Mitigating risk in pulling credit reports

Recently, there has been an uptick in lawsuits involving dealerships pulling consumer credit reports. Some have resulted in payments of six figures. In addition, there is always a chance that a financial institution will ask the dealer for indemnification. The success of some of these lawsuits have led to additional lawsuits being filed. With this background, it may be a good time to ensure that proper procedures are in place before a credit application is submitted and a credit report is pulled.

In a perfect world at a dealership, before any credit reports are pulled, the consumer should fill out and sign a credit application acknowledging that the information provided is true and correct. In addition, the application should contain an acknowledgment that their credit report will be pulled so the application can be evaluated. Although this sounds simple, and should be simple, for various reasons in practice it has led to a multitude of problems.

For example, some employees of dealerships have not only filled out all the information on a credit application on behalf of the consumer, but have also signed the consumer’s name to the application. It should not come as a surprise there have been several occasions where the consumer’s income is inflated and the consumer will claim that the submission, and thus the subsequent credit pull, was unauthorized. If the application goes through Dealertrack, it could lead to multiple pulls of the consumer’s credit report, which can enhance exposure to a permissible purpose lawsuit under the Fair Credit Reporting Act (“FCRA”).

Although it is impossible to avoid all potential liability, there are certain practices that can be implemented to minimize the risk.

First, there should be a written policy in place to ensure employees do not fill out a consumer’s credit application. The credit application should always be filled out by the consumer and returned to the dealership for submission. Second, while it is preferred the consumer fill out the credit application while in the dealership, that is not realistic in today’s world. It is permissible for this to be handled over email, but at the very least a record needs to be kept of the outgoing email to the customer and incoming email containing the credit application. Third, under no circumstances should the dealership employee sign the customer’s name or submit an unsigned application. Fourth, when the consumer fills out the application and submits it electronically, before the submission, there needs to be a box that must be checked by the consumer, not only acknowledging that the information submitted is true and correct, but also that the consumer’s credit report will be pulled. Finally, if it is a joint application, it needs to be signed all parties applying for credit.

It is impossible to avoid all risks, but having the consumer actually fill out their own credit application with the proper acknowledgments will go a long way to reduce the risk. In addition, having a strong policy in place regarding the submission of credit applications and communicating the policy in clear and certain terms to employees who directly work with customers will also help minimize exposure.

Gregg D. Stevens is a Member in McGlinchey’s Dallas office, and part of the Consumer Financial Services Litigation team. He can be contacted at gstevens@mcglinchey.com or (214) 445-2406.