New rules from the Federal Reserve Board (FRB) and Federal Trade Commission (FTC) will soon require that consumers who are denied credit receive free credit scores. The new rules will also apply to consumers whose existing loan terms become less favorable as a result of their credit scores.
New Rules Effective July 21
As a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, both the FRB and FTC issued the final rules to give consumers a better understanding of how their credit has affected their relationship with a lender or creditor.
Starting on July 21, banks and other institutions will be required to issue a free credit score to consumers if they use a score to:
- Set credit terms
- Deny credit
- Revoke credit
- Change existing terms
Credit scores are very often used by lenders who want to set or adjust loan terms. Since scores can change to reflect adjustments in borrowers’ financial history, lenders frequently check them to make their own adjustments. It is when these adjustments are made (or when a consumer is denied credit, a product, or a service before becoming a customer) that the agencies believe an explanation is due.
What Lenders Will Need to Disclose
The two agencies stated that in addition to credit scores, lenders will need to disclose the following information after making adjustments or turning a consumer down based on credit:
- The range of possible scores under the model used to generate the score
- The date on which the score was created
- The name of the consumer reporting agency or entity that provided the score
- Up to four key factors that hurt the credit score or up to five factors if the number of inquiries made into the consumer’s credit report is a key factor
The Fed estimates that lenders will need, on average, two business days to update their systems so that they can comply with the new requirements. Some businesses have said it will take a couple of weeks or more, however, which is why they’ve been granted a deadline of July 21.
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