Do the New FCRA Adverse Action Letter Requirements Apply To You?
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Recent changes to the Fair Credit Reporting Act (“FCRA”) have resulted in numerous client inquiries. FCRA was originally enacted in 1996, to ensure that consumers were informed of the information utilized to make adverse credit decisions, and required users of credit reports to notify the consumer of the adverse action. Legislation amending FCRA (the Dodd-Frank Act) was enacted in 2010 and became effective July 21, 2011. The Dodd-Frank Act may or may not affect the adverse action notice requirements you must follow, when you take adverse action against an applicant or resident.
As originally enacted, FCRA required you to provide notification of adverse action to any applicant when you denied their application based on a “consumer report”, more commonly known as a credit report, that was provided by a “consumer credit reporting agency”. What is a credit report? A credit report is simply a compilation of information regarding an individual’s credit history, character, or lifestyle. A consumer credit reporting agency is a company that specializes in providing credit reports to third parties for a fee. Many companies that provide credit reports for tenant screening purposes do not compile the reports themselves. Regardless, even if a company does not compile the information itself, or simply resells information provided by another consumer credit reporting agency, they meet the definition of a consumer credit reporting agency under FCRA.
Obviously, you must take adverse action to trigger FCRA adverse action notice requirements. Denying an application is adverse action. However, adverse action covers additional scenarios as well, because it is defined broadly under FCRA to include all actions adverse to the interests of the applicant (the consumer) in connection with an application. Imposing higher rents, requiring a cosigner or a guarantor, and requiring higher security deposits, are all examples of adverse action. In the multifamily industry, there are usually three possible application outcomes. Approved, approved with conditions, and denied. Approved with conditions is adverse action. Regardless of the recent changes in the law, are you (your third party credit verification service) sending out adverse action notices when a resident is “approved with conditions”?
Prior to the Dodd-Frank enactment, FCRA required an adverse action notice to inform the applicant that the decision was made in connection with a consumer credit report, identify the consumer credit reporting agency that provided the report, and a statement that the consumer credit reporting agency did not take the adverse action. Additionally, the adverse action notice set forth applicable rights of the consumer (applicant or resident), including their right to obtain a free copy of the credit report resulting in the adverse action, and to contest the information in the report.
The Dodd-Frank changes to FCRA’s adverse action requirements may or may not affect you. FCRA, as amended by Dodd-Frank, requires additional adverse action notifications only if the adverse action is 1) based on a consumer report provided by a consumer credit reporting agency, and 2) is based on a credit score.
When the new law is evaluated against industry standard practice, the key issue becomes clear. Current industry resident screening models for resident applications are almost certain to involve credit reports provided by credit agencies. Thus, the key issue governing whether the new law applies to you, is whether your screening process utilizes a “credit score” as part of the application process. If your application utilizes a credit score (based on the definitions set forth in FCRA), you must comply with the law by making the new adverse action disclosures. If a credit score is not utilized in an adverse action, FCRA’s original requirements still apply even though the Dodd-Frank adverse action requirements are not triggered.
Unfortunately, the definition of a credit score under FRCA is not clear or easily understandable. In simple terms, FCRA defines a credit score as a numerical value based on a statistical model. However, the full definition, including limitations and exceptions, is imprecise. For example, some resident screening models may use “scores”, but such scores are not “FICO” scores used to make lending decisions and therefore wouldn’t be considered “credit scores” under FCRA, and wouldn’t trigger compliance with the Dodd-Frank adverse action requirements.
The Dodd-Frank Act did not change how the adverse action notice is delivered to applicants. FCRA allows for delivery of adverse action either orally or in writing. The best business practice is to always make the adverse action notice in writing.
If you fall under the new adverse action notice requirements, you must inform the applicant of the score used to make the adverse decision, the range of possible scores, and key factors (not to exceed 4 key factors) that adversely affect the score. If the number of credit inquiries is a key factor that negatively affects the applicant’s score, you must always disclose this as a key factor, plus four other key factors.
Determining whether you must comply with the amended FCRA can be a complicated and time-consuming proposition. Fortunately, you have an easy solution. You can shift responsibility for both the compliance determination, and compliance to your third party credit verification company (the consumer credit reporting agency you pay to provide credit reports in connection with applications). Industry best practices dictate utilization of a third party credit verification company in connection resident applications. These companies provide credit reports, and should automatically generate legally compliant adverse action notices for you in connection with the application process.
These consumer credit reporting agencies are or should be experts in Fair Credit Reporting Act issues. You should contact your provider, in writing, to address the key issues, and request a written response from them. Does your screening model utilize a “credit score”? In their opinion, are the new adverse action notice requirements applicable? Are they making them when they generate adverse action notices for you? Are they willing to indemnify you for non-compliance? You should also verify that the actual adverse action notices prepared by your provider track their representations. If your current third party credit verification company isn’t willing to address these issues, you should take your business elsewhere.