MLO Mentor: The Federal Credit Reporting Act

MLO Mentor is an ongoing series covering best practice compliance for mortgage loan originators (MLOs). This article provides an overview of the Fair Credit Reporting Act (FCRA). registered mail the first tuesday 8 hours NMLS CE to renew your California MLO license and learn more about fraud and abuse prevention in your practice.

Purpose and Scope of the FCRA

the Fair Credit Reporting Act (FCRA) came into force in 1971. It governs the collection, compilation and use of consumer credit information, ie the “credit report”. It protects all consumers who are explicitly defined as individuals. [15 USC §1681a(c)]

In 1996 the FCRA was amended by the Consumer Credit Reporting Reform Act 1996. The amendment created specific guidelines for consumer hotlines to follow when responding to consumer disputes. In addition, it was necessary for the creditors to provide the applicants with a Advice on adverse measures when an individual’s credit application is treated unfavorably based on information obtained from 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 that offer consumers additional protections to combat identity theft. Specifically, the FACT Act gave consumers the right to one free annual credit report from each of the three credit reporting agencies. For lenders, other creditors and employers using credit report information, the FACT Act has created a set of “Red Flag Rules” that provide guidelines for appropriate responses to identity theft red flags.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) further amended the FCRA, requiring disclosure of all credit scores used in making a credit decision unfavorable to the applicant.

Today, the FCRA regulates the conduct of:

  • Consumer credit reporting agencies, defined as any entity that compiles, markets, or sells consumer credit information [15 USC §1681a(f)]; and
  • Users, defined as legal entities authorized to access consumer credit information:
    • primarily for personal, family or household purposes;
    • for employment purposes;
    • to provide credit or insurance services to consumers;
    • for other legitimate business purposes initiated by the consumer; or
    • for government or judicial purposes. [15 USC §1681b(a)]

In particular, the FCRA:

  • limits 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 consumers to verify their consumer credit information and dispute inaccuracies;
  • requires disclosures to consumers:
    • about the use of their credit information;
    • in the case of a negative decision on a credit application based on the consumer’s credit information; [15 U.S.C. § 1681m(a)(3)(A)] and
    • when granting credit, partly on the basis of the consumer’s credit information;
  • requires a business to provide the consumer with a copy of a consumer credit report that will be used in making a credit decision; and
  • guarantees consumers a free credit report every year. [15 USC §§1681 et seq.]

An applicant shall be notified if a credit is denied, in whole or in part, on the basis of information obtained from a source other than a consumer credit reporting agency. [15 USC § 1681m(b)(1)]

FCRA Disclosure Summary

For lender purposes, FCRA requires the use of some key disclosures:

  • the Credit Disclosure and Notice to the Home Loan Applicant [15 USC §1681g(g)];
  • the Risk-Based Pricing Disclosure [12 CFR §1022.72];
  • the Credit Exception Notice [12 CFR §1022.74(d)]; and
  • the Advice on adverse measures. [15 USC §1681m(a)]

Not all of this information is required for all lending. This is how it breaks down:

Disclosure of creditworthiness and notice to the home loan applicant must be disclosed to all consumers whose creditworthiness is used in connection with an application for a consumer loan secured by a one to four unit residential property. The creditworthiness disclosure and notice to the home loan applicant is to be provided by the first lender, whether a broker or a lender, who retrieves the consumer’s creditworthiness in connection with the application. The creditworthiness disclosure and the notification to the applicant for a home loan should be provided “as soon as possible”, but in any case before the loan is closed. [15 USC §1681g(g)(1)]

Risk-based pricing disclosure is triggered on approval when a lender uses information in a consumer credit report to offer credit on terms that are significantly less favorable than the most favorable terms available to a significant portion of consumers. It must be presented at the earliest when the loan is approved and at the latest when the loan is completed. Only the original lender (ie the person to whom the obligation is initially payable) needs to provide risk-based pricing. [75 Federal Register 2730; 15 USC §1681m(h)(1)-(2)]

As an alternative to disclosing risk-based pricing, lenders making loans secured by one to four units of residential property may provide a creditworthiness exception notice. The content of this notice includes the creditworthiness disclosure and notice to the home loan applicant. If the creditworthiness exception notice is provided, it must be provided as soon as reasonably practicable after the creditworthiness is obtained. The industry standard is to disclose the creditworthiness disclosure, the notice to the home loan applicant, and the notice of the creditworthiness exception early, ie, within three business days of the receipt of the application.

Editor’s note – Laws and regulations treat creditworthiness exceptions as a type of risk-based pricing disclosure. However, for the sake of simplicity, we treat them as separate disclosures.

The FCRA requires the use of the Adverse Action Notice when the loan is denied based on information on a consumer credit report. Since the disclosure of risk-based pricing (or its alternative, the creditworthiness exception notice) is only required upon credit approval, the consumer will receive either the adverse action notice or the risk-based pricing disclosure (or the creditworthiness exception notice). but not both. As we will discuss, the Adverse Action Notice also requires some of the same information as the original creditworthiness disclosure. However, these two notices are different and must not be combined. [15 USC §1681m(a); 76 FR 41596]

Next week we’ll take a look at the content and specifics of each type of disclosure.

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