Last week, I received a letter from my credit union stating: “Because of your excellent credit record we’re increasing the limit on your credit card.” This got me thinking about whether the institution had a permissible purpose to review my credit.

Section 604 of the Fair Credit Reporting Act requires that credit bureaus (credit reporting agencies, or CRAs) must have a permissible purpose for providing a credit report. Essentially, if there is not a permissible purpose for the credit report and one is pulled, it is a violation of the FCRA. Section 604 of the FCRA provides a list of permissible purposes.

Section 604(a)(3)(A) allows a credit report be provided to a person (in my case, the credit union) which it (the credit bureau) has reason to believe “intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer…”

Since my credit card is a variable rate, and I did not apply for a new loan, it is safe to assume that the credit union used the credit report to review my account to determine if a rate increase was appropriate based on increased risk shown by a declining credit score.

What about the review of a closed-end loans?

The Gowen Letter (Advisory Opinion to Gowen (04-29-99)) addresses closed-end loans and the review of an account:

The terms of a closed-end credit transaction are predetermined and generally may not be changed unilaterally by the creditor unless the contract expressly provides for such action (e.g., in the event of default). Therefore, the creditor is unlikely to have a reason to consider “whether to retain or modify current account terms” and, thus, would not have any routine need to procure consumer reports to “review” its accounts. (Highlight added)

What about after I close my credit card?

The Benner Letter (Advisory Opinion to Benner (04-30-99)) states that there is not a permissible purpose of ‘review an account’ for closed loans or credit cards:

Once an account is closed because the consumer has paid the debt in full (and also, in the case of an open-end account such as a credit card account, notified the creditor to close the account), it is our view that no permissible purpose exists for a CRA to provide file information on a consumer to the creditor. Because there no longer exists any account to “review” and the consumer is not applying for credit, the FCRA provides no permissible purpose for the creditor to receive a consumer report from a CRA. (Highlight added)

What about marketing other products or services?

One of the frequent questions that we, here at CSG, are asked is if the institution can pull a credit report for a deposit account and use that to market products to new consumers.  The answer is yes and no. Yes, the institution can pull a credit report under permissible purpose found in Section 604(a)(3)(F):  “otherwise has a legitimate business need for the information,” in order to determine whether the consumer meets the qualifications of a deposit account. However no, the institution cannot use the credit report that was pulled to open the account in order to market other products (e.g. loans) to the consumer. Section 607(a) requires financial institutions to “certify the purposes for which the information is sought, and certify that the information will be used for no other purpose.”  Thus, the institution can use the report for one use, and one use only. It cannot use a credit report that was pulled for a permissible purpose to market other products and services to the consumer.

In summation, an institution can only use the credit report for the purpose that it was pulled, and not for marketing other products or services to the consumer.

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