Fair Credit Reporting: What's "Adverse"?

Not all of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 was burden reduction. That legislation contained major changes to the Fair Credit Reporting Act ("FCRA"). While some of the changes will make life a bit easier for credit card issuers, many of the changes will increase compliance. The revisions to FCRA take final effect on September 30, 1997. This is the first of a series of articles that are intended to help you with FCRA compliance changes by that date.

Definition of "Adverse Action"
The amendments to FCRA added a definition of adverse action. The earlier version of the act had relied on descriptions of action placed in various substantive provisions of the law. For example, the FCRA notice provision, section 615, required providing the notice "whenever credit or insurance for personal, family, or household purposes, or employment involving a consumer is denied or the charge for such credit or insurance is increased either wholly or partly because of information contained in a consumer report?"

The practical result of current statutory language is to trigger a notice whenever the consumer doesn't get what he or she requested. An applicant who asked for a $10,000 loan but was approved for and accepted a loan for $8,000, because of information in their credit file, should receive a FCRA notice. Similarly, an applicant whose application is denied because of information in their credit file should also be given an FCRA notice.

The definition of adverse action in the Equal Credit Opportunity Act and Regulation B is somewhat different. The ECOA defines adverse action as "the denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested." ECOA, ?701(d)(6)

Regulation B defines adverse action as "a refusal to grant credit in substantially the amount or substantially the terms requested in an application unless the creditor makes a counteroffer?and the applicant uses or expressly accepts the credit offered." ?202.2(c) Thus, the regulation has made a key modification to the act by removing a customer's acceptance of an otherwise adverse decision from the definition of adverse action. Under Regulation B, when the applicant accepted the offer of a loan for $8,000, the action was not "adverse" for purposes of Regulation B.

The new FCRA statutory language contains a definition of adverse action that specifically refers to the ECOA language but not to Regulation B. It incorporates the ECOA definition for purposes of credit applications and adds similar language for insurance, employment, and licenses. For example, the insurance provision defines as adverse: "a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for, in connection with the underwriting of insurance." This does not exempt situations in which the customer accepts the terms.

The new FCRA also incorporates all interpretive material and decisions under ECOA for purposes of determining whether an action on a credit application or account is adverse. Arguably, this brings in the Regulation B exemption for customer acceptance of the counter-offer but does so in an indirect way. Complicating this is the fact that FCRA is a non-regulatory statute. This means that no agency is charged with the responsibility of writing regulations under the act. The Federal Trade Commission has authority to interpret the act which the Commission now does with a commentary. However, this does not provide the Commission with the power to modify a statutory provision for purposes of compliance as the Federal Reserve has done with Regulation B. There can be no changes from the FTC, only clarification or explanation.

Notice Changes
Whenever adverse action is taken on a credit application because of information in the consumer's report, the creditor must send a notice to the consumer. The new act makes changes to the content of these notices. The old notice included three pieces of information: the fact that the action was based on information in the consumer's report, the name of the credit bureau, and the address of the bureau. The new notice will contain more information. Beginning no later than September 30, the notice must include: the name, address, and telephone number of the reporting agency (this must be a toll-free number if the bureau is a national reporter), a statement that the consumer reporting agency did not make the decision and cannot provide the specific reasons why the action was taken, and information about the consumer's right to obtain copies of the consumer's report and the consumer's right to dispute information in the report.

ACTION STEPS

Review procedures for credit notifications. Include decisions on applications, and notifications of credit limit or term changes on existing accounts. Determine whether they comply with Regulation B and the new FCRA.
Notify lending staff - including credit card - of these changes to the FCRA. Ask them to let you know about any situations they think might be affected.
Review adverse action notice forms including form letters sent to customers when credit limits are reduced or accounts closed. Identify all forms that must be revised before September 30, 1997.