By Jennifer L. Sarvadi*
Everyone wants to find ‘good’ customers, and, as a result, customer acquisition strategies are always changing.
One popular tool allows a consumer to determine if he or she can be pre-qualified for credit. Pre-qualification, or “pre-qual,” refers to the process by which a consumer makes an inquiry to a potential creditor to see if the creditor might have products available to that consumer prior to committing to a full application.
In order to determine if the consumer can pre-qualify for one or more products, the creditor requests limited information from the consumer – generally enough to obtain a consumer report, such as a credit score, from a consumer reporting agency but something less than a full application. Based on the limited information the creditor receives, including any consumer report, the creditor may communicate one or more offers to the consumer.
A credit score is a consumer report under the Fair Credit Reporting Act. In order to obtain a credit score, a creditor must have a permissible purpose to access the consumer’s credit report information as provided under Section 604 of the FCRA. There are two permissible purposes pursuant to which the pre-qualification inquiry may be submitted to a consumer reporting agency.
First, a user, including a creditor, may rely on the written instructions of the consumer, an independent permissible purpose under Section 604(a)(2) of the FCRA. A consumer may provide written permission for any person to obtain his or her consumer report from a consumer reporting agency. These written instructions must meet certain language and presentation requirements mandated by the FCRA, as well as any applicable requirements set forth by the consumer reporting agency.
Second, where the available products are considered extensions of credit, a creditor may certify that it has a permissible purpose pursuant to Section 604(a)(3)(a) of the FCRA. Note, however, that a consumer reporting agency may require that a creditor obtain the consumer’s written instructions even if a credit permissible purpose exists. Creditors should review their contracts with the consumer reporting agency to assure compliance.
Creditors report that they have heard that obtaining a pre-qual report will not have any impact on the consumer’s credit score and want to advertise this fact as part of their pre-qualification process. Creditors should proceed carefully, however, because whether a particular report will result in the notation of a “hard” or “soft” inquiry is a determination that is made by each consumer reporting agency. Therefore, creditors should confirm that they have a correct and thorough understanding of the product they are obtaining and how it fits into their workflow, in particular whether additional consumer reports must be obtained later in the process, which may result in an additional inquiry being noted by the consumer reporting agency.
Pre-qualification can be helpful in assuring a favorable consumer experience with a deal, but creditors should proceed with caution in structuring their programs. Depending on the program, creditors may have issues in obtaining and using reports, including whether or not notice of adverse action is required under both the FCRA and the Equal Credit Opportunity Act. Additionally, creditors could unintentionally create risk to the business by implementing a pre-qualification program that runs afoul of federal and state laws designed to deter unfair, deceptive, or abusive acts and practices, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act.
*Jennifer L. Sarvadi is a partner in the Washington, D.C., office of Hudson Cook, LLP. She can be reached at 202.715.2002 or by email at email@example.com.