Our bank issues balloon notes that we frequently extend on maturity. When considering an extension, our loan review policy requires us to examine the borrower’s credit (without obtaining their consent), and we have always run hard credit inquiries for these reviews. We would like to switch to using soft credit inquiries that do not appear on our customers’ credit reports. Are there any rules that would prohibit us from using soft credit inquiries for these reviews, and do we need the borrowers’ consent to pull their credit? An examiner once advised us to do credit checks before renewing loans, and an auditor recommended a hard credit pull for new loans, but a representative from the Federal Reserve said we could use soft credit pulls in this case.

Oct 17, 2022

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No, we are not aware of any law or regulation that would prohibit you from using “soft pulls” for your loan reviews conducted before renewing loans. We do not believe that you need to obtain borrowers’ consent when pulling credit for purposes of deciding whether to offer a loan extension for the balloon notes.

Under the Fair Credit Reporting Act (FCRA), a bank may obtain an individual’s credit report without their consent in limited circumstances, including for purposes of “reviewing” a consumer’s loan account in connection with a credit transaction or to determine whether the consumer continues to meet the terms of the account. The FCRA does not distinguish between soft and hard credit inquiries.

The Federal Trade Commission (FTC) has issued an advisory opinion clarifying what it means to “review” an account, which provides a permissible purpose for pulling a consumer’s credit report without their consent. The opinion concludes that, based on the FCRA’s legislative history, this permissible purpose “is limited to an account review for the purpose of deciding whether to retain or modify current account terms.” The FTC explains that in many cases, this permissible purpose does not exist for closed-end credit transactions since the transaction terms “are predetermined and generally may not be changed unilaterally by the creditor unless the contract expressly provides for such action.”

Here, you would be using the credit inquiry for the purpose of deciding whether to offer borrowers a loan renewal that would modify a term of the balloon loan by extending the maturity date. Consequently, we do not believe that you need to obtain borrowers’ consent before pulling their credit for purposes of deciding whether to offer a loan renewal — and in any event, your bank may have obtained blanket consents from these borrowers before entering into the balloon loans.

For resources related to our guidance, please see:

Fair Credit Reporting Act, 15 USC 1681b(a)(3) (“Subject to subsection (c), any consumer reporting agency may furnish a consumer report under the following circumstances and no other: . . . (3) To a person which it has reason to believe

(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; . . .

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(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.”)

Fair Credit Reporting Act, 15 USC 1681a(m) (“The term ‘credit or insurance transaction that is not initiated by the consumer’ does not include the use of a consumer report by a person with which the consumer has an account or insurance policy, for purposes of (1) reviewing the account or insurance policy; or (2) collecting the account.”)

FTC, Advisory Opinion to Gowen (April 29, 1999) (“Section 604(a)(3)(A) of the FCRA gives a creditor a permissible purpose to obtain a consumer report without the consumer's consent ‘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.’ . . . When obtaining consumer reports for such purposes, creditors need not comply with prescreening disclosure requirements because these transactions are exempt under Section 603(m)(1) of the FCRA.”)

FTC, Advisory Opinion to Gowen (April 29, 1999) (“In commenting on the proposed provision which became Section 604(a)(3)(F)(ii), the Senate Committee on Banking, Housing, and Urban Affairs stated: ‘Like creditors, banks and others may need to consult a consumer’s report in order to determine whether the consumer’s current account terms should be modified. For example, the institution may provide more favorable pricing terms after consulting the report. The permissible purpose created by this provision, however, is limited to an account review for the purpose of deciding whether to retain or modify current account terms.’”)

FTC, Advisory Opinion to Gowen (April 29, 1999) (“The terms of a closed-end credit transaction are predetermined and generally may not be changed unilaterally by the creditor unless the contract expressly provides for such action (e.g., in the event of default). Therefore, the creditor is unlikely to have a reason to consider ‘whether to retain or modify current account terms’ and, thus, would not have any routine need to procure consumer reports to ‘review’ its accounts.’”)

Fair Credit Reporting Act, 15 USC 1681b(a)(2) (“Subject to subsection (c), any consumer reporting agency may furnish a consumer report under the following circumstances and no other: . . . (2) In accordance with the written instructions of the consumer to whom it relates.”)