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Saturday, July 23, 2011

Turned Down for a Loan? Now You Can Find Out Why

Your credit score determines the interest rate you pay for a credit card, car loan, private student loan, or a home mortgage. A low score could prevent you from getting a loan at all. But for years, this important number has been a mystery to most consumers.
Starting today, that will change.

A provision of the Dodd-Frank financial reform law that takes effect today requires lenders to provide consumers with a free credit score whenever:

They reject an application for a loan. In that case, lenders will be required to provide consumers with an “adverse action” notice that includes their credit score and explains why they were turned down.

They approve a loan but at a higher rate than the rate provided to their best customers. As in the first instance, lenders will be required to provide borrowers with a credit score and explain why they’re charging a higher rate.

Lenders must provide the score they used to make a decision about your loan. They’ll also be required to explain the factors that adversely affected your score and the range of possible scores so you’ll know where you stand.

Consumers submit about 1 billion credit applications every year and of those, about half will fall under one of those two categories, says Mark Greene, CEO of FICO, which developed the most widely used credit score.

Many borrowers who receive the notices will be surprised to learn that they didn’t qualify for a lender’s best rate, Greene says. That could encourage more consumers to shop around and take steps to improve their scores, he says.

The requirement won’t create a burden for lenders because they’ve already bought the scores from FICO or other credit score providers, Greene says. “All (lenders) are doing is sharing it with the consumer,” he says.

The requirement won’t help consumers who want to view their scores before they apply for a loan. A federal law enacted in 2003 requires the three main credit bureaus to provide consumers with a free annual copy of their credit reports, but they’re not required to include a score.

Consumers can purchase a credit score from the credit bureaus when they order their free credit reports. They can also obtain credit scores when they enroll in credit-monitoring services offered by the credit bureaus.

However, those scores aren’t necessarily the same ones lenders use, according to a report issued Tuesday by the Consumer Financial Protection Bureau. Some credit bureaus sell consumers “educational” scores that aren’t the ones used by lenders. In other cases, the score may be based on a different model than the one lenders use, the report said.

If these differences lead consumers to mistakenly believe they’re poor credit risks, they may settle for less-favorable terms than they’re eligible to receive, the report said. Conversely, a consumer who mistakenly believes he is a good credit risk could waste time and effort applying for loans he’s not qualified for, CFPB said.

More cash

A separate provision of the financial reform bill that takes effect today will double the amount of money financial institutions must make available to customers after they deposit a check.

The provision requires banks and credit unions to make a minimum of $200 available to depositors in one business day, up from the current minimum of $100. There are exceptions: Financial institutions can hold on to funds for a longer period if the check exceeds $5,000 or the customer has repeatedly overdrawn his or her account.

Nessa Feddis, senior counsel for the American Bankers Association, says most banks already exceed the new requirement. “I don’t think many consumers are going to notice” the change, she says.

But some financial institutions have expressed concern that the rule change will make it more difficult for them to identify fraudulent checks. “There’s going to be more of a risk exposure to financial institutions in general as a result of this” rule change, says Mary Dunn, general counsel for the Credit Union National Association, a trade group.

Source: USA Today

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