Final Regulation B Credit Score Adverse Action Notice Rule
September 9, 2011
Section 1100F of the Dodd-Frank Act amended the Fair Credit Reporting Act (“FCRA”) to require creditors to disclose a credit score and related information if the score is used in taking an adverse action based at least in part on information contained in a consumer report.
The Federal Reserve Board is amending its commentary and model notices (hereafter, “Amendment”) under Regulation B (Equal Credit Opportunity Act or “ECOA”) to incorporate these changes. (See the related CBA Regulatory Compliance Bulletin regarding the new credit score notice addition to the risk-based pricing notice, published contemporaneously with this Bulletin).
The Amendment provides that if the credit score was a factor in the adverse action decision, even if it was not a significant factor, the revised notice requirement applies. In addition to the consumer’s numerical score, the notice must also include: the range of possible scores under the model used; up to four key factors that adversely affected the consumer’s credit score (or up to five factors if the number of inquiries made with respect to that consumer report is a key factor); the date that the credit score was created; and the name of the person or entity that provided the credit score.
The Board offers essentially the same guidance on proprietary scores that it provided with its Regulation V (Fair Credit Reporting) amendment, which adds the credit score notice to the FCRA risk-based pricing notice. The definition of a credit score is the FCRA definition: section 609(f)(2)(A) of FCRA defines a credit score to mean: “a numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors . . ..” Certain proprietary scores developed by creditors or for specific creditors (in contrast to those developed by consumer reporting agencies or companies such as FICO) might not be covered by the rule if the scores are not used to predict credit behavior, such as insurance scores, scores used to predict the likelihood of false identity, and scores that incorporate factors other than credit information (such as mortgage loan-to-value ratio, the amount of down payment, or the financial assets of a consumer).
If a creditor uses only a proprietary score that is considered a credit score, the creditor should disclose the proprietary score. Thus, if a creditor uses a proprietary score that includes only information acquired from a consumer reporting agency, the proprietary score is a credit score for purposes of this revision. If a creditor uses both a proprietary score that is not a credit score and a credit score from a consumer reporting agency, the latter needs to be disclosed. If a creditor uses a credit score from a consumer reporting agency as an input to a proprietary score (that itself is not a credit score), the score from the consumer reporting agency must be disclosed. Where both a disclosable proprietary score and a credit score from a consumer reporting agency are used, the creditor may choose which credit score to disclose.
The Board notes that if a non-disclosable proprietary score is the basis of the adverse action, the creditor would still be required to disclose the reasons the consumer did not score well compared to other applicants without necessarily disclosing the score and related information.
Substitute Notices and Combined Notices
In response to questions from entities submitting comments, the Board clarified that creditors are not permitted to combine the Regulation B credit score adverse action notice with other credit score notices. One is the credit score notice required under Section 609(g) of the FCRA in connection with applications for residential real property credit. The other is the exception notice alternative to the risk-based pricing notice (for creditors that provide certain credit score disclosure notices to consumers who request credit, hereafter the “exception notice”) .
The Board notes that, as to loans secured by residential real property, the exemption notice would be provided to the consumer concurrently and combined with the Section 609(g) notice. Nevertheless, the Board notes that the Regulation B notice requirement may not be satisfied by the provision of either of those notices, nor could it be combined with the 609(g) notice. Aside from timing differences, the credit score disclosed on the exception notice or 609(g) notice might not be the credit score used in taking adverse action. For example, with the exception notice if the creditor uses a proprietary score, it is permitted to disclose either the proprietary score or a credit score it obtained from an entity regularly engaged in the business of selling credit scores, even if the latter credit score was not used in the credit decision. In contrast, if that proprietary score is deemed a credit score, the FCRA adverse action notice must contain that proprietary score.
Co-Applicants and Guarantors
While Regulation B permits an adverse action notice to be given to one applicant where there are multiple applicants (where known, to the primary applicant), the Board expects that because of privacy concerns creditors would generally provide separate FCRA adverse action notices to each applicant with only the individual’s credit score on each notice. Similarly, a guarantor or co-signer’s credit score should not be disclosed to an applicant in an adverse action notice even if the applicant received an adverse action notice based solely on information in the guarantor’s or co-signer’s consumer report.
A creditor might use more than one credit score in setting the material terms of credit, but disclosure of only one score and related information is required. When a creditor obtains multiple scores but only uses one in making the decision, the creditor must disclose the credit score that it used. Otherwise, any of the scores obtained may be disclosed, but the Board cautions that creditors should have policies and procedures to determine which of multiple credit scores was used in taking adverse action.
The Board states it believes that a person would need to disclose a credit score obtained from a consumer reporting agency as part of the adverse action notice even if the person used the credit score to take adverse action for a non-lending product. It reasoned that the FCRA adverse action notice is not limited to credit decisions.
The Regulation B model notices are designed to comply with the adverse action provisions of both the ECOA and the FCRA. The Board notes that a creditor may not comply with this Amendment by attaching a credit score disclosure furnished by a consumer reporting agency. This is a summary of some of the changes to the notices and to the official comments to Regulation B.
- If a credit score is used, the credit score notice must be provided regardless of whether the creditor provides a statement of specific reasons for taking the adverse action or a disclosure of the applicant’s right to the statement. (A creditor may not elect to provide the credit score disclosure only when a consumer responds with a request for a statement of specific reasons for an adverse action). This is reflected in Form C-5.
- The model forms include optional language to direct the consumer to the entity that provided the credit score (i.e., a consumer reporting agency or the creditor itself in the case of a disclosable proprietary credit score) for questions about the credit score, along with the entity’s contact information. Use or non-use of the optional language does not affect the safe harbor provided under Regulation B and the ECOA.
- Comment 9(b)(2)-9 is amended to incorporate the credit score notice, and it also clarifies that disclosing the key factors that adversely affected the consumer’s credit score does not satisfy the ECOA requirement to disclose specific reasons for the adverse action. In its preamble to the Rule, the Board states its belief that providing separate lists that distinguish factors that adversely affected the credit score from reasons for the adverse action determination would be useful to consumers.
- Conforming changes are made to paragraph 2 of Appendix C.
- A creditor may at its option include in the notice that no credit score was available from a consumer reporting agency, but the credit report notice applies only if a creditor uses a credit score in taking adverse action.
- The Board acknowledges that a consumer reporting agency might not provide the key factors that adversely affect the consumer’s credit score needed to be disclosed, but offers no guidance on how to comply.
- Model Form C-3 is used to clarify the differences between a proprietary score and a credit score obtained from a consumer reporting agency. A creditor may amend the form as needed, for example to reflect that the application was processed by a system that assigns a numerical value to the various factors the creditor considers rather than a credit scoring system.
The Amendment was effective as of August 15, 2011.
- See Section 222.74(d), (e), and (f) of the Board’s Regulation V (Fair Credit Reporting). This is also discussed in CBA’s Regulatory Compliance Bulletin published together with this Bulletin.
The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.
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