MLO Mentor is an ongoing series covering compliance best practices for Mortgage Loan Originators (MLOs). This article provides an overview of the Fair Credit Reporting Act (FCRA). Register for the first tuesday 8 hour CE NMLS to renew your California MLO license and learn more about preventing fraud and abuse in your practice.
FCRA Purpose and Coverage
the Fair Credit Reporting Act (FCRA) came into force in 1971. It governs the collection, assembly and use of consumer credit information, ie “the credit report”. It protects all consumers, who are specifically defined as individuals. [15 USC §1681a(c)]
In 1996, the FCRA was amended by the Consumer Credit Reporting Reform Act of 1996. The amendment created specific guidelines for consumer reporting agencies to follow when responding to consumer disputes. In addition, it required creditors to provide plaintiffs with a notice of adverse action when adverse action is taken on an individual’s credit application due to information found in the applicant’s credit history.
The next major change to the FCRA came in 2003, with the Fair and Accurate Credit Transactions Act 2003also known as FACT Act. The FACT Act added several provisions to the FCRA, providing consumers with additional protections to combat identity theft. Notably, the FACT law gave consumers the right to a free annual credit report from each of the three credit bureaus. For lenders, other creditors, and employers using information from credit reports, the FACT Act has created a series of “alert rules” that establish guidelines for appropriate responses to identity theft alerts.
The Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act further amended the FCRA, requiring disclosure of any credit score used to make a credit decision against the applicant.
Today, the FCRA regulates the behavior of:
- consumer information agencies, defined as any entity that compiles, markets or sells consumer credit information [15 USC §1681a(f)]; and
- users, defined as entities authorized to access consumer credit information:
- primarily for personal, family or household purposes;
- for employment purposes;
- for the purpose of providing consumer credit or insurance services;
- in other legitimate commercial uses initiated by the consumer; Where
- for governmental or legal purposes. [15 USC §1681b(a)]
Specifically, the FCRA:
- restricts access to sensitive consumer credit information and establishes guidelines for the provision of consumer credit information;
- limits the information that can be included in a consumer credit report;
- creates a system of alerts and procedures to prevent identity theft;
- creates a system that allows the consumer to review their consumer credit information and dispute inaccuracies;
- requires that information be communicated to consumers:
- about the use of their credit information;
- when making an adverse decision on a credit application based on consumer credit information; [15 U.S.C. § 1681m(a)(3)(A)] and
- when granting credit based in part on consumer credit information;
- requires an entity to provide the consumer with a copy of any consumer credit file used to make a credit decision; and
- guarantees consumers a free credit report every year. [15 USC §§1681 et seq.]
An applicant should be notified when credit is denied in whole or in part based on information obtained from a source other than a consumer reporting agency. [15 USC § 1681m(b)(1)]
FCRA Disclosure Overview
For loan originator purposes, the FCRA requires the use of a few key pieces of information:
- the credit rating disclosure and Notice to home loan applicant [15 USC §1681g(g)];
- the risk-based pricing disclosure [12 CFR §1022.72];
- the credit score exception notice [12 CFR §1022.74(d)]; and
- the notice of adverse action. [15 USC §1681m(a)]
Not all of these disclosures are required for all loan arrangements. Here’s how it breaks down:
Credit Score Disclosure and Notice to Home Loan Applicant must be disclosed to all consumers whose credit scores are used in connection with an application for a consumer loan secured by a residential property of one to four dwellings. Credit score disclosure and notice to the home loan applicant must be provided by the first loan originator – whether a broker or lender – who extracts the consumer’s credit score in the context of the request. Disclosure of credit rating and notice to home loan applicant must be provided “as soon as reasonably possible”, but in any event prior to consummation of the loan. [15 USC §1681g(g)(1)]
Risk-based pricing disclosure is triggered upon approval, when a lender uses information in a consumer credit report to offer credit on terms significantly less favorable than the most favorable terms available. for a substantial portion of consumers. It must be provided at the earliest on loan approval, and at the latest on loan consumption. Only the original lender (ie the person to whom the obligation is originally payable) is required to provide the risk-based pricing disclosure. [75 Federal Register 2730; 15 USC §1681m(h)(1)-(2)]
As an alternative to risk-based pricing disclosure, lenders making loans secured by one to four units of residential property can provide a credit score exception notice. The content of this notice contains the credit rating disclosure and notice to home loan applicant. If the Credit Score Exception Notice is provided, it must be provided as soon as reasonably possible after obtaining the Credit Score. The industry standard is to provide Credit Score Disclosure, Notice to Home Loan Applicant and Credit Score Exception Notice with early disclosures i.e. in three working days following receipt of the request.
Editor’s note – Laws and regulations treat the credit score exception notice as a type of risk-based pricing disclosure. However, for the sake of simplicity, we will treat them as separate disclosures.
The FCRA requires the use of the Notice of Adverse Action if the loan is denied based on information contained in a consumer credit report. Since disclosure of risk-based pricing (or its alternative, Credit Score Exception Notice) is only required upon loan approval, the consumer will receive either the adverse action, or risk-based price disclosure (or credit score exception notice), but not both. As we will see, the adverse action notice also requires some of the same information as the initial credit score disclosure. However, these two opinions are distinct and cannot be combined. [15 USC §1681m(a); 76 FR 41596]
Next week, we’ll look at the content and specifics of each type of disclosure.