May 19, 2024

Bucks: Bad Loan Terms? Some Clues Why

Did you apply for a loan but receive a higher interest rate than you think you deserve? You’re now entitled to receive a few clues about how the lender arrived at its decision.

A federal law that went into effect at the beginning of the year requires lenders to make certain disclosures to consumers when they receive less favorable credit terms than those given to borrowers with more pristine credit histories. That may come in the form of a higher interest rate, or a smaller line of credit.

Lenders can comply with the new law, which is essentially an update to the Fair Credit Reporting Act, by sending you one of two notices, said Careen Foster, director of scores product management at FICO, the company that developed the FICO credit score, the measure used most frequently by traditional lenders to determine creditworthiness.

In one of those notices, the lender must disclose which credit report it used to judge you — most lenders use the reports created by the three major credit bureaus, Experian, Equifax and TransUnion. The lender also must provide information on how to get a free copy of the report. Before the new rule, only individuals who were denied credit were entitled to a free copy. You must request the copy within 60 days of receiving the letter — known as a “risk-based pricing notice” — though it won’t include a copy of your credit score.

Alternatively, lenders can choose to send all consumers who are approved for credit another notice — known as the credit score disclosure notice — that will include their credit score. In most cases, the score will be one of your three FICO scores.

The goal of the new rule is to help consumers more broadly understand how their credit reports are used, and encourage them to identify any errors and request to have them fixed, Ms. Foster said. “By getting consumers engaged in the process, we will help everyone make better decisions,” she added.

But starting July 21, anyone who is denied credit or who receives less favorable terms than other borrowers must receive a free credit score (if a credit score was used in the lender’s decision). The new rules sprang from the financial regulation overhaul last year.

“All of the disclosure notices will start to look pretty similar” at that point, Ms. Foster said. “This is good for consumers because they will get the credit score the lender uses, which is going to be the FICO score more often,” she added. It will also include “the factors as to why their score wasn’t higher and what they can do to improve their score or get better terms next time.”

Technically speaking, the July law requires the so-called risk-based pricing notices to include a score, in addition to information about where to get the credit report the lender used in the decision.

Lenders are already required to send a letter to consumers who are denied credit or whose existing terms were changed for the worse. The notice must outline their reasons and provide information on how to get a copy of their credit report. In July, those letters must include scores too, said Manas Mohapatra, an attorney in the division of privacy and identity protection at the Federal Trade Commission.

Some lenders, however, will continue to comply with the law by sending notices – with scores — to all borrowers who receive credit. FICO has a Web site,, which provides more information for consumers about the changes.

Have you received one of these notices in the mail? If so, was it helpful in clarifying why you received the terms you did?

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