STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
of Credit Practices
Bureau of Consumer Protection
Clarke W. Brinckerhoff
March 3, 1998
Paul H. Schieber, Esq.
Blank Rome Comisky & McCauley
One Logan Square
Philadelphia, PA 19103
Dear Mr. Schieber:
This responds to your letters dated November
28, 1997, and January 22, 1998, on behalf of the Mortgage Insurance
Companies of America ("MICA"), stating your opinion
that Section 615(a) of the Fair Credit Reporting Act ("FCRA")
does not require a mortgage insurer to provide notice to an applicant
for a residential mortgage when it refuses to insure the loan
for which the consumer has applied.
You describe a common scenario in the mortgage
lending industry in which a lender submits a residential loan
application file to a mortgage insurer ("MI") to obtain
insurance that protects the lender against the consumer's default
on that loan. A credit report from a major credit bureau, which
the MI may receive as part of the file or obtain on its own, is
often a part of the MI's decisionmaking process. It is not uncommon
for the first MI contacted by the lender to decline coverage,
but for another MI subsequently to insure the transaction, with
the result that the consumer obtains the loan.
Section 615(a) provides that a person that
"takes adverse action with respect to any consumer that is
based in whole or part on any information contained in a consumer
report" must notify the consumer of the action, and provide
information relating to the consumer reporting agency that provided
the report and the consumer's rights under the FCRA. You support
your belief that an MI should not be required to provide this
notice with (1) a legal argument that the section does not apply
where an MI declines to insure a consumer residential loan based
on the credit report on the applicant, and (2) a policy argument
that consumers will be confused or distressed by the notices.
We disagree, for the reasons set forth in this letter.
In our view, the plain language of Section
615(a) requires MIs to provide the notice. First, an MI takes
"adverse action" -- in both the common sense and legal
definition of that term -- when it declines to extend insurance
coverage that is a prerequisite for approval of the consumer's
residential mortgage loan application. That term is defined broadly
by Section 603(k)(1)(B)(i) to include "a denial ... in connection
with the underwriting of insurance . . .." An MI's refusal
to insure a consumer loan is certainly a "denial in connection
with the underwriting of insurance."
Similarly, the term "consumer report"
is defined broadly in Section 603(d) of the FCRA and certainly
includes the garden-variety credit report from a major credit
bureau used by lenders and their MIs. A credit report contains
information "bearing on a consumer's credit worthiness, credit
standing, credit capacity, character, general reputation, personal
characteristics, or mode of living" that the bureau "collected
... for the purpose of serving as a factor in establishing the
consumer's eligibility for" credit, insurance, employment,
or other purposes for which the agency is permitted to provide
reports under the FCRA, and is therefore undeniably included within
the definition set forth in Section 603(d).(1)
The report's status as a "consumer report" in this case
is reinforced by the fact that the critical insurance factors
relate to the consumer, not the lender with which the MI does
business. First, the reason the MI is allowed to obtain a report
on the loan applicant is because Section 604(a)(3)(C) provides
a permissible purpose "in connection with the underwriting
of insurance on the consumer" (emphasis added).(2)
Second, the party evaluated by the MI is the consumer.
Third, the premium when coverage is granted is paid by the consumer.
Finally, we are unpersuaded by your policy
argument that consumers will be confused by receiving the notices
required by Section 615(a) from one or more MIs, even in the case
where the loan application itself is ultimately approved when
a second MI agrees to provide coverage. We believe that the benefit
provided by the notice -- fulfilling Section 615's critical function
of informing the consumer that something in a credit bureau file
caused the MI's action -- outweighs any problems that might arise
when consumers get the notice. If MIs, perhaps with the assistance
of lenders with which they do business (as suggested in your January
22 letter, and discussed in the following paragraph), craft the
text of their notices to explain to the applicant the circumstances
under which the MI has taken its action and the process involved,
potential confusion can be minimized. A notice that includes the
specific items set forth in Section 615(a) will comply with that
provision, even with such an explanation included in the text.
An MI may meet its responsibility under
Section 615(a) by contracting with a lender (or other party) to
deliver the notice to the consumer.(3) In that case, the lender may fulfill the MI's
obligation by providing to the consumer either (1) a separate
notice in the name of the MI, or (2) its own notice that communicates
the refusal by one or more MIs to insure the loan (including,
if applicable, information that the lender is required by Regulation
B to disclose to the consumer if it has denied the loan application).
In that way, MIs and their lender clients can arrange to comply
with the FCRA without providing duplicative notices to the consumer.
The opinions set forth in this informal
staff letter are not binding on the Commission.
Clarke W. Brinckerhoff
1. Your letter's
lengthy argument that the lender and MI are engaged in a "commercial
transaction" -- and that the insurance is issued for a "commercial
purpose" as a technical matter -- is simply not germane to
the status of a report from a credit bureau as a "consumer
report." That might have relevance if the report concerned
the applicant's business history and was provided by an agency
that compiles and provides data for commercial purposes; in that
case, personal references to a corporate director or officer would
not change the commercial credit report into a consumer report.
Comment 603(d)-4C, Federal Trade Commission Commentary on the
FCRA, 55 Fed. Reg. 18804, 18810 (May 4, 1990).
2. A commercial
purpose, standing alone, would be insufficient under Section 604
to provide the MI a permissible purpose to obtain a credit report
on the consumer applicant.
3. Of course,
the MI would have some exposure if the lender with which it contracted
failed to deliver the required notice. However, Section 615(c)
specifically would allow the MI to avoid liability if it "shows,
by a preponderance of the evidence that at the time of the alleged
violation [the MI] maintained reasonable procedures to assure
compliance with the provisions of this section." We believe
that this provision would protect an MI, if it contracted with
one or more responsible lenders to deliver notices required by
Section 615(a) and appropriately monitored such other parties'
performance of that obligation.