I responded by saying that it was possible to inform the applicant legally by including the applicant’s rights in the credit denial letter. The notification of the applicants legal rights at the time of denial is not required of business credit grantors under Regulation B of the Equal Credit Opportunity Act but not prohibited either. This caused several readers to write concerning credit and confidentiality and resurrect a controversy that another column of mine in this publication caused five years ago concerning the same topic.

I have been asked to address this once again. There are two subjects involved. One is the handling of confidential information within the organization and the other is revealing sources of information to applicants or other creditors. I will attempt to address both of these issues separately. For clarification at the end of each subject there will be a brief Q & A session conducted by Rich Hill. I want to stress to the readers that the opinions expressed below are mine alone and do not represent the opinion of Creditworthy.

Disclosure of Credit Information

In 1955, the National Association of Credit Management and the then Robert Morris Associates together formed “Statement of Principles for the Exchange of Credit Information Between Banks and Business Credit Grantors”. These seven principles were to be followed when exchanging information. The first principle stated that Confidentiality is the cardinal principle in the exchange of credit information. And went on to state, The identity of inquirers and sources should not be disclosed without their permission.

1955! 13 years before Congress passed the Consumer Protection Act and 19 years before Regulation B was enacted. In 1978, NACM and RMA revised the Statement of Principles to reflect current usage and included language that stated the use of the seven principles was subject to applicable federal and state laws including antitrust, credit reporting and the use of confidential records. The Consumer Protection Act along with Regulation B made the second sentence of the first of the seven principles obsolete. The identity of inquirers and sources is dependent upon the applicant requesting the source in writing and it makes no difference whether they are a consumer or a commercial applicant. For those unfamiliar with Regulation B, it is an amendment to the Equal Credit Opportunity Act that comes under the direction of the Federal Reserve Board. Among other things Regulation B: defines type of credit, the difference between a credit application and a completed credit application, reporting requirements when approving and denying credit and how long the application and credit information must be retained.

Regulation B, a federal law, makes a distinction between consumer and commercial credit denial by stating the commercial credit grantor is not required to inform the applicant of their rights under the Equal Credit Opportunity Act when being denied credit. It does not say that the commercial credit grantor is prohibited from doing so, just that they don’t have to. However, if the commercial credit applicant exercises their rights upon being notified that their request for credit has been denied then the same information provided the consumer must be provided the commercial applicant.

Question:

Does “applicant” mean a debtor company who is applying for new credit or does it also mean an existing customer of the creditor?

Answer:

It applies to both a company applying for new credit or an existing customer applying for an increase in credit. 

Question:

Does Regulation B apply only when rejecting a new request for credit?  What about when the creditor converts an existing credit line to COD or even when the creditor lowers an existing line of credit?

Answer:

If the debtor makes written inquiry as to the reasons as to why their credit line has been reduced and the reason was due to information received from sources outside the control of the creditor then Regulation B applies. If the credit line was reduced due to the customer’s poor payment history or failure to respond timely to the creditor’s written request for adequate assurance of performance (UCC § 2-609) then Regulation B would not apply.

Question:

Are there any rules as to what must be told to the applicant or debtor company when advising them of the reason for the credit denial?  How specific do you have to be?

Answer:

You have to provide the debtor with the reason and give them an opportunity to correct the information if it is incorrect. Therefore, if the source of the information is from a credit reporting agency then the name of the agency must be given (this is also included in the Fair Credit Reporting Act that the FTC has published an opinion paper that includes commercial credit grantors). If the information came from trade references then all that is necessary is a statement to the effect “information from your references” is not satisfactory.

Question:

What are the penalties for noncompliance of Reg B?

Answer:

$10,000 fine for each and every occurrence.

Question:

Creditors need to have timely and accurate information in order to make good credit decisions.  However, some creditors are hesitant to report negative information if it is felt that their report will get back to the debtor.  Even though the creditor is only reporting accurate information, this may cause problems between the 2 parties.  Do you have any recommendations or suggestions for what the reporting trade creditor can do? 

Answer:

I don’t mean to sound flippant, but contact their elected federal representatives and lobby to amend the law. Regulation B is a 12 month amendment governed by the Federal Reserve Board. Every February at their first meeting of the new year the board votes whether to continue Regulation B for another 12 months and to make any proposed amendments.

Question:

If you deny credit because of the information obtained on a Credit Report, does the credit reporting agency have to divulge the source of their information? 

Answer:

No. The credit reporting agency has an obligation to remove the information from the debtor’s credit report until it receives back information from the creditor that the information is factual.

I wish you well.

This information is provided as information only and not legal advice. Legal advice should be obtained from a competent, licensed attorney, in good standing with the state bar association.