New Fed, FTC rules mean more free credit scores for consumers
If you apply for a loan and are
rejected or approved but at less-than-ideal terms, expect to receive a free credit
|More consumers likely to see free credit reports
The next time you get turned down for a loan, or just get one with less than the best possible terms, you'll likely see a form that looks like the ones above.
The Federal Reserve and Federal Trade Commission released these sample forms as part of a final rule requiring lenders to share details of a consumer's credit score when that score causes them to be turned down for a loan or receive it without the best terms.
Click on the image above and then scroll to the end of the linked PDF file to see what these forms will look like.
That's thanks to final rules issued July 6, 2011, by the Federal Reserve
and the Federal Trade Commission, more lenders will soon begin disclosing the
credit scores used in their decisions. As a result of the rules, when a
borrower's low credit score means they are turned down for credit or given
higher interest rates, the lender must share details of that score with the
borrower. Those rules became effective July 21, 2011 -- coinciding with the
implementation of the new Consumer Financial Protection Bureau (CFPB) -- making
millions of borrowers eligible for free scores.
In January 2011, federal regulation took effect that
required lenders to notify consumers who applied for loans, but did not receive
the best terms, of their scores. That could mean, for example, that a consumer was approved for
a new credit card, but assigned an annual percentage rate (APR) that was higher
than the APR provided to an applicant with better credit. Lenders could comply
by providing all applicants with credit scores. However, banks that chose
not to give scores to all applicants weren't required to provide credit scores
to consumers who were flatly rejected (known as an "adverse action") for
credit cards or other loans. The new rules change that.
"If you deny someone credit, and it's in whole or part
based on a credit score, you're required to send the credit score," says
Rebecca Kuehn, assistant director with the division of privacy and identity
protection at the FTC.
That credit score will be provided on a disclosure form that
includes the score, the range for that score and the factors that negatively
impacted the borrower's score, such as late payments or high debt levels.
That's important information for borrowers to know, since lenders use
consumers' credit scores when deciding whether to approve or deny loans, and
what interest rates and other terms to assign to borrowers.
And the disclosures aren't limited to commercially available
credit scores, such as the FICO score or VantageScore, which can be purchased
by consumers. Many banks have their own proprietary scoring models developed
in-house, which are typically not available to consumers. Under the new rules, banks may no longer be able to keep their scoring models so secretive. "If
you develop your own score, you may have to disclose that, too," Kuehn
What's the scenario?
So who gets a free credit score? Under a combination of the old and new
rules, if the lender uses a credit score in its decision-making process, consumers
can expect one of the following three scenarios when applying for credit.
|Scenario||Free credit score provided?
|You get a loan with the best possible rate.
|You get a loan with less than the best possible terms.
|Your loan application is rejected.
In other words, this is one time where having good credit
actually could leave you out of luck. "If you apply and get the best terms
available, you may not get" a free credit score, says Kuehn.
You also won't get a score from some types of businesses
that employ their own scoring models. "We are disappointed that it does
not include free scores for customers in the telecommunication and insurance
markets," says Linda Sherry, director of national priorities for nonprofit
advocacy group Consumer Action.
"Otherwise, I think it should lead to greater awareness
of the importance of good credit," Sherry says.
See related: Free credit scores become more available to borrowers, New rules could provide millions with free credit scores, Consumer financial protections at least a year away
Updated: July 21, 2011