Congratulations: You've been pre-approved!
These four simple words can strike fear into the hearts of marketers who want to ensure compliance with credit regulations.
Credit approval prescreening was designed to ease the process of matching lenders with interested and appropriate customers. But since the Fair Credit Reporting Act defined this process 18 years ago, today's lenders must attempt to retrofit outdated guidelines with the complexities of their current enterprise structures, processes and media landscape. Further complicating matters is the fact that the existing regulation was designed for traditional direct mail, the dominant media channel of the day. It's no wonder that lenders are often confused about how to navigate the complexities, opportunities and differences that prescreening requires in the digital world.
Under the rules of the FCRA, lenders can only access the customer's credit data without their knowledge or permission if the data is anonymous and if the lenders have a pre-defined set of criteria for offer eligibility. If customers meet the established criteria, they must then receive an offer for that product. Banks can verify customers' creditworthiness with another credit bureau, but they must accept the customer's application unless there is a significant change in the customer's status.
In theory, this is a fair transaction. The lender never sees identifiable information without customer permission, and the consumer is compensated for the privacy intrusion when they receive the offer of credit.
In practice, though, it's a bit more complicated.
Take, for example, a pre-approved customer who opts to add her spouse as a joint applicant. Does the firm offer of credit based on her individual data still stand? Or suppose that one credit reporting agency evaluates the customer based on a piece of information that another agency does not have upon review. Is it fair to say that the person's credit deteriorated? And if a customer only meets the established criteria because his or her information is incomplete, is the firm offer of credit still valid?
Whereas traditional prescreening is hampered by complex processes, digital prescreening is hampered by unclear policies. There is no definitive locus of guidance lenders (or marketing service providers) can access to determine what is appropriate and what is not. Thus, it's unclear whether lenders should be able to use credit reporting agency data to target display advertising. Nor do lenders know if they can use authenticated digital platforms to distribute firm offers or use cookie-based descriptive data in firm offers.
Though leveraging credit prescreening can be complicated, organizations that are proactive in developing clear, flexible and comprehensive policies and processes can position themselves to target ideal customers, engage with them safely and adhere to changing regulatory demands.
The Consumer Financial Protection Bureau has highlighted the importance of internal assessments and ongoing monitoring of key performance indicators in managing a compliant lending practice. With that in mind, coupled with the regulatory focus on data and privacy, lenders should focus on three key areas.
Lenders can protect themselves by carefully considering and document their policies (their articulation of how they intend to manage their business to comply) and their processes (the detailed rule sets that examine all possible scenarios and outlines appropriate outcomes for each scenario). From there, they can gauge the level of interpretation they are taking in their program: a lender's loose interpretation may be a regulator's violation.
Lenders should also educate member service providers such as data management platforms and digital agencies about how the FCRA works in practice and how their capabilities can be used in ways that align with regulation. This creates an outlet for innovation that remains compliant.
Finally, lenders should be disciplined about reviewing all marketing practices to make sure they stay within regulatory guidelines and adjusting them accordingly. In this way, they can ensure a safe and predictable environment and the ongoing sustainability of their evolving marketing practices.
Rich Walker is a managing director with Winterberry Group, where he leads the financial service practice. Prior to joining Winterberry, he served in various marketing roles at Capital One and led many compliance projects to ensure alignment with the 1996 amendments to the Fair Credit Reporting Act, Fair and Accurate Credit Transactions Act and Card Act.