When to Include a Credit Score on Adverse Action Notices
We made it through NAFCU’s Regulatory Compliance School, friends! It was an eventful week!
As you can guess, this is an exciting blog about Adverse Action Notices…. specifically credit scores on adverse action notices.
As discussed in a previous blog, the Fair Credit Reporting Act (FCRA)/Regulation V and the Equal Credit Opportunity Act (ECOA)/Regulation B require credit unions to provide adverse action notices to members when adverse action has been taken with respect to an application. Specifically, the FCRA requires adverse action notices to include the member’s credit score if one was used in making the decision to take adverse action against the member. This often leads to a question that involves a bit of digging and nuance… When exactly is the credit score required?
General Rules
Reg B requires disclosure of the principal reasons for denying or taking other adverse action on an application for an extension of credit. Accordingly, Reg B requires credit score be included only if it is a principal reason for taking the adverse action.
In addition to the Reg B notices, the FCRA requires a credit union to disclose when it has based its decision in whole or in part on information found in a credit report. The FCRA also requires a credit union to disclose, as applicable, a credit score it used in taking adverse action along with related information, including up to four key factors that adversely affected the member's credit score (see Commentary to Reg B section 1002.9(b)(2)).
According to section 615(a)(2) of the FCRA, if the credit union takes adverse action, the credit union is required to provide a notice of adverse action, a numerical credit score “used by such person in taking any adverse action based in whole or in part on any information in a consumer report”, and certain information listed in section 609(f)(1). The credit union is also required to provide the contact information for the consumer reporting agency that furnished the report, and a notice that the member may contact the consumer reporting agency for a free copy of the report.
Credit Score Not Used to Make the Decision
Sometimes, a credit union uses information in a credit report to make a credit decision, but does not rely on the credit score itself. For example, the credit report may reveal that the member has an amazing credit score, but very high amounts of debt. If a credit union received a member’s credit score, but other aspects of the consumer report drove an adverse action decision, is the score still needed to be provided? Unfortunately, the FCRA is not entirely clear on this, and Regulation V does not address it.
In absence of guidance from the CFPB, one resource to look to is the FTC’s 40 Years of Experience with the FCRA. While the FTC’s guidance is not binding, it can be informative. The Commission used slightly differently phrasing when referring to the requirement to provide a credit score in an FCRA adverse action notice: “the party taking the adverse action must also disclose any numerical credit score that contributed to the adverse action, along with certain related information.” This wording suggest that the credit score itself must have affected the member negatively in order to be required to be disclosed. As the rule is not entirely clear, credit unions will need to make judgements based on the text of the FCRA and available guidance. A conservative approach may be to include the credit score.
Member Has No Credit Score
In some cases, a credit union may try to obtain a credit score for a member, but the member may have insufficient credit history for the consumer reporting agency to generate a credit score. The notice requirements of the FCRA only apply if a credit score has been taken into account for the credit decision. Accordingly, if the member has no credit score, it was not taken into account and is not required to be addressed. However, under Reg B, if the fact that the member has no credit score was a primary reason for the adverse action, this fact is required to be disclosed.
Multiple scores
Some credit unions may obtain multiple credit scores from consumer reporting agencies in connection with their underwriting processes. A credit union is permitted to use one or more of those scores in taking adverse action. FCRA only requires a credit union to disclose a single credit score used in taking the adverse action. However, it does not prohibit a credit union from providing multiple credit scores if they are all used in making the credit decision.
Appendix C of Reg B contains language in Forms C-1 through C-5 which may be used to direct the member to the entity that provided the credit score for any questions about the credit score, along with the entity's contact information. There is no prohibition against providing the contact information for more than one consumer reporting agency that provided a credit score.
