MLO Mentor is an ongoing series covering compliance best practices for mortgage loan originators (MLOs). This article gives an overview of the Fair Credit Reporting Act (FCRA). Enroll in firsttuesday’s 8-Hour NMLS CE to renew your California MLO license and learn more about fraud and abuse prevention in your practice.

FCRA Purpose and Coverage

The Fair Credit Reporting Act (FCRA) went into effect in 1971. It governs the collection, assembly and use of the consumer credit information, i.e., “the credit report.” It protects all consumers, who are specifically defined as individuals. [15 USC §1681a(c)]

In 1996, the FCRA was amended by the Consumer Credit Reporting Reform Act of 1996. The amendment created specific guidelines for consumer reporting agencies to follow when responding to consumer disputes.  Additionally, it required that creditors provide applicants with an adverse action notice when an unfavorable action is taken on an individual’s request for credit due to information found in the applicant’s credit history.

The next major change to the FCRA was in 2003, with the Fair and Accurate Credit Transactions Act of 2003, also known as the FACT Act. The FACT Act added several provisions to the FCRA, providing consumers with additional protections to combat identity theft. Notably, the FACT Act gave consumers the right to a free annual credit report from each of the three credit bureaus. For lenders, other creditors and employers using credit report information, the FACT Act created a series of “red flag rules” which set guidelines on proper responses to identity theft red flags.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) further amended the FCRA, requiring disclosure of any credit score used in making a credit decision unfavorable to the applicant.

Today, the FCRA regulates the behavior of:

  • consumer reporting agencies, defined as any entity which compiles, markets or sells consumers’ credit information [15 USC §1681a(f)]; and
  • users, defined as entities which are authorized to access consumer credit information:
    • primarily for personal, family or household purposes;
    • for employment purposes;
    • for the purposes of offering credit or insurance services to the consumer;
    • in other legitimate business uses initiated by the consumer; or
    • for government or judicial purposes. [15 USC §1681b(a)]

Specifically, the FCRA:

  • limits access to sensitive consumer credit information, and sets guidelines for providing consumer credit information;
  • limits the information which may be included in a consumer credit report;
  • creates a system of alerts and procedures to prevent identity theft;
  • creates a system which allows the consumer to review their consumer credit information and dispute inaccuracies;
  • requires disclosures be made to consumers:
    • about the use of their credit information;
    • upon making an adverse decision on a credit application based on the consumer’s credit information; [15 U.S.C. § 1681m(a)(3)(A)] and
    • upon extending credit based in part on the consumer’s credit information;
  • requires an entity to provide the consumer with a copy of any consumer credit report used to make a credit decision; and
  • guarantees consumers a free credit report each year. [15 USC §§1681 et seq.]

An applicant is to be notified when credit is denied either wholly or in part based on the information obtained from a source other than a consumer reporting agency. [15 USC § 1681m(b)(1)]

FCRA disclosure overview

For loan originator purposes, the FCRA requires the use of a few key disclosures:

  • the credit score disclosure and Notice to Home Loan Applicant [15 USC §1681g(g)];
  • the risk-based pricing disclosure [12 CFR §1022.72];
  • the credit score exception notice [12 CFR §1022.74(d)]; and
  • the adverse action notice. [15 USC §1681m(a)]

Not all these disclosures are required on all loan originations. Here’s how it breaks down:

The credit score disclosure and Notice to Home Loan Applicant are required to be disclosed to all consumers whose credit scores are used in connection with an application for a consumer-use loan secured by a one-to-four-unit residential property. The credit score disclosure and Notice to Home Loan Applicant are to be provided by the first loan originator — whether they are a broker or lender — who pulls the consumer’s credit score in connection with the application. The credit score disclosure and Notice to Home Loan Applicant is to be provided “as soon as is reasonably practicable”, but in all cases before loan consummation. [15 USC §1681g(g)(1)]

The risk-based pricing disclosure is triggered on approval, when a lender uses information in a consumer credit report to offer credit on terms materially less favorable than the most favorable terms available to a substantial portion of consumers. It must be provided no sooner than the approval of the loan, and no later than the loan consummation. Only the original lender (i.e., the person to whom the obligation is initially payable) is required to provide the risk-based pricing disclosure. [75 Federal Register 2730; 15 USC §1681m(h)(1)-(2)]

As an alternative to the risk-based pricing disclosure, lenders making loans secured by one-to-four units of residential property may provide a credit score exception notice. The contents of this notice contain the credit score disclosure and Notice to Home Loan Applicant. If the credit score exception notice is provided, it is to be provided as soon as reasonably practicable after the credit score has been obtained. The industry standard is to provide the credit score disclosure, the Notice to Home Loan Applicant and the credit score exception notice with early disclosures, i.e., within three business days of receiving the application.

Editor’s note — The laws and regulations treat the credit score exception notice as a type of risk-based pricing disclosure. However, for simplicity, we’ll treat them as distinct disclosures.

The FCRA requires use of the adverse action notice if the loan is denied based on information in a consumer credit report. Since the risk-based pricing disclosure (or its alternative, the credit score exception notice) is only required upon loan approval, the consumer will receive either the adverse action notice or the risk-based pricing disclosure (or the credit score exception notice), but not both. As we’ll discuss, the adverse action notice also requires some of the same information as the initial credit score disclosure. However, these two notices are distinct, and may not be combined. [15 USC §1681m(a); 76 FR 41596]

Next week, we’ll take a look at the content and specifics of each type of disclosure.