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
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.
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myFICO is the consumer division of FICO. Since its introduction 20 years ago, the FICO® Score has become a global standard for measuring credit risk in the banking, mortgage, credit card, auto and retail industries. 90 of the top 100 largest U.S. financial institutions use the FICO Score to make consumer credit decisions.