Pub. 2 2011 Issue 4

winter 2011 7 providing the score. The creditor must generally disclose no more than four key factors, although in cases where the number of inquiries is a key fac- tor, the limit is five. Since the credit reporting agency is in the best posi- tion to determine those key factors, the creditor may rely on the agency’s assessment. Now that we have cov- ered the general rules, let’s move to the always thorny specifics. Specific Requirements If the creditor requests a score, but cannot obtain one due to lack of credit history, for example, the creditor is unable to disclose one and, fortunately, is not required to do so. If the creditor purchases a credit score, but does not utilize it in the decision, such score does not have to be disclosed. While a score may not be formally used, it could be informally used by the officer making the underwriting decision. If your Bank is obtaining but not using the score, save your money and avoid the risk of unintended consequences. Credit Scores Requiring Disclosure In general, credit scores that must be disclosed under this requirement are those obtained from the credit reporting agencies. Some credit scores are excluded from this requirement. Ones used in an automatic mortgage underwriting system, such as those used in secondary market loans, do not meet the definition. Likewise, many “proprietary” scores—such as those developed in house by a Bank— are exempt from the disclosures. If the creditor uses non credit information factors, such as loan-to-value, down payment, or assets of the applicant in addition to credit information to develop its own score, that score does not have to be disclosed. On the other hand, if the creditor develops its own score using only information acquired from a credit reporting agency, that proprietary score would likely be subject to disclosure. Thus, any creditor using its own proprietary credit score must intentionally design it such that it is clearly subject to disclosure or not. More than One Consumer Another complex area involves credit scores obtained for multiple consumers for one credit request. In a situation involving two or more borrowers, the general risk-based pricing notice must be provided to all borrowers, not only the borrower whose score was may have been used to set the material terms. Even when borrowers have the same address, a separate notice must be provided to each one. However, a credit score should be disclosed only to the consumer to whom the noticed is ad- dressed. Guarantors or co-signers are treated differently than co-borrowers. A guarantor or co-signer is not pro- vided a risk-based pricing notice, even if that person’s credit score was the only one used in setting the material terms. Even though most Banks will be relying on rules built into their document preparation software to generate the notices, Bank staff must be trained to clearly understand the regulatory requirement, the defini- tions of terms, how forms or screens are completed, and how the software handles unusual situations. Testing the accuracy of disclosures would serve as a quality assurance control. More than One Credit Score In some cases, a creditor may obtain multiple credit scores, such as those contained in a “merged” file. Only one must be disclosed. If the creditor used only one score to make the decision, for example the lowest score, that score is the one disclosed. When multiple scores are used in setting the terms, any one score may be disclosed, or, optionally, all may be disclosed. Bank procedures should delineate how the multiple scores are used and specify which one(s) to disclose. Conclusion In conclusion, now that institutions have had three or four months’ of activity under the new rules, it is a good time to review policies and procedures over risk-based pricing for credit decisions, including the use of credit scores, and to test some disclosures for compliance. Such a review can be used to consider any remedial action required for requests already processed and to adjust the Bank’s program going forward. n If the creditor uses non-credit information factors, such as loan-to-value, down payment, or assets of the applicant in addition to credit information to develop its own score, that score does not have to be disclosed.