myFICO Blog

[#1]

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.

[#2]

Can I assume that the part that says: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 that this will include outright denial of credit? Common sense tells me it should but often creditors seems to lack that virtue. 

If that seems like a silly question forgive me.

I think if scores (FICO) are offered instead of reports this is a good thing for consumers since reports are readily available now.

[#3]

Hi Marinevietvet,

Good question!  For denials of credit, consumers will continue to receive adverse action notices that provide access to a free credit report and the top reasons why the score was not higher, but not the score used in the lending decision.  ScoreInfo.org has more to say about adverse action notices.

-Barry

[#4]

"For denials of credit, consumers will continue to receive adverse action notices that provide access to a free credit report and the top reasons why the score was not higher, but not the score used in the lending decision".

It would be nice to know what score you had for outright denial though.

Perhaps this will change some time in the near future

Thanks Barry.

[#5]

What about Auto Insurers who use FICO as a means of assessing risk / pricing? Will they also be impacted under this new regulation? Wireless Providers?

[#6]

Good questions.   If we are going down that path, will utility companies who use credit to determine if a deposit (and how  much of a deposit) will be needed have to disclose the same information?

hhmmm...things we want to know!

[#7]

Hi 8SuperMom8 and IOBA --

FICO doesn't believe insurance carriers and utilities, including wireless providers, are affected by the Risk-Based Pricing Rule. The Rule applies when credit information is checked in connection with an application for credit.

That is, while credit information may be used by insurance companies, wireless providers, utilities, landlords, etc., these businesses aren't granting "credit."  And as a result, they aren't impacted by the Risk-Based Pricing Rule.

-Barry

[#8]

I hope in the future, they will have to disclose more information -- basically be more transparent -- about how our credit report and FICO scores affect our insurance rates & utility deposits.  :)  It would be nice to know!

[#9]

What, exactly, are tiers and how do lenders develop them.

I read that score ranges determine the tiers. Is this true?

Lenders have many criteria for developing their lending practices.

If scores were a major part of decisions, why have lenders been so reluctant

to provide them. I think they have been playing with this law for over six years.