I. INTRODUCTION
Section 212(c) of the FACT Act, effective December 1, 2004, requires two separate disclosures that a financial institution must give to home loan applicants when the financial institution uses a credit score in connection with either closed-end or open-end consumer loans that are secured by 1-to-4 family residential real estate.
II. NOTICE TO THE HOME LOAN APPLICANT
The “Notice to the Home Loan Applicant” (a sample of a notice follows this article) must include the name, address and telephone number of the consumer reporting agency from which a credit score will be received and must be provided “as soon as reasonably practicable.” For in-person applications, the notice should be given at the time of application and for telephone or Internet applications for either a closed-end or open-end consumer loan are secured by 1-to-4 family residential real estate, the notice should be mailed within two days of receiving the application.
III. CREDIT SCORE NOTICE
The “Credit Score Notice” must be provided to an applicant for either a closed-end or open-end consumers loan secured by 1-to-4 family residential real estate, as soon as possible after a financial institution receives a credit score from a consumer reporting agency. Within two days, the notice must state: the current credit score of the applicant; the range of possible credit scores under the model used; the key factors that affected the credit score (not exceeding four factors); the date of the credit score; and the name of the person or entity that provided the credit score or the credit file upon which the score was created.
If a consumer reporting agency provides the notice to the consumer with the above-described information, the financial institution may rely upon such notice as compliance with § 212(c); however, if the consumer reporting agency does not provide the notice, the financial institution must utilize its own form (a sample of a disclosure form follows this article). Should a financial institution utilize a “proprietary” credit score that is internally created, the institution may provide a credit score from a consumer reporting agency in place of the institution’s proprietary score. If an institution utilizes an automated underwriting system, the institution may comply with the credit score disclosure requirement by disclosing a credit score furnished by a consumer reporting agency.
Although the law provides that only one disclosure per loan transaction is required, a lender should provide, until further clarified by guidance or regulation, a notice to each applicant for whom a credit score was obtained.
The law also provides that a financial institution is not required to explain information contained in a “Credit Score Notice (unless developed internally by the institution), disclose information other than the score or key factors affecting the score or disclose credit score or related information obtained by the institution after a loan has been closed.
IV. CONCLUSION
This provision of the FACT Act only applies to institutions that use a credit score in connection with either closed-end or open-end consumer loans that are secured by 1-to-4 family residential real estate. If your institution does not receive or use credit scores in connection with home loan applications, the institution does not need to comply with this section of the FACT Act.