Credit Score Disclosure Within Risk-Based Pricing Notification
This past January, risk-based pricing notification rules went into effect that basically require lenders to provide a notice to people when they don’t receive the most favorable interest rates on an approval for a loan and a credit bureau report was used to help make that decision. Risk-based pricing is a common practice where lenders set the terms of the loan (interest rate, credit line, etc.) based on the consumer’s risk—more often than not by the credit score.
Consumers with higher credit scores tend to receive more favorable terms compared to those with lower credit scores, which help lenders substantially lower the cost of credit.
Lenders have two options to comply with this rule:
- The Risk-Based Pricing Notice is sent to those approved applicants who (based on a credit bureau report) did not receive the best terms available to a substantial portion of their applicants for credit. The notice does not provide consumers with their credit score, but does communicate what credit bureau report was used and provides information to contact that credit reporting agency to check the accuracy of your credit report information.
- As an alternative to the Risk-Based Pricing Notice, lenders can send a Credit Score Exception notice to all approved consumers. With this notice, the credit score and credit score information is shared in the notice, along with the source of the credit bureau report and credit reporting agency contact information. Note: the top 4 factors on why the score is not higher is not required to be disclosed in the Credit Score Exception notice. I think it should be included, as this notice would then be of higher value to the consumer.
[Consumer Resource: How to Order Your Free Annual Credit Report]
The new rule being proposed by the Federal Reserve and FTC last week would require the lender to share the credit score and following credit score information in their Risk-Based Pricing Notification to approved applicants who did not receive the best terms if the score was used in setting the terms of the loan:
- 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.
In the proposed rule, the Agencies also clarified that only one credit score need be sent with the revised risk-based pricing notice in those instances where multiple credit scores are obtained or used within a credit transaction.
Interestingly, there were no new rules proposed for the Credit Score Exception notice option. I would anticipate that most lenders will use the Credit Score Exception notice to comply with the risk-based pricing notification requirements simply because it is easier to implement from an operational perspective.
While the proposals are silent on proposed mandatory compliance dates and comments on the proposals have been requested (will be due 30 days after the notices are published in the Federal Register), the Agencies believe it is important to have implementing regulations and revised disclosure forms in place by July 21, 2011. Comments will be considered before a final rule is completed.
We will keep you posted on progress.
In the end, the intent of these notifications is to improve the accuracy of credit bureau reports by making consumers aware that a credit bureau report (and credit score) was used in the credit evaluation decision. Consumers can (and should) check their credit bureau report for accuracy and correct any inaccurate information they find. Now that credit scores are being disclosed as well, it’s good news for consumers because it provides them with access to a vital piece of information that lenders use to make credit-granting and term-setting decisions.
When armed with the credit score and key score factors, you can understand where you need to focus your credit activities to increase your score over time so you can get those better loan terms in the future!
Note: The author is not a lawyer and nothing in this article should be considered legal advice or legal interpretation and should not be acted upon without specific legal advice.