A provision in the new financial reform law will allow consumers turned down for credit or offered less favorable terms because of their credit report or score to get a free credit score disclosure with their adverse action notice. An overlapping set of federal regulations that were finalized last year will likely broaden access to free credit scores even further when they go into effect Jan. 1, 2011.
What do the risk-based pricing rules say?
The statute generally requires a creditor to notify individual consumers anytime it uses their "consumer report" to provide them with "material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor." Those who receive a risk-based pricing notice can then check their credit report for free.
"Material terms" generally means the APR, or in the case of charge cards, the annual fee or deposit requirement, says Ed Rice, general counsel at Zoot Enterprises Inc., a provider of credit decisioning and loan origination solutions in Bozeman, Mont. The term "consumer report" includes both credit reports and credit scores, he says.
To determine whether a consumer should receive the risk-based pricing notice, issuers can directly compare the terms that different customers receive, or use one of two methods.
- Credit score proxy method -- The creditor uses a 40 percent, 60 percent score cutoff approach. "What the creditor does is it takes a sampling of its product lines and looks at what the scores are for people in the top 40 percent versus the bottom 60 percent," says Rice. The applicants with scores below the cutoff automatically get the risk-based pricing notice.
- Tiered-pricing method -- People who don't place in the top pricing tier or tiers due to their report receive a notice. For instance, when there are four tiers, anybody in the bottom three tiers gets a risk-based pricing notice.
A special exception to the notice requirement is if issuers provide a free credit score disclosure, along with other information about their score, to all applicants regardless of their creditworthiness. The score must be the one actually used by the creditor.
Rice believes card issuers will prefer the score disclosure option over having to send risk-based pricing notices. A risk-based pricing notice "tells the consumer that 'guess what, you didn't qualify for our best thing,' whatever that thing is," he says. "Nobody wants to do that, no bank wants to do that."
What the overlapping rules mean for you
The requirement under the Wall Street reform legislation will benefit people that have been penalized by their score. Creditors that use the credit score disclosure method to comply with the new risk-based pricing rules will help every applicant, regardless of their score.
Would you care to know your credit score if it didn't qualify you for the very best credit terms?
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