CFPB Study: Consumers, Lenders Not Looking at Same Credit Scores

Key Findings:

The scores consumers purchase from a credit reporting agency (CRA) are likely not the same scores as those purchased and used by a lender for credit decisioning.

Consumers could potentially be harmed if a score they purchased leaves them with a different understanding of their creditworthiness than that upon which a creditor would base a lending decision.

What does this all mean? Consumers might wind up applying for loans for which they won’t be approved, thus wasting time and money, and potentially hurting their credit scores due to the incremental credit inquiries.

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Alternatively, consumers may be left with an impression that they are a higher risk than they really are (in the eyes of the lender). This could dissuade a consumer from applying for credit he/she assumes is out of reach. It could also cause people to seek higher-cost credit alternatives associated with higher credit risk profiles.

Here are some important points to remember:

Presently, the only sure way a consumer can access a credit score used by a lender in association with an application for credit is through the mandatory regulatory provisions of credit score disclosures.
When applying for a mortgage loan, the mortgage lender is generally required to provide applicants with a copy of the credit scores they obtained in connection with the loan application.
If a request for credit is denied and the lender used a credit report to help make that decision, an adverse action notice is required to be provided to the declined applicant. Effective July 21^st, the lender is generally required to include a credit score used by the lender in taking adverse action in that notification.
Lenders who engage in risk-based pricing to provide credit based on a credit report are required to provide disclosure of the credit score they used to the consumer. Starting July 21^st, a credit score will be included whether the lender opts to meet compliance with either a “risk-based pricing notice” of a “credit score disclosure” notice.

It will be interesting to see the variations amongst all these different scores and to understand how the industry can help the consumer make more informed credit empowerment decisions.

What’s Next? (cont.) »