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Soft Pulls and Adverse Action - A Primer on FCRA

Credit reports come in different varieties and there are requirements and pitfalls with each. Credit scores, hard pulls, and soft pulls are all credit reports, called “consumer reports” in the federal Fair Credit Reporting Act (FCRA). But there are also investigative consumer reports and things that don’t look like consumer reports but which are and need to be treated as such. This is a complex area but let me try to simplify it for you

Under the FCRA, a “consumer report” means any communication (written or oral) of any information bearing on a consumer’s credit worthiness, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part as a factor in determining the consumer’s eligibility for: (A) credit or insurance for consumer purposes; (B) employment purposes; or (C) any other purpose authorized under the FCRA.

Lots of things get caught in this definition but other things don’t. Excluded from the definition of a consumer report are reports having information solely as to “transactions or experiences” between the consumer and the person making the report. So, if someone tells you I am delinquent on my debt to them alone, that is not a consumer report. But if they tell you I am delinquent on many obligations, that is a consumer report if it is used as a factor in establishing my creditworthiness.

A credit score is definitely a consumer report. It is a numerical assessment of my credit history.

A traditional credit report accessed through a “hard pull” is an itemized list of the consumer’s credit accounts and an indication of how they have performed. Accessing a person’s credit report results in a formal inquiry that may cause a temporary lowering of their credit score. So, if you don’t have a permissible purpose to pull the credit report, that can damage a consumer and be the basis for a lawsuit.

The best permissible purpose is to get the consumer’s consent to pull their credit report. Every credit application has language authorizing you to do so. A signed credit app is the best way to get the consumer’s consent to pull their credit report.

What about “soft pulls”? A soft pull is an inquiry of certain limited information about the consumer that does not show up as an inquiry on their credit report. It is often used to “prequalify” a customer for credit pending a full review based on a hard pull of their credit report. Typically, the information a soft pull returns will include a credit score and certain demographic information.

But even a soft pull requires the customer’s consent or another permissible purpose as it is a “consumer report” under the FCRA. Get the consumer to consent to a soft pull to prequalify and document the consent. While it may be harder for the consumer to show actual damages, statutory damages under the FCRA are available and your making a soft pull without the customer’s consent could be found to be an unfair or deceptive act or practice (UDAP) for which damages of $46,517 per violation could be assessed.

The only time you can pull a consumer report (hard or soft pull) without the customer’s consent is to “prescreen” the consumer. When you prescreen, you check the customer’s credit profile against a pre-established list of criteria (e.g., minimum credit score). If the customer passes the inquiry, you must make a “firm offer of credit” to the consumer. A prescreen can be used to find whether a customer qualifies for an offer and is always subject to continued qualification after a formal credit review. A prescreen does not negatively affect the customer’s credit score.

Investigative consumer reports are ones that seek information about a consumer other than how they pay their bills. This includes information on a consumer's character, general reputation, personal characteristics, or mode of living obtained through personal interviews with neighbors, friends, or associates of the consumer.

Other than for prescreening, if you have made a hard or soft pull of a consumer report and you don’t finance the customer, you must send the consumer an adverse action notice within 30 days of receipt of the credit application. So, a consumer who seeks prequalification but who is not approved or declines your final credit offer must receive an adverse action notice just like a consumer about whom you made a hard pull.

Some dealers send adverse action notices to every consumer who applies for credit. Not a good idea. Your credit bureau agreements will prohibit you from doing that because they are in the business of selling credit reports, not giving them away for free to persons who received adverse action notices. Sending an adverse action notice to everyone also is not what the Equal Credit Opportunity Act (ECOA) or the FCRA require. It can also create ill will with customers who do finance with you and who will be mystified why they got an adverse action notice.

Know what kind of consumer reports you want to use and as a rule, get the customer’s written consent to make a hard or a soft pull. Keep the consent document in the deal jacket. And if you get consent to make a soft pull, you will need another consent (generally on a credit app) if you want to then make a hard pull. The soft pull consent won’t generally cover you.

Get the customer’s written consent for the type of pull you are making and be prepared to send an adverse action notice if you don’t get the customer financed. These two practices are most critical to compliantly accessing credit reports.

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