A Legal Perspective of the Fair Credit Reporting Act and Equal Credit Opportunity Act
FAIR CREDIT REPORTING ACT
EQUAL CREDIT OPPORTUNITY ACT
A Legal Perspective
The Fair Credit Reporting Act (FCRA) was passed by the U.S. Congress in late 1997 to regulate the use of individual credit reports and credit information. The Equal Credit Opportunity Act (ECOA) was passed a few years earlier to prohibit discrimination against credit borrowers based on race, religion, color, national origin, sex, age, or marital status.
Both acts impact credit applications between buyers and suppliers. Since both acts are fairly new, there is very little case law to provide examples of acceptable and unacceptable behavior. There is uncertainty about the meaning of some portions of the acts. We would still like to provide some recommendations, however, based on our best interpretation.
The bottom line of both acts, considered together, is that all credit lenders must respond to applications for credit within 30 days after receipt of a completed application. Lenders must always provide notice of borrower's rights under both acts. Suppliers normally take the role of "lender" and the buyer normally takes the role of "borrower." The enclosed "Response Form" will help most credit lenders comply with both acts.
Fair Credit Reporting Act
In commercial transactions, the FCRA concerns only the use of personal consumer credit reports used to evaluate credit in a business transaction. The FCRA does not apply to the use of business or commercial credit reports. The permissible purposes for using a consumer credit report include:
1. By permission
2. For the extension of credit pursuant to an application from the consumer.
3. Review or collection of a consumer's account.
4. A legitimate business need in connection with a transaction initiated by the consumer.
It will always be the best policy to get written permission to run a consumer credit report. This permission should be contained in the terms of all credit applications and should also be included in all personal guarantee forms.
If a lender takes any type of "adverse" action, based in whole or in part on a consumer credit report, the lender must send the applicant a notice informing the borrower:
That the adverse action was taken in whole or in part based on information contained in a consumer credit report
The name, address and phone number of the consumer reporting agency that provided the report
An explanation of the borrower's rights to obtain a copy of the credit report to dispute any erroneous information in the report.
The attached Response Form contains the required statements. "Adverse action" includes a denial of credit, a modification of the requested terms, or a change in terms on an existing account.
The purpose of the FCRA is to promote the accuracy, fairness and privacy of information in credit reports. Borrowers must have an opportunity to dispute inaccurate information in their credit reports. Borrowers have an opportunity to do this only if they are told that adverse action by a creditor is based on the credit report and told where to get a copy.
Summary of the Fair Credit Reporting Act
The triggering factor requiring notice under the FCRA is the use of a personal consumer credit report. A creditor should send the notice if they pulled a personal consumer credit report and then refused to extend credit on the terms requested. It does not matter whether the credit is for a commercial account or a personal account. If a personal credit report is pulled in connection with a commercial transaction, the described notice of adverse action must be sent. On the other hand, no notice is required in commercial transactions based on unfavorable trade references, unfavorable public record information or unfavorable business credit reports.
Equal Credit Opportunity Act
The ECOA on the other hand requires a written response within 30 days of a completed application in all transactions, whether for business or personal use. The notice must inform the borrower of their right to request a written statement of the specific reasons for the denial within 60 days after a notice of credit denial. If a written request is made, the creditor must send a written statement of the reasons for denial within 30 days. The statement of reasons do not need to be very specific and examples include "adverse credit history," "lack of sufficient business experience," lack of sufficient working capital," "too much secured credit," or "value or type of collateral insufficient."
A creditor must send notice if credit on the requested terms is denied or if credit is approved on less favorable terms than what was requested in the application or less favorable than the creditor's normal terms. Creditors should keep records of all credit applications and responses made for at least twelve months. The creditor must also send notice if an application is incomplete. The Response Form attached complies with these requirements in a typical commercial transaction.
The ECOA also prohibits credit discrimination based on sex and marital status. In more than one case, a creditor was not allowed to enforce a personal guarantee against a borrower's wife, because the creditor had a blanket policy of requiring all borrowers' spouses to sign. The problem was in the blanket policy of discriminating against married persons by requiring their spouses to co-sign guarantees. A lender is always free to evaluate the individual assets of a borrower or guarantor, decide that the individual assets are insufficient, and decline credit unless additional guarantors are supplied. Creditors can also have a blanket policy requiring multiple personal guarantors, requiring all officers or all stock holders to sign, etc. The problem is to make sure that discrimination is not based on race, religion, color, national origin, sex, marital status, or age.
The ECOA has created problems for companies who wish to quickly open credit accounts and obtain deliveries. Before spousal signatures can be required, the borrower must submit individual financial statements, the creditor must review those financial statements and determine that the individual assets are insufficient. This can take precious time and many customers do not like supplying individual financial statements. In most cases, individual assets will be insufficient, because most assets are owned jointly by married couples. It is difficult to find a practical solution to this problem.
The safest course for suppliers will be to require and evaluate individual financial statements and then either decline credit or require additional guarantors if individual assets are insufficient. If this is not practical, it is our recommendation that suppliers provide their customers a choice of either submitting complete financial statements of individual assets to apply for individual credit or provide the signature of multiple guarantors such as other officers, shareholders, spouses or other family members. Although it has not been tested in the courts, this option to debtors would seem to comply with the spirit and the letter of the ECOA, while reducing paper work and the time necessary to open an account. Personal Guaranty Forms should also waive rights under the ECOA and acknowledge that individual guarantors have decided not to apply for individual credit. Examples of such forms are included in this mailing or can be seen and printed free of charge on our website, www.Fullertonlaw.com.
The owners of most small closely held corporations will probably decide to provide guarantees of owners and spouses, but it is the borrower that has decided to make a joint application. Spousal signatures can be volunteered by the borrower but cannot be required by the creditor. The borrower is always free to make an application for individual credit, supported by financial statements.
Summary of the Equal Credit Opportunity Act
Responses to credit applications under the ECOA can be verbal. The required notice of rights under the ECOA can be included on the credit application itself in order to comply with the acts. This will cut down on the total paper work. We think it is a better policy, however, to make all responses in writing, by using a form similar to the one attached. This allows creditors to keep a complete written record of notices sent. Under the ECOA creditors are required to keep records of credit applications and responses for 12 months.
We hope that this has been helpful to you in understanding some of the concepts and issues involved in the FCRA and ECOA. Please keep in mind, however, that there is still a good deal of uncertainty about the workings of these acts. We are not providing you legal or professional advise in supplying this information. Every set of facts and circumstances raise different legal issues and counsel should be consulted in dealing with any specific situation.
Sample Response Form
Your Company Letterhead Here
Inquiries Should Be Sent Attention:
Dear Credit Applicant:
Thank you for your recent application for credit. We have given your request careful consideration, but regret that:
__ We cannot act on your application for credit because it was incomplete and missing the following items:
__ We are unable to extend credit to you at this time.
__ We must terminate your existing account.
__ We must change the terms on your existing account.
__ We cannot extend credit on the terms requested, but can extend credit on other terms.
The terms on which we can extend credit are as follows:
Credit Limit: Payment due within days of invoice date.
Security required:, Additional terms:
Notice: Credit Limit and other terms can be changed at any time.
If your Application for credit was denied, you have the right to a written statement of the specific reasons for this action.. To obtain the statement, write us within 60 days from the date you receive this notice. We will send you a written statement of reasons for the [denial/change in terms] within 30 days of receiving your request.
Check here if you obtained a personal consumer credit report and the following statement is applicable.
__ Our credit decision was based in whole or in part on information obtained in a credit report we obtained from the following Consumer Reporting Agency:
Under the Fair Credit Reporting Act, you have the right to know the information contained in your credit file at the Consumer Reporting Agency. You can obtain a free copy of your report from the Reporting Agency, if you make a written request to the Reporting Agency within 60 days after you receive this notice. You also have the right to dispute directly with the Reporting Agency as to the accuracy or completeness of the information in the report. The Reporting Agency played no part in our decision and is unable to supply specific reasons why we have denied credit to you.
NOTICE: The federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant's income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The federal agency that administers compliance with this law concerning this creditor is the Federal Trade Commission, Equal Credit Opportunity, Washington D.C. 20580.