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October 27, 1998

Dear Mr. Greenblatt:

This is in response to your letter requesting the staff's opinion concerning the application of certain provisions of the Fair Credit Reporting Act ("FCRA") to the following scenario:

Brokerage clients suffer substantial losses on a financial product sold to them by their brokerage firm. A large number of investors obtain legal counsel and notify their brokerage firm of their losses. An early dispute resolution conference is scheduled with each brokerage client. Prior to the meetings, and with civil litigation seeming imminent, the legal department at the brokerage firm obtains the consumer credit report of every complainant. Some complainants do not have any debt, negative balance or outstanding margin balance in their accounts. The primary purpose for obtaining the credit report is to identify the financial status of each complainant prior to settlement negotiations. Settlement offers are prepared, at least to some extent, based upon the content of the consumer credit reports.

Specifically, you have asked three questions that we will address here. Those questions are quoted verbatim in italics below, followed by the staff's analysis.

1. Whether the requests for the consumer credit reports comply with the requirements of the Fair Credit Reporting Act, §604, 15 U.S.C. §1681b?

No. Neither the dispute resolution conference, the imminent threat of civil litigation, nor the desire to craft a settlement offer provide the brokerage firm with a permissible purpose to obtain a brokerage client's consumer report under Section 604.

In the 1990 Commentary on the FCRA, the Federal Trade Commission ("Commission") stated that "[t]he possibility that a party may be involved in litigation involving a consumer does not provide a permissible purpose for that party to receive a consumer report on such consumer . . . because litigation is not a 'business transaction' involving the consumer." 16 C.F.R. § 600 App., 55 Fed. Reg. 18804, 18816 (May 4, 1990). This statement extends to all aspects of litigation, including the pre-litigation discussions and settlement preparations that you describe, and was not altered by the recent amendments to the statute.

While the brokerage firm does not have a permissible purpose to obtain consumer credit reports in the scenario you describe, the brokerage firm is permitted to obtain such reports for the purposes enumerated in Section 604(a)(3)(F) of the statute. Section 604(a)(3)(F) allows a consumer reporting agency to provide a consumer report to anyone who "has a legitimate business need for the information -- (i) in connection with a business transaction that is initiated by the consumer; or (ii) to review an account to determine whether the consumer continues to meet the terms of the account." Therefore, the brokerage firm may request a consumer credit report prior to establishing a relationship with an individual who applies to open an account, or thereafter to determine whether to discontinue doing business with an established client.

If the brokerage firm misrepresents to a consumer reporting agency that it is requesting consumer reports pursuant to Section 604(a)(3)(F), however, and instead uses the reports in connection with the settlement discussions you describe, the firm is in violation of the FCRA.

2. Whether the brokerage firm is required to inform any of the brokerage clients of the use of the credit reports or that any settlement offers may have been based upon information in the reports, as in §615, 15 U.S.C. §1681m?

Because we have opined that the brokerage firm is not permitted to obtain consumer credit reports in the scenario you describe, we do not reach this question.

3. If the consumer credit report requests fail to comply with §604 of the Act, what are the penalties for violation?

The penalties for violating the FCRA are governed by several different sections of the statute, and the applicability of a particular section depends on such factors as who brings the action and the degree of the violator's noncompliance. For example, Sections 616 and 617 impose liability for willful noncompliance and negligent noncompliance, respectively. The monetary penalties mandated by these two sections include actual damages proven by a consumer, plus costs and attorneys fees in each such case. In the case of willful violations, the court may also award punitive damages to a consumer. Any person who procures a consumer report under false pretenses, or knowingly without a permissible purpose, is liable for $1000 or actual damages (whichever is greater) to both the consumer and to the consumer reporting agency from which the report is procured. Also, Section 621 governs enforcement actions brought by the Commission, other agencies, and the states, and provides for various monetary and injunctive penalties. The potential monetary penalties include, for those who knowingly violate the FCRA, up to $2500 per violation in a civil action brought by the Commission in district court.

I hope this information is helpful to you. The views expressed herein are those of the staff and do not necessarily reflect the views of the Commission or of any individual Commissioner.


Kellie A. Cosgrove