The credit card legislation currently under consideration includes a great many elements that are focused on improving consumer protections. Among the changes that are most likely to impact lenders are the clarifications to UDAP (aka unfair or deceptive acts and practices). Of particular interest to lenders who utilize prescreen or pre-approved offers is a proposed restriction on the ability to offer a preliminary approval followed by a later credit review. Commonly called a post-screen, the lender includes a stipulation in the initial approval that the consumer must pass their full standard decisioning criteria before the credit is extended. Although the stipulation can be readily identified under the terms and conditions included with every card offer (read the fine print folks), few consumers know what to look for or understand the implications of the disclosure.
Here is an example. You receive a mailing that uses bold letters to inform you of this special offer: “Exclusive, Pre-approved, Platinum Card (with your name embossed on a sample card), Credit Limit up to $10,000, 0% Fixed APR, No Balance Transfer Fees, No Annual Fee, Plus 3 Bonus Features.” How exciting! Turn the page and you will find out that this is only a preliminary offer, your credit will be reviewed and all information on your application verified before you will receive the card and all its fabulous benefits. If you don’t meet these requirements, you guessed it…no credit card for you. So what does pre-approved really mean?
The proposed legislation simply states that offering a consumer “pre-approved credit” and later informing them the credit is not forthcoming is a deceptive practice. From a consumer standpoint, this is a very understandable position. Unfortunately, many lenders have come to rely on post-screen activity to maintain the ROI of their prescreen program and manage risk.
Post-screen is commonly used when the lender’s prescreen process is hosted by the credit bureaus or an outside entity that is unable to quickly and affordably make changes to credit logic in response to market changes. In these cases, the consumer is “pre-approved” based on fairly general credit criteria, then further qualified with a more comprehensive credit review internally before the loan product is issued to the consumer. (This is done because prescreening is only FCRA compliant when done by the bureaus or an authorized agent of the bureaus.)
In order to meet the new legislative requirements, lenders will need to be able to update their complete credit risk policy at their prescreen vendor, make changes to that policy as rapidly as the market changes, and maintain this policy at a reasonable price. Without these abilities, lenders will be unable to maintain the profitability of their prescreen program.