Credit Reports and Adverse Action Requirements

By Robert Wilkins

Most of us are familiar with the requirement to provide an adverse action notice to a member when we deny a loan or make an adverse employment decision.  But it is important to remember that the way the FCRA defines “adverse action” can have implications in other contexts.

Briefly, here’s how Section 604 of the FCRA defines adverse action:

“(k) Adverse Action (1) Actions included. The term “adverse action” – (A) has the same meaning as in section 701(d)(6) of the Equal Credit Opportunity Act; and (B) means (i) a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for, in connection with the underwriting  of insurance; (ii) a denial of employment or any other decision for  employment purposes that adversely affects any current or prospective employee; (iii) a denial or cancellation of, an increase in any charge for, or any other adverse or unfavorable change in the terms of, any license or benefit described in section 604(a)(3)(D) [§ 1681b]; and (iv) an action taken or determination that is (I) made in connection with an application that was made by, or a transaction that was initiated by, any consumer, or in connection with a review of an account under section 604(a)(3)(F)(ii)[§ 1681b]; and (II) adverse to the interests of the consumer.”

Section 604(a)(3)(F)(ii) describes one of the permissible purposes for a consumer reporting agency to furnish a consumer report to someone that “otherwise has a legitimate business need for the information to review an account to determine whether the consumer continues to meet the terms of the account.”

As you can see, taking an action that is “adverse to the interests of the consumer,” can be classified as an adverse action, depending on the circumstances.  Section 615 of the FCRA provides that any person that takes an adverse action with respect to a consumer “that is based in whole or in part on any information contained in a consumer report” is required to provide an adverse action notice to the consumer.

For example, making a decision to close a member’s account based on information in a consumer report, even if in accordance with a stated limitation of services policy, can trigger an adverse action notice requirement.  Larger scale programs that use credit scores or other information in a consumer report that result in less features or functionality on a deposit account for a member can also trigger adverse action notice requirements.

As you are probably aware, failure to comply with the FCRA can expose financial institutions to penalties and the risk of class action lawsuits.  A class action lawsuit involving an FCRA claim can result in plaintiffs seeking actual damages, $1,000 per class member in statutory damages, punitive damages, and attorney’s fees.  Accordingly, please make sure that your credit union is not ignoring FCRA obligations that may apply outside of the lending context.


About the Author

Robert Wilkins

Robert Wilkins is an Associate Attorney at SW&M with experience in regulatory compliance, trust and decedent accounts, operational matters and cannabis banking. Robert was instrumental in creating the firm’s Cannabis Banking practice. Additionally, he co-authored SW&M’s California Trust Accounts Manual […]

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