Credit Score Compliance

Lending activities are subject to various regulations and laws designed to protect the consumer. The major ones, Regulation Z (Truth in Lending Act, Regulation B (Equal Credit Opportunity Act), The Fair Housing Act (FHA) and Consumer Credit Protection Act are specifically designed to regulate the lending industry to make credit equally available to all creditworthy borrowers.

These laws prohibit discrimination against applicants based on the basis of race, color, religion, national origin, sex, marital status, age or receipt of public assistance income. Other Federal and State Regulations, Letters and Opinions also apply to lending and several apply specifically to the use of credit scores.

Monitoring Credit Scores

Every lender should consider a validation of the results of their application of credit scores at least annually. More frequent monitoring of distribution charts, repayment and loss ratios will record trends and changes to the credit scores within each score range. Most successful lending programs rely on quarterly reports to assure the scores are distributing loans as anticipated.

I recommend a validation be conducted annually, or if nonpaying loans increase beyond normal or expected limits.

Consumer Federal Protection Bureau

The Consumer Federal Protection Bureau (CFPB) is a government agency that originated as part of the Dodd/Frank Act. The agency has far reaching authority over every aspect of consumer lending. The goal of the CFPB is to provide education, rules and policy, compliance and enforcement in consumer related financial markets and protect consumers from deceptive or abusive credit practices.

The CFPB has responsibility of supervision over the development, application and marketing of credit scores.

CFPB Task Force

In 2018, an interagency task force was created to assess how consumers could be better served by banks, credit unions, credit card issuers and other financing entities to evaluate the application of credit scores on consumer lending.

The CFPB goal is to address and resolve challenges to financial inclusion and access to credit that remains unresolved for many, especially lower-income, minority and immigrant consumers. The concept of “inclusion” is of great interest and ranked first in importance by individuals and organizations interacting with the task force during its public outreach efforts that helped inform its work.

Financial Inclusion is the ability of consumers to gain access to the products and services offered by the financial system. One of the most important issues identified by the task force was the great number of consumers who did not have access to credit because they did not have a credit score or borrowers who were subject to discriminatory pricing or lending practices due to the inaccurate reporting of subscribers to the three major credit reporting agencies. The issue of Credit Invisibles or Credit Ghosts will be a topic in a future addition of Credit Score Lending.

The task force report states:

Full access to lending products and services like credit cards, auto financing, student loans and on-line purchasing systems helps consumers lead financial lives efficiently, at low cost and to their overall benefit. Consumers unable to use financial products, obtain credit or are otherwise left out of the system, can suffer as a result. These consumers pay higher costs, are blocked from wealth creation tools such as mortgage loans used to obtain home ownership or credit used to purchase durable goods and can find even the purchase of necessities more difficult. Financial exclusion can become chronic throughout one’s life.

*cfpb_taskforce-federal-consumer-financial-law_report-volume-1_2021-01.pdf 

*cfpb_taskforce-federal-consumer-financial-law_report-volume-2_2021-01.pdf 

To obtain an estimate and proposal for converting your current credit score lending program to a Hybrid scoring system contact sales@creditscorelending.com.