Use Credit Reports Legally

Credit reports can help your company make a wide range of decisions, from extending credit to offering employment. And regardless of how you use the reports, the Fair Credit Reporting Act requires you to tell applicants the reason if the data results in an application being denied.

A case before the Federal Trade Commission illustrated the point and helps clarify the issue. The FTC charged Quicken Loans Inc., a Michigan-based mortgage lender, with failure to tell consumers the reason for rejection after they were denied online pre-approval of loans. The lender based its decisions on a review of the applicant’s credit report and additional information provided by the consumer.

Applicants who were denied approval were told simply they had “unique borrowing needs” and were invited to click a button for further contact information on the firm’s Web site. The company had no contact with applicants who did not click the button.

The FTC charged that Quicken should have provided reasons for the denials — called an adverse action notice. The company reached a settlement that helps clarify when notices must be provided. The FTC agreed not to file complaints if:

• The company provides clear disclosure “in close proximity” to the offer that pre-approval may be granted online or offline.
• If the company determines it cannot grant pre-approval online, the consumer must be told the request has not been denied but that Quicken needs more information. If the consumer submits the additional data, Quicken must make a decision and inform the consumer of it.

The key: Under the settlement, Quicken can make a preliminary determination of creditworthiness online without the notification requirement. But the company must make it clear that this is an initial determination. If an applicant completes a full application and a final denial is made, Quicken must then provide adverse action notification.

The implications, of course, extend beyond mortgage applications. If your company uses credit reports to make business decisions, you must provide notification to applicants if the law requires.

The credit report doesn’t have to be the sole basis for a denial to trigger the notification requirement. Even if a rejection is based partially on the report, an adverse action notice is required.

The bottom line: If your company uses credit reports to decide whether to grant any benefits, the safe course is to provide reasons when making denials. Consult with your attorney for more information.

Section 615 of the Fair Credit Reporting Acthelps ensure the accuracy of credit reports. It requires that applicants be informed that their credit reports were used in reaching decisions; provides an opportunity for consumers to see the information contained in their own reports; and allows them to seek corrections if necessary. When an application is denied, the law also requires credit reporting agencies to provide consumers with free copies of their reports, making it more likely that they will be checked for accuracy.