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Can a bank decline all applicants with a fraud alert on their credit report?

May a bank, as a blanket policy, decline all applications from applicants who have placed a fraud alert on their credit report as a means to streamline an automated loan process?

No. Doing so could constitute illegal discrimination against those exercising their right under the Fair Credit Reporting Act (FCRA) to place an alert, thereby violating ECOA and Regulation B.

FCRA section 605A(h)(1)(B) states that creditors may not establish an account if there is a fraud or active duty alert on the consumer’s credit report unless they first take steps to verify the identity of the applicant. It does not require creditors to verify the information, only that they not establish an account until they do.

However, automatic declinations of loan applications from people who have placed a fraud alert (or active duty alert) risk violating the Equal Credit Opportunity (ECOA) because that act prohibits discrimination on the basis that credit applicants are asserting their rights under the FCRA. ECOA and its implementing regulation, Regulation B, consider as a protected class, applicants that “in good faith exercised any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Bureau.”

The FCRA falls under the Consumer Credit Protection Act. Therefore, without a legitimate business reason for declining all loans with fraud alerts, it appears that doing so could illegally discriminate against those exercising their right under FCRA to place an alert, thereby violating ECOA and Regulation B. (March 2017)

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