New Rules for Prescreening

The 1996 amendments to the Fair Credit Reporting Act ("FCRA") contain clarification of rules governing use of a consumer report for the purpose of developing a mailing list for product offerings. Often referred to as "prescreening" - and not to be confused with the use of that term in the context of fair lending laws - this practice has been strongly criticized by consumer groups.

Prescreening is most frequently used for credit card solicitations. Many companies used the prescreening to generate a mailing list and then treated the consumer's response as an application, including review of the consumer's credit report. This application processing sometimes resulted in denials of credit and was raised as a concern by consumers who believed that what they had received in the mail was a firm offer of credit.

The amended FCRA now contains a definition of "firm offer of credit or insurance." This new definition incorporates the process that a creditor must follow in order to have access to a consumer's file through prescreening.

The importance of the new procedure is that it permits the creditor to make a limited review of responses to a solicitation. The FTC's interpretation of the previous law was that the creditor could only access a consumer's report if it made an unconditioned firm offer of credit to each consumer identified in the prescreening process. That meant that once the consumer was identified in the prescreen, the creditor had to offer to open an account and could not take any further action to verify the current credit status of the consumer.

The amendments to FCRA incorporate a new definition of "firm offer" which permits the creditor to take certain specific additional actions on applications from consumers in response to the solicitation. Specifically, the creditor may review additional information related to credit worthiness.

However, the new definition sets several clear standards which the creditor must meet. Most important, the credit criteria and other standards must be established before the consumer is identified, i.e., before the prescreening process is begun. This means that before requesting the prescreening by the credit bureau, the creditor must establish not only the criteria for the prescreening, but also standards and criteria for any subsequent review.

The creditor may review the consumer's response to determine whether the consumer meets specific criteria bearing on credit worthiness. These criteria must be established before the consumer is selected through the prescreening process and must be specifically for the purpose of determining whether to extend credit.

In lieu of taking the additional step of credit review, the creditor may take steps to verify that the consumer continues to meet the specific criteria used in the prescreening process. For example, the creditor could pull another credit report to verify that the consumer continues to be current on all accounts and has not opened additional lines of credit that exceed the criteria used in the prescreen. Alternatively, the creditor may verify information in the consumer's application to determine credit worthiness.

In addition to these creditor requirements imposed on the creditor, the new act imposes strict requirements on the credit bureau including determining that the prescreening meets the requirements of a "firm offer of credit", and complying with requirements to provide consumers to opt out of having their files subjected to prescreening.

ACTION STEPS

If your bank conducts any presolicitation for credit products involving the use of a credit bureau, meet with the people managing that process. Learn everything you can about how the process works. Inform staff involved in prescreening and credit solicitations about the changes to FCRA. Point out that they may begin compliance at any time but compliance becomes mandatory on September 30, 1997.
This is a good time to review credit criteria used in the prescreening program. In fact, it would be useful to review all credit criteria used in credit solicitation efforts.
Pay particular attention to the criteria that would cause denial of an application or a response to a prescreened solicitation. Check these for compliance with the new FCRA and for any fair lending concerns.
Be sure your lending and retail staff understand FCRA's rules and restrictions on obtaining credit reports. This is a good time to have a review course on permissible purposes and situations for obtaining credit reports.
Audit your bank's responses to any prescreened solicitation. Look for compliance with the limitations and conditions set by FCRA. In fact, audit how your bank handles responses to any solicitation - prescreened or not.