Certain consumers will soon know a lot more about their creditworthiness, and that power could create competitive and compliance headaches for lenders.
An amendment approved Monday to the Senate regulatory reform bill would give consumers free access to their credit scores if they are denied a loan, receive unfavorable terms on one, or if they are otherwise hurt because of poor credit (turned down for a job or an apartment, for example). This goes a step beyond a regulation scheduled to take effect next year, which is expected to nudge lenders to disclose scores to consumers who receive inferior loan terms.
Under the Fair Credit Reporting Act, consumers can already access their credit reports once a year free of charge. But the reports only include a consumer's payment history, not the score that lenders use in their decision-making process.
The three major credit bureaus — Experian PLC, Equifax Inc. and TransUnion LLC — and Fair Isaac Corp., the maker of FICO scores, offer consumers access to their credit scores for a fee, typically about $15. Allowing some consumers to bypass these services means, among other things, that there will be more demands on lenders to explain to borrowers why their credit score fell below the mark.
"Lenders are going to be put under a tremendous amount of pressure to disclose their score requirements, which they don't disclose today," said John Ulzheimer, head of consumer education at the lead generator Credit.com Inc.
Forcing lenders to reveal information about their credit decision-making processes could in turn undermine them competitively. "Citibank doesn't want to tell Capital One what their credit ranges are. And Capital One doesn't want Discover to know what their credit ranges are," Ulzheimer said. "They work long and hard on crafting those scoring tiers, or score requirements, and there's meaning behind them based on revenue and risk."
Nessa Feddis, a vice president and senior counsel at the American Bankers Association, said the amendment would create more confusion for lenders, which are already trying to comply with a new rule under the 2003 Fair and Accurate Credit Transactions Act that goes into effect next year. The Senate amendment "complicates compliance because there are overlapping and potentially conflicting provisions," she said.
Nevertheless, the amendment is in line with the way the industry is headed.
For example, the FACT Act rule, written by the Federal Reserve Board and the Federal Trade Commission, will require lenders to provide consumers with risk-based pricing information when they receive less-favorable loan terms.
Starting in January, creditors must provide consumers notice when, based on their credit report, they've received terms on a loan that are less favorable than terms provided to other consumers. Those consumers who receive such a notice are to be entitled to a free credit report.
However, as an alternative, lenders can give loan applicants a free credit score and information about their score. In effect, this will result in more consumers being given their credit scores, said Lisa Nelson, vice president of scores at Fair Isaac.
Sen. Mark Udall, D-Colo., who proposed the reform bill amendment, said his aim was "to level the playing field for consumers to ensure they have all the information they need to make smart decisions about their finances. This amendment will result in more people getting access to their credit score than ever before."
The Udall amendment specifies that the score that is used in the adverse decision be disclosed to the consumer by the entity that used it, whether it is a lender, insurance company, employer or landlord.
Any number of scores can be used in different credit decisions; many lenders, for example, have their own proprietary or customized scores. The most commonly used one is Fair Isaac's FICO score, which ranges from 300 to 850.
Fair Isaac does not oppose the amendment. "We actually view this as a positive," Nelson said. "We think it's important for consumers to understand this industry and how credit scores are used."
In addition to one-shot credit scores, the bureaus and Fair Isaac each offer some sort of service that lets consumers regularly view their credit reports and scores for $5 to $15 a month.
Nelson said she isn't too concerned that the amendment would put a significant dent in her company's fee income by deterring consumers from seeking their scores on the FICO website. There will be others who aren't aware of their score who will want access to it, she said.
"I can tell you the interest in credit scores is not just limited to those who have bad credit," he said. "So I don't think this is Armageddon for any company that sells credit scores."