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Federal R eserve Bank O F DALLAS ROBERT D. M C T E E R , J R . P R E S ID E N T AND C H IE F E X E C U T IV E O F F IC E R December 20, 1991 DALLAS, TEXAS 75222 Notice 91-106 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Federal Financial Institutions Examination Council Policy Statement Related to Prescreening Under the Fair Credit Reporting Act DETAILS The Federal Financial Institutions Examination Council (FFIEC) has announced its approval of a policy statement affecting prescreening of consumers who are offered preapproved credit card accounts by financial institutions. The council is recommending to the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision that they adopt the policy statement attached. In May 1990, the Federal Trade Commission (FTC) issued a commentary providing guidance on issues relating to the Fair Credit Reporting Act (FCRA). As a result of publication of the commentary, council member agencies received inquiries regarding the approach to be taken in examining financial institutions for compliance with the FCRA, particularly with regard to prescreening consumers who would be offered preapproved credit card accounts. The council’s policy statement addresses a number of concerns that are not covered by the FTC’s commentary. For example, the statement provides that an institution may withdraw an offer of credit if a significant change, such as foreclosure, filing for bankruptcy, or garnishment, takes place between the prescreen and the consumer’s acceptance of the credit offer. The statement emphasizes, however, that the council believes an institution may not condition or withdraw a credit offer if the consumer fails to meet a specified income level or debt-to-income ratio. The council worked with the Federal Trade Commission to ensure that a uniform policy position was reached consistent with the previously published FTC commentary. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - ATTACHMENT A copy of the FFIEC’s policy statement is attached. MORE INFORMATION For more information, please contact Marion White at (214) 744-7490. For additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 651-6289. Sincerely yours, S - PRESCREENING BY FINANCIAL INSTITUTIONS AND THE FAIR CREDIT REPORTING ACT What is prescreening? Prescreening is a process by which a consumer reporting agency (credit bureau) compiles or edits a list of consumers meeting specific credit-granting criteria provided by an institution. The list is provided to the institution or a third party acting for the institution (for example, a mailing service) for use in soliciting specific consumers for credit products. Is a prescreen a consumer report? A prescreened list represents a series of consumer reports since the list conveys that each consumer named on the list meets certain criteria for creditworthiness. Is prescreening permissible under the FCRA? While the Fair Credit Reporting Act (FCRA) does not expressly authorize it, prescreening is permissible if the institution follows certain rules. The act permits prescreening if the institution makes a firm offer of credit to each consumer whose name appears on the prescreened list. To obtain a consumer report, the institution must have a "permissible purpose" under the FCRA. Section 604(3)(A) of the FCRA permits an institution to obtain a consumer report if it intends to use the information in connection with a credit - 2 - transaction involving the extension of credit to the consumer. (Prescreening cannot be used to solicit responses for insurance, employment or other purposes.) Therefore, an institution cannot use a prescreened list solely to send promotional material. The purpose of the FCRA is to safeguard the confidentiality of consumer credit information. The statute requires a clear connection between the creditor and consumer before the creditor obtains a credit report. A firm offer of credit to the consumer provides this connection. Permitting the practice of prescreening without this link would be contrary to the purpose of the act. What controls can the institution use to develop a list? o The institution may wish to be specific in the creditgranting criteria it designates for targeting creditworthy consumers. This will ensure that the institution is not obligated to extend credit to individuals who do not meet its standards. In addition, prompt use of the prescreened list after receipt from the credit bureau will further ensure that credit is extended only to individuals meeting the specified standards. - o 3 - The institution may request "tiered" lists that identify consumers with different characteristics, enabling the institution to make different credit offers (e.g., various credit limits). o The institution may include demographic analysis, such as geographic data (for example, to establish a service area) or data on income and type of employment (for example, by the use of specialized magazine subscription lists) in the credit-granting criteria. This analysis may be applied by the credit bureau or by a third party after the initial screen. The application of demographic analysis must not have the effect of excluding persons on a prohibited basis, o If the institution wishes to limit the number of consumers it makes an offer of credit to, it may request the credit bureau or a third party to make random deletions from the list if it is too lengthy. In all cases, whether or not an additional screen is obtained (either demographic or random), the institution must make an offer of credit to all consumers whose names appear on the final screened list. - 4 - What constitutes an offer of credit? The institution must make a firm offer of credit to all consumers whose names appear on the screened list. A conditional offer of credit is inadequate since it indicates that the institution does not intend to enter into a credit transaction unless the consumer meets a subsequent condition. For example, imposing a minimum income requirement on the credit application it provides to consumers on the screened list would not be a firm offer of credit. Can the institution withhold or withdraw an offer of credit to a consumer whose name appears on the list? Once the consumer has accepted the offer of credit, the institution cannot, except in limited circumstances, withdraw or deny the credit, even when based on new information concerning the consumer. Errors in applying the criteria to the data base of the credit bureau during the prescreening or failure of the prescreening to retrieve all information about the consumer do not quality as permissible reasons for withdrawing an offer. Only in certain, specified, rare and unusual circumstances that occur between the prescreen and the consumer's acceptance, may the institution withdraw the offer - of credit. 5 - These circumstances include: foreclosure; attachment; garnishment; repossession; charge-offs; filing for bankruptcy; or entry of liens or judgments. These criteria must have been part of the original prescreening in order to quality as valid reasons for withdrawing or denying the offer. Other reasons for withdrawal of an offer: The institution may withdraw the offer if it determines that the consumer: o is below the age required to create a valid contract; o has moved beyond the institution's service area for the product offered (if the service area is limited); or o has fraudulently altered information in the credit report. Other permissible practices: o The institution may initially offer a modest credit limit and then increase the limit after a full credit report has been obtained, if the terms of the initial guaranteed credit are clearly specified. A modest credit limit may not be lower than the usual minimum limit offered for a particular product. Once the consumer has accepted the initial credit offer, the institution may request information verifying income for the purpose of offering a higher credit limit. The institution may ask for identifying information (such as the home address and social security number) in the offer of credit. The institution may impose a reasonable time limit on the period during which the offer of credit is available. It may treat any response received after the deadline as a regular credit application, and may obtain a full credit report to evaluate the consumer's creditworthiness. Only when the consumer accepts the credit offer may the institution obtain a full credit report on the consumer. The consumer's account may be reviewed regularly and if the consumer does not prove to be creditworthy, the institution may close the account. The institution's timing for closing the account, however, must not make the offer illusory. The institution may prescreen using its own records related to the institution's prior transactions or experiences with particular consumers without making an offer of credit. Any prescreening that uses records held by either subsidiaries or affiliates will trigger coverage by the FCRA. The institution may require consumers accepting prescreened offers to take the steps necessary to create a legal obligation for the credit offered, such as signing a credit contract or security agreement.
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