By Tom Quinn
Among the responsibilities placed on the Consumer Financial Protection Bureau by the Dodd-Frank financial reform act of 2010 was the study of credit scores—specifically, the differences between scores purchased by consumers and those used by lenders to make credit-granting decisions. Tuesday, the CFPB followed through on this mandate, releasing a report to Congress titled “The impact of differences between consumer- and creditor purchased credit scores.”
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The CFPB’s report covers background information on credit reporting and credit scoring, as well as an overview of the different types of credit scores available to consumers and lenders. For those with a limited understanding of how this all works, this is helpful info.
It also explores the ways in which differences between consumer-purchased scores and those used by lenders could ultimately cause consumers harm, and provides insight into forthcoming CFPB research on the topic.
- The scores consumers purchase from a credit reporting agency (CRA) are likely not the same scores as those purchased and used by a lender for credit decisioning.
- Consumers could potentially be harmed if a score they purchased leaves them with a different understanding of their creditworthiness than that upon which a creditor would base a lending decision.
What does this all mean? Consumers might wind up applying for loans for which they won’t be approved, thus wasting time and money, and potentially hurting their credit scores due to the incremental credit inquiries.
Alternatively, consumers may be left with an impression that they are a higher risk than they really are (in the eyes of the lender). This could dissuade a consumer from applying for credit he/she assumes is out of reach. It could also cause people to seek higher-cost credit alternatives associated with higher credit risk profiles.
Here are some important points to remember:
- Presently, the only sure way a consumer can access a credit score used by a lender in association with an application for credit is through the mandatory regulatory provisions of credit score disclosures.
- When applying for a mortgage loan, the mortgage lender is generally required to provide applicants with a copy of the credit scores they obtained in connection with the loan application.
- If a request for credit is denied and the lender used a credit report to help make that decision, an adverse action notice is required to be provided to the declined applicant. Effective July 21st, the lender is generally required to include a credit score used by the lender in taking adverse action in that notification.
- Lenders who engage in risk-based pricing to provide credit based on a credit report are required to provide disclosure of the credit score they used to the consumer. Starting July 21st, a credit score will be included whether the lender opts to meet compliance with either a “risk-based pricing notice” of a “credit score disclosure” notice.
It will be interesting to see the variations amongst all these different scores and to understand how the industry can help the consumer make more informed credit empowerment decisions.
What’s Next. . .
To conduct its upcoming round of research, the CFPB will obtain a database of 200,000 randomly selected, depersonalized consumer records where credit report information and a variety of credit scores (FICO, VantageScore and other educational scores) from each of the CRA’s will be included. The CFPB will then analyse and quantify the variations between credit scores most frequently sold to lenders and those most frequently sold to consumers.
[Related article: How the CFPB Should “Regulate” Credit Reporting and Credit Scoring]
They will evaluate absolute comparisons between the various scores, which is most appropriate when the scores being compared are scaled the same (for example, the same branded score from credit bureau A vs. credit bureau B). Relative comparisons will also be evaluated—a relevant approach when comparing scores that have different score ranges and the scaling is different. Evaluations and comparisons will be made on the entire sample as well as for sub-groups of interest. Possible examples include consumers who are relatively new to credit or consumers who have a history of missed payments.
It will be interesting to see how the CFPB will accommodate in their findings and conclusions the different minimum scoring criteria these various models incorporate, those that result in the outcome that some consumers meet the scoring criteria with some versions, but not others.
No information was provided as to when they anticipate publication of the study results.
Tom Quinn is Credit.com’s Consumer Credit Expert. Tom shares invaluable insight to navigating the often complicated world of credit scoring, credit reporting and credit granting industry practices. Formerly with FICO (Fair Isaac), MDS (now Experian) and Citibank, Tom has more than 20 years of experience in the credit industry and is currently Vice President of Scoring at Nomis Solutions. Reach Tom at [email protected].