Authorization for Credit - Annual Term Loan Review

Our credit administration department has a process in place to review commercial term loans over a certain dollar amount annually. This includes pulling credit on the guarantors/business individuals. Because closed-end credit terms are predetermined, it's unclear if "permissible purpose" applies to a closed-end loan like it does for an open-end loan.

Can we incorporate verbiage into the commercial guaranty to authorize obtaining credit when necessary? Or should we obtain authorization via a separate form each year?

Well, what do you plan to do if the review does not go well? I do not think that most banks actually pull credit on closed-end commercial loans, they just require updated financials.

Since a decline in credit is a sign of financial stress, special assets would just keep an eye on it.

Also, I have since discovered we have broad language in our personal financial statement (see below), so if updated financial information is obtained on this form, we should be able to obtain an updated credit report.

"The bank is authorized to make any investigation of credit and employment status of the applicant(s). The Bank may pull credit reports both at the beginning and at any time during the duration of the loan (and after the loan term has ended if the borrower continues to own any amounts)."

Well, you still have to have a permissible purpose and that is pretty general boiler plate language, and I am not sure that complies with the FCRA. I think you would need specific written permission to pull credit. A consumer cannot just give a lender carte blanche permission to pull credit whenever they feel like it.

You could also not rely on the general "review" permissible purpose and if the borrower is not past due, you could not rely on the "collections" permissible purpose. On closed-end loans, the FTC has been pretty clear that a review purpose does not exist on closed-end credit.

In a 1999 letter, the staff opined on this issue in the context of closed-end credit transactions. Because the terms of closed-end credit transactions are generally predetermined and thus may not be changed unilaterally by the creditor, the staff opined that the creditor in that instance did not have a “review” permissible purpose.

Staff believes that the “review” permissible purpose applies only where the creditor has an existing account relationship with the consumer and uses the report solely to decide whether to modify the terms of the account.

Super helpful, rlcarey! Is it acceptable to include review permissible purpose language in commercial LOC and HELOC documents since an existing account relationship exists and they are open-end transactions?

If they are open-end agreements and you are contemplating reviewing for a potential change in terms, such as a higher credit limit, freezing the line, etc., sure. If you are just looking to look, then it would not be for a "review" purpose. I would want to make sure that I had solid procedures in place that says if we find this, this is what happens.

"uses the report solely to decide whether to modify the terms of the account".