What is “Permissible Purpose” Under the FCRA?

The Fair Credit Reporting Act outlines rules, restrictions, and guidelines pertaining to consumer credit reports, credit privacy, and credit checks. All creditors, like landlords, lenders, and banks, can only request/pull credit information from the credit bureaus if they do so with a "permissible purpose."

Today, let’s take a deep dive into what permissible purpose is under the FCRA, what it means, and what to do if your credit information is retrieved without a permissible purpose.

What is a “Permissible Purpose”?

According to the FCRA, a "permissible purpose" is any circumstance or situation in which a credit reporting agency, like one of the big credit bureaus, is legally allowed to provide consumer credit information to a creditor, like a lender. Similarly, a permissible purpose includes any circumstances where a creditor can request information about a consumer or loan applicant.

For example, if a mortgage loan company wants to know whether to underwrite a loan for an applicant, they may request information from the credit bureaus. That’s a permissible purpose since the applicant’s credit information is a feasibly important data point in the decision.

For another example, a credit bureau may not provide credit information about a consumer because their parents asked for it. That’s not a permissible purpose since there’s no good reason for the consumer’s parents to have access to their credit information.

The Key Elements of Permissible Purposes

There are two primary elements to all permissible purposes as outlined by the FCRA:

• The information requested is consumer-specific – that is, the requested information is about one individual and their credit history, not about an entire group or the credit information about people related to them. Because of this element, credit bureaus/CRAs may only release credit information unless it believes the information only pertains to the subject of the request 
• The information is necessary for a valid purpose. This touches on what was broken down above; creditors can’t request credit information for no good reason, and credit bureaus can’t release the information unless they believe the reason for the request is valid

For instance, if a lender wants to check the credit of a loan applicant, they can request that information because:

• They only want the information for the loan applicant specifically
• They want the information to determine the loan applicant's creditworthiness as it relates to a specific loan application

Examples of Permissible Purposes as Defined by the FCRA

Fortunately for both consumers and creditors alike, the Fair Credit Reporting Act includes a list of all permissible purposes currently recognized under the law. It's located in FCRA Section 604. Permissible purposes include:

• Being ordered by a court or federal grand jury subpoena
• Upon instruction by a legal consumer in writing (i.e., consumers can always request their own credit information)
• For decisions related to the extension of credit or the review or collection of a consumer’s credit account
• For employment purposes, like hiring and/or promoting decisions, but only if the consumer gives written permission
• When deciding on underwriting insurance policies upon receiving an application from a consumer
• When there is a legitimate business purpose and it's in connection with a business transaction initiated by the consumer (e.g., a business needs to check credit for a line of credit application when a consumer wants to purchase a new car)
• When an organization needs to determine a consumer’s eligibility for a license or any other benefit granted by governmental instrumentality as required by law, or when considering an applicant’s financial status or responsibility
• When a potential investor or service or needs information to value or assess the credit and/or prepayment risks for an existing credit obligation
• When state and/or local officials need to determine child support payments, or the modification and enforcement rules for existing child support payments

Given this list, it is usually fairly easy for both consumers and creditors to determine whether they have a permissible purpose to request or give out credit information.

For example, if you apply for a car loan, you can bet that the car lender has a permissible purpose to examine your credit score. The car lender wants to know whether they can rely on you to pay back your loan on time and in full.

However, your employer does not need to know your credit score if you have already been hired and are not up for promotion. Therefore, if they want to know your credit score but are cagey about the reason, you might consider denying the request unless they tell you exactly what it’s for. 

Violations of the Permissible Purpose Clauses

Unfortunately, not everyone follows the permissible purpose clauses to the letter, either intentionally or inadvertently.

For instance, a creditor, like a lender, may request a consumer’s credit information from a credit bureau as a preliminary measure to determine what kinds of loans they may qualify for. This is not a permissible purpose since it is not in conjunction with a specific loan application.

However, the credit bureau that receives the request might approve it without looking too hard at the reason for the request. In this hypothetical case, both the creditor and the credit bureau are guilty of violating the FCRA and its permissible purpose clause.

Some violations happen intentionally, as in the above example with an employer requesting credit information about an employee. Landlords may also try to request credit information about tenants after they've already accepted their lease applications.

If your credit is checked too many times, especially hard checked, they could have a negative effect on your credit score, making it more difficult for you to qualify for future loans and other financial opportunities. Therefore, all consumers need to watch for violations of the permissible purpose clause.

Your Legal Rights if a Creditor Violates Permissible Purpose Clauses

If a creditor or credit bureau violates the FCRA and gives or requests your credit information without a permissible purpose, you have certain legal grounds and rights.

For instance, say that you discover your landlord pulled your credit information after already accepting your lease. You’ve lived at your apartment for two years and you aren’t up for lease renewal yet. But when you check your credit report, you discover a record of a hard credit check performed by your lender.

Since there is no permissible purpose for this, your landlord is in violation of the FCRA. You could sue your landlord for violating your rights – any hypothetical lawsuit might result in monetary damages. Furthermore, you have the right to dispute the hit to your credit score that resulted from the hard credit check by filing a credit dispute letter with the credit bureau(s) in question.

The credit bureaus might also be in trouble in this hypothetical example, as they’re not supposed to give out credit information unless there is a permissible purpose. If your landlord requested credit information without needing it for an application, and the credit bureau accepted the request, that organization is just as responsible for the damage to your score.

It can be tough to know whether you have grounds for legal action or whether your rights were violated in some circumstances, however. In these cases, you’ll be better off contacting knowledgeable legal representatives who can inform you of your rights and help you understand the best path forward.

Wrap Up

A permissible purpose under the FCRA is a legitimate reason to retrieve credit information about an American consumer. Lenders, banks, and other creditors may only request credit information from the credit bureaus under a permissible purpose; if they don’t, they could be liable for legal action from consumers. Reach out to legal representatives if you believe your credit information was retrieved illegally or under false pretenses.

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