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Access to Credit Scores
Is Business Credit Next?
By Scott Blakeley
Federal statutes enacted to govern consumer transactions
have recently been extended to commercial, or business, credit transactions.
For example, the Federal Trade Commission (FTC) issued an opinion that
the Fair Credit Reporting Act (FCRA), a federal statute enacted to
protect consumers from the unauthorized pulling of credit reports,
requires vendors extending business credit to obtain the express consent
of a consumer before pulling a consumer credit report. Also, a federal
court ruled that the Equal Credit Opportunity Act (ECOA), a federal
statute enacted to protect consumers from creditors discriminating
in the granting of credit based on a prohibited basis, governs business
credit. With these recent extensions of federal laws intended to protect
consumers being applied to business credit, credit professionals extending
business credit must be mindful of recent legislation and cases intended
to protect consumers may be applied to business credit. For instance,
California recently adopted legislation, and like legislation is pending
in the United States Congress to apply to all states, that requires
creditors to reveal to applicants details of credit scores. Will this
this type of legislation soon apply to business credit?
Legislation Disclosing Consumer Credit Scores Adopted
California recently adopted a law that requires lenders
or creditors to tell consumers applicants the credit score used in
any homeloan decision. Lenders also have to reveal the key reasons
why the credit scoring was not higher. Presently, lenders are not required
to reveal credit scores, which estimate an applicant's creditworthiness
based on their credit reports. Under the new law, applicants may go
to a credit reporting agency before applying for credit. Under the
new law, applicants will also know what factors affect their credit
scores and how to achieve a better credit score. The law is effective
July, 2001.
Current Disclosures To Applicants Denied Business Credit
Given the recent interest by state legislatures and the
U.S. Congress in requiring disclosure of credit information for consumer
applicants denied credit, what is the present disclosure requirements
imposed on credit professionals for applicants requesting business
credit?
Disclosures Under the Equal Credit Opportunity Act
Under ECOA, a credit grantor must provide notice to
the applicant of denial of credit, or an adverse action, taken with
the request for credit within 30 days after a completed application
is received by the credit grantor. The credit professional's letter
states that the applicant may be provided with a statement of reasons
why credit was denied within 60 days of the date of the letter. If
an applicant requests an explanation for denial of within 60 days,
the credit grantor is to provide a statement of reasons within 30 days.
What information must the credit professional provide? ECOA does not
require the credit professional to provide specific reasons for denying
credit, but instead may provide language such as, "adverse credit
history"; "lack of business experience"; "lack
of working capital"; or "too much secured debt." Unlike
the legislation recently adopted in California for disclosing consumers
credit information where the creditor must provide reasons for declination,
ECOA does not require such specific disclosure.
Disclosures Under the Fair Credit Reporting Act
The FCRA requires that a credit grantor provide notice
to the consumer if the credit grantor is denying credit, or otherwise
taking adverse action with respect to the credit application, based
upon the information obtained in the credit report. Thus, a credit
grantor will provide notice to the company of the denial of credit;
the credit grantor must also provide notice to the president, shareholder
or guarantor with respect to whom the credit report was obtained.
The notice can be oral, in writing, or electronic. The
credit grantor is required to provide the name, address and telephone
number of the consumer reporting agency. In addition, the credit grantor
must state that the consumer reporting agency did not make the adverse
credit decision and such agency is unable to provide the consumer with
the specific reasons why the adverse credit decision was taken. Finally,
the credit grantor must notify the consumer of the consumer's right
to obtain a free copy of the consumer report. Notice must also be provided
of the consumer's right to dispute with the consumer reporting agency
the accuracy or completeness of any information in the consumer report.
Applying Consumer Legislation To Business Credit Transactions
How can a federal court in analyzing the ECOA, and the
FTC in considering the FCRA, conclude that legislation intended to
govern consumer credit apply to commercial credit transactions? Look
to the statutes. ECOA and FCRA's broad definitions of "creditor", "applicant" and "credit
transaction", for example, the court in analyzing ECOA, and the
FTC in considering FCRA, could reasonably conclude that the FCRA and
ECOA governs business credit as well as consumer credit. The United
States Supreme Court has held that in interpreting a federal statute,
courts are to give effect to a statute's plain meaning.
Vendors Vigilant To Consumer Law Developments
Given state legislatures and the U.S. Congress inclination
to broadly define terms with consumer legislation, and the trend of
courts and regulatory agency to liberally apply consumer legislation
to business credit, credit professionals extending business credit
should keep an eye on developments with consumer laws. It may be that
the consumer legislation applies to business credit.
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