The recent success of lawsuits alleging that financial institutions impermissibly accessed a consumer’s credit report have encouraged filings of additional suits, some of which have resulted in six-figure payments. Consequently, implementing a best-practice policy related to pulling credit reports for extensions of credit can go a long way in mitigating litigation risks for banking institutions.
Under the Fair Credit Reporting Act (FCRA), financial institutions may access a consumer’s credit report only for a permissible purpose. A permissible purpose exists when there is a credit transaction involving the consumer and the extension of credit to, or review or collection of, the consumer’s account. One way to be certain that no violation of the FCRA exists is requiring the consumer to complete and sign a credit application acknowledging that the information provided is true and correct before any credit reports are pulled. In addition, the application should contain an acknowledgment by the consumer that credit reports will be pulled in order to evaluate the application. In the absence of a signed acknowledgment, it could be argued that a consumer ratified the credit pull by creating a duty to pay, but it is better to avoid the issue altogether with signed documents.
Accessing credit reports is also allowed where there is a legitimate business need for the information in connection with a consumer-initiated transaction. This includes transactions where credit is granted, or the consumer creates a debt obligation. For instance, a permissible need arises related to the collection of a debt owed by the consumer, or to review an account to determine whether the consumer continues to meet the terms of the account.
Pre-screening consumers in conjunction with offers of credit has also caused litigation risks to banks relative to permissible credit pulls. In these situations, to properly access a consumer’s credit report, the financial institution must make sure that a “firm offer of credit” is being communicated to the consumer. This includes confirming that the offer of credit specifies the banks’ pre-selection and eligibility criteria, and setting forth any additional conditions (or requesting that the consumer contact the lender to discuss additional conditions). The lender is not, however, required to include specific loan terms such as interest rate, repayment period, method by which interest would be compounded, or whether penalties would be incurred for late payment. Lenders should be certain, however, that the offer conveys sufficient value to distinguish it from a sales pitch.
A permissible purpose to access consumers’ credit reports also exists when required for a response to an order of a court with jurisdiction, or a federal grand jury subpoena. This includes not only court orders, but also attorney-issued subpoenas.
Although it is impossible to avoid all potential liability, there are certain practices that can be implemented to minimize the risk of a FCRA violation. Banks should have a written policy in place to ensure that the consumer actually signs the loan application, which contains an acknowledgment that credit reports will be pulled. While this sounds elementary, given modern technology available to companies and individuals, it can be easy to miss required signatures on electronically transmitted documents. In addition, under no circumstances should a lender or third-party (i.e. dealership) sign the customer’s name or submit an unsigned application. For electronic submissions, it is also a good idea to include a check box that the consumer actively checks to acknowledge that the information submitted is true and correct, and also that the consumer consents to the credit report being pulled. Finally, if there are joint applicants, lenders should confirm that all parties applying for credit have signed the loan/credit application.
Implementing policies to mandate that consumers complete and sign the credit application with the proper acknowledgments will go a long way to reduce future litigation risks. In addition, having a strong policy in place regarding submission of credit applications, and communicating that policy in clear and certain terms to employees who directly work with customers, will also help minimize exposure.
Frank Catalano is of counsel in McGlinchey’s Dallas office, and part of the Consumer Financial Services Litigation team. He can be contacted at firstname.lastname@example.org or (214) 445-2411.