Home > Uncategorized > Can you use a credit report without actually using it? Yes.

Can you use a credit report without actually using it? Yes.

January 18, 2013

For many, many years, creditors have used credit reports and credit scores to decide whether and on what terms to make loans to consumers.  Consumers with sterling credit reports and high credit scores got loans on favorable terms (e.g., low interest rates, low fees); consumers with problematic credit reports and low credit scores either didn’t get loans or got them on less-favorable terms (e.g., high interest rates and high fees).  Consumers who didn’t get loans were given notice of the problems with their credit report that caused the lender to deny them credit.  However, consumers who got loans were not given such notice:  they were not told whether they got the most favorable terms, the least favorable terms, or something in between.

The 2003 FACTA amendments to the FCRA aimed to change that.  They required lenders to provide “risk based pricing notices” or RBPNs to consumers per 15 U.S.C. Sec. 1681m(h).  Under that provision, and under the FTC’s related regulations (see 16 CFR Sec. 640.1 et seq.; 12 CFR Sec. 222.70 et seq.) any lender who, after consulting a credit report and a credit score, offers a consumer anything less than the most favorable terms possible, must give the consumer an RBPN that discloses what its issues with the report were and what the credit score was.

This all seems clear enough, I hope.  But there are some situations in which it is less than clear.  The District Court for the District of Columbia recently addressed one of them in Nat’l Auto. Dealers Ass’n v. FTC, 864 F. Supp. 2d 65 (D.D.C. 2012).  A group of auto dealers represented by the NADA had expressed the following concern:  what happens when (as is not uncommon), an auto dealer arranges loans for car buyers by taking their personal information, providing it to auto lenders who use it to pull credit reports and decide whether and on what terms to lend, and then, if the consumer chooses one of the loans that may be offered by one of the lenders, makes the loan to the consumer itself and then immediately assigns it to the lender for servicing?  In other words, what happens if an auto dealer participates in the lending process but doesn’t really “use” the credit report or set the loan terms?  Does the dealer nevertheless have to provide its customers with an RBPN?

The FTC, in its regulations, said yes:  when an auto dealer contacts numerous lenders to see if they will offer a consumer a loan, and then sets the consumer up with a loan from one of them, the FTC regulations require the auto dealer, and not the lenders, to provide the consumer with an RBPN.  This is so even though the dealer didn’t “use” the consumer’s credit report in that it (the dealer) didn’t decide whether to make a loan or the terms on which any loan would be made.

The NADA dealers didn’t like this answer and filed suit in an attempt to change it.  The District Court declined to do that.  Without going into details (such as when a court has the power and duty to overturn regulations imposed by an agency like the FTC), the court found that the FTC’s regulations make sense:  they ensure that a consumer in this kind of situation will get an RBPN from someone he or she recognizes (the dealer) as opposed to multiple notices from entities that he or she doesn’t recognize (the behind-the-scenes lenders).  Also, it would prevent lenders who didn’t want to give consumers RBPNs from routing their loans through dealers as a way of avoiding the RBPN requirement.  See 864 F. Supp. 2d at 78-80.

Fair enough, you might say.  I agree.  But it nevertheless leads to the odd result in which an entity (an auto lender) which doesn’t ever use a credit report to decide whether or how to offer credit is nevertheless required, as a “user” of the report under Sec. 1681m(h), to provide RBPNs to consumers.

 

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