Jan 19, 2023
When a credit grantor is selling a sole proprietor, partnership, small corporate entity, or has obtained a personal guarantee, you should consider obtaining a consumer report on the owner(s) of that business. Although, the Fair Credit Reporting (FCRA) permits the use of a “consumer credit report” with a permissible purpose, it is recommended that you include the authority to obtain an individual report within the body of the application or as a separate document. If the personal guarantee is part of your credit application there should be a clear delineation from where the credit application ends and the personal guaranty begins. The signature line for the personal guaranty should be separately signed without a designation of title. Below are permissible purposes and adverse action requirements.
Users Must Have a Permissible Purpose
Congress has limited the use of consumer reports to protect consumers’ privacy. All users must have a permissible purpose under the FCRA (Fair Credit Reporting Act) to obtain a consumer report. A list of the permissible purposes under the law are:
- As ordered by a court or a federal grand jury subpoena.
- As instructed by the consumer in writing.
- For the extension of credit as a result of an application from a consumer, or the review or collection of a consumer’s account.
- For employment purposes, including hiring and promotion decisions, where the consumer has given written permission. (Check state law on this also)
- For the underwriting of insurance as a result of an application from a consumer.
- When there is a legitimate business need, in connection with a business transaction that is initiated by the consumer.
- To review a consumer’s account to determine whether the consumer continues to meet the terms of the account.
- To determine a consumer’s eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant’s financial responsibility or status.
- For use by a potential investor or servicer, or current insurer, in a valuation or assessment of the credit or prepayment risks associated with an existing credit obligation.
- For use by state and local officials in connection with the determination of child support payments, or modifications and enforcement thereof.
Users Must Notify Consumer When Adverse Actions Are Taken
Adverse action includes all business, credit and employment actions affecting consumers that can be considered to have a negative impact as defined by Section 603(K) of the FCRA such as denying or canceling credit or insurance or denying employment or promotions.
If a user takes any type of adverse action as defined by the FCRA that is based at least in part on information contained in a consumer report, you are required to notify the consumer. The notification may be done in writing, orally, or by electronic means. It must include the following:
- The name, address, and telephone number of the Credit Reporting Agency (including a toll-free telephone number, if it is a nationwide CRA) that provided the report.
- A statement that the CRA did not make the adverse decision and is not able to explain why the decision was made.
- A statement setting forth the consumer’s right to obtain a free disclosure of the consumer’s file from the CRA if the consumer makes a request within 60 days.
- A statement setting forth the consumer’s right to dispute directly with the CRA the accuracy or completeness of any information provided by the CRA.