UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Division of Financial Practices
Clarke W. Brinckerhoff
October 26, 1998
William F. Hall, Esquire
United Guaranty Residential Insurance Co.
230 North Elm Street
Greensboro, North Carolina 27401
615(a) of the Fair Credit Reporting Act
Dear Mr. Hall:
This responds to your letter on behalf
of United Guaranty Residential Insurance Company of North Carolina
and United Guaranty Credit Insurance Company (collectively "UGICO").
You report that UGICO obtains consumer report information from
lenders who apply for insurance to protect them in the event borrowers
default on unsecured property improvement loans and second mortgage
residential loans. You inquire whether UGICO is required by Section
615(a) of the Fair Credit Reporting Act ("FCRA") to
provide notice to the individual debtor when it refuses to provide
credit insurance because of such consumer report information.
You correctly cited our letter to an attorney
for Mortgage Insurance Companies of America (Schieber,
3/3/98), which states that mortgage insurers must provide the
notices required by Section 615(a) of the FCRA.(1)
You contend that the result should be different here, primarily
because the motivation of a lender that purchases UGICO's credit
insurance is different from the motivation of a lender that procures
mortgage insurance offered by Mr. Schieber's clients.(2)
Specifically, you assert that UGICO's clients use credit insurance
as a way to manage the risk on their loan portfolio,
unlike the lenders who obtain mortgage insurance as a critical
step in making a mortgage loan to meet the requirements of a secondary
market. In our view, that factor has no bearing on the duty imposed
by Section 615(a) on an insurer that "takes any adverse action
with respect to any consumer that is based in whole or in part
on any information contained in a consumer report" to notify
the consumer of the action, and provide information relating to
the credit bureau that provided the report and the consumer's
rights under the FCRA. "Adverse action" is defined very
broadly in Section 603(k)(1)(B)(I) to include "a denial ...
in connection with the underwriting of insurance." It is
therefore our opinion that UGICO's refusal to insure a consumer
loan is a "denial in connection with the underwriting of
insurance" that requires it to comply with Section 615(a),
just like the mortgage insurers discussed in our letter.(3)
In closing, your letter asserts that there
exists a "practical problem of how to give a meaningful notice
that complies with Section 615(a)." You state that UGICO
may not know the source of information, if it is not specified
in the file it reviews, and thus it may not be able to provide
a meaningful notice to the consumer. It is our experience, based
on our extensive contacts with representatives of mortgage insurers
in preparing our response to Mr. Schieber, that lenders and insurers
can work together to properly identify information and craft notices
that will comply with Section 615(a) and be helpful to consumers.(4)
Similarly, the first paragraph of your letter acknowledges that
UGICO's own mortgage insurer affiliate now complies with the requirements
of Section 615(a). We see nothing in your presentation that causes
us to doubt UGICO's capacity to do the same.
The opinions set forth in this informal
staff letter are not binding on the Commission.
Clarke W. Brinckerhoff
1. Enclosed are
copies of the correspondence to which we were responding, which
is cited in footnotes below. (Schieber-Brinckerhoff letters dated
11/28/97 and 1/22/98).
2. You also note
that UGICO always obtains the credit report information indirectly
from the lender as part of the application process, never directly
from a credit bureau. That is clearly not a distinguishing factor,
because similarly some "mortgage insurance companies . .
. rely on reports, or information extracted from reports, forwarded
to them by the lender." (Schieber-Brinckerhoff letter dated
11/28/97, page 2).
3. The legal
analysis is the same because the factual background is the same.
Like UGICO, a "mortgage insurer decides whether to guarantee
a lender's risk regarding a particular obligation owed to the
lender." (Schieber-Brinckerhoff letter dated 11/28/97, page
4. See the mortgage
industry's proposal (Schieber-Brinckerhoff letter dated 1/22/98)
and our response on page 3 of the March 3 letter that you cited.