Legal, Regulatory, and Privacy Issues

New Fed, FTC rules mean more free credit scores for consumers


Final rules issued by the Federal Reserve and Federal Trade Commission mean more credit applicants will be receiving free credit scores starting later this month.

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If you apply for a loan and are rejected or approved but at less-than-ideal terms, expect to receive a free credit score.

More consumers likely to see free credit reports
FTC 'model forms' to help consumers understand the credit scores that lenders will have to supply -- for free

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 says.

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.

ScenarioFree credit score provided?
You get a loan with the best possible rate.No
You get a loan with less than the best possible terms.Yes
Your loan application is rejected.Yes

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

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