WASHINGTON Pressure from fellow regulators and banking industry officials has persuaded the Federal Trade Commission to change its mind about whether lenders need written consent to run credit checks on individuals guaranteeing a commercial loan.
An FTC staff opinion last year said that the Fair Credit Reporting Act requires such permission, but industry officials complained that applications would be bogged down if the lenders had to get authorization to order credit reports on each partner, executive, or board member of a small business or a limited corporation who could be held responsible for a loan.
It would have been very costly and inconvenient for businesses seeking loans, Nessa Feddis, the senior federal counsel for the American Bankers Association, said of the FTCs initial opinion. Many loans are not done in person and involve minimal paperwork, she said.
Citing safety and soundness concerns, the banking regulatory agencies sided with the industry and issued a joint letter in late May to the FTC effectively asking it to withdraw the opinion and warning that they would not enforce it.
In its June 22 letter to the banking regulators, the FTC reversed itself and withdrew the staff interpretation that the Fair Credit act permits automatic credit checks of consumer loan applicants, but not of individuals applying for or guaranteeing business loans.
Joel Winston, the acting associate director of the FTCs financial practices division, wrote in the letter that someone who agrees to guarantee a commercial loan gives their implicit permission for a credit check.
We agree that it is reasonable to view a business transaction in which an individual has accepted personal liability for the business debt as involving the consumer, thus providing a permissible purpose for the lender to obtain a consumer report, he wrote.
Rick Fischer, a banking attorney with the firm of Morrison & Foerster, said the flap indicates that the regulatory landscape is becoming more clouded.
An agency can make a decision regarding people it has no real regulatory authority over, he said. The FTC is not a bank regulator.
With the passage of laws such as the Gramm-Leach-Bliley Act of 1999, multiple agencies have new rule-writing and interpretive powers, Mr. Fischer said. Regulators need to bear that in mind and run things by one another before taking action, he said.
Mike Bylsma, the community and consumer law director for the Office of the Comptroller of the Currency, agreed that consensus among regulators is crucial.
This was something we tried to get fixed, he said. The key is uniformity and that the FTC got behind the other regulators decision.
