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Reg B Permissible Purpose/Community Prop State

Scenario: In California - a community property state - assume a couple files for divorce but it is not finalized yet. The husband needs a place to live and applies individually for an FHA loan, leaving the estranged wife as a non-applicant, non-borrower, who plans on using non-marital separate funds to purchase her home. Since this is an FHA loan, the lender needs to pull a credit on the estranged wife to count her debts towards the husband's since the divorce is not final. When the lender calls the estranged wife for consent to pull her report as per our risk management policy, she denies consent for her report just to keep the husband from getting his own place. This makes it harder for him to claim joint custody of the kids. Reg B has contradicting situations: permissible purpose is granted for community property states so lender does not need spouse's consent. However it also states there is no permissible purpose to obtain a consumer report on a .... nonapplicant spouse who has legally separated or otherwise indicated an intent to legally disassociate with the marriage. Can lender pull the non-applicant non-borrowing spouse's credit report without her consent due to being in a community property state, or would the divorce show intent to legally disassociate the marriage and overule the permissible purpose granted by being in a community property state?

A: by Andy Zavoina:

Reg B addresses information and signatures on collateral/security agreements as it pertains to community property states but the Fair Credit Reporting Act is what controls access to credit bureau files. "Community property" is not a provision included in 604 of the FCRA addressing permissible purposes, which include:

1) As ordered by a court or a federal grand jury subpoena. Section 604(a)(1)
2) As instructed by the consumer in writing. Section 604(a)(2)
3) For the extension of credit as a result of an application from a consumer, or the review or collection of a consumer's account. Section 604(a)(3)(A)
4) For employment purposes, including hiring and promotion decisions, where the consumer has given written permission. Sections 604(a)(3)(B) and 604(b)
5) For the underwriting of insurance as a result of an application from a consumer. Section 604(a)(3)(C)
6) When there is a legitimate business need, in connection with a business transaction that is initiated by the consumer. Section 604(a)(3)(F)(i)
7) To review a consumer's account to determine whether the consumer continues to meet the terms of the account. Section 604(a)(3)(F)(ii)
8) To determine a consumer's eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant's financial responsibility or status. Section 604(a)(3)(D)
9) For use by a potential investor or servicer, or current insurer, in a valuation or assessment of the credit or prepayment risks associated with an existing credit obligation. Section 604(a)(3)(E)
10) For use by state and local officials in connection with the determination of child support payments, or modifications and enforcement thereof. Sections 604(a)(4) and 604(a)(5)
11) In addition, creditors and insurers may obtain certain consumer report information for the purpose of making "prescreened" unsolicited offers of credit or insurance. Section 604(c).

If the spouses are involved in a nasty divorce and you have no right to access the estranged spouses credit report, I would not be surprised to see a complaint and potentially a letter from that person's attorney offering a settlement because of the banks infraction by accessing the file. This is also going to be a breach of the contract between the bank and credit reporting agency as the bank will have agreed to follow access rules.

A by Randy Carey:

Actually, that may not be true in a community property State. If the divorce has not been finalized, the lender would most likely have that right based on what I know about CA CP laws. The FTC had this in the old 16 CFR 600 commentary (since repealed) but addressed in the 201 interpretations document.

Where permissible purpose exists. A creditor has a permissible purpose to obtain a consumer
report on an applicant’s spouse if that spouse will be permitted to use the account or will be
contractually liable upon the account, or if the applicant is relying on the spouse’s income as
a basis for repayment of the credit requested. In addition, a creditor may obtain a consumer
report on an applicant’s spouse if (i) the state law doctrine of necessaries (which may make
a consumer liable for certain debts of a spouse) applies to the transaction, (ii) the applicant
resides in a community property state, (iii) the property upon which the applicant is relying as
a basis for repayment of the credit requested is located in such a state, or (iv) the applicant is
acting as the agent of the nonapplicant spouse.

First published on 05/03/2020

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