Credit Today Legal Case Study: The ‘Business Exception’ to the Fair Credit Reporting Act


This article originally appeared in Credit Today, the leading publication for the credit professional.
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By Ann Morales Olazábal

Landers Lighting Co. is a large manufacturer and retailer of lighting products. In addition to its retail business, Landers does fairly sizable sales to local contractors, some of whom are on open credit terms. One of its longstanding business customers is Del Amo Electric, Inc. (DAE), a contractor in the business of installing and servicing lighting and other electrical fixtures. Frank Del Amo is DEA’s president, and he and his wife are the company’s sole shareholders.

DEA’s account with Landers has gotten in arrears recently, and the parties have informally discussed the possibility of Mr. and Mrs. Del Amo personally guarantying a note representing the $26,000 outstanding balance owed by DEA. Consequently, Landers’s credit manager is considering pulling a consumer credit report on the Del Amos “to ascertain their personal creditworthiness. Landers routinely obtains such credit reports on its retail customers by way of a contractual agreement with one of the three largest nationally recognized consumer credit information providers.

Under these circumstances, and given the business-oriented purpose of the credit report, may Landers legally obtain Mr. and Mrs. Del Amo’s consumer credit report?

Make your decision and read below for the answer!




The ‘Business Exception’ to the Fair Credit Reporting Act

By Ann Morales Olazábal

No. The Fair Credit Reporting Act is a consumer protection statute that requires credit reporting agencies to “adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information.” 15 U.S.C. Section 1681(b).

Most of the provisions of the FCRA regulate the behavior of credit reporting agencies. But, because consumer credit reporting agencies cannot prohibit illegal use of consumer credit information if credit report users are not bound by law to obtain consumer credit reports only for permissible purposes, the FCRA also extends to the conduct of parties who request credit information.
Generally speaking, credit reports can legally be requested by those considering (1) the extension or collection of consumer credit accounts, (2) employment of a consumer, (3) underwriting of insurance for a consumer, (4) a consumer’s entitlement to government benefits, or (5) any another “legitimate business need” in connection with a consumer business transaction.

This latter purpose for obtaining credit reports has long been referred to as the “business exception” to the FCRA. Six years ago, the FCRA was substantially amended as part of the Consumer Credit Reporting Reform Act of 1996. Since then, the precise language of the “business exception” provision of the FCRA has read as follows: . . . any consumer reporting agency may furnish a consumer report under the following circumstances . . . (3) To a person which it has reason to believe . . . (F) otherwise has a legitimate business need for the information — (i) in connection with a business transaction that is initiated by the consumer.

Exception in Question

While courts had previously held that businesses extending trade credit may have had a legitimate need for consumer credit information on sole shareholders, the 1996 amendment to the statute’s language threw the continuing validity of the FCRA business exception, as we once knew it, into question.

Subsequent Federal Trade Commission Staff Opinion letters interpreting the FCRA make it clear that where a credit application is made by a business entity, the statute does not provide a permissible purpose for a creditor to obtain a consumer report on a guarantor or co-signer for–or a principal, owner, or officer of–the commercial credit applicant. Thus, no consumer credit report should be obtained in circumstances similar to this case without the individual subject’s consent.

Both the entities and individuals who are involved in obtaining and using consumer credit information in circumstances other than those specifically outlined in and permitted by the FCRA can be held liable in private lawsuits brought by the subject(s) of the credit report. Therefore, both Landers and its credit manager, individually, could be sued and held legally liable for any resulting damage award, if a consumer credit report is obtained on the Del Amos, in connection with their offer to guaranty their business’s outstanding debt.

The best practice is always to obtain the consumer’s written consent before requesting a consumer report from a credit reporting agency. Another alternative may be to investigate the Del Amos’ business history and status by way of a commercial credit information agency, which would not be subject to the strictures of the FCRA.

Ann M. Olazábal, MBA, JD, formerly Credit Today’s Legal Editor, is Vice Dean, Undergraduate Business Education, Chair and Professor, Business Law at the University of Miami School of Business Administration.

Thanks to Credit Today’s library of Legal Case Studies


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