There has been a lot of activity in Washington over the past couple of years to propose, revise and enact rules that increase consumer access to credit scores that lenders use when setting loan terms and making a decision on whether to grant or deny a consumer request for credit. On the whole, this is good news for consumers because it provides additional transparency around the credit evaluation process—as well as access to the actual credit score the lender used to decide whether or not to accept or deny the application.
As with most regulations, the devil is in the details and the rules are being finalized as we speak. In addition, it can also be quite confusing with all the different rules and different governmental agencies proposing and enforcing the rules—as evidenced in the proposed credit score disclosure rules released last week by the Federal Reserve and FTC. These proposed rules relate to credit score disclosure within the context of adverse action and risk-based pricing notifications. Stay with me, I’ll explain what these two terms mean in English.
I’ve received a lot of questions about who does what, by when and how it impacts all of us as consumers. Hopefully this explanation will help you navigate through this regulatory maze as it evolves!
Credit Score Disclosure Within Adverse Action Notification
Simply put, when you get denied credit the lender needs to notify you with an explanation of why you were denied and instructions on how to access a free copy of your credit report from the credit reporting agency they used to make their decision.
A bit more detailed explanation: when a lender denies an applicant’s request for credit—and if they base their adverse decision using the applicant’s credit bureau report—the lender is required to notify the consumer of that decision as governed by the Fair Credit Reporting Act (FCRA) and by the Equal Credit Opportunity Act (ECOA) and Regulation B.
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The notice provides the lender’s name and address, a statement of the action taken, a list of the principle and specific reasons for the adverse action, and the ECOA notice. It also includes: A statement that the credit report was used in taking adverse action; the name, address and telephone number of the credit reporting company; a statement that the consumer has a right to a copy of their credit report and to dispute the accuracy of information in the report; and a statement that the credit bureau did not participate in and cannot explain the credit decision.
So where’s the credit score?
Currently, the lender is not obligated to disclose any credit score within the adverse action notification. That is likely going to change this year.
The Dodd-Frank Act amends the FCRA to require lenders that use credit scores to include those scores and related information in adverse action notices provided to consumers in addition to what is already required in adverse action notices. This past week, the Federal Reserve proposed new rules to implement this provision and provides new credit score disclosure language for the adverse action notices. When a lender takes adverse action based on information contained in a consumer’s credit report, the lender must provide to the consumer:
- The credit score used in taking the adverse action.
- The range of possible scores under the model used.
- The top factors or reasons that caused the credit score to be low—which should be ranked in order of their importance (should not exceed 4 factors—unless the # of credit inquiries is a factor and is not already reflected in the top 4).
- The date on which the credit score was created.
- The name of the credit reporting agency that provided the credit score.
I am encouraged that the proposed rules include not just disclosing the credit score, but also includes the top factors on why that credit score was not higher. By providing the top factors, consumers will now have access to the main reasons why their score was not higher and can focus their activities on those areas to help increase their score over time.
Image by cannonsnapper, via Flickr