Many BHPH dealerships never pulled credit reports in the past. Their philosophy was, “My customers all have bad credit. I don’t need to pay for a report to tell me that.” That philosophy has been changing over the past few years and obtaining a report on all prospective customers is a “best practice” that should be adopted by all BHPH dealers.
You need to obtain credit reports on your prospective customers not to evaluate your customer’s credit, which is why getting a score is not necessary, but rather to verify the information they have given you. Comparing the credit report with the information supplied on the application can help you find any discrepancies that you need to explore. A credit bureau report can usually be invaluable sources of information for a dealership. They can help you determine a person’s eligibility for a loan, show you how a loan applicant has handled credit in the past, and even provide useful insight on their bills to help determine their ability to make their payments.
You must be careful, however. Obtaining credit reports can also be a source for compliance violations if you don’t strictly abide by the guidelines in the Fair Credit Reporting Act (“FCRA”) for when, and under what circumstances, it is permissible to obtain a credit report.
Under the FCRA, a credit report (also called “consumer report”) may only be acquired for a “permissible purpose”. Section 604 of the FCRA sets forth circumstances that are considered permissible purposes. Many of the ones listed will not directly affect an auto dealership. Let’s take a look at the ones that do.
Customer’s Authorization
It is permissible for a credit report to be obtained in accordance with the “written instructions of the consumer to whom it relates.” Therefore, in circumstances where you do not otherwise have a permissible purpose, you can still obtain a credit report if the consumer authorizes you, in writing, to do so. Your application should include such an authorization and it should be signed by the prospective customer before any credit report is obtained. The next two “permissible purposes” probably allow you to pull the report any way but a signed authorization is the best course of action to follow.
Credit Transaction
You may also obtain a consumer report if you intend to use it in connection with a credit transaction involving the consumer on whom the information is to be furnished. If Joe Blow applies for a loan, you can pull a credit report on him. The credit transaction must “involve” the person who is the subject of the credit report.
You may also obtain a credit report in connection with a review or collection of an account of the consumer. Perhaps Joe is late on some payments and you’re concerned about whether his financial circumstances have changed. You can use his credit report for that determination. Or, if you are in the process of collecting on his delinquent obligation, you can procure a credit report to help you.
Legitimate Business Need
It is also considered a “permissible purpose” if you obtain a consumer report when you have a legitimate business need for the information
- in connection with a business transaction that is initiated by the consumer, or
- to review an account to determine whether the consumer continues to meet the terms of the account.
The first hurdle you must surmount here is the requirement that there be a “legitimate business need”. Then, you must either be reviewing an account to determine continued eligibility, or the business need must be in connection with a business transaction that the consumer has initiated.
If, for example, an individual applies for credit with your dealership, you would have a legitimate business need in connection with a business transaction the consumer has initiated. This section of the law would not allow you to embark upon an information fishing expedition, however. It does not mean that you could call up a credit report on any customer at any time. You must satisfy the criteria for it to be a permissible purpose.
Final Tips
- Make sure everyone within your dealership understands the limitations on pulling credit reports and does not deviate from your procedures.
- Be sure the permissible purpose for pulling a credit report is apparent from your documentation.
- To guard against fraud or violations of FCRA, compare the list of credit reports you are billed for with those that you know were requested.
