Advisory Opinion to Hall (10-26-98)

October 26, 1998

William F. Hall, Esquire
Law Department
United Guaranty Residential Insurance Co.
230 North Elm Street
Greensboro, North Carolina 27401

Re: Section 615(a) of the Fair Credit Reporting Act

Dear Mr. Hall:

This responds to your letter on behalf of United Guaranty Residential Insurance Company of North Carolina and United Guaranty Credit Insurance Company (collectively "UGICO"). You report that UGICO obtains consumer report information from lenders who apply for insurance to protect them in the event borrowers default on unsecured property improvement loans and second mortgage residential loans. You inquire whether UGICO is required by Section 615(a) of the Fair Credit Reporting Act ("FCRA") to provide notice to the individual debtor when it refuses to provide credit insurance because of such consumer report information.

You correctly cited our letter to an attorney for Mortgage Insurance Companies of America (Schieber, 3/3/98), which states that mortgage insurers must provide the notices required by Section 615(a) of the FCRA.(1) You contend that the result should be different here, primarily because the motivation of a lender that purchases UGICO's credit insurance is different from the motivation of a lender that procures mortgage insurance offered by Mr. Schieber's clients.(2) Specifically, you assert that UGICO's clients use credit insurance as a way to manage the risk on their loan portfolio, unlike the lenders who obtain mortgage insurance as a critical step in making a mortgage loan to meet the requirements of a secondary market. In our view, that factor has no bearing on the duty imposed by Section 615(a) on an insurer that "takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report" to notify the consumer of the action, and provide information relating to the credit bureau that provided the report and the consumer's rights under the FCRA. "Adverse action" is defined very broadly in Section 603(k)(1)(B)(I) to include "a denial ... in connection with the underwriting of insurance." It is therefore our opinion that UGICO's refusal to insure a consumer loan is a "denial in connection with the underwriting of insurance" that requires it to comply with Section 615(a), just like the mortgage insurers discussed in our letter.(3)

In closing, your letter asserts that there exists a "practical problem of how to give a meaningful notice that complies with Section 615(a)." You state that UGICO may not know the source of information, if it is not specified in the file it reviews, and thus it may not be able to provide a meaningful notice to the consumer. It is our experience, based on our extensive contacts with representatives of mortgage insurers in preparing our response to Mr. Schieber, that lenders and insurers can work together to properly identify information and craft notices that will comply with Section 615(a) and be helpful to consumers.(4) Similarly, the first paragraph of your letter acknowledges that UGICO's own mortgage insurer affiliate now complies with the requirements of Section 615(a). We see nothing in your presentation that causes us to doubt UGICO's capacity to do the same.

The opinions set forth in this informal staff letter are not binding on the Commission.

Sincerely yours,

Clarke W. Brinckerhoff

1. Enclosed are copies of the correspondence to which we were responding, which is cited in footnotes below. (Schieber-Brinckerhoff letters dated 11/28/97 and 1/22/98).

2. You also note that UGICO always obtains the credit report information indirectly from the lender as part of the application process, never directly from a credit bureau. That is clearly not a distinguishing factor, because similarly some "mortgage insurance companies . . . rely on reports, or information extracted from reports, forwarded to them by the lender." (Schieber-Brinckerhoff letter dated 11/28/97, page 2).

3. The legal analysis is the same because the factual background is the same. Like UGICO, a "mortgage insurer decides whether to guarantee a lender's risk regarding a particular obligation owed to the lender." (Schieber-Brinckerhoff letter dated 11/28/97, page 3).

4. See the mortgage industry's proposal (Schieber-Brinckerhoff letter dated 1/22/98) and our response on page 3 of the March 3 letter that you cited.