Photograph by Kathy De La Torre

In response to pressure from supporters of SB 1607, Fair, Isaac and Company recently opened its proverbial 'black box' and added a new section to its website that explains the various 'reason codes' that go into making a credit score. Consumers can access the information at www.fairisaac.com.

California considers 'right to know' legislation

By Sue Stone

Anyone who has recently purchased or tried to purchase a home, buy a car or apply for a loan knows that something called a credit score can help or hinder success at the lending table. A score below 500 can mean a higher interest rate or an outright rejection. A credit score of 700 or higher means lower interest rates and more credit alternatives. What most consumers don't know is how they were given the score and what, if anything, they can do about it.

The California State Assembly Banking and Finance Committee is considering SB 1607, legislation that promotes "consumers' right to know" their credit rating and what affects the individual scores. If the bill passes, California will be the first state in the nation to adopt such legislation. Heavy hitters from the California Association of Realtors (CAR), state Senate and consumer action groups are sponsoring similar federal legislation now before Congress. Banks, credit bureaus and lending agencies oppose the proposed law.

While there are many types of credit scores, the most frequently used are credit bureau risk scores developed by Fair, Isaac and Company, a San Rafael company. These scores are commonly known as FICO scores. The score tells the lender how likely an individual is to repay a loan or make payments on time. Using a mathematical model that takes five different factors into account, a three-digit score ranging from 300 to 900 is calculated and sent to a lender requesting a credit rating for someone.

The five factors that make up a credit score are: 35 percent payment history; 30 percent amount of outstanding debt; 15 percent length of credit history; 10 percent recent new applications or opened accounts; 10 percent mix of credit and types of accounts and loans.

In response to the pressure from supporters of SB 1607, Fair, Isaac and Company recently opened its proverbial "black box" and added a new section to its website that explains the various "reason codes" that go into making a credit score. Consumers can access the information at www.fairisaac.com. Though the website now offers more detailed information on the five sections, it falls short of allowing consumers to access their own individual scores for evaluation. The company intends to provide the information later this year when it joins with one of the three major credit bureaus or lending institutions.

"A major objective this year is to partner with a company that has access to the scores and can handle a large volume of customer inquiries and requests per day," said Craig Watts, public relations representative, Fair, Isaac and Company. "Our company provides the technology to generate the scores but the bureaus have the actual reports, so we are working closely with the three major players--Equifax, Experian and Trans Union--to create online reports that individual consumers can access."

Once in place, a consumer will be able to request his own credit report with an explanation of the scores and how that compares with the rest of the nation.

Supporters of SB 1607 believe that consumers who have this information will be better equipped to manage their overall credit portfolio. For instance, potential homebuyers who know that having too many credit cards, even if they have zero balances, can affect their overall score, may choose to close some before applying for a home loan.

State Sen. Liz Figueroa (D-Fremont) is leading the charge on SB 1607. "Lenders have kept consumers in the dark about credit scoring for too long," Figuaroa says. "SB 1607 will put an end to the secrecy," she said in a recent CAR newsletter.

What SB 1607 will do is require lenders to provide consumers with their specific credit scores, what credit information went into making up the score, and an explanation of how credit scores work in the loan approval process. In addition, it will compel credit reporting agencies to correct inaccurate information in a timely manner or be held liable to pay a consumer lost-opportunity costs on a loan. Last, it will provide additional legal recourse to consumers when credit reporting agencies continue to report inaccurate information after acknowledging that the information is incorrect.

Lenders now are not required to disclose credit scores to borrowers or the factors used to determine those scores. "This puts consumers at an extreme disadvantage because information that may not appear to be negative on a credit report can adversely affect a credit score," said Penny Pompei, executive vice president of the Silicon Valley Association of Realtors.

For example, shopping for a loan online at companies such as e-Loan or Lendingtree.com can affect a consumer's score because each company, from which the consumer uses to obtain a rate, requests a credit rating which in turn becomes an "inquiry" on the individual's account. The number of inquiries on an account is counted. Too many inquiries can be scored negatively.

According to the California Association of Realtors, this is counter to what potential homebuyers are advised to do--shop for the best rates. Some members of the association have speculated about the motives of the lending institutions and FICO in creating such hidden mechanisms.

Ron Gates, real estate broker at Ridge Properties in Los Gatos, advises, "Follow the money. Fair Isaac makes a lot of money off of its trademarked scoring model. Banks and lending institutions make a lot of money off of using credit reports as a means for charging more for a loan. This process has hindered potential homebuyers and consumers for too many years. The bill in the Assembly is way overdue."

In addition to the credit rating disclosure, SB 1607 includes an incentive to credit bureaus to fix reporting errors in a timely manner or face stiff penalties. According to CAR, most Realtors can relate horror stories about clients who had uncorrected errors on a credit report prevent them from closing an escrow and purchasing a home. In Silicon Valley's current market, sellers can't or won't wait the two months or more it takes for a credit bureau to correct the errors on a buyer's report so the sale can be financed. SB 1607 allows homebuyers to recover actual damages if a credit bureau or creditor doesn't correct errors in the time allowed by federal law.

For example, if a creditor takes 90 days to correct mistakes on a homebuyer's credit report, and in the meantime the interest rate on their loan increases, the credit bureau would be liable for the difference in the loan rates over the life of the loan.

"Realtors typically see themselves as problem solvers," Gates adds. "When it comes to credit reports, though, we have our hands tied. The 'black box' of privately held information does not allow us to do our job, and certainly does not allow the consumer an advantage in securing the best loan possible."

When it comes to the real estate industry, "as California goes, so goes the rest of the nation." Earlier this month, the National Association of Realtors announced its support for new legislation by Sen. Charles Schumer (D-NY) for "full, free and fair access" to credit scores for all consumers. A similar bill, the Fair Credit Full Disclosure Act (H.R. 2856) was introduced into the U.S. House of Representatives earlier in the year.

If you would like more information on credit scoring and SB 1607, visit the California Association of Realtors website at www.car.org.

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