Application Etiquette


When should and shouldn’t banks share a copy of a customer’s credit report?

By Mary Thorson Wright

Like a lighthouse beacon, an accurate and complete credit report slices a path through uncertain and unfamiliar ground and shows the community banker a picture of a loan applicant’s creditworthiness—his credit history, his account’s status and how his accounts have been handled. A credit report is, unquestionably, an essential risk evaluation tool.

However, misuse of a credit report can cause unneeded compliance problems.

When can a bank pull a credit report on a borrower? What is required of the entity using the report? When pulling a report, should the bank provide a copy to the applicant? Does it matter if the application was denied or approved for a loan?

To pull or not to pull …

The Fair Credit Reporting Act (FCRA) and Federal Regulation V lay out rules for when, and under what circumstances, it is permissible to obtain a credit report to evaluate an applicant’s or borrower’s creditworthiness. A credit report, also called a consumer report, may only be obtained for the permissible purposes described in Section 604 of the FCRA, including:

  • under written instructions of the consumer to whom the report relates; and
  • when the report will be used in connection with a credit transaction, or other legitimate business need for the information.

In addition, a permissible purpose also includes evaluations for employment, insurance underwriting, license eligibility, investment valuation and responses to court orders such as subpoenas or other authorized governmental offices or agencies.

When consumers apply for credit, they typically complete an application and authorize the bank to obtain credit information. However, a credit report also may be obtained to conduct a review of an account, prepare for account collection, or evaluate a loan where an individual is personally liable on business credit, including individuals who guarantee or cosign a business loan. It’s preferable to have a good audit trail to show the consumer’s authorization whenever possible, but when circumstances preclude getting the authorization, the bank may still proceed if it can show it has a legitimate business need for the information.

Section 1002.5 of Regulation B— Equal Credit Opportunity Act defines when information may be obtained about a credit applicant’s spouse. A bank may request a credit report for an applicant’s spouse if that spouse will be permitted to use the account or be contractually liable for the account, or if the applicant is relying on the spouse’s income as a basis for repayment of the credit. A bank also may request a credit report for an applicant’s spouse if:

  • state law requires it;
  • the applicant resides in a community property state (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin (only by opt-in arrangement);
  • the property that the applicant relies on as a basis for repayment of the credit is located in a community property state; or
  • the applicant is acting as the agent of the non-applicant spouse.

Sharing credit reports

A prospective bank relationship or denial of that relationship is often discussed face-to-face. When a consumer asks, can a loan officer disclose a customer’s credit score? Can the loan officer give the customer a copy of the credit report?

Under certain circumstances, such as a written credit denial, a bank may be required to disclose a credit score under the Fair and Accurate Credit Transactions Act’s credit score rules dealing with risk-based pricing. In some states, the bank may be required to provide a credit score, and each bank should check state law for this requirement.

As to whether a bank can provide a copy of a credit report directly to a consumer, §607(c) of the FCRA states that disclosure of consumer reports by users is allowed; however, there may be more good reasons to not provide the credit report directly to the consumer than the reasons to do it. Credit reports provided to financial institutions may contain codes or terms that would not be included in a report provided to the consumer from the credit reporting agency. To ensure consumers get the information afforded them under the law, it is better done by the credit agency and with the user-friendly reports they produce specifically for this purpose.

Under the FCRA, the credit agencies are responsible for maintaining and reporting the information in credit reports. The bank may have reported credit information about the consumer in the past, but it is likely that most or all of the information reflected on the credit report was reported by other entities. Because the bank employee who provides a credit report to a consumer really cannot respond to questions about information in the report, it’s better that the consumer obtains the report from the responsible credit agency. That also puts the consumer in touch with the credit agency that can initiate any corrective actions on erroneous data.

Evaluating the credit risk of a prospective or current customer is essential to safe and sound community banking. Doing so in a fully compliant manner is essential to effective compliance management.

Mary Thorson Wright, a former Federal Reserve managing examiner, is a financial writer in Virginia.