There's more than just the credit score disclosure at stake here. I don't believe you should ever reuse a credit report. Here's an article we wrote on this topic for our November 2016 magazine:
Reusing a Credit Report
In our experience, most banks reuse credit reports for subsequent transactions. This has been an accepted practice for as long as we can remember and it’s generally spelled out in the bank’s loan policy. Often there are some stipulations, such as the report can’t be more than 6 months old, etc. As time has gone on; however, we feel there is growing regulatory support that would prohibit the use of prior credit reports. We’ve changed our stance and we wanted to give you the reasons why.
Fair Credit Reporting Act
Section 604(a) allows a consumer reporting agency to issue a credit report to a bank when it believes that the information will be used “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...”. Section 607 requires the bank to identify itself to the consumer reporting agency, so that the consumer reporting agency can meet their compliance responsibilities. It states that the user of the credit report shall, “certify the purposes for which the information is sought, and certify that the information will be used for no other purpose...”
In other words, when you order a credit report, you’re telling the consumer reporting agency that you’re using it for an allowable purpose and not for anything else. This is likely referenced in the contract you have with your consumer reporting agency because without it there is a risk that you could cause them to be in violation of the FCRA requirement. We believe this slams the door on your ability to reuse a credit report down the road for another transaction. It’s also important to note that neither bank policy, customer agreement, nor contract provisions can override the regulatory requirement of the Act.
Ability to Repay
The Ability to Repay requirements also make us question whether you can and/or should reuse a credit report. Although the rule only applies to consumer-purpose credit transactions secured by a dwelling, it requires that you look at debts, monthly payments, and credit history to make a reasonable determination that a borrower can repay a loan. What if the borrower’s credit history has changed since you pulled the last credit report? If their debt, monthly payments, etc., have increased, your Ability to Repay calculation likely won’t be accurate. You may end up making a loan you shouldn’t which can result in civil liability.
Military Lending Act
Due to the uncertainties about when someone qualifies as a dependent and the stiff penalties of non- compliance associated with the Military Lending Act, our recommendation is to shoot for the safe harbor when it comes to covered borrower status checks. While there are some uncertainties with the safe harbor, you can either rely on the database or use a qualifying credit report to get it. However, the Act does state that a status check is “conclusive” (i.e., you have a safe harbor) only “with respect to that transaction or account...”. So, if you’re relying on a prior credit report for your status check, it would appear that you’re not eligible for the safe harbor because the safe harbor only applies to the prior transaction, for which you originally pulled the credit report.
Credit Scores/Fraud Alerts
Relying on a prior credit report could also lead to inaccurate credit score disclosures, as well as the potential to miss any fraud alerts that have been placed since the previous report was pulled. Additionally, if you’re doing risk-based pricing, you don’t want to base the rate or any other credit term on outdated information.
It’s hard to follow up on a fraud alert when you don’t know it’s there. It doesn’t portray a very positive image of the bank when a customer expects you to follow through on a fraud alert and you don’t do so. We realize you may look at a fraud alert as just another time-consuming step in the process, especially if you know an application wasn’t made fraudulently. However, if your customer goes through the process to put the alert out there, imagine the trust lost when you don’t follow through with the appropriate steps.
If you don’t think this is enough regulatory support to prohibit the reuse of credit reports, check your contracts with consumer reporting agencies. The chances are pretty great that your contract doesn’t allow for reuse either.
Before you take on the risks associated with the use of a prior credit report, understand what, if any, benefit there is to doing so. We often hear that banks want to help their customers by avoiding the “hit” to their credit score. While keeping your customers happy is certainly a good thing, we don’t feel it outweighs the potential legal and regulatory risks. We do understand; however, that getting your customer to understand that may be a different story. How you achieve that is up to you, whether you apologize for your new procedure, blame it on regulations; or spin it in a positive manner (e.g., it’s for the customer’s protection), etc. The benefit for the bank is that you are basing your credit decision on the best information available and you could catch something that the customer should be aware of, whether it’s a potential reporting error or fraud issue.
By not pulling a new credit report, the lender is actually manipulating the scoring model. The fact is the consumer is requesting new credit. The scoring methods should know this and adjust the consumer’s score as appropriate. If a new credit report isn’t ordered, the consumer’s score is distorted.
Have you thought of all these potential risks? We don’t think most banks have. While it’s important to keep your customers happy, you also need to look out for potential risks to your bank. Trying to fulfill a customer’s request not to pull a new credit report or save a customer a few dollars exposes the bank to an unnecessary level of risk, given the above regulatory and potential legal concerns. It might be good to discuss these concerns with Management and see if you should make changes to your loan policy.