the consumer of the action and disclose the nature of the
information upon which the action was based. The only time an adverse
action notice is not required is if the information is obtained directly
from the consumer’s application or is based solely on the user’s own
past experience in direct transactions with the consumer.
Although the FCRA does not specify that adverse action notices must
be made in writing, this procedure is strongly recommended because
it provides the dealership with the best evidence that it has taken
reasonable steps to comply with the notice requirements. The dealership
does not necessarily have to make the disclosures itself. It may contract
with a third party to provide the required disclosures or rely on the
financing source. However, the dealership‘s reliance on the third party
must be reasonable and must be monitored. The failure to comply with
the notice requirements could result in payment of the actual damages
and attorney fees the consumer incurs, and, in certain situations,
statutory and punitive damages. The good news is that for many of these
notice requirements, the maintenance of proper procedures may provide
the dealership with a viable defense. If a dealership can demonstrate
that a violation occurred notwithstanding the fact that it maintained
reasonable procedures to comply with its obligations under the FCRA,
it may limit its potential liability. In Carroll V. Exxon Co.,
U.S.A., one of the few court decisions addressing this defense, the Court indicated
that to successfully raise a defense under the FCRA, the procedures
must be designed to avoid and prevent errors which might slip through
procedures aimed at good faith compliance. This means that the procedures
should contain an extra preventive step, a safety catch or a re-checking
mechanism.
Credit and Privacy related issues have received a great deal of regulatory
attention recently and are gaining popularity among Consumer Protection
Lawyers. The Federal Equal Credit Opportunity Act, as well as state law,
may impose additional disclosure requirements. A quick review of your
dealership’s policies and procedures would be very timely and might help
prevent a problem in the future. |
