Credit Issues

When we talk about a credit score, the general principle is this: higher is better.  But what does a credit score actually mean?

The three main credit bureaus each have their own scoring models and ranges

• Experian (formerly TRW) has a range of 300-800
• Trans Union has a range of 300-850
• Equifax has a range of 350-800

The factors that influence the score the most are:

1)      Paying bills on time

2)      Low Balance to Limit on credit cards

3)      No collections or tax liens (or other public record court related problems)

4)      Not a large number of inquiries in the last 4 months

Since everyone has a feel about school grading; and everyone has intuitive understanding about what a certain amount of money in the bank means, the chart below puts a credit score into two perspectives:

1)      Grade

2)      Net Worth

A Website for Free Credit Reports --www.AnnualCreditReport.com

 A major new credit resource for home buyers and other consumers is set to go live Dec. 1 – www.AnnualCreditReport.com.

Not only will it provide congressionally mandated free credit reports for millions of Americans – one per year from each of the three national credit bureaus – but it will offer extensive tools to help you monitor your credit files and guard against identification theft.

Though designed to be most efficient as an online resource, AnnualCreditReport.com also will be accessible by toll-free telephone, (877) 322-8228, and by regular mail (Box 105281, Atlanta, GA 30348-5281).

Consumers anywhere should be able to visit AnnualCreditReport.com starting Dec. 1, but eligibility for free annual credit reports will be phased in over the coming 10 months on a schedule moving from the Western region to the East Coast.

Creation of AnnualCreditReport.com was required by Congress in last year's Fair and Accurate Credit Transactions Act. Among other provisions, the law ordered the three national credit bureaus – Equifax, Experian and TransUnion – to design and operate a centralized resource where consumers can obtain a free copy of each of their bureau reports once every 12 months.

The three giant, private credit firms each receive billions of bits of data on more than 200 million consumers every year from banks, credit card companies, department stores, collection agencies and local governments. The bureaus' electronic files frequently contain different data – some creditors report to one or two bureaus, some report to none – which is why Congress mandated annual free reports from each.

Visitors to AnnualCreditReport.com will first be asked to identify the state where they live. Between now and the final rollout date of Sept. 1, 2005, for the Eastern Seaboard states, only residents of eligible states will be able to proceed to the second step at the site – ordering their free reports. Temporarily ineligible consumers will be able to link to each of the credit bureaus' own Web sites, and order their reports for a fee – generally around $9.95 per report.

Visitors eligible for free reports Dec. 1 – an estimated 70 million consumers – will be asked to enter key personal identifying information – all kept secure by a barrage of anti -hacker technology – ranging from date of birth to Social Security number.

Personally speaking

Since some of the authentication questions will be highly specific – the name of your mortgage

company, for example, or the amount of your monthly mortgage payment – the three bureaus strongly recommend that you have your personal financial documents handy when you visit the site. They emphasize, however, that the authentication procedures will never require you to divulge credit card or bank account numbers.

The Facts About the FACT Act of 2003

While many provisions of the Fair and Accurate Credit Transactions Act of 2003 (the "FACT Act") impose obligations on credit reporting agencies, Federal banking agencies, the National Credit Union Administration, and the Federal Trade Commission, there are a few sections of the FACT Act that affect a lender and broker's disclosure obligations to its consumers. These disclosure obligations will become effective on December 1, 2004.

This article will give lenders and brokers the facts needed to comply with the FACT Act. But, first, here's a short summary of the FACT Act:

President Bush signed into law the FACT Act on December 4, 2003. The FACT Act amends many provisions of the Fair Credit Reporting Act ("FCRA") (15 U.S.C. 1681a) and is intended to accomplish the following:

1. To ensure that lenders make decisions on loans based on full and fair credit histories, and not on discriminatory stereotypes.
2. To improve the quality of credit information, and to protect consumers against identity theft, by:
   • Giving every consumer the right to his or her credit report free of charge every year. In this way, a consumer may determine if there has been any unauthorized activity, including any activity resulting from identity theft.
   • Preventing identity theft before it occurs by requiring merchants to leave all but the last five (5) digits of a credit card number off store receipts.
   • Creating a national system of fraud detection to make identity thieves more likely to be caught. Prior to the enactment of the Act, consumers would have to call all of their credit card companies and three of the major credit rating agencies to alert them to the crime. Now, consumers will only need to make one call to receive advice, set off a nationwide alert, and protect their credit standing.
   • Establishing a nationwide system of fraud alerts for consumers to place on their credit files. The Act requires credit reporting agencies to follow procedures to ensure that any future requests are by the true consumer, not an identity thief posing as the consumer. The Act also enables active duty military personnel to place special alerts on their files when they are deployed overseas.
   • Requiring regulators to devise a list of red flag indicators of identity theft, drawn from the patterns and practices of identity thieves. Regulators are now required to evaluate the use of these red flag indicators in their compliance examinations of financial institutions, and impose fines where disregard of red flags has resulted in losses to customers.
   • Requiring lenders and credit agencies to take action before a victim knows a crime has occurred. With oversight by bank regulators, the credit agencies will draw up a set of guidelines to identify patterns common to identity theft, and develop methods to stop identity theft before it can cause major damage.

Disclosures of Credit Scoring Information and Notice to the Home Loan Applicant

Section 212(c) of the FACT Act amends Section 609 of the FCRA by adding a subsection (g). Subsection 609(g) applies to all persons making or arranging loans and who use a consumer credit score, as defined in Subsection 609(f) of the FCRA, in connection with a consumer's application for a closed end loan or the establishment of an open end loan for a consumer purpose that is secured by one (1) to four (4) units of residential real property. Although Subsection 609(g) of the FCRA refers to these persons as "lenders", the provisions under this Subsection will apply to both lenders and brokers of residential mortgage loans. This article will collectively refer to lenders and brokers as "lenders".

Fact 1 - Under Subsection 609(g) of the FCRA, a lender must provide the following to the consumer as soon as reasonably practicable:

1. The credit score obtained from a consumer reporting agency or which was developed and used by the user of the information (the "credit scoring information"); and
2. The name, address, and telephone number of each consumer reporting agency providing a credit score that was used together with a notice entitled "Notice to the Home Loan Applicant".

Credit Scoring Information: The credit scoring information that must be provided to the consumer is set forth in Section 212(b) of the FACT Act, which amends Section 609 of the FCRA by adding a new subsection (f). The credit scoring information must include the following:

1. The current credit score of the consumer or the most recent credit score of the consumer that was previously calculated by the credit reporting agency for a purpose related to the extension of credit;
2. The range of possible credit scores under the model used;
3. All of the key factors that adversely affected the credit score of the consumer in the model used, the total number of which shall not exceed four (4), unless a key factor that adversely affects the consumer's credit score consists of the number of enquiries made with respect to a consumer report. In this case, then five (5) key factors may be listed;
4. The date on which the credit score was created; and
5. The name of the person or entity that provided the credit score or credit file upon which the credit score was created.

Notice to the Home Loan Applicant: Under Section 609(g)(1)(D) of the FCRA, as amended by Section 212(c) of the FACT Act, a Notice to the Home Loan Applicant must be provided to the consumer together with the consumer's credit scoring information. The Notice to the Home Loan Applicant must contain the following language:

"NOTICE TO THE HOME LOAN APPLICANT

'In connection with your application for a home loan, the lender must disclose to you the score that a consumer reporting agency distributed to users and the lender used in connection with your home loan, and the key factors affecting your credit scores.

'The credit score is a computer generated summary calculated at the time of the request and based on information that a consumer reporting agency or lender has on file. The scores are based on data about your credit history and payment patterns. Credit scores are important because they are used to assist the lender in determining whether you will obtain a loan. They may also be used to determine what interest rate you may be offered on the mortgage. Credit scores can change over time, depending on your conduct, how your credit history and payment patterns change, and how credit scoring technologies change.

'Because the score is based on information in your credit history, it is very important that you review the credit-related information that is being furnished to make sure it is accurate. Credit records may vary from one company to another.

'If you have questions about your credit score or the credit information that is furnished to you, contact the consumer reporting agency at the address and telephone number provided with this notice, or contact the lender, if the lender developed or generated the credit score. The consumer reporting agency plays no part in the decision to take any action on the loan application and is unable to provide you with specific reasons for the decision on a loan application.

'If you have questions concerning the terms of the loan, contact the lender."

Compliance: DSI will implement the credit scoring information form and Notice to the Home Loan Applicant that are in compliance with the FACT Act into the DocMagic loan document preparation software prior to the effective date. In the meantime, please contact DSI's Legal Department at (800) 649-1362 if you have any questions about the FACT Act.

Additional Disclosure Requirements for California and Colorado Lenders

Persons making or arranging loans in California or Colorado must comply with additional disclosure requirements, as mandated by their respective state statutes, in addition to providing the credit scoring information and Notice to the Home Loan Applicant required by the FACT Act.

Fact 2 - California: The disclosure requirements in California are identical to the disclosures required under the FACT Act, subject to two exceptions. California Civil Code Section 1785.20.2 requires lenders and brokers to provide credit scoring information and a "Notice to the Home Loan Applicant" ("Notice") to a consumer applying for a closed end or open end loan for a consumer purpose, secured by residential real property comprising not more than four (4) units, but the contents of the credit scoring information and Notice differ slightly from their counterparts under the FACT Act.

As you recall, the credit scoring information required under the FACT Act allows not more than four (4) key factors to be disclosed to the consumer except when one of the key factors includes the number of enquiries made on a consumer credit report. If a key factor includes the number of enquiries made, then up to five (5) key factors may be disclosed under the FACT Act. Under California Civil Code Section 1785.15.1(a), a lender is limited to disclosing only up to four (4) key factors.

The language of the Notice to the Home Loan Applicant required under Civil Code Section 1785.20.2 is substantially identical to the language of the Notice contained in the FACT Act. The only difference with the Notice required under Section 1785.20.2 is that the term "consumer reporting agency", as contained in the FACT Act Notice, is replaced with the term "credit bureau".

As the FACT Act does not preempt Civil Code Sections 1785.20.2 and 1785.15.1(a), a California lender of a residential home loan will need to provide the credit scoring information and the Notice to the Home Loan Applicant required under both the FACT Act and California Civil Code even though complying with California law would seem duplicative. <P>Compliance: In addition to the disclosures required under the FACT Act, DSI will implement the credit scoring information form and Notice to the Home Loan Applicant that are in compliance with Civil Code Sections 1785.20.2 and 1785.15.1(a) into the DocMagic loan document preparation software prior to the effective date for those lenders extending home loans in California.

Fact 3 - Colorado: While Colorado law does not require a separate Notice to the Home Loan Applicant, a lender making or arranging a home loan in Colorado will be required by Colorado Revised Statutes Section 5-3-106(2) to provide separate credit scoring information in addition to the credit scoring information required by the FACT Act, if a consumer requests such information. The credit scoring information required by Colorado law is identical to the information required to be disclosed to California consumers in that the number of key factors that must be disclosed is limited to four (4) key factors, as provided in Colorado Revised Statutes Section 12-14.3-104.3. This scoring information must be provided to a consumer of a residential home loan in Colorado in the form obtained from the consumer reporting agency as soon as practicable and reasonable, but not later than thirty (30) days from the date of the consumer's request.

Compliance: In addition to the disclosures required under the FACT Act, DSI will implement the credit scoring information form that is in compliance with Colorado Revised Statutes Section 5-3-106(2) and Section 12-14.3-104.3 into the DocMagic loan document preparation software prior to the effective date for those lenders extending residential home loans in Colorado. Whether or not a consumer of a Colorado home loan requests credit scoring information, a credit scoring information form that complies with Colorado law will be automatically generated.

Risk-Based Pricing Disclosure

Fact 4 - If a lender uses a consumer report in connection with an application for, or a grant, extension, or other provision of, credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of its consumers, based on all or a portion of the consumer report, lenders must comply with Section 311(a) of the Act, which adds a subsection (h) to Section 615 of the FCRA. Lenders that are subject to this provision must provide an oral, written, or electronic notice to the consumer in the form and manner required by regulations that are jointly prescribed by the Federal Communications Commission ("FCC") and Federal Reserve Board ("Board"). (As of the date of this article, the Board and FCC have not yet prescribed regulations implementing Subsection 615(h) of the FCRA.) The notice must be provided at the time of an application for, or a grant, extension, or other provision of, credit or at the time of communication of an approval of an application for, or a grant, extension, or other provision of, credit.

The notice required by Subsection 615(h) shall, at a minimum:

1. include a statement informing the consumer that the terms offered to the consumer are set based on information from a consumer report;
2. identify the consumer reporting agency furnishing the report;
3. include a statement informing the consumer that the consumer may obtain a copy of a consumer report from that consumer reporting agency without charge; and
4. include the contact information specified by that consumer reporting agency for obtaining such consumer reports (including a toll-free telephone number established by the agency in the case of a consumer reporting agency described in section 603(p)).

Disclosure under Subsection 615(h) of the FCRA, as amended by the FACT Act, is not required in the following two instances:

1. The consumer applied for specific material terms and was granted those terms, unless those terms were initially specified by the lender after the transaction was initiated by the consumer and after the lender obtained a consumer report; or
2. The lender has provided or will provide a notice to the consumer under Subsection 615(a) of the FCRA, which is a notice of adverse action taken based on information contained in a credit report.

Compliance: Once the Federal Communications Commission and Federal Reserve Board adopt regulations implementing Subsection 615(h) of the FCRA, DSI will prepare the appropriate disclosure form that complies with this new Subsection and implement it into the DocMagic loan document preparation software.

You now have all the facts necessary to comply with the FACT Act. However, DSI customers need not worry about what needs to be done in the loan closing process. DSI will revise existing forms and prepare new forms to comply with the FACT Act and California and Colorado laws before the effective date of December 1, 2004. (Are you already thinking, "I can't believe it's magic!"?) Go forth and start closing those loans!