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The Fair Credit Reporting Act pertains to consumer credit and has very little relevance to businesses that extend credit to other businesses. However, since some businesses may be operated as a sole proprietorship, it is advisable for credit granters to familiarize themselves with some of the key aspects of the law.
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Section 604 of the Fair Credit Reporting Act discusses the permissible purposes and uses of a consumer report. The Section states that a consumer reporting agency may furnish a consumer report to a person, where person is defined to mean any individual, partnership or corporation, who “intends to use the information 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 or otherwise has a legitimate business need.”
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How we choose to interpret this law is extremely important for business to business credit grantors. It is very common for corporate creditors to receive an application for the extension of open, unsecured business or trade credit for a sole proprietor or partnership. Additionally, in response to a request for unsecured business or trade credit, business creditors often seek personal guaranties from a principal, owner or officer of the applicant company, which requires the investigation of the guarantor, who may be considered a consumer under the law. The question is whether the FCRA applies to business credit transactions and if business creditors have a legitimate business need to obtain consumer credit reports, and if they can do so without obtaining specific written permission.
The FTC, who administers this law, has not yet written an opinion on the topic of business creditors getting credit reports on individuals that are sole proprietors, partners or have personally pledged assets as part of a personal guaranty.
Since the law is rather vague with regard to this, we suggest that you seek written permission from the person(s) before you attempt to gather consumer credit information about an individual.
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CreditManagementWorld.com is not in the business of providing legal advice. Laws change over time and vary widely by state and jurisdiction. For professional legal advice, we highly recommend that you consult an attorney in your area that specializes in business credit and collections.
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