FCRA Compliance: What Every Financial Institution Should Know Before Making "Firm Offers of Credit"

Background

The federal Fair Credit Reporting Act (FCRA) strictly regulates the use of consumer reports, which contain highly sensitive information bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living. Unless a financial institution has a permissible purpose as enumerated in the FCRA, a financial institution cannot obtain a consumer report nor can a consumer reporting agency provide one. This includes lists of consumers that match a specified set of characteristics, because the FCRA treats each name on the “prescreened” list as a consumer report. Thus, a financial institution must have a permissible purpose to obtain a consumer report about each individual on the list.

However, the FCRA establishes a framework by which financial institutions can obtain such a prescreened consumer list if the financial institution intends to extend a firm offer of credit to each consumer on the list. To avoid violating the FCRA, financial institutions must develop internal processes to ensure that the FCRA’s proscriptive requirements are satisfied when making firm offers of credit.

How Are Consumers Prescreened to Receive Firm Offers of Credit?

The process by which individual consumers are identified to receive firm offers of credit is based on a predetermined set of criteria used to prescreen those individuals for inclusion on a consumer list. Prescreening is the only circumstance in which consumer report information may be used for marketing purposes, and one of the few circumstances in which consumer report information may be provided in the absence of a consumer-initiated transaction.

A financial institution can tailor the prescreening criteria based on a wide variety of characteristics, which typically include demographic information, such as ZIP code, and credit information, such as number of existing lines or credit or current credit limits. Alternatively, rather than stipulating certain characteristics, a financial institution may also rely on the consumer reporting agency to use its own independent algorithms and credit evaluation processes—only consumers with a minimum credit score, for example—to identify consumers for the financial institution.

Once the prescreened individuals have been identified for inclusion on a consumer list, the consumer reporting agency may only provide the financial institution with limited information about each individual. The consumer reporting agency must exclude information about any individual that has elected not to be included on prescreened consumer lists. The consumer reporting agency also must exclude anyone under age 21 unless the individual has consented to be included in prescreened consumer lists.

For individuals who have not opted out of receiving firm offers of credit and those under 21 who have given consent to receive firm offers of credit, the consumer list may only include each individual’s name and address; an identifier not unique to the individual, which the financial institution uses solely to verify the individual's identity; and other information that does not identify the individual's relationship or experience with another financial institution or entity.

Each individual included on the prescreened consumer list provided to a financial institution must receive a firm offer of credit.

What is a "Firm of Offer of Credit?"

A "firm offer of credit" is defined as "any offer of credit or insurance to a consumer that will be honored if the consumer is determined, based on information in a consumer report on the consumer, to meet the specific criteria used to select the consumer for the offer." A financial institution must extend credit to each individual on the prescreened consumer list under the terms of the firm offer. The firm offer must be unconditional; all a consumer must do to receive the credit is accept the offer.

However, the FCRA does not dictate what terms are required for a firm offer of credit; therefore how “firm” an offer of credit must be to satisfy the FCRA has primarily been determined by the courts. Although judicial interpretations may vary, a prudent financial institution should ensure that any firm offers of credit provide some meaningful value to the consumer. Offers that are determined to be merely “shams” for marketing will not be considered firm offers of credit. Additionally, although not a strict legal requirement, a financial institution should also consider whether to specify in solicitations sent to prescreened consumer lists any additional material terms that could impact the firm offer of credit.

Firm offers of credit that satisfy the FCRA must also comply with other federal and state laws, such as the prohibition against unfair or deceptive acts or practices. For example, a solicitation may contain a firm offer of credit while simultaneously making a false representation that an existing creditor of the individual referred the individual’s information to the financial institution.

A consumer who agrees to accept a prescreened offer of credit, but is later denied based on a subsequent post-screen consumer report, is entitled to an adverse action notice. A financial institution is not required to provide adverse action notices to individuals on a consumer list that receive firm offers of credit if the individuals do not respond to the solicitation—consumers who have not applied for credit have not suffered adverse action.

What Additional Disclosure Requirements Must Accompany a Firm Offer of Credit?

Firm offers of credit must be accompanied by two separate notices: a short notice and a long notice.

The short notice must conspicuously inform consumers that they have the right to opt out of prescreened offers of credit, provide the toll-free telephone number to call to opt out, and direct consumers to the long notice.

Sample Short Notice

You can choose to stop receiving “prescreened” offers of credit from this and other companies by calling toll-free [toll-free number]. See PRESCREEN & OPT-OUT NOTICE on other side [or other location] for more information about prescreened offers.

The long notice—which, based on available space, may be printed on the back of an offer letter—must include the following information:

• A statement that a consumer report has been used;
• That the consumer received the solicitation because the consumer met the criteria for the credit being offered;
• That the consumer may not receive such credit if the consumer does not actually meet the criteria for the credit; for example, if the consumer has not maintained the required minimum credit score;
• That the consumer can prohibit the use of his/her consumer report in future solicitations; and
• Contact information the consumer may use to opt out of such future solicitations.

Sample Long Notice
PRESCREEN & OPT-OUT NOTICE: This “prescreened” offer of credit is based on information in your credit report indicating that you meet certain criteria. This offer is not guaranteed if you do not meet our criteria [including providing acceptable property as collateral]. If you do not want to receive prescreened offers of credit from this and other companies, call the consumer reporting agencies [or name of consumer reporting agency] toll-free, [toll-free number]; or write: [consumer reporting agency name and mailing address].

Can Financial Institutions Conduct Post-Screens on Consumers?

Generally, the predetermined set of criteria used to prescreen individuals for inclusion on a consumer list must be the only criteria used to post-screen a consumer that responds to a firm offer of credit. A financial institution cannot place post-conditions on the firm offer of credit by imposing additional requirements, except in very limited circumstances.

Once a consumer responds to a firm offer of credit, the financial institution is permitted to obtain a full consumer report—not just the limited information permitted in the consumer list—to verify that the consumer continues to meet the specified prescreening criteria established before the firm offer of credit was extended.

The financial institution is also permitted to use information in the consumer’s application for credit to determine whether the consumer continues to meet the specified prescreening criteria, including application information that may not otherwise be included in a consumer report. For example, a financial institution may specify in the prescreening criteria that the individual must have a valid bank account in order to accept the firm offer of credit. While this information may not otherwise appear in a consumer report, the financial institution may post-screen for this information when determining whether to honor the firm offer of credit. The financial institution does not have to honor the firm offer of credit if the consumer no longer meets the specified prescreening criteria. The financial institution is also permitted to use information in the post-screen consumer report and information from the consumer’s application to conduct checks for potential fraud or take reasonable measures to verify the consumer's identity and confirm that the application is not the result of identity theft.

To the extent that a financial institution conducts post-screening on consumers that have received a firm offer of credit, nothing in the FCRA requires that a financial institution use the same consumer reporting agency to conduct the prescreen and the post-screen. Because the prescreen contains more limited information than the post-screen, a financial institution has a permissible purpose to pull a complete consumer report on the individual once the consumer has applied to receive the firm offer of credit.

A financial institution may also verify that the consumer is able to furnish any collateral required for the credit. Collateral requirement must be established before selection of the consumer for the offer of credit and must be disclosed to the consumer in the firm offer of credit. For example, a firm offer of credit relating to a vehicle title loan requires a vehicle as collateral. As discussed above, the FCRA does not require a financial institution to disclose many of the terms of the firm offer of credit, only the required collateral, if any.

What Are the Consequences of Failure to Make a Firm Offer of Credit?

Financial institutions that do not send firm offers of credit to those individuals identified on a prescreened consumer list may face consumer litigation, and the FCRA does not have a cap on the amount of statutory damages that could be imposed in a consumer class action.

Additionally, financial institutions may face regulatory scrutiny from federal agencies, such as the Consumer Financial Protection Bureau (CFPB). The CFPB expects that financial institutions that use consumer reports, including prescreened consumer lists, should employ procedures, controls, or other safeguards to ensure that they obtain and use consumer reports only in situations for which there is a permissible purpose. Unless a firm offer of credit is extended to each individual that appears on a prescreened consumer list, the financial institution does not have a permissible purpose. In order to respond to consumer litigation or regulatory scrutiny, a financial institution should maintain records of the prescreening criteria and the firm offers of credit extended to prescreened consumers for at least three years.

Making firm offers of credit can be a difficult process to maneuver. Financial institutions seeking to obtain consumer lists and engage in this form of consumer outreach should carefully consider whether to consult with legal counsel in developing prescreening procedures.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance relating to consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance. In particular, Ballard Spahr attorneys regularly advise financial institutions and consumer reporting agencies regarding FCRA compliance.