All About The New Risk Based Pricing Rules

2011 marks a new era of lender transparency as a new set of disclosure rules went live at 12:00am on January 1^st.   As of January 1, 2011 any lender who adversely approves an application because of a credit report must provide the applicant with a notice that they’ve received less favorable terms as a result of information on their credit report.  This complements the Fair Credit Reporting Act’s adverse action requirements, which require lenders to send declination letters to consumers who have been denied credit based on credit data.

Details About the New Rules

The Risk Based Pricing Rules are an amendment to the Fair Credit Reporting Act (Also referred to as the FCRA or FACTA).  The amendment was part of the 2003 amendments that brought up www.annualcreditreport.com.

A “notice” is required if the consumer is adversely approved (approved but not at the best rates or terms) based on credit information.

The notice can be either a letter stating the higher rate is due to a practice called “risk based pricing” OR a letter providing the consumer with a free copy of the actual credit score used to make their decision.  The notices also must provide other data such as information on how to claim your credit reports.  And, if the score disclosure notice is provided the consumer must be told the range of the score and where they rank nationally compared to other consumers.  And, finally, if the application is “joint” then the notice must be provided to each applicant

The new rules apply only to lenders, not to insurance companies, landlords or utility providers.

The New Rules Not Perfect, But We’re Getting Closer

The new rules are a step in the right direction but don’t guarantee that consumers will get a free copy of their score.  The new rules place the score disclosure option on lender’s shoulders rather than with the credit bureaus, which is good news.  This prevents the credit bureaus from providing consumers with an “educational score” under the guise that it’s your actual credit score used by lenders.  It’s also fair to not saddle the credit bureaus with this burden considering they already have to give away free credit reports.

On July 21st Sen. Mark Udall’s FACS Act (Fair Access to Credit Scores Act) goes live and closes the loop by mandating that anyone else (insurance company, landlord, or utility company) who makes any sort of adverse decision based on a credit score must disclose that score.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

Categorised in: Credit Score, Government, Money & Identity

This post was written by John Ulzheimer