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Thursday, May 8, 2014

Prescreening and Firm Offers of Credit

QUESTION
I have heard that there are additional requirements imposed on a lender when it utilizes pre-screened credit data for marketing or advertising. Is this true?

ANSWER 
Yes.

Prescreening is a process by which a consumer reporting agency (viz., a credit bureau) compiles a list of consumers meeting specific credit-granting criteria provided by an institution. The list is provided to the institution for use in soliciting specific consumers for credit products.

The use of prescreened data is beneficial to an institution because it allows the institution to qualify consumers for an offer and ensure that only qualified consumers receive the offer.  By way of example, a financial institution could get a list of consumers (a) with a credit score over 700; (b) not down 30 in the last 12 months; and (c) in a specific zip code. A list of consumers fulfilling these three criteria could not be assembled from publicly available information. While these criteria can serve as a powerful marketing tool, if an institution uses prescreened data it must make a “firm offer of credit” to all consumers whose names appear on the prescreened list. Furthermore, if the consumer accepts the offer of credit, the institution cannot, with limited exceptions, withdraw or deny the credit, even when based on new information concerning the consumer.

The guidelines set forth in the Fair Credit Reporting Act (“FCRA”) which is now enforced by the CFPB speak to the requirements to be followed when an institution utilizes prescreened data. The FCRA permits the use of prescreened data for marketing purposes if the institution makes a “firm offer of credit” to each consumer whose name appears on the prescreened list. Specifically, Section 604(3)(A) of the FCRA permits an institution to obtain prescreened data if it intends to use the information in connection with a credit transaction involving the extension of credit to the consumer. Therefore, an institution cannot use prescreened data to send promotional materials.

The requirement to offer a consumer whose name appears on the prescreened list a “firm offer of credit” should not be taken lightly.  If your institution utilizes prescreened data, you must understand all of the requirements of a “firm offer of credit”.  

These requirements include, but are not limited to, offering a short form and long form opt-out notice on the offer, setting forth all collateral requirements on the offer and establishing and documenting all credit requirements before the offer is made to the consumer.

In addition, these requirements are imposed upon an institution that is using credit data, whether obtained directly from the credit bureau or through a third party lead provider. 

Michael Barone
Director/Legal & Regulatory Compliance
Lenders Compliance Group