I do not want a new credit report.
I do not want to have to retort
Or even begin to resort
To saying, “I do not like you new credit report”.
This old one seems to work just fine.
I wish the federales wouldn’t mind
If I used it just one more time
Because this old one seems to work just fine.
Oh for the “halcyon days” of yesteryear when our customers’ financial and credit information stayed the same for decades and “just a little dab (of credit research) would do ya”. In the golden years of lending, we would obtain a consumer report (we called them credit reports back then) once a year whether we needed to or not. We would happily lend, using that same credit bureau over and over and over again, oblivious to the pending storm clouds brewing in what was to become known as the Fair Credit Reporting Act. Regulators became enamored with changing how we did things here in Hooterville and wanted us to do things the big city way. So we stumbled and we bumbled and we fumbled and found ourselves more confused than we could ever have imagined.
We’ll try and sort through the confusion, give citations for extra credit reading, and come to some sense of what the FCRA expectations are with regard to two topics: Reuse of existing credit reports; Annual review of customer credit.
Can the lender reuse an existing consumer report to underwrite a new request for credit? We believe the answer to the question is “no”.
FCRA 604(a) Permissible purposes of consumer reports: …Any consumer reporting agency may furnish a consumer report under the following circumstances and no other:
(3) To a bank which it has reason to believe
(A) intends to use the information 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
FCRA 607(a) Compliance procedures: …These procedures shall require that prospective users of the information identify themselves, certify the purposes for which the information is sought, and certify that the information will be used for no other purpose…
The foregoing FCRA sections mean that, in order to obtain a credit report, the lender must certify that it has a permissible purpose to obtain the report AND that the report will be used for that specific purpose and no other. If a report is "reused" to underwrite a later credit request, the credit report is being used for a purpose other than the purpose certified to at the time the report was obtained. Lenders are not permitted to obtain a credit report for the purpose of determining whether not a current credit application will be granted AND any future credit applications the customer might submit. Except in the instance of simultaneous applications for credit, one application for credit, one consumer report is the rule.
The prohibition cannot be removed by Bank policy (i.e.“Credit reports are considered valid for a period of one year from the date of the report.”) or by generic customer permission (i.e. “I understand that where appropriate, a consumer report may be obtained.”)
In addition to the regulatory prohibition, the lender may have a contractual restriction with the report provider that limits it from reusing a consumer report. The following is common verbiage found in most credit report contracts: “We certify that consumer reports, as defined by the Fair Credit Reporting Act, will be ordered only when intended to be used as a factor in establishing a consumer's eligibility for new or continued credit (i.e. modifications to existing accounts), collection of an account, insurance, licensing, employment purposes, or otherwise in connection with a legitimate business transaction involving the consumer and such reports will be used for no other purpose."
Another regulatory factor against reusing an existing consumer report to underwrite a new request is that the consumer may have placed a fraud alert or credit freeze on his or her consumer report to combat actual or suspected identity theft, and without a new credit report, a lender would be unaware of that action. The lender may perpetuate the consumer’s identity theft problem by granting credit underwritten by an old consumer report. Where a consumer report is obtained, Section 605.A(h) of the FCRA prohibits the lender from proceeding with any application for credit where a consumer report reveals that there is a fraud alert or credit freeze without first addressing the alert or freeze. The lender may find itself in legal hot water for granting credit while using an old consumer report without knowledge of the consumer’s freeze or alert or for granting credit using a new consumer report without regard to freeze or alert warnings on the consumer report.
Finally, there is the issue of providing accurate risk-based pricing (RPB) or exception notices as required by Regulation V. Without the benefit of a new consumer report, the Bank will not be able to provide an accurate risk-based pricing or exception notice. Because a consumer’s information can quickly change, using data from an old consumer report to create an RBP or exception notice could cause the Bank to violate the Regulation by providing inaccurate information in the notice with regard to credit score, factors influencing the score, etc.
Can the Bank obtain a new consumer report to review the credit of an existing loan customer? We believe that the answer to the question is generally “no”.
FCRA 604(a) Permissible purposes of consumer reports: …Any consumer reporting agency may furnish a consumer report under the following circumstances and no other:
(3) To a bank which it has reason to believe
(A) intends to use the information 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
In the FTC’s informal Gowen staff opinion letter, it states “Your questions raise the issue of whether a creditor in a closed end credit transaction may exploit consumer reports obtained for "review" purposes in order to market its products or services. In the circumstances you described, we believe the answer is "no." The permissible purpose created by this provision, however, is limited to an account review for the purpose of deciding whether to retain or modify current account terms.
The terms of a closed-end credit transaction are predetermined and generally may not be changed unilaterally by the creditor unless the contract expressly provides for such action (e.g., in the event of default). Therefore, the creditor is unlikely to have a reason to consider "whether to retain or modify current account terms" and, thus, would not have any routine need to procure consumer reports to "review" its accounts. Second, the credit bureau must require the creditor to "certify the purposes for which the information is sought, and certify that the information will be used for no other purpose.”
In the FTC’s informal Benner staff opinion letter “Once an account is closed because the consumer has paid the debt in full (and also, in the case of an open-end account such as a credit card account, notified the creditor to close the account), it is our view that no permissible purpose exists for a CRA to provide file information on a consumer to the creditor. Because there no longer exists any account to "review" and the consumer is not applying for credit, the FCRA provides no permissible purpose for the creditor to receive a consumer report from a CRA.”
A recent FTC Staff Report notes, “A report from a CRA on the personal credit of a consumer to a business credit grantor is a “consumer report” regardless of the purpose for which the information may in fact be used. Reports obtained from CRAs on consumers retain their character as “consumer reports” even if they are subsequently furnished in connection with a commercial credit or insurance transaction.”
The regulatory cite along with the informal letters and staff report hold that review of a close-end account is not a permissible purpose to obtain a consumer report. Furthermore, use of a consumer report to review a closed-end, non-consumer credit account is also prohibited.
In order for a creditor to have a permissible purpose to obtain a consumer report to review an account, it must have an existing credit account with the consumer and must use the consumer report solely to consider taking action with respect to the account (e.g., modifying the terms of an open end account, changing the rate, etc.).
Lastly, the FCRA does not distinguish between “hard pulls”, where the credit score can be impacted and “soft pulls” where it cannot be impacted. The Bank must have a permissible purpose to obtain a consumer report in either instance. So for instances of account review, both “hard pull” and “soft pull” consumer reports come under the same restrictions.
So, as the cold, harsh regulatory climate in which we live drags us away from the cheerful warmth of the old credit report, we trudge onward with the new credit report, walking uphill both ways in waist-deep snow.
