UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Division of Financial Practices
Bureau of Consumer Protection
Ronald G. Isaac
April 29, 1999
Mr. Don Gowen
Senior Vice President
Security Mutual Financial Services, Inc.
1310 Cantwell Avenue, S.W.
Decatur, Alabama 35601
Dear Mr. Gowen:
This will respond to your letter posing a series of questions
related to the efforts of creditors to market additional credit
to current and former borrowers of closed end consumer credit.
Your questions focus on the term "credit or insurance transaction
that is not initiated by the consumer," which is used in
the amended Fair Credit Reporting Act ("FCRA"), 15 U.S.C.
§§ 1681-1681u, to refer to the practice of prescreening.(1)
You observe that Section 603(m)(1) of the FCRA provides that this
term does not include the use of a consumer report by a person
with whom the consumer has an account or insurance policy for
purposes of "reviewing the account or insurance policy,"
but the section offers no guidance as to what constitutes "reviewing."
I believe your questions can be answered more easily by summarizing
the treatment of current and former borrowers under the FCRA.
Section 604(a)(3)(A) of the FCRA gives a creditor a permissible
purpose to obtain a consumer report without the consumer's consent
"in connection with a credit transaction involving the consumer
on whom the information is to be furnished and involving the extension
of credit to, or review or collection of an account of the consumer."
Section 604(a)(3)(F)(ii), which relates to deposit or other non-credit
accounts, similarly provides a permissible purpose "to review
an account to determine whether the consumer continues to meet
the terms of the account." When obtaining consumer reports
for such purposes, creditors need not comply with prescreening
disclosure requirements because these transactions are exempt
under Section 603(m)(1) of the FCRA.(2)
Your questions raise the issue of whether a creditor in a closed
end credit transaction may exploit consumer reports obtained for
"review" purposes in order to market its products or
services. In the circumstances you described, we believe the answer
is "no.". First, "review" is not a purpose
for which a closed-end creditor would ordinarily need to obtain
consumer reports on its customers. In commenting on the proposed
provision which became Section 604(a)(3)(F)(ii), the Senate Committee
on Banking, Housing, and Urban Affairs stated:
Like creditors, banks and others may need to consult a consumer's
report in order to determine whether the consumer's current
account terms should be modified. For example, the institution
may provide more favorable pricing terms after consulting the
report. The permissible purpose created by this provision,
however, is limited to an account review for the purpose of
deciding whether to retain or modify current account terms.
The terms of a closed-end credit transaction are predetermined
and generally may not be changed unilaterally by the creditor
unless the contract expressly provides for such action (e.g.,
in the event of default). Therefore, the creditor is unlikely
to have a reason to consider "whether to retain or modify
current account terms" and, thus, would not have any routine
need to procure consumer reports to "review" its accounts.
Second, the credit bureau must, pursuant to Section 607(a), require
the creditor to "certify the purposes for which the information
is sought, and certify that the information will be used for
no other purpose." (emphasis added). Because
Section 604(a) provides no authority for a creditor (or any party)
to use a consumer report for marketing purposes,(4)
a creditor would violate its certification by using an existing
report in such a manner.
As the previously-quoted legislative history makes clear, "review"
of an account under Section 604(a)(3) refers to an existing
(i.e., open or current) account. A creditor has no existing
business relationship with consumers whose closed end credit accounts
have been paid off, i.e., former borrowers. Hence, the
creditor would either have to (1) obtain those consumers' written
authorizations pursuant to Section 604(a)(2) to access their credit
reports or (2) comply with the prescreening requirements set forth
in Section 604(c) and, where applicable, Section 615(d).
In response to your question, it is not considered an "adverse
action" under the FCRA for a creditor to decide not to include
a current borrower in a credit solicitation based in whole or
in part on the creditor's review of consumer report information,
whether that information is new or was previously acquired and
retained in the borrower's file. Section 603(k) provides that
with respect to actions involving credit, the term "adverse
action" has the same meaning as the term is defined under
the Equal Credit Opportunity Act ("ECOA"). Under the
ECOA, adverse action must involve either (1) an "application"
by the consumer(5) or (2) a termination
of the consumer's account or an unfavorable change in the terms
of that account that does not affect all or a substantial portion
of the creditor's accounts within that class.(6)
Failure to include a consumer in a solicitation for credit does
not qualify as adverse action, as defined by the ECOA. Therefore,
it does not constitute adverse action as defined by Section 603(k)
of the FCRA.(7)
I trust this answers all of your questions. This is an informal
staff opinion and is not binding on the Commission.
Ronald G. Isaac
1. The Commission's Commentary on the
Fair Credit Reporting Act defines "prescreening" as
"the process whereby a consumer reporting agency compiles
or edits a list of consumers who meet specific criteria and provides
this list to the client or a third party (such as a mailing service)
on a behalf of the client for use in soliciting these consumers
for the client's products or services." 55 Fed. Reg. 18,815.
2. In commenting on Senate Bill 650,
which contained provisions very similar to the ones enacted as
the "Consumer Credit Reporting Reform Act of 1996,"
the Senate Committee on Banking, Housing, and Urban Affairs stated:
Section 603(m) makes it clear that the prescreening
provisions of the FCRA do not apply where a consumer report
is obtained by a creditor in connection with reviewing or collecting
an existing account of the consumer for safety and
soundness purposes, even if the creditor subsequently decides
to change the credit available to the consumer (emphasis added).
S. Rep. No. 104-185 at 33 (1995). Hence, a creditor
may obtain consumer reports for the purpose of reviewing its
current closed end (or other) credit accounts without having
to comply with the FCRA requirements applicable to prescreened
3. Id. at 35.
4. Trans Union Corp. v. FTC,
81 F. 3d 228, 234 (D.C. Cir. 1996).
5. Section 202.2(e) of Regulation B,
the implementing regulation of the ECOA, defines "application"
to mean "an oral or written request for an extension of credit
that is made in accordance with procedures established by a creditor
for the type of credit requested."
6. Section 202.2(c) of Regulation B.
7. See S. Rep. No. 104-185 at 32, which
The definition [adverse action] does not cover situations
such as those where a creditor obtains consumer reports on its
customers in connection with a review of its credit or other
portfolio and, in connection with the review, a consumer's account
is not changed, or is changed in a way that is not less favorable
to the interest of that consumer, even if the accounts of other
consumers are changed in a more favorable manner.