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Fair Credit Reporting ActJoseph L. Barloon

Skadden, Arps, Slate, Meagher & Flom LLP

MBA Legal Issues and Regulatory Compliance Conference

September 25, 2011



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The Fair Credit Reporting Act, 15 U.S.C. § 1681,et seq.

• The Fair Credit Reporting Act (FCRA) is designed to

ensure the fair and accurate use and dissemination

of consumer-related information.

• Key Amendments to FCRA:» Fair and Accurate Credit Transactions Act of 2003.» Credit Card Accountability Responsibility and

Disclosure Act of 2009.

» Title X of the Dodd-Frank Wall Street Reform andConsumer Protection Act (the Consumer FinancialProtection Act of 2010).

• As a result of the Dodd-Frank Act, the FCRA

regulatory framework changed significantly in July

2011:» The FRB and the FTC published final rules to

implement the credit score disclosure provisions.» FCRA rulemaking/interpretive authority shifted from

the FTC to the Consumer Financial Protection Bureau(CFPB).



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Overview of the FCRA

• FCRA regulates conduct by:

» Consumer Reporting Agencies (CRAs)

» Users of Consumer Reports

» Furnishers of consumer-related information

• FCRA addresses issues related to, among other

things, access and use of data, identity theft,consumer disclosures, disputed accuracy

procedures, affiliate sharing and adverse action.

• Both the FTC and the Consumer Bureau have

authority to enforce the Act.



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Applicability of FCRA

• FCRA focuses principally on two mutually dependent

concepts: CRAs and Consumer Reports.

• A CRA is “any person, which for monetary fees, dues, or

on a cooperative nonprofit basis, regularly engages . . . in

the practice of assembling or evaluating consumer credit

information or other information on consumers for the

purpose of furnishing consumer reports to third parties.”(15 U.S.C. § 1681a(f)).

• Consumer Reports encompass written, oral or other

communications by a CRA bearing on a consumer’s

“creditworthiness, credit standing, credit capacity,

character, general reputation, personal characteristics ormode of living” that are used, intended to be used, or

collected, to determine a consumer’s eligibility for certain

consumer transactions. (15 U.S.C. § 1681a(d)).



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Uses of Consumer Reports

• A CRA may furnish a Consumer Report (and a “User” may

use it) only for enumerated “Permissible Purposes:

» Credit or insurance transactions;

» Business transactions initiated by the consumer;

» Review of an account.

• A CRA may also furnish a Consumer Report in connection

with credit or insurance transactions not initiated by the

consumer if:

» the consumer authorizes the CRA to do so; or

» the transaction consists of a firm offer of credit or

insurance and the prospective User has otherwisecomplied with the FCRA opt-out requirements.

• FCRA restricts the information a CRA may supplyto a User in connection with a firm offer.



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Key Limitations on Information Contained InConsumer Reports

• CRAs cannot report information Congress deems

obsolete, for example:» Civil suits, civil judgments and records of arrest that antedate

the report by more than seven years or until the governingstatute of limitations has expired, whichever is longer;

» Accounts placed for collection or charged to profit and losswhich antedate the report by more than seven years.

• Prohibition against CRAs providing outdated information

does not apply to credit reports furnished in connection

with high-dollar ($150,000+) credit and life insurance

transactions or the employment of an individual with an

annual salary ≥ $75,000.• FCRA also imposes limitations on the use, sharing and

format of medical information contained in a Consumer

Report.



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Key Obligations Imposed by FCRA

• Certification

» CRA must require prospective Users of Consumer Reportsto identify themselves, certify the purposes for which theinformation is sought, and certify that the information will beused for no other purpose.

» Prospective Users are required to provide additionalcertifying information under certain circumstances, such asthe procurement of an investigative consumer report or theprocurement of a consumer report for employment purposes.

• Accuracy» CRAs must follow “reasonable procedures to assure

maximum possible accuracy.” (15 U.S.C. § 1681e(b)).» A Furnisher must not report data that it knows or has

reasonable cause to believe is inaccurate.

• Access

» CRAs must provide all information in their files for a person

upon request.• Dispute and Correction

» CRAs must investigate and, where appropriate, correctdisputed information.

» Furnishers must correct and update information whereappropriate.



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Key Obligations Imposed by FCRA

• Notices

» FCRA imposes various disclosureobligations on CRAs, Users andFurnishers:

• CRAs are required to provide Users and

Furnishers with a notice of such person’sresponsibilities under FCRA;

• Certain mortgage lenders are required to providea “Notice to Home Loan Applicant” and relateddisclosures when a credit score is used;

• Furnishers must notify CRAs of voluntary account

closures and account delinquencies;

• Users must provide notices to consumerswhenever a Consumer Report is used in whole orin part to take adverse action.



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FCRA’s Relationship to State Laws

• State Laws

» States may also promulgate laws that regulatethe use of consumer information, but only to theextent such laws are consistent with FCRA.

» FCRA preempts state regulation of certainsubject matters addressed in the Act as well ascertain common law actions in variouscircumstances.



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Key Liability Provisions

• FCRA imposes civil liability for negligent

and willful violations of the Act.

» A person who negligently fails to comply witha requirement imposed under the FCRA is liablefor

• actual damages; and• court costs and reasonable attorneys' fees.

» For willful violations, a consumer may receive

• either actual damages or statutory damages

(ranging from $100 to $1,000);• punitive damages; and

• court costs and reasonable attorneys’ fees.



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FACT Act (Select Provisions)

• The Fair and Accurate Credit Transactions

Act of 2003 (FACT Act) added important

provisions to FCRA:

» Identity theft;

» Consumer notices;» Data access and accuracy.



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FACT Act: Identity Theft & Privacy

• Fraud Alerts

» Upon request, a CRA must include a fraud alertin the file and must provide the consumer withnotice that he or she may obtain a free copy ofthe consumer file and related disclosures.

» Fraud alerts notify creditors that they may notextend credit without verifying that the consumerhas actually requested credit.

» The FCRA Red Flag Rule requires "financialinstitutions" and "creditors" to develop IdentityTheft Prevention Programs.

• FTC recently settled charges against three creditreport resellers who allegedly allowed their clients toaccess reports without requiring basic securitymeasures, such as firewalls and updated antivirussoftware.



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FACT Act: Identity Theft & Privacy

• Truncation of Credit Card and Debit Card Numbers

“No person that accepts credit or debit cards shall print morethan the last 5 digits of the card number or the expiration

date.” (15 U.S.C. § 1681c(g)).

• Free Consumer Reports

» All CRAs must provide consumers with a copy of their

consumer file and related disclosures once during any12-month period upon the request of the consumer andwithout charge.

• Affiliate Sharing

» FCRA prohibits the use of credit information obtained

from an affiliate for marketing purposes unless:• It is clearly and conspicuously disclosed to the consumerthat the information may be communicated for solicitations;and

• The consumer is given an opportunity to prohibit suchsolicitations.



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FACT Act: Accuracy of Data

• Data Accuracy and Integrity Rule and

Guidelines» Various federal agencies recently issued joint

guidelines to ensure the accuracy and integrityof the information Furnishers supply to CRAs.

• Furnishers are required to establishreasonable policies and procedures forimplementing the guidelines.

• Furnishers are required to investigate certaindisputes regarding the accuracy ofinformation in Consumer Reports.

• Notice of Negative Information» Financial institution must provide written notice

to the consumer within 30 days after providingnegative information to CRA.



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FACT Act: Risk-Based Pricing

• Risk-based pricing provisions recently added to

address the practice of setting or adjusting the terms

of credit offered or extended to a consumer based

on that particular consumer’s nonpayment risk.

• Lenders are required to provide a “Risk-Based

Pricing Notice” if:» A consumer is extended credit “on material terms that

are materially less favorable” than the terms offered to“a substantial proportion of consumers” and

» A Consumer Report is used in connection with the

credit decision.



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• The FRB and FTC jointly issued the Risk-Based

Pricing Rule.• The Rule provides, among other things:

» Model forms that provide a “safe harbor” for compliance.

» Insight regarding the circumstances when the risk-

based pricing notice is not required:• Lender opts to provide consumers with a credit

score disclosure exception notice;

• Adverse Action Notice provided to the consumer;

• Consumer applies for, and is granted, specificmaterial terms.

» A risk-based pricing notice is required in connectionwith an account review if the APR is increased based,at least in part, on the Consumer Report.

FACT Act: Risk-Based Pricing



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Credit CARD Act of 2009

• The Credit Card Accountability

Responsibility and Disclosure (CARD) Actof 2009 amended FCRA to prevent

deceptive marketing of “free” credit reports.

• FTC issued a Final Rule implementing the

statutory revision, which requires ads for

“free” credit reports to contain clear

disclosures.



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Dodd-Frank Act

• The Dodd-Frank Act provides the

Consumer Financial Protection Bureau with

broad rulemaking and enforcement

authority and the mandate to prevent

“abusive” financial practices.• Dodd-Frank also imposes a number of

enhanced data collection and reporting

requirements, several of which impact

FCRA.



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Dodd-Frank Act

• Section 1100F of the Dodd-Frank Act requires

Users to add credit score disclosures to their

Adverse Action and Risk-Based Pricing notices if a

credit score is used in setting credit terms or taking

adverse action:

» Numerical credit score;

» Range of possible credit scores under themodel used;

» Four key factors that adversely affected theconsumer’s credit score (or up to five factors if the number of inquiries made with respect tothat Consumer Report is one of the factors);

» Date on which the credit score was created; and

» Name of the person or entity that provided thecredit score or credit file upon which the creditscore was created.

D dd F k A K I l i R l



2020

Dodd-Frank Act: Key Implementing Rules

• In July 2011, the FRB and the FTC issued final rules to

implement the credit score disclosure provisions.

• Highlights from the FTC and FRB’s Risk-Based Pricing Rule:» Defines “credit score” for purposes of the FCRA.

» Emphasizes that disclosure of the number of inquiries for a ConsumerReport is required, regardless of whether it is one of the top four keyfactors that adversely affected the credit score.

» Maintains creditors’ ability to send credit score disclosure exception

notices in lieu of risk-based pricing notices.» Clarifies that a lender need only disclose a single credit score even if

multiple credit scores are used in connection with the credit decision.

• Highlights from the FRB’s Adverse Action Rule:» Clarifies that both the key factors that adversely affected the consumer’s

credit score and the specific reasons for taking adverse action on anapplication or extension of credit are necessary to satisfy the separate

requirements of ECOA and FCRA.» Confirms that a creditor is not required to disclose a credit score if an

application has no credit score.

» Discusses interplay between proprietary scores, “credit scores” and non-credit information.



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Recent Developments

• The FTC’s official Commentary on the FRCA was

formally rescinded in July.

» The passage of time and various amendmentsmade the Commentary “partially obsolete.”

• A July 2011 FTC Staff Report, however, provides

revised commentary on the FCRA and highlights thekey areas in which the former Commentary differs

from the FTC’s current view of the Act.

• The extent to which the Consumer Bureau will adopt

the FTC FCRA interpretations or take a differentinterpretive approach remains to be seen.



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Recent Developments

• The Consumer Bureau recently issued two formal

studies required by Dodd-Frank, both of which

discuss credit scoring.

» A July 19, 2011 report analyzes the differencesbetween credit scores available to consumersand creditors.

» A July 20, 2011 report focuses, in part, on thepotential use of remittance histories in thecalculation of credit scores and the FCRA-related challenges to such use.



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FCRA

For additional information, contact:

Joseph L. Barloon

Skadden, Arps, Slate, Meagher & Flom LLP

(202) 371-7322

[email protected]

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