Hot News on FCRA

Sometimes your regulatory agency is your friend. Every now and then, the agencies do something that makes compliance a bit more livable. That just happened with regard to the Fair Credit Reporting Act.

Remember the Tatelbaum letter? That would be the letter in which Federal Trade Commission staff opined that an application for a business loan does not create a permissible purpose for obtaining a consumer report. Thus, in order to evaluate the creditworthiness of the business - which in the case of a small business is basically the creditworthiness of the small business owner - a creditor needed permission from each individual whose consumer report the creditor wanted to obtain and review.

There was a significant practical problem with this interpretation: generally, it is only the business owner's consumer report that reveals whether the consumer is capable of running a business. Or, as is often the case, it is the consumer report that reveals that the individual's previous several tries at running a business all failed and led to personal bankruptcy.

Conclusion? Business lenders have a powerful need to obtain the consumer report of every individual participating in the business loan process. The problem was that the FTC interpretation stopped this practice dead in its tracks.

Regulators as White Knights
Enter the bank regulatory agencies with some very legitimate concerns about safety and soundness. Some invisible lobbying has been going on to deal with this vexing problem. There were basically two approaches open to the bank regulatory agencies.

First, the agencies could work to persuade the FTC to adjust its interpretation to permit banks to obtain consumer reports on individuals connected with business loan applications. With the correct adjustment, there would be apparent unity in the views of the regulatory agencies charged with enforcing the FCRA. The agencies made this formal request on May 31, 2001.

The second alternative would have been more similar to a hostile takeover than a compromise merger. The agencies could have used their new FCRA regulatory powers to issue a regulation to provide specific permission to obtain the consumer reports. This alternative, however, would have risked permanent disagreement, leaving a judge with some interesting but ominous choices at some time in future litigation.

What happened
What has actually happened is very interesting. The banking agencies have persuaded the FTC to back away from its original interpretation but have left some room for face-saving.

FTC has issued a new letter, dated June 22, 2001, written to the counsels of each of the bank regulatory agencies. The letter, all of two paragraphs, spends the first paragraph summarizing the FTC's previous opinion as stated in the July 2000 Tatelbaum letter. In that letter, FTC staff concluded that a permissible purpose to obtain a consumer report does not arise when an individual "signs a personal guarantee in connection with a credit application by a third party."

The letter then states that the bank regulatory agencies advocate "an alternative interpretation of Section 604(a)(3)(A)." This alternative interpretation would conclude that "the FCRA would permit a lender to obtain a consumer report in connection with a business credit transaction where the consumer in question is or will be personally liable on the loans, such as in the case of an individual proprietor, co-signer, or guarantor."

FTC staff now agrees that it is "reasonable to view a business transaction in which an individual has accepted personal liability for the business debt as involving the consumer, thus providing a permissible purpose..."

So essentially, the FTC staff has backed off from the earlier interpretation that relied on the FCRA to protect the privacy of consumers. In this new letter, the staff admits that other interpretations are reasonable.

The new FTC letter also acknowledges the practical reasons - the safety and soundness of business lending - the agencies put forward.

The result is that the FTC is willing to "consider the Tatelbaum letter superceded to the extent that it concludes" that the lender does not have a permissible purpose to obtain a consumer report on an individual guaranteeing a business loan. However, this is only applicable for consumers who will be personally liable for repayment. If the consumer will not be personally liable, there is no permissible purpose to obtain the report.

Is a bit of crow on the menu in the FTC cafeteria? It certainly appears that way. The FTC's June 22, 2001 letter appears to say that it stands by its original interpretation except to the extent that the banking agencies disagree so the FTC will back off - even though they claim they were right in both the first letter and the second! And as a final word, the letter concludes with the reminder: "this informal staff letter is not binding on the Commission." So there you have it!

ACTION STEPS
It's finally time to brief and train your commercial lenders. Get going.

Prepare a list of individuals in their relationship to the loan application for whom lenders may obtain credit reports without specific written permission.

Review existing loans to small businesses for compliance with the latest interpretation.

Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 8, 8/01