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More Disclosures on the Way to “Help” the Consumer

In their never ending quest to “simplify” the confusion surrounding the borrowing of money, the Fed has released their Final Rule for Risk Based Pricing Notices, as well as Adverse Action Notices. More paper work filled with CYA, legal terminology that winds up baffling people more than giving them any clarity. Let’s take a peek….

Risk Based Pricing Notices are required under the Fair Credit Reporting Act (FCRA), and now, because of provisions in the Dodd-Frank Act, they must include language that relates to credit scores IF those scores were used to determine the interest rate (and resultant APR) given the customer. Also, the language can’t simply be “the lower your credit score, the higher rate you will pay”. That would be too easy. You see…lower credit scores have statistically proven to have higher defaults (more risk), so charging those clients more makes sense. But in the world we live in, the government wants to inundate the customer with mumbo jumbo, and insists on a form that gives the following information:

  1. The credit score used in making the credit decision;
  2. The range of possible credit scores under the model used to generate the credit score;
  3. All of the key factors that adversely affected the credit score. Note that the risk-based pricing notice generally may not list more than four key factors. However, if one of the key factors is the number of inquiries made with respect to the consumer report, up to five key factors may be used.
  4. The date on which the credit score was created; and
  5. The name of the consumer reporting agency or other person that provided the credit score.

Further, if there is more than one borrower, each receives their own, personalized disclosure.

Adverse Action Notices are basically Rejection Letters. They used to say things like “your file was turned down because your credit/income/assets/appraisal does not fit the guidelines under which we approve borrowers”. Now, when credit scores are a reason for denial the language is slightly more confusing but essentially the same 5 things stated above for Risk Based Pricing. But, the really good news is that they added up to 5 different, new forms to tell the consumer where they can inquire about the score in their “consumer report” (the new term that replaces the old “credit report”).

Who gets paid for this stuff?  More paper work, more muddied explanations, all to protect the consumer? Or to protect the jobs of the bureaucrats and law makers? Am I alone in thinking that often the efforts to protect wind up frustrating instead? Simply stated, if your credit is bad because you made late payments, you can be turned down or your may be approved and be forced to pay a higher rate. Now, if your credit score is bad because of errors in the credit report, you should be directed on how to fix it. But that’s a topic for a different day.

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