Q 1: May a financial institution obtain a consumer
report from a consumer reporting agency in connection with a consumer’s
application for an extension of credit?
A: Yes. Reports may be obtained
for this purpose, as well as certain other legitimate business purposes.
Reports (known as “consumer reports” under the statute) may also be
obtained in connection with the review or collection of an account,
in connection with employment, or the underwriting of insurance. (§ 604)
(See question 25 for a list of permissible purposes.)
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Q 2: Are new procedures required to obtain
a consumer report?
A: Yes. The financial institution must identify itself
and certify to the reporting agency (called a “consumer reporting
agency” under the statute) the purposes for which the information
is sought. It must also certify that the information will be used
for no other purpose. (§ 607)
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Q 3: Must certification be given each time a consumer
report is requested?
A: No. A written blanket certification by the financial
institution could cover all inquiries to a particular consumer reporting
agency.
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Q 4: Does a financial institution that uses a consumer
report have any new responsibilities to the consumer?
A: Yes. If a financial institution
denies employment; if it denies credit or insurance for personal,
family, or household purposes; or if it increases the cost, even partially
because of information in a consumer report from a consumer reporting
agency, it must make disclosures to the consumer. It must advise
him orally or in writing that information in the report caused or
contributed to the denial or increase in cost, and inform him of the
name and address of the consumer reporting agency issuing the report.
The financial institution is not required to disclose the nature of
the information in the report. (§ 615(a)) (See question 56, which
deals with the denial of employment based on a consumer report.)
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Q 5: What would constitute a
“denial” of credit?
A: If any condition is imposed, without which credit would
not be extended, and it is imposed because of information in
the consumer report, there is a “denial” that would require disclosures. This would
include cases where a larger downpayment, a shorter maturity, a co-signer,
guarantor, or additional collateral is required as a condition of
extending credit. If a consumer applies, for example, for a credit
card limit of $1,500, and only $1,000 is approved because of information
in a consumer report, a “denial” has occurred.
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Q 6: Does a financial institution have any
responsibility to the consumer when it obtains information from someone
other than a consumer reporting agency?
A: Yes. Disclosures must be made when credit for
personal, family, or household purposes is denied or the charge is
increased even partially because of information obtained from someone
other than a consumer reporting agency bearing upon the consumer’s
creditworthiness, credit standing, credit capacity, character, general
reputation, personal characteristics, or mode of living. Disclosure
would not be required if the denial is based on the financial institution’s
own experience with the consumer, on his credit application, or on
the institution’s own credit policies. Where disclosures are required
they must be made regardless of whether the information is obtained
currently, or is already in the files. At the time credit is denied
or the charge increased, the financial institution must inform the
consumer orally or in writing of his right to make a written request
for disclosure of the “nature” of the information. If the consumer
requests this information within 60 days, the financial institution
must tell him the nature of the information orally or in writing.
Note that these requirements apply only in the case of credit, and
not in the case of insurance or employment where disclosures are required when a report from a consumer reporting agency is involved. (
§ 615(b)) (See question 4.)
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Q 7: What would the “nature” of the information include?
A: It would include information that the consumer’s credit
history with another financial institution is poor, his income is
not what he represented it to be, he has not been employed or has
not lived at the address indicated on the application for the period
specified, that his debts are greater than represented, that a statement
that his debts are current is inaccurate, and so on. The nature of
the information should be given with enough detail to enable the consumer
to question the accuracy of the information if he believes it is erroneous.
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Q 8: In disclosing the “nature”
of the information, must the source be disclosed?
A: Although the statute does not require that
the source be disclosed, it may be impossible to identify the “nature”
of certain information without also revealing the source.
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Q 9: Do the requirements of disclosure by
a user of information discussed in questions 4 through 8 apply in
the case of information about a comaker, guarantor, or surety?
A: Yes. In these instances, disclosures, as indicated
above, should be made to the comaker, guarantor, or surety to whom
the information relates.
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Q 10: Are these rules applicable when a financial institution
decides not to honor an overdraft on a checking account on the basis
of information from a third party?
A: Yes. If an overdraft is denied on the basis of information from any outside source, disclosures must be made. This is so
whether or not the account ordinarily includes overdraft credit privileges
(for example, “check credit”). No disclosures need to be made if the
denial is based on the financial institution’s general policy not
to honor overdrafts.
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Q 11: Must disclosures be made when a financial institution
that issues credit cards refuses to authorize a merchant to honor
a credit card, or, itself, refuses to honor a credit card, because of information received
from any outside source?
A: Yes. The issuer would have to disclose the name and
address of the consumer reporting agency, or the consumer’s right
to know the nature of the information when it was received from someone
other than a consumer reporting agency. In the latter instance, when
a merchant is involved, it appears that he would need to make disclosures
on the issuer’s behalf, since the consumer must receive notice of
his right “at the time such adverse action is communicated to the
consumer.” However, if the information does not bear upon the customer’s
creditworthiness, credit standing, credit capacity, character, general
reputation, personal characteristics, or mode of living (for example,
if the information is simply that the card is lost, stolen or being
used in an unauthorized manner), or if the information is not obtained
from an outside source, disclosures would not be required.
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Q 12: Do these requirements for disclosure
by users of information apply to business or commercial transactions?
A: No. The “user” requirements of disclosure apply only
in the case of credit or insurance for personal, family, or household
purposes, or in connection with employment. In other words, in the
case of credit, they are applicable to the general type of consumer
credit transactions covered by Regulation Z, but do not include agricultural
credit.
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Q 13: Must a financial institution make any disclosure
to the consumer when it denies credit or increases the charges solely
on the basis of its prior transactions or experiences with the consumer,
or on the basis of unverified information furnished by the consumer
on his application?
A: No. There is no responsibility of disclosure in these
circumstances. However, if credit is denied or the cost increased
because of information obtained from third parties in the process
of verifying information on the application, then disclosures must
be made. (§ 603(d)(3)(A))
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Q 14: If one department or branch of a financial institution
obtains information on the consumer from some other department or
branch of the same financial institution as to its prior transactions
or experiences, and denies credit or increases the charge based on
this information, must disclosures be made?
A: No. Disclosures are required only when information
is obtained from an outside source. However, disclosures must be made
if the department or branch transmitting the information relays information
obtained from third parties outside the financial institution, and
the institution either denies or increases the cost of credit based
upon the information.
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Q 15: What are some actions that a financial institution
should consider taking to ensure that it can comply with the requirements
imposed on a user of consumer reports?
A: First, file the appropriate certification mentioned
in question 2 with each consumer reporting agency whose services are
expected to be used. Retain a file copy. Instruct employees that consumer
reports may be obtained only for the purposes specified in the act
and certification. Develop procedures for making required disclosures
to consumers when credit, insurance, or employment is denied, or when
the cost of credit or insurance is increased, based on information
obtained from outside sources. Record all inquiries to reporting agencies
or others, as well as the information obtained through those inquiries,
so that accurate disclosure can be made to consumers.
Forms may be useful to advise the
consumer of the name and address of the consumer reporting agency
(when a consumer report is involved), or to advise him of his rights
to request the nature of the information when other outside sources
are involved.
