An important new amendment to the Fair Credit Reporting Act, known as the Risk-Based Pricing Rule, went into effect on January 1, 2011. Now, lenders are required to notify a consumer when a lending decision, based on their credit score or credit report, results in credit terms that are less favorable than those offered to other borrowers. Less favorable terms may include a higher interest rate or larger down payment requirement. Notification by the lender will be in the form of a disclosure notice that is either enclosed with the credit approval package or sent separately to the consumer.
This new disclosure requirement sets out to increase the level of transparency in the lending process by giving consumers insight into how their credit terms may have been affected by their credit history. Millions of consumers—whether they were approved for or denied credit—will now be provided the credit score or access to the credit report used to make the lending decision.
It’s been estimated that in 2011 alone lenders in the U.S. will process more than one billion credit applications, resulting in the delivery of more than 500 million Risk-Based Pricing notices! And while the Risk-Based Pricing Rule allows lenders to choose the disclosure method —providing the credit score or access to the credit report used to make the lending decision—most lenders are expected to provide the credit score. In most cases that will be a FICO® score, since FICO® scores are used by more than 90% of lenders.
We at FICO anticipate that the information provided in these Risk-Based Pricing notices will help build increased awareness about how credit history impacts the credit terms consumers receive when applying for credit. We also look forward to seeing this awareness lead to increased consumer empowerment with the help of our free educational resources, such as myFICO.com, the FICO Forums and ScoreInfo.org, a new educational website developed by FICO that helps consumers understand:
- these new consumer lending regulations
- how to interpret the credit disclosure notices
- how credit and FICO® scores are used in lending decisions
- what actions to take to improve financial health
Check out ScoreInfo.org, and see how it can be a valuable resource for people trying to get a better understanding of these new disclosures and the information they will be providing to millions of consumers this year. Come back regularly to see the new information and tools that will be added to the site in the coming months as more regulation changes are implemented.
Tell us what you think about these new Risk-Based Pricing notices as a means toward increasing consumer awareness and empowerment. As always, we value your opinions, so leave us a comment!
Author: Barry Paperno serves as community manager for the myFICO® Forums and consumer operations manager for FICO®, where he has advised consumers and businesses on FICO® credit scoring since 1995.