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Question

Difficulty: HardFair Credit Reporting Act (FCRA)

An individual applies for a $250,000 whole life insurance policy. To evaluate the risk, the insurer orders a standard consumer report from a credit reporting agency. The report reveals a Chapter 7 bankruptcy that was discharged 12 years ago and a paid tax lien from 9 years ago. The applicant discovers this and objects, claiming that federal law prohibits the inclusion of such old financial records. Under the Fair Credit Reporting Act (FCRA), which of the following is correct regarding the insurer's right to use this information?

  1. The information was legally provided and may be used, because the FCRA's time restrictions on obsolete information do not apply to life insurance applications of $150,000 or more.Answer
  2. B
    The insurer is prohibited from using the data, because the FCRA strictly mandates that bankruptcies older than 10 years and paid tax liens older than 7 years must be excluded from all consumer reports.
  3. C
    The insurer may only use this historical data if it previously obtained the applicant's written authorization to order an investigative consumer report rather than a standard consumer report.
  4. D
    The insurer must issue a preliminary adverse action notice and suspend the underwriting process for 30 days to allow the applicant time to have the obsolete items removed from their file.

Answer

The information was legally provided and may be used, because the FCRA's time restrictions on obsolete information do not apply to life insurance applications of $150,000 or more.
The correct answer accurately states the FCRA exemption. While the Fair Credit Reporting Act generally restricts the reporting of bankruptcies to 10 years and other adverse information (like paid tax liens) to 7 years, these limits are completely waived when a consumer report is used to underwrite a life insurance policy with a face amount of 150,000ormore.Sincethispolicyisfor150,000 or more. Since this policy is for 250,000, the older information is legally reportable and usable by the underwriter.

Step-by-Step Solution

1
Identify the standard time limits for reporting adverse financial information under the FCRA.
Bankruptcies generally cannot be reported after 10 years, and paid tax liens cannot be reported after 7 years.
To determine if the 12-year-old bankruptcy and 9-year-old tax lien are considered obsolete under normal circumstances.
2
Evaluate the specific insurance scenario provided in the stem against FCRA statutory exemptions.
The applicant is applying for a life insurance policy with a face amount of $250,000.
To check if any exemptions to the standard obsolescence rules apply based on the transaction size.
3
Apply the FCRA life insurance exemption rule.
The FCRA explicitly exempts life insurance policies of $150,000 or more from the 7-year and 10-year reporting limits.
Because the policy is for 250,000(whichexceedsthe250,000 (which exceeds the 150,000 threshold), the credit reporting agency is legally permitted to report the older data, and the insurer is permitted to use it.

Key Concept

FCRA Exemptions for Large Life Insurance Policies
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Topics

Fair Credit Reporting Act (FCRA)

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