The omnibus federal budget recently signed into law by President Clinton contains significant provisions for banks and other lenders.
Among these are substantial reforms in the Fair Credit Reporting Act that have been sought for years by the banking industry. These amendments strengthen protections for consumers but also provide important regulatory relief for banks.
The amendments relating to prescreening will be of great benefit in marketing credit cards and other retail loan products. In particular, the new rules will permit banks to prescreen effectively for secured loans and accounts.
Prescreening has been used by banks for more than two decades as a cost- efficient way to identify consumers who are qualified for and interested in particular credit products, such as credit cards.
The process begins when a bank selects criteria for consumers to qualify for loans or accounts. The bank then instructs a credit bureau to compile a prescreened list of consumers who meet those criteria.
Sometimes the bank gives the credit bureau a list it has purchased ; other times the prescreened list is extractedfrom the credit bureau's files.
Despite the wide use of prescreening, interpretations by the federal banking agencies and the Federal Trade Commission have created substantial operational and credit problems for banks.
These agencies say the reporting act requires banks that engage in prescreening to extend a "firm" credit offer to all consumers whose names appear on a prescreened list - even if it is determined later that the consumer does not qualify.
This often occurred because the agencies would permit a bank to withdraw the offer only in "certain specified, rare, and unusual circumstances." The agencies interpreted these to be a handful of major credit problems, such as foreclosure, repossession, or bankruptcy.
Moreover, the agency guidelines would permit a bank to consider such a gross credit problem only if it occurred after the prescreen but before the consumer's acceptance of the offer.
Federal agencies even required banks to grant loans and open accounts for unqualified consumers who were included on a prescreened list erroneously.
When this was questioned by bankers for reasons of safety, soundness, or other grounds, they were often told that this is a risk inherent in prescreening, and that the banks should take up the issue with their credit bureaus.
The reporting-act amendments restore rationality to the prescreening process. These amendments let banks withdraw an offer of credit if the consumer does not meet the criteria .
The bank simply establishes the criteria to qualify for the loan. If the consumer meets the criteria, he gets the loan; otherwise he does not. What could be more rational?
Under the amended law, a bank is required to establish its credit criteria in advance of the prescreening, and is not permitted to add criteria once the prescreening has occurred.
Banks are required to maintain a record of the presecreening criteria for three years, so they can show that the criteria did not change during the prescreening process.
But now banks may "postscreen," separately evaluating each consumer who responds to the solicitation to determine whether the consumer actually meets the criteria.
The bank may use a credit bureau report, review the consumer's response form, or consider any other information about the consumer's creditworthiness. The only stipulation is that the information be used to verify that the consumer meets the criteria .
The bank also may verify other information on the consumer's response form to determine that the consumer actually meets the criteria. If the consumer does not qualify, the bank may withdraw the offer.
As a result, banks now may postscreen against all criteria set in advance, not just the "rare and unusual circumstances" previously identified by federal regulators. This is logical, fair, and is the very essence of safe and sound credit underwriting.
Other important points in the amendments:
*Prescreening may be used to offer insurance as well as credit products.
*A prescreened list may include, for each consumer: name and address; a partial Social Security number; and any "other information pertaining to a consumer that does not identify the relationship or experience of the consumer with respect to a particular creditor or other entity."
Thus, a prescreened list may include a variety of credit-related information so long as the particular creditor or creditors are not identified.
*A bank using prescreening in connection with secured credit products may condition the offer on the provision of the required collateral by the consumer. This is essential to prescreen effectively for secured credit cards, car loans, and home equity accounts.
In exchange for these benefits, banks are required to provide consumers with a new prescreening disclosure. This will explain that the offer results from presecreening by a credit bureau, and that consumers may notify the credit bureau if they wish to be dropped from future prescreening.
National credit bureaus also are required to establish procedures that will let consumers exclude themselves from future prescreening.
This requirement helps consumers but also benefits banks, because consumers who ask to be dropped from prescreening are unlikely to respond affirmatively to prescreened offers.
The reporting-act amendments preempt all state laws and regulations relating to prescreening, so banks need comply only with the new federal provisions.
The new prescreening rules become effective on Sept. 30, 1997.
However, the act contains a voluntary early-compliance provision. This allows banks to operate under the new prescreening rules immediately.
Banks that choose this option must comply with the corresponding provisions, such as the new consumer prescreening disclosure. And the credit bureau that furnishes the prescreened list also must be prepared to comply with the applicable provisions of the act.
Mr. Fischer, Mr. McEneney, and Mr. Camper are lawyers in the Washington firm Morrison & Foerster.
