WASHINGTON - Bankers are crying foul over a Federal Trade Commission attempt to quash the routine practice of automatically running credit checks on individuals guaranteeing a commercial loan.
In a nonbinding staff interpretation of the Fair Credit Reporting Act, the FTC said in a July 26 letter that when business owners are personally guaranteeing or applying for a commercial loan, bankers must get the applicants' written permission to review their personal credit report.
"This calls into question the current practices of most banks," said James D. McLaughlin, director of regulatory affairs at the American Bankers Association.
"Many times in small business you have individual owners or board members signing for a loan, so bankers will customarily do a credit check on them," he said. "Now bankers are going to have to alter their procedures and get written authorization from the individuals involved in the business to review their personal credit reports. Since many times you don't have a formal loan application for every business loan, it's going to make [the business] more cumbersome."
Since Fair Credit was enacted in 1970 to give consumers certain protections when applying for credit, bankers have treated consumer loan applications and commercial loan applications by sole proprietors or small corporations in the same way - pulling a credit report on the individual applying for or guaranteeing the loan without getting their explicit permission.
In its first interpretation of the law's application to credit checks on consumer loans, the FTC said automatic credit checks on individuals for consumer loans are permissible, but not for individuals applying for or guaranteeing commercial loans.
The law "provides no authority for a lender to obtain a consumer report in connection with a credit application for any commercial purpose," David Medine, the associate director of the FTC's financial practices division, wrote in a response to a two-year-old inquiry from the National Association of Credit Management.
The letter is not legally binding, but is a good indication of how the FTC might formally interpret the law, which impacts banks along with other businesses involved in commercial credit. The FTC and federal banking regulators have overlapping authority to interpret the law, but the FTC has sole power over credit bureaus which provide the reports to banks.
Calling the letter Mr. Medine's "parting shot" before leaving the FTC last week on a six-month detail at the White House National Economic Council, Washington banking attorney L. Richard Fischer, a partner at the law firm of Morrison & Foerster, said the interpretation "completely ignores how banking is done.
"The businessperson gets on the phone to the banker and says, 'I need $50,000 and I'm personally going to guarantee it,' " he said. "The letter says you can't even consider that person's credit unless you get their written permission. It means that businesses have more consumer protections than consumers. It literally makes no sense whatsoever from a policy standpoint or legal standpoint." The letter is prompting banking trade groups to advise members to get written permission from business loan applicants before checking their credit.
"Maybe it's just a case of adding another form when you do a commercial transaction, but in a lot of cases business loans don't have written applications," said Rob Rowe, regulatory counsel at the Independent Community Bankers of America. "It is going to be a burden. It will cause a lot of problems for commercial transactions for all banks. Commercial transactions don't operate under the same kind of restrictions as consumer transactions."
He said that if Mr. Medine's interpretation is what Congress intended when it wrote the law, the ICBA may "ask for legislation to fix it."
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