FTC Staff Opinion Letter: Fair Credit Reporting Act Section 604(a)(3)(A)

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580

Division of Credit Practices
Bureau of Consumer Protection
~
Clarke W. Brinckerhoff
Attorney
-
(202) 326-3224

August 5, 1998

Ms. Joyce E. Bauchner
Ass. Chief Counsel (General Litigation)
INTERNAL REVENUE SERVICE
Washington, DC 20224

Re: Permissible purpose for judgment creditor - FCRA '604(a)(3)(A)

Dear Ms. Bauchner:

This responds to your letter asking our opinion as to whether the Internal Revenue Service (IRS) would have a permissible purpose under the Fair Credit Reporting Act (FCRA) to obtain a consumer report on the spouse of a taxpayer, whom your letter calls the "nonliable spouse," based on a combination of (1) the existence of a federal tax lien having the effect of a judgment against the taxpayer, and (2) the operation of some state community property laws that allow the IRS to reach the property of the spouse to satisfy the taxpayer's obligation. For the reasons set forth below, we answer in the negative.

Section 604(a)(3)(A) of the FCRA provides a permissible purpose to a party that "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." (1) The Commission stated in its Commentary on the FCRA that this "credit" purpose extends to a judgment creditor seeking a report on the judgment debtor, (2) and that a tax collection agency that has obtained a judgment (or a lien having the same effect as a judgment) against a taxpayer thus has a permissible purpose. (3) You note that some community property states allow the IRS to reach the spouse's share of community property to satisfy the taxpayer's liability, and argue that the IRS should have a permissible purpose to obtain a report on the spouse.

The "judgment creditor" permissible purpose had its inception in a series of informal opinion letters issued by the Commission staff. We opined that a court ruling created a definitive obligation on the part of the judgment creditor to the judgment debtor:

[O]ur theory is that the "credit" relationship required by Section 604(3)(A) is deemed to exist because the report is used by (or on behalf of) a judgment creditor to collect an established debt.

(Noonan-Klejna letter dated December 18, 1986)

Our theory is, and always has been, that the court's ruling establishes a concrete debt owed to the judgment creditor. . . . It is the fact of the legally established debt . . . that establishes the permissible purpose.

(Fortney-Schutzman letter dated December 2, 1983).

Although a judgment creditor may be able to reach the property of a nonliable spouse to satisfy the taxpayer's debt, we do not believe that this possibility gives rise to the type of "concrete" or "established debt" of that nonliable spouse that provides a permissible purpose under Section 604(a)(3)(A). The nonliable spouse has no "credit" relationship with the judgment holder under that provision, and thus no "concrete" or "established" connection to that party that would provide a permissible purpose pursuant to its terms. In our view, therefore, a judgment creditor -- including the IRS, if it relies solely on its status as a judgment lienholder against the taxpayer -- has no permissible purpose under Section 604(a)(3)(A) to obtain a consumer report on a debtor's nonliable spouse.

Stated differently, the "judgment creditor" theory affords a judgment holder a permissible purpose under Section 604(a)(3)(A) by treating the debtor-creditor relationship established by a court action the same as a consensual debtor-creditor relationship. In the absence of any such "credit" relationship between the judgment holder and the spouse, we do not believe the same permissible purpose exists.

The views set forth in this staff opinion letter are not binding on the Commission. Copies of the previous staff letters quoted above are attached.

Sincerely yours,

Clarke W. Brinckerhoff

Enclosures


1. Your letter cites this provision as Section 604(3)(A), as it existed prior to the September 1996 amendments that substantially revised the FCRA. Public Law 104-208 (Title II, Subtitle D, Chapter 1), the "Consumer Credit Reporting Reform Act of 1996." The text of this subsection was unchanged by that legislation.

2. 16 C.F.R. Part 600 Appendix, comment 604(3)(A)-2; 55 Fed Reg. 18,804, 18,815 (May 4, 1990). The Commentary, of course, was based on the FCRA as it existed before the 1996 amendments.

3. Id., comment 604(3)(A)-4.