On Dec. 22, 2009, more than six years since President George W. Bush signed into law the Fair and Accurate Credit Transactions Act of 2003 (FACTA), the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) announced the final rules that require creditors to provide consumers with a notice when they have been charged more for credit based on their credit score. The final rules implemented in FACTA amends the Fair Credit Reporting Act (FCRA), the primary federal law that governs the use of credit reports.
Credit score-driven risk-based pricing has been in practice in almost all sectors of consumer lending for close to two decades. To protect consumers from being overcharged for credit terms based on inaccurate information in their credit files, the FCRA has required lenders to provide consumers a notice of adverse action when the lender has denied the consumer a loan based on their credit report contents. There has been a gap in the consumer disclosures due to the creation of risk-based lending. Often, risk-based lending does not deny the consumer a loan, but approves the consumer at a higher interest rate and this model was not covered under FCRA. Consumers in this category were not provided any notice regarding their rights to check the accuracy of the credit data. In many lending models, more loans have fallen into this category of approved, but at a higher rate than the yes/no based loan underwriting of years gone by.
Congress closed that gap in the lender-provided consumer notices in 2003 with the provisions of FACTA that started requiring the use of a risk-based pricing notice; however, it’s been a long and slow bureaucratic process to get the actual rules of the 2003 law written by the FRB and the FTC finally implemented. Lenders will have time to adjust their practices for the new law as well, since it does not go into effect until Jan. 1, 2011.
The new requirement is for the lender providing credit to a consumer on less favorable terms than it provides to other consumers based on the use of credit scores and risk-based pricing, to provide the affected consumer a notice of the risk-based adverse action. This risk-based pricing notice includes their credit score, information about their credit report and score, and how to obtain a free credit report to check the accuracy of the information in their credit report.
The final rules, a 202-page document published in the Federal Register in the closing days of 2009, provides creditors with several methods for determining which consumers must receive risk-based pricing notices, copies of the model forms to use when sending the notice to consumers, and other details about compliance with the new law (a Web link to this document is provided below). There are different form models to cover most lending activities, including specific model disclosure forms for mortgage lending. To assist mortgage lenders, be sure to note the definitions starting on page 115 and the forms specific to mortgage lending starting on pages 153, and then again on 195.
Looking at the rules from a consumer’s perspective, besides being a decade-plus behind the actual need for this disclosure, there is a major flaw in the notice as well. All the model forms provide the consumer information about the free credit report they are entitled to under federal law and how to obtain that report.
While this is a great help, considering there are so many bait and switch sites out there conning consumers into getting a “free” credit report that turns out to be a hook into some program that is vastly more expensive than just buying a credit report, the real problem is that the credit report the consumer will receive after following the notice instructions is often going to be different than the credit report used to make the loan decision. The methods of compiling the data for a lender credit report vary greatly from the methods used for consumer disclosure reports and discrepancies between the two report methods can have huge impacts on credit scores.
This means that hundreds of thousands or even millions of consumers who think they have gone through their credit report as directed on the government-required disclosure and corrected any problems they discovered in the data, will find that when they apply for credit again there may be other problems on the report that were undisclosed to them previously and they may still fall into higher risk-based credit terms.
Based on the track record of how long it took this section of FACTA to actually becoming a reality that is an issue for another day likely many years from now.
The FTC/FRB official notice can be found online by clicking here, and the full 202-page Federal Register Notice with details about all aspects of the rule can be found here.
Terry W. Clemans is the executive director of the National Credit Reporting Association Inc. (NCRA).
