Limited Credit-related Purposes for which Reports are Available, "Prescreening," and Reports on Spouses

As we’ve seen, the FCRA restricts the circumstances under which a consumer reporting agency may give a report to a user. The FCRA also prohibits a user of a consumer report from obtaining or using the report for any purpose other than one for which the consumer reporting agency is authorized to provide the report. [15 USC 1681b(f)] In addition, the FCRA imposes criminal liability on a user who obtains a consumer report under false pretenses. [15 USC 1681q]

Following are descriptions of permitted purposes that are relevant to lenders.

Credit-related Purposes

One of the circumstances under which a consumer reporting agency may provide a report is when the agency believes the person to whom the report is being given intends to use it “in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer.” [15 USC 1681b(a)(3)(A)]

If you read the quoted provision carefully, you will see that it does not include what is a very common use by users of consumer reports—to evaluate an application for credit. The provision above seems to assume that a credit transaction or account is already in existence. Where is the authority for receiving a report when you are merely evaluating an application and no actual credit transaction yet exists?

According to the FTC Commentary, the authority comes from the definition of “consumer report.” You might recall that “consumer report” is defined as any “…communication of any information by a consumer reporting agency…which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for (1) credit or insurance to be used primarily for personal, family, or household purposes….” [15 USC 1681a(d)] The FTC contends that this provision must be read together with the permitted purpose quoted above and together the provisions authorize providing consumer reports for the purpose of establishing the consumer’s eligibility for consumer credit. [16 CFR § 600, Appendix § 604—1A]

Regardless of the authority, it is well accepted that one can request a consumer report for the purpose of evaluating an application for credit.

Recall that in our discussion of rules that affect consumer reporting agencies, we noted that the FTC, in an Informal Staff Letter, has interpreted this permitted purpose as not authorizing the obtaining of a consumer report on an individual when the individual is the owner of a business that is applying for business credit, even if the individual is guaranteeing the credit. The rationale is that it is the business, and not the individual, to whom the credit is being granted. See the Informal Staff Letter from the FTC’s David Medine to Charles Tatelbaum, dated July 26, 2000, available at www.ftc.gov. A later Informal Staff Opinion, however, supersedes this opinion in a certain respect. The later opinion states that “…it is reasonable to view a business transaction in which an individual has accepted personal liability for the business debt as involving the consumer, thus providing a permissible purpose for the lender to obtain a consumer report under [15 USC 1681b(a)(3)(A)].” [See the Informal Staff Letter from the FTC’s Joel Winston to Banking Agency Counsels, dated June 22, 2001.] The later opinion does not, however, supersede the earlier with respect to other issues, such as whether merely being the owner, director, or officer, without being obligated personally on the credit, is a permissible purpose for obtaining a report on the individual under this paragraph. The earlier opinion had ruled that such a case does not present a permissible purpose.

Prescreening

Another purpose for which lending institutions sometimes use the facilities of a consumer reporting agency is to assemble a list of names and addresses of persons who meet certain financial characteristics. The institution then uses the list to send offers of credit to the persons on the list. This is called “prescreening.”

The FCRA affects prescreening in the following way: One might think that since the consumer reporting agency is supplying only a list of names and addresses with no explicit information concerning the credit worthiness, character, and so on of the persons named, the list is not a “consumer report.” However, since a person must have certain characteristics to be on the list, the agency is providing information about those characteristics. In that sense, each name and address on the list is a consumer report in itself and, therefore, can only be provided by the agency for permitted purposes. [16 CFR § 600, Appendix § 604(3)(A)—6]

Furthermore, the FCRA prohibits consumer reporting agencies from providing a consumer report in connection with a transaction “not initiated by the consumer,” unless the consumer has authorized the agency to provide his or her name or all three of the following are true: the transaction is a “firm offer” for credit or insurance, the agency has complied with requirements giving the consumer an opportunity to get his or her name off the prescreened list, and the consumer has not elected to get his or her name off the list. [15 USC 1681b(c)(1)] From the creditor’s point of view, it must make a “firm offer” of credit in order to get a list at all and that list will be limited to names of consumers who have had an opportunity to get their names off the list and have not elected to do so.

A “firm offer” is defined as an offer that will be honored if the consumer is found to have the characteristics that put the consumer on the agency’s list. Creditors are, however, allowed to impose some conditions and still have the offer be considered a “firm” offer. Creditors may require that the consumer meet preestablished credit worthiness criteria, that information about the consumer be verified, and that the consumer meet any preestablished collateral requirements. [15 USC 1681a(l)]

Finally, the FCRA requires that a person who makes a credit solicitation on the basis of a consumer report must provide the consumer with a disclosure along with the solicitation. The disclosure must state:

  1. That information contained in the consumer report was used in connection with the transaction;
  2. That the consumer received the offer of credit because the consumer satisfied the criteria for credit worthiness under which the consumer was selected for the offer;
  3. If applicable, that the credit may not be extended if, after the consumer responds to the offer, the consumer does not meet the criteria used to select the consumer for the offer or any applicable criteria bearing on credit worthiness or does not furnish any required collateral;
  4. That the consumer has a right to prohibit information contained in the consumer’s file with any consumer reporting agency from being used in connection with any credit or insurance transaction that is not initiated by the consumer; and
  5. That the consumer may exercise the right referred to in the previous paragraph by notifying a notification system. (The disclosure must also include the address and toll-free telephone number of the notification system.) [15 USC 1681m(d)]

The creditor must also maintain on file the credit worthiness criteria and collateral requirements for the offer for three years following the solicitation to the consumer. [15 USC 1681m(d)(3)]

Reports on Spouses

A final consideration in the area of permitted purposes has to do with whether a user can request a report on the consumer’s spouse. For example, if John Doe is married and is applying for a loan, can the creditor obtain a consumer report on John’s wife? The answer is that the creditor can obtain the report if it has a permitted purpose for having the report. A creditor would have a permitted purpose only if the spouse were involved in John’s credit transaction in some way such that the report on his spouse would be relevant to the credit transaction. [16 CFR § 600, Appendix § 604(3)(A)—5A] The FTC, in its Commentary, has compared this situation to the rules in Regulation B (the Equal Credit Opportunity Act regulation), which restrict the circumstances in which creditors may ask for and consider information about an applicant’s spouse.

If the creditor receives information clearly indicating that the applicant is not acting as the agent of the nonapplicant spouse, and that the applicant is relying only on separate property to repay the credit extended, and that the state law doctrine of necessaries does not apply to the transaction and that the applicant does not reside in a community property state, the creditor does not have a permissible purpose for obtaining a report on a nonapplicant spouse. A permissible purpose for making a consumer report on a nonapplicant spouse can never exist under the FCRA where Regulation B…prohibits the creditor from requesting information on such spouse. There is no permissible purpose to obtain a consumer report on a nonapplicant former spouse or on a nonapplicant spouse who has legally separated or otherwise indicated an intent to legally disassociate with the marriage. (This does not preclude reporting a prior joint credit account of former spouses for which the spouse that is the subject of the report is still contractually liable….) [16 CFR § 600, Appendix § 604(3)(A)—5B]

The rationale for this rule is the same as that for the Regulation B rules. Creditors should not be asking for or considering information about an applicant’s spouse unless the information actually has a bearing on the credit transaction, which means either (1) the spouse will be liable on the account, or (2) property in which the spouse has an interest is being offered to enable the applicant to qualify for the credit.