'Bum deal for bum credit' notification rule moves forward

A proposed federal regulation that would force lenders to tell consumers "This isn't our best deal" moved a step closer on Monday.

Now, lenders offer loans at whatever rates they like, without explanation. Consumers with the cleanest credit reports and highest credit scores tend to get the best rates.

Under the proposal, lenders that decide to offer higher-rate loans based on consumers' credit reports would have to notify consumers of that fact. The notification would have to come before the deal was done.

The change, jointly proposed by federal regulators in May 2008, is intended to:

• Make lending more transparent.
• Give consumers the chance to review and fix credit report errors.
• Let consumers take steps to improve their credit before committing to a loan.

In short, it requires lenders to say, "Hey, consumer, we're giving you a bum deal because you have bum credit."

Public comments
Monday was the final day for public comment on the proposed regulation, proposed jointly by the Federal Reserve and the Federal Trade Commission. It would amend risk-based pricing provisions of the Fair and Accurate Credit Transactions (FACT) Act of 2003. That's the act best known for giving consumers the right to see their credit reports, once a year, for free.

The new regulation would force lenders to notify consumers in some way that due to their credit scores, they're not getting the lender's best rates. For instance, according to a model form included in the regulations, a consumer who doesn't get the lender's best loan rate might get a notice saying, "The terms offered to you may be less favorable than the terms offered to consumers who have better credit histories." If the lender doesn't want to send such a notification, the regulation lets the lender opt to send the consumer a copy of the credit report that triggered the high-rate offer.

The context: Regulations galore
Federal regulators are also in the process of proposing more-sweeping credit card rules. That set of changes drew a record 56,000 public comments. This narrower proposal drew 23. The numbers were far smaller, but they generally showed the same divide: Consumers cheered the increased regulation; bankers were wary or hostile.

The way that federal regulation changes work, the government regulators propose changes, publish them, invite comment, then create final rules. That public comment period ended Monday. According to Federal Trade Commission spokesman Frank Dorman, what happens next "is really up in the air." Government staffers will evaluate the comments and at some point come out with a final rule. "It could be several months," he says.
 
Want to learn more? View the Federal Reserve's announcement of the proposal; the full text of the proposed regulation; a summary on the FTC's site; or the public comments themselves.

Here is a sampling of the comments:

"Given that credit cards are loans, the basic interest fee is enough. But when they use factors that are beyond my control for changing the terms of my account, I feel used." -- Adam Edmunds, Charlottesville, Va.

"I believe that the board did an excellent job of addressing how to effectively implement this difficult section of the FACT Act to be both beneficial to consumers and avoid excessive burden on lenders." -- Kevin Mitchell, vice president of the People's Bank of Lubbock, Texas

"This proposed amendment will be very expensive and cumbersome to comply with ... We have enough cumbersome things to do that are more beneficial to the consumers without adding another that would probably wipe out an entire rain forest." -- Jean Whigam, a vice president of the Community State Bank of Poteau, Okla.

"Overall, the notice requirements will increase loan origination costs due to system programming changes, notice creation and printing, record retention requirements and postage. Consumers are better educated than when the law was passed. They now have the ability to obtain a free annual credit report and understand their credit score is a factor in determining which interest rate they receive." -- Katherine A. D. Foster, compliance research manager, Commerce Bancshares, a $17 billion Kansas City bank holding company

A credit score number "is supposed to predict how well you will be able to pay back debt. Please tell me how a number can gaurantee life doesn't happen?" -- S. Hermannn, Mount Sinai, N.Y.

"These companies are slowly sucking the blood out of every taxpayer in the nation." -- Cheryl Smart, Tulsa, Okla.

"Please regulate the unscrupulous practices that often confuse us and increase profits of the lenders." -- William Dugger, Dayton, Ohio.

See related: Fed proposes end to credit card rate surprises