Distinctiion between hard and soft inquiries

[RobertEG]

Distinction between hard and soft pulls.

Section 604(a)(3) is a general authorization for a person to pull a CR for specified reasons.  It  makes no distinction between “hard” and “soft” pulls.  The pertinent sections are 604(a)(3)(A) and (F), which authorize a credit pull to a person who the CRA believes:

(A)  intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of the consumer; or

(F)   otherwise 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.

So this broad authorization permits CR pulls for unsolicited offers for credit, whether or not initiated by the consumer (e.g., letters of solicitation for new credit),  review of consumer intiated applications for credit, and review of existing accounts or their collection.

 

Section 604(c)) of the FCRA then puts restrictive limitations on the extent of CR data that may be supplied by the CRA, depending only upon whether the consumer was considered to have “initiated” the inquiry.. This is hazy legal ground, and has not been clarified by federal court interpretations of this portion of the FCRA.  The distinction is generally called the difference between a “hard” and a “soft” inquiry, although the statute does not use that terminology.  Section 604(c)(1) defines the legal distinction between a hard a and soft pull, and then section 604(c))(2  goes on to define  limitations on what can be obtained if it qualifies only as a soft pull. 

FCRA Section 604(c) reads as follows:

(1)   In general [hard pull].  A consumer reporting agency may furnish a consumer report relating to any an consumer pursuant to [604(3)(a)(3)] in connection with any credit transaction that is not initiated by the consumer only if

(A)  the consumer authorizes the agency to provide the report to such person; or

(B)   (i) the transaction consists of a firm offer of credit or insurance; and

(ii)  the consumer reporting agency has complied with subsection (e),
       to have the consumer’s name and address excluded from lists
       provided by the agency pursuant to this paragraph.

(2)   Limits on information received under paraqraph (1)(B).  [soft pull] A person may receive pursuant paragraph (1)(B) only (A) the name and address of the consumer; (B) an identifier that is not unique to the consumer…

 

A common type of “hard” pull that is frequently disputed by consumers is the pulling of a CR by a collection agency.   It is argued that a CA cannot do a hard pull unless specifically authorized by the consumer under section 604(c))(1)(A).  It is further argued that an account in collection is not an open account, and thus is considered a transaction that is “not initiated by the consumer.”

The opposite  argument is that an account opened by a consumer qualifies for further hard inquiries on that account as being associated with a credit transaction initatiated by the consumer, and also sanctioned by section 604(a)(3)(F), and thus not therefor subject to the restriction of section 604(c)(1)(A) that only authorizes a hard pull upon prior consent of the consumer under conditons of that section.  Such hard inquires, absent any 604(c)(1)(A) restrictions, may be made by a CA without consumer consent.

 

This appears to be an issue ripe for litigation.

[Anonymous]

I like to contribute to this nice thread by discussing the opposite argument that would legitimize the hard pull:

I quote from your point:

" an account opened by a consumer qualifies for further hard inquiries on that account as being associated with a credit transaction initatiated by the consumer, and also sanctioned by section 604(a)(3)(F), and thus not therefor subject to the restriction of section 604(c)(1)(A) that only authorizes a hard pull upon prior consent of the consumer under conditons of that section.  Such hard inquires, absent any 604(c)(1)(A) restrictions, may be made by a CA without consumer consent."

FTC Opinion: Brinckerhoff-Long says that there must be a credit transaction or a business transaction initiated by the consumer for applicability of 604(a)(3)(F) and credit is defined very narrowly, certainly not including a CA or JDB, as there is no credit transaction, but collection of a fixed debt - there is no review of terms, no extension of new credit:

Section 604(a)(3)(F) allows a person to obtain a consumer report in connection with non-credit transactions. Section 604(a)(3)(F)(i) provides a permissible purpose on behalf of a party who has a legitimate business need for a report "in connection with a business transaction that is initiated by the consumer."

[...]

Section 604(a)(3)(F)(ii) is inapplicable because it permits a report user to obtain a consumer report only "to review an account to determine whether the consumer continues to meet the terms of the account." The legislative history shows the narrow focus of this subsection: "The permissible purpose created by this provision . . . is limited to an account review for the purpose of deciding whether ro retain or modify current account terms."(3) When a tenant has vacated an apartment, a landlord (or attorney) has no need for a "review" to see if the former tenant "continues to meet the terms of the account" as required by the subsection, and the "limited ... purpose of deciding whether to retain or modify current account terms" does not exist.

FTC Opinion: Isaac-Gowen states that 604(a)(3) refers to an existing, open and current account:

" As the previously-quoted legislative history makes clear, "review" of an account under Section 604(a)(3) refers to an existing (i.e., open or current) account.

[...] 

Hence, the creditor would either have to (1) obtain those consumers' written authorizations pursuant to Section 604(a)(2) to access their credit reports or (2) comply with the prescreening requirements set forth in Section 604(c) and, where applicable, Section 615(d)"

FTC FCRA Opinion: Medine-Tatelbaum http://www.ftc.gov/os/statutes/fcra/tatelbaum.shtm   "A consumer relationship must exist between the party requesting the report and the subject of the report. Houghton v. New Jersey Manufacturers Ins. Co., 795 F.2d 1144, 1149 (3d Cir. 1986)"

FTC FCRA Opinion: Cosgrave-Greenblatt: litigation or settlement is not permissible purpose to request a credit report

"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."

I rest my case, Your Honor. 

[Anonymous]

To me, the distinction should be quite simple. 

What increases the risk to a potential lender?  HARD inquiries.

--Applications for credit INITIATED BY CONSUMER - lender should be required to prove that consumer authorized the request

What does NOT increase the risk to a potential lender?  All of these should be SOFT inquiries.

--Application for Insurance

--Application for Employment

--Promo offer of credit (i.e. credit card, car loan, etc.)

--Consumer request of credit report

--Pull by creditor to determine if CLI is appropriate

--Review by existing creditor of consumer's credit (i.e. periodic account review)

--Collection Agency (the CA reporting on the credit report speaks for itself)

--Collection activity by creditor

Please add any that I may have missed.

[Anonymous]

A SOFT inquiry is a FULL copy of your credit report, EXCLUDING the soft inquiries themselves.

Promo offers have their own Section in the statute and only provide name and address.

Firm offer of credit qualify for SOFT inquiries. 

Application for Insurance by the customer is CLEARLY defined in the statute as HARD inquiry.

then it gets murky.

Collection Agency does or does not have a relationship with the customer? In some views not.

If the account is given to the CA (but the contract not sold or assigned to), there should be Permissibility for account collection purpose.

If the account is SOLD and the contract assigned, then there should be no permissibility any longer, as the relationship with the creditor is gone - the debt obligation is not a account.