Be Careful if You’re Pulling Consumer Credit

Depending on the nature of your business, you may find it necessary-or good practice-to check the credit of your clients or customers. Credit checks are used not just for loans, but for rentals, employment, and for general background checks.

But pulling credit in violation of federal law can lead to harsh and expensive penalties. When can you pull someone’s credit? And even if you can pull (check) someone’s credit legally, when do you need consent to do so?

What the Law Says About Credit Pulls

The Fair Credit Reporting Act (FCRA) allows businesses to legally check someone’s credit—and not just businesses that are directly lending money or extending credit. Landlords, employers and insurance companies do it all the time, legally. But there are limits to that ability.

The law requires that you have a “permissible purpose” when pulling credit. Some of these purposes are obvious, like the extension of credit, applications for insurance or rentals, or employment. But the law also allows credit pulls when there is a “legitimate business need,” a category that is very vague, and which can lead to disputes.

Even Permissible May Not be Permissible

Even the permissible purposes written into the law aren’t as clear as they seem, because every situation is different.

For example, if you are a company extending credit to someone, you almost surely have the right to pull credit. But that isn’t true if the debt is “involuntary.” For example, a towing company that tows your car, and assesses a penalty against you without your permission, could not pull your credit.

Landlords have the right to pull credit on potential tenants. However, this is only true if the tenant is an actual candidate for a rental. A landlord doesn’t have the right to pull the credit of everyone who just comes out to look at property and who considers renting.

An insurance company can pull credit for the purposes of evaluating the consumer for insurance, but cannot pull credit for evaluating anything related to a claim.

Be Careful of Credit Pitfalls

It is almost always illegal just to do a general credit pull for the purposes of litigation. For example, if you sued a contractor for nonperformance of an agreement, you could not pull their credit just to see if they were soluble, or whether they could pay a judgement against them if it were entered.

In many cases, the fact that a consumer is filling out an application (such as for a rental or a loan) is enough to warrant a credit pull legally.

Employers can pull credit-but only with the employee or potential employee’s permission.

If all this sounds confusing it’s because it is. The better practice is that unless you’re absolutely positive you’re allowed to pull credit without permission, to get written permission from clients or customers before you pull credit. Otherwise, you or your business could end up in deep financial and legal trouble.

Call the West Palm Beach business litigation lawyers at Pike & Lustig for help making sure your business is safe, and to protect your business from liability or lawsuits.

Resource:

ftc.gov/enforcement/statutes/fair-credit-reporting-act