Starting today, lenders who deny a borrower credit or offer a higher-than-normal interest rate are required to show the borrower his credit score.
The new rule is part of an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act that passed exactly one year ago. Introduced by Sen. Mark Udall, D-Colo., it requires creditors to provide additional information in adverse action notices if a credit score was used in making a credit decision.
Udall said the credit scores to which consumers previously had access were often not the same as those lenders used to gauge an applicant's creditworthiness. Bad credit scores, of course, can mean higher interest rates and less-favorable loan terms.
Now when lenders such as banks or credit card companies use credit scores to deny credit or offer an unusually high interest rates, they must disclose not only the relevant scores to the borrowers but also what influenced how their scores were arrived at, the range of possible scores under the model used, the date the score was created and the name of the entity or person that provided the score.
"Your credit score can skew the terms of your car loan or even prevent you from being approved for a home mortgage. With such important financial decisions hanging in the balance, you ought to be able to see the score that is being used against you," Udall said. "This law adds a level of protection for American consumers while giving them access to a crucial tool to make smart choices about their finances. "
Fair Isaac and Company, or FICO, the developer of the software that generates most of the credit scores used by U.S. lenders, estimates the new provision will result in more than 500 million credit score disclosures each year. The new Consumer Financial Protection Bureau, which also officially launches today, will enforce the rule with the Federal Trade Commission and other banking regulators.
But consumer advocates fear the law may not be strong enough nor the rules clear enough for consumers to get the information they need to secure a better loan later.
"The good news is consumers will get credit scores ... when they apply and are rejected for credit," Ed Mierzwinski, director of the consumer program at the U.S. Public Interest Research Group, said. "The disappointing news is you will also not get a complete notice explaining why you paid more."
Some lenders that use a proprietary scoring system may not be required to provide that score to the consumer, and some industries, such as car financing, may fall out of the purview of the new rule altogether.
"You're going to get more credit scores, but will you get them all the time?" Mierzwinski asked.
Nessa Feddis, senior counsel at the American Bankers Association, said lenders would be required to give credit scores too many times.
"We supported giving credit scores, but our frustration is you have to provide it twice in some cases, causing unnecessary paperwork," she said.
Feddis said that when consumers apply for a mortgage, they immediately get a credit score notice upon application. Now, if consumers are denied the loan, they will get the credit score again.
"Consumers are already getting credit scores in a number of cases, but now they're going to get it more often," Feddis said. "Proprietary scores are so complicated, people are not going to understand them. Do people really care?"