A few months ago someone wrote into Creditworthy
and wanted to know if there was a legal way that they could inform an
applicant of information they had received from one of the
applicant’s trade references. They believed the reference, a
competitor, had provided false information because it was inconsistent
with information provided by other references. They wanted to find out
if the information was, in fact, correct from the applicant.
I responded by saying that it was possible to inform the applicant
legally by including the applicant’s rights in the credit denial
letter. The notification of the applicants legal rights at the time of
denial is not required of business credit grantors under Regulation B
of the Equal Credit Opportunity Act but not prohibited either. This
caused several readers to write concerning credit and confidentiality
and resurrect a controversy that another column of mine in this
publication caused five years ago concerning the same topic.
I have been asked to address this once again. There are two
subjects involved. One is the handling of confidential information
within the organization and the other is revealing sources of
information to applicants or other creditors. I will attempt to
address both of these issues separately. For clarification at the
end of each subject there will be a brief Q & A session conducted
by Rich Hill. I want to stress to the readers that the opinions
expressed below are mine alone and do not represent the opinion of
Disclosure of Credit Information
In 1955, the National Association of Credit Management and the then
Robert Morris Associates together formed “Statement of Principles
for the Exchange of Credit Information Between Banks and Business
Credit Grantors”. These seven principles were to be followed when
exchanging information. The first principle stated that
Confidentiality is the cardinal principle in the exchange of credit
information. And went on to state, The identity of inquirers and
sources should not be disclosed without their permission.
1955! 13 years before Congress passed the Consumer
Protection Act and 19 years before Regulation B was enacted. In 1978,
NACM and RMA revised the Statement of Principles to reflect current
usage and included language that stated the use of the seven
principles was subject to applicable federal and state laws including
antitrust, credit reporting and the use of confidential records. The
Consumer Protection Act along with Regulation B made the second
sentence of the first of the seven principles obsolete. The identity
of inquirers and sources is dependent upon the applicant requesting
the source in writing and it makes no difference whether they are a
consumer or a commercial applicant. For those unfamiliar with
Regulation B, it is an amendment to the Equal Credit Opportunity Act
that comes under the direction of the Federal Reserve Board. Among
other things Regulation B: defines type of credit, the difference
between a credit application and a completed credit application,
reporting requirements when approving and denying credit and how long
the application and credit information must be retained.
Regulation B, a federal law, makes a distinction between
consumer and commercial credit denial by stating the commercial credit
grantor is not required to inform the applicant of their rights under
the Equal Credit Opportunity Act when being denied credit. It does not
say that the commercial credit grantor is prohibited from doing so,
just that they don’t have to. However, if the commercial credit
applicant exercises their rights upon being notified that their
request for credit has been denied then the same information provided
the consumer must be provided the commercial applicant.
Does “applicant” mean a debtor company who is applying for new
credit or does it also mean an existing customer of the creditor?
It applies to both a company applying for new credit or an existing
customer applying for an increase in credit.
Does Regulation B apply only when rejecting a new request for
credit? What about when the creditor converts an existing credit
line to COD or even when the creditor lowers an existing line of
If the debtor makes written inquiry as to the reasons as to why
their credit line has been reduced and the reason was due to
information received from sources outside the control of the creditor
then Regulation B applies. If the credit line was reduced due to the
customer’s poor payment history or failure to respond timely to the
creditor’s written request for adequate assurance of performance (UCC
§ 2-609) then Regulation B would not apply.
Are there any rules as to what must be told to the applicant or
debtor company when advising them of the reason for the credit denial?
How specific do you have to be?
You have to provide the debtor with the reason and give them an
opportunity to correct the information if it is incorrect. Therefore,
if the source of the information is from a credit reporting agency
then the name of the agency must be given (this is also included in
the Fair Credit Reporting Act that the FTC has published an opinion
paper that includes commercial credit grantors). If the information
came from trade references then all that is necessary is a statement
to the effect “information from your references” is not
What are the penalties for noncompliance of Reg B?
$10,000 fine for each and every occurrence.
Creditors need to have timely and accurate information in order to
make good credit decisions. However, some creditors are hesitant
to report negative information if it is felt that their report will
get back to the debtor. Even though the creditor is only
reporting accurate information, this may cause problems between the 2
parties. Do you have any recommendations or suggestions for what
the reporting trade creditor can do?
I don’t mean to sound flippant, but contact their elected federal
representatives and lobby to amend the law. Regulation B is a 12 month
amendment governed by the Federal Reserve Board. Every February at
their first meeting of the new year the board votes whether to
continue Regulation B for another 12 months and to make any proposed
If you deny credit because of the information obtained on a Credit
Report, does the credit reporting agency have to divulge the source of
No. The credit reporting agency has an obligation to remove the
information from the debtor’s credit report until it receives back
information from the creditor that the information is factual.
I wish you well.
information is provided as information only and not legal advice.
Legal advice should be obtained from a competent, licensed attorney,
in good standing with the state bar association.