How Not to Quicken Compliance

The Federal Trade Commission has taken a giant step in enforcing the Fair Credit Reporting Act in the context of Internet lending. The target of this enforcement action is Quicken Loans, Inc. The company, based in Michigan, takes applications and makes lending decisions on the Internet.

The issue is whether the lender took adverse action and therefore owed the applicant an adverse action notice under FCRA. The case does not deal with Regulation B adverse action notice requirements.

What They Did
Quicken solicited and took applications over the Internet. They offered applicants several options including prequalification and preapproval.

Prequalification did not involve the use of a credit report. Instead, Quicken accepted basic financial information from the applicant. This usually included income, assets, loan type, amount, and down-payment. Using only that information, Quicken would prequalify the applicant for a loan amount. This activity does not use any third-party information sources and thus does not trigger the FCRA's coverage. ECOA is a different matter.

The practice that concerned the FTC was the process for preapproval. To request preapproval, the applicant clicked on the request "order my credit report and use it to approve me for a loan."

If the information in the credit report was positive, Quicken preapproved the applicant. However, if the report contained negative information, Quicken took a bit of a detour. The applicant did not get a preapproval or a direct denial. Instead, the applicant received an invitation to follow another path - the detour.

Step one of the detour involved an obscure message from Quicken: "Based on the information you have provided, it appears that you have unique borrowing needs." Note that the information used to trigger this message was not information provided by the applicant, as the statement implies, but information obtained from the credit bureau.

What happened next was not, in FTC's opinion, compliant. The applicant was invited to click the "Next Step" button to permit a Quicken loan consultant to contact them about other possible Quicken loan options. Quicken claimed that this is simply another step in a continuing application. FTC disagreed.

What The FTC Thought
In the view of the FTC, Quicken's interpretation is hair-splitting and it won't fly. FTC staff concluded that Quicken had actually communicated a denial to the applicant and triggered FCRA's adverse action requirements. What would you think if you were told that you had "unique borrowing needs?"

FTC concluded that Quicken failed to comply with the adverse action notice requirements of FCRA. Quicken had taken adverse action based on information in the consumer's credit report. The consumer is entitled to know this and the consumer is also entitled to a copy of the credit report.

The agreement would require Quicken to send a notice that complies with the FCRA adverse action notice requirements. These notices would include the basic FCRA disclosure that information in the report was used in making the decision, the name and contact information of the credit reporter, the statement that the consumer has a right to see the report, and the explanation that the credit reporter cannot answer questions about the credit decision.

The FTC did carve out some interesting permissions for Quicken that would enable Quicken to continue its application process while providing the consumer with information the FTC considers essential. First, Quicken would have to clearly disclose to the customer that the preapproval may be offline as well as on line. Presumably, this notice is intended to overcome the implication of denial when the consumer is asked to contact a Quicken employee.

The second component is that Quicken would notify the consumer that it needs additional information from the consumer and if the consumer provides the information, Quicken Loans would decide whether to approve the application. This is essentially a modified version of the Regulation B notice of incompleteness. Note that this FCRA-Internet notice that Quicken Loans may use does not comply with Regulation B requirements when incompleteness is the reason for adverse action under Regulation B.

Interesting Issues
This enforcement action does not deal with ECOA and Regulation B, even though Quicken's practice arguably violates Regulation B's section 202.9 as well as FCRA's 615 notice requirements. Ignoring ECOA in this action should not be construed as a statement from FTC that it considers the practice compliant with Regulation B. It simply communicates that FTC chose to raise the FCRA issue. After all, FCRA is their turf.

Both prequalification and preapproval procedures meet Regulation B's definition of application. Arguably, a negative response or a non-response to a customer seeking prequalification could constitute a failure to provide proper adverse action information under Regulation B. The FTC did not deal with Regulation B concerns, limiting the case solely to the FCRA issues.

Incomplete Applications
Applying Regulation B to Quicken's practice would bring up an additional violation for enforcement. By directing the applicant to take further steps to pursue the application, Quicken was advising applicants in a roundabout way that more information was needed to process the application. Quicken failed, however, to tell the customer what information was needed and failed to provide a time frame.

Effectively, Quicken used an alternative path for providing notices of incompleteness. What they did tell the customer clearly fails the Regulation B test. Quicken's technique dumped all responsibility for taking action onto the customer without giving the customer any explanations or guidance. The customer simply didn't get what the web site first promised. Most customers using the Internet would move on to another web-based lender rather than pursue the application with Quicken.

The consent agreement has been published for public comment. The public comment period closed on January 29, 2003. Now that the public comment period has closed, the Commission will decide whether to make the agreement final. [EDITOR'S NOTE: The final FTC agreement was issued April 8, 2003.]

Best Practices
Ordinarily, using the requirements in a consent order as a guide is a good practice. In the Quicken case, we don't recommend that. The limitation of this case to FCRA issues could actually create ECOA compliance confusion.

The best practice to follow in developing an Internet application response is to develop a notification procedure using Regulation B's rules as a guide. Give careful attention to the definition of application, analyze procedures, and use model forms as a guide. Then test it on some consumers to evaluate how clear your communications and notices are.

ACTION STEPS

Review your processes for taking in credit applications and compare them to Quicken's. Make sure that you aren't communicating decisions without sending notices.
Perform an FCRA audit. Compare the use made of credit reports with credit decisions and notifications sent to applicants.
Use the guidance in the Regulation B Commentary to train staff on the difference between giving advice and evaluating applications.
Select withdrawn applications for an audit. Look carefully at the process that led to the withdrawal to be sure you don't have a Quicken situation.
Establish documentation requirements for all withdrawn applications to explain the reason for withdrawal.
If you solicit or accept applications through a web site, review the process carefully to identify any Regulation B or FCRA problems.