On the heels of the Federal Reserve/FTC’s risk-based pricing rule that went into effect January 1, lenders must immediately turn their attention to the next set of regulations governing credit score disclosures. As part of the Dodd-Frank financial reform bill, Senator Mark Udall added a provision that requires credit scores and related information to accompany any risk-based pricing or adverse action notice.
These new requirements take effect on July 21, with a goal of providing additional consumer access to credit scores, along with greater transparency into the credit granting process. Since implementation details were left to regulators, on March 1, the Fed and the FTC issued two proposed regulations providing compliance guidance to lenders.
The first proposed rule addresses additions to the risk-based rule. The Udall provision requires that any lender sending a risk-based pricing notice must include the credit score used in making the credit decision, along with disclosures found in the Fair Credit Reporting Act (FCRA) section 609 (f) (1)(B)-(E):
- The credit score range of the scoring model used by the lender
- The key factors or reason codes that adversely affected the credit score, with a requirement to disclose five “reason codes” any time inquiries are a “key factor” that adversely affected the score
- The date on which the credit score was created
- The credit bureau that provided the credit score
Regulators created two new model forms to incorporate these disclosure requirements, which are an addition to the five model forms issued for the risk-based pricing rule. The new forms only apply to lenders that send risk-based pricing notices to comply with the risk based pricing rule; for lenders sending a credit score disclosure notice instead, no additional changes are necessary. You can review the new model forms by going to the end of the proposed rule.
The second proposed rule focuses on the inclusion of credit score information in certain adverse action notices. When a lender denies credit to a consumer, the adverse action notice must now include the credit score used in making the decision, along with the same FCRA information referenced above. The regulators have revised five adverse action model forms to assist lenders with compliance. These forms can also be found at the end of the proposed rule.
Regulators are currently sifting through public comments to these proposed rules. The model risk-based pricing and adverse action forms could be revised in the final rule, expected prior to the July 21 effective date.
At FICO, we are taking steps to assist clients with compliance. Our FICO® Score models and versions include five reason codes when inquiries adversely affect the score, as required by the new rules. While this requirement is sometimes referred to as the “fifth reason code,” it has not resulted in the creation of any new reason codes for the FICO Score.
In addition, we'll continue to discuss regulatory issues here on the blog, and update our non-commercial educational website, ScoreInfo.org, to help consumers understand the new score disclosures. We also invite lenders to sign up for our May 11 webinar about disclosure notices, as well as other regulatory webinars in our Best Practice Risk Management webinar series.