Scott v. Real Estate Finance Group, ERA: Broker May Obtain Credit Report Without Potential Tenant’s Permission

A 1997 U.S. District court case addressed the important issue of the use of consumer credit reports in connection with residential leases. This case is particularly of interest because it is one of only a few interpreting the Fair Credit Reporting Act (“FCRA”), the federal statute that governs the use of consumer credit reports.

The plaintiffs in this case were two brothers who wanted to rent a house in New York state. They engaged a real estate brokerage company, Re/Max Premiere REALTORS®, and one of its sales associates found a listing for a potential house. She contacted Ira Simonoff, the listing agent, and he showed them the residence. The Scotts liked it, made an offer on the spot, and discussed related issues such as the security deposit, pets and smoking. Simonoff informed them that the owners, who lived in Japan, required a cedit report, and they responded that he was not authorized to obtain their credit reports. He went ahead and obtained the reports anyway through the Real Estate Finance Group, a mortgage brokerage company.

The Scotts sued, claiming that their credit reports had been obtained under false pretenses, in violation of federal and state law, and for failure to provide adequate notice under New York law. Section 1681q of the FCRA imposes a $5,000 fine and/or imprisonment up to a year on one “who knowingly and willingly obtains information on a consumer from a consumer reporting agency under false pretenses.” To determine whether the Scotts’ credit reports had been obtained under false pretenses, the court examined the “permissible purposes” set forth in section 1681b of the FCRA. One of the purposes for which a consumer reporting agency may furnish a consumer credit report is general, “To a person which it has reason to believe...(E) otherwise has a legitimate business need for the information in connection with a business transaction involving the consumer.”

The Scotts argued for a narrow interpretation of this language to exclude residential rental property. However, the court looked to the Federal Trade Commission’s Statements of General Policy or Interpretation, which states that the term “legitimate business need” includes “real estate agents who obtain consumer reports to assist owners of residential properties in screening consumers as tenants.” Under these standards, the court found that Simonoff had a permissible purpose to obtain the credit reports. The court pointed out that he had advised the Scotts that the owners required a credit report at the same meeting where the Scotts had made an offer to rent the property and discussed other details of the rental. According to the court, this conversation constituted a “business transaction” under FCRA and created a “legitimate business need” to obtain the credit reports. It therefore found that Simonoff and his broker had not used false pretenses when obtaining the credit reports.

The Scotts argued that they did not give their authorization for the credit reports to be obtained. However, the court explained that where, as in this situation, there is a permissible purpose for obtaining a credit report, it is immaterial that the consumer did not authorize that the report be obtained. In reaching this conclusion, the court relied on another case as well as the FTC Policy Statements, which state that “When permissible purposes exist, parties may obtain and consumer reporting agencies may furnish, consumer reports without the consumer’s permission or over their objection.” The court also rejected the Scotts’ argument that they were entitled to notice that the credit reports had been obtained, observing that no notice was required under these circumstances.

As far as the Scotts claims against the mortgage brokerage which actually obtained the credit reports, the court found that since it did not have a relationship with the Scotts, it did not have a permissible purpose, and therefore violated the FCRA.

The Scotts’ also asserted a false pretenses claim under the New York statute. The provisions of the New York law parallel those of the federal law and courts generally have interpreted the statutes similarly. The court noted that, if anything, the Scotts’ arguments were weaker under the state law because the statute specifically includes the rental of residential property. They also argued another cause of action under New York law - failure to comply with the statute’s notice provisions. The New York statute provides that before a consumer credit report may be requested, a lease applicant must be notified in writing or in the same manner in which the application is made, that such a report may be obtained. Since the Scotts’ application to lease the home was made orally, the court found it entirely proper that Simonoff advised them orally that a credit report was required. The court also found this notice sufficient to absolve the mortgage brokerage on this point.

Real estate practitioners who need to obtain consumer credit reports should familiarize themselves with the applicable provisions of the FCRA as well as state laws governing the use of credit reports.

Scott v. Real Estate Finance Group, ERA, 956 F.Supp. 375 (E.D. New York 1997), aff'd in part and rev'd in part, 183 F.3d 97 (2d Cir. 1999).

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