FCRA and Obtaining a Credit Report for Guarantor of Existing Business Loan
Issue/Inquiry
The Bank has been informed by the vendor through which it runs credit reports that if a closed-end commercial loan is made to the business itself, there is no permissible purpose to run credit on the individual guarantor after the original lending decision phase. The Bank would like to know whether this is correct. It obtains personal credit reports when it needs to calculate the global cash flow of the credit relationship, since the personal financial statement completed by the guarantor is not always complete or sufficient. Is this practice legally permissible?
Response Summary
The Bank’s practice of obtaining a consumer report for the individual guarantor of an existing business loan is legally permissible. Interagency guidance indicates that lenders are authorized by the Fair Credit Reporting Act (“FCRA”) not only to obtain a consumer report in circumstances where the individual is personally liable on a business credit, as in the case of an individual proprietor, co-signer, or guarantor, but during the entire, ongoing relationship between the lender and the obligor.
Response Detail
On the basis of current Federal guidance, the Bank’s practice of obtaining a consumer report for the individual guarantor of an existing business loan is legally permissible.
On May 31, 2001, the Federal Reserve Board, Office of the Comptroller of Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision responded to guidance from the Federal Trade Commission (“FTC”), known as the “Tatelbaum Letter,” which indicated that a lender would not have a permissible purpose in a business transaction to obtain a consumer report, absent written instructions from the consumer.
The Federal agencies noted that Section 604(a)(3)(A) of the FCRA provides that a consumer reporting agency may furnish a consumer report to a person that it has reason to believe intends to use the information in connection with the extension of credit to, or review or collection of an account of the consumer on whom the report is being furnished. The agencies interpreted this to mean that if a consumer is a signatory and party to a transaction, either as a legal obligor, in the case of a sole proprietorship, or joint obligor, in the case of a co-signer, then such a credit transaction would involve an extension of credit to the consumer, since the consumer is legally liable for the repayment of the credit.
With regard to business transactions in which there was an individual guarantor, the Federal agencies believed that such a transaction also involved an extension of credit to a consumer, in that the guarantor is also obligated to repay the loan. As the lender would be relying upon the creditworthiness of the guarantor, it would have a legitimate reason to obtain the information provided by a consumer report.
As for existing loans under review or collection, the Federal agencies found that a similar analysis of Section 604(a)(3)(A) indicated that a lender would have a permissible purpose to obtain a credit report about an individual who had guaranteed or is otherwise obligated to pay a business loan. A lender is permitted to obtain a consumer report if it intends to use it (a) in connection with a credit transaction involving the consumer described in the report; and (b) involving the review of the account and ultimately the collection of the loan on which the consumer is obligated.
In this regard, the Federal agencies stated the following:
By referring to a “credit transaction involving the consumer…and involving…the review or collection of an account of…the consumer, “section 604(a)(3)(A) provides a broad conception of the whole “credit transaction” and is not limited to strictly to the formation of the loan agreement and disbursement of funds. Rather, that provision encompasses the entire, ongoing relationship between the creditor and obligor. If the consumer is personally obligated to repay the loan, then the lender would be seeking the report in connection with a credit transaction involving the consumer described in the report. With respect to the second requirement, we believe that the plain meaning of the statute permits a lender to obtain a consumer report about a consumer who has guaranteed or otherwise become personally liable on any loan (or loan account) for the purpose of “review or collection of an account of…the consumer.”
The Federal agencies addressed another aspect of the Tatelbaum Letter, which appeared to require lenders to obtain written instructions from individual proprietors, guarantors, and co-signers in order to obtain credit reports in connection with the review or collection of a business loan. The agencies noted that safe and sound lending practices require a creditor to regularly review the quality of its loan portfolio, and that this necessarily includes an assessment of the financial strength of all persons who may be liable on the creditor’s loans, including sole proprietors, guarantors, and co-signers. Timely access to credit reports is an essential aspect of that process. The agencies concluded that the FTC’s requirement would have an immediate and adverse effect on evaluating loan portfolios and substantially raise the cost of complying with safe and sound lending principles.
The FTC staff responded to the Federal agencies on June 11, 2001, indicating that its previous guidance was superseded to the extent that it was inconsistent with the interpretation of the agencies. FDIC, FIL-61-2001; OCC, AL 2001-6. No subsequent guidance has qualified or changed this interpretation.