Fair Credit Reporting Act News
How the Fair Credit Reporting Act guarantees accuracy and fairness in credit assessment for choices for alternative lending
Tuesday, November 12, 2024 - Credit scoring has had to change as non-traditional loans--from personal loans by fintech companies to peer-to-peer lending and buy-now-pay-later services--become more common. Often catering to those with weak credit files or limited access to traditional credit, typical credit scoring models do not always reflect the creditworthiness of customers seeking these non-traditional loan options. Regulating the use of credit scores in this alternative lending environment is mostly dependent on the Fair Credit Reporting Act (FCRA), which guarantees customers obtain fair and accurate assessments when seeking non-traditional loans. The FCRA's main defense is its mandate for "reasonable procedures" to guarantee credit data utilized in scoring's correctness. To evaluate creditworthiness, non-traditional lenders can look at alternative data such as energy bills, rental payment history, and even social media activity. Although this information offers a more complete picture of a consumer's financial conduct, improper verification runs the danger of introducing mistakes. Whether traditional credit data or alternative data is used for scoring, credit bureaus and data furnishers under the FCRA must guarantee the accuracy of the material they provide. In non-traditional credit scoring, this need is absolutely essential in preventing consumers from being unfairly punished by mistakes or incorrect data.
For borrowers seeking non-traditional loans especially, the FCRA also safeguards consumers' rights to question erroneous information and credit report errors. Should an alternative lender base a lending decision on erroneous data or credit score, the FCRA enables customers to contest such information with the credit bureau. After that, the credit bureau has 30 days to look at the dispute under direction from the data furnisher, verifying or fixing the disputed information. This right to dispute helps consumers fix mistakes that could otherwise keep them from using non-traditional credit options including loans customized to credit-invisible persons, personal loans from fintech platforms, or short-term loans. Should a consumer's credit score cause their application for a non-traditional loan to be declined, the FCRA mandates the lender send an "adverse action notice." This notice tells the customer the particular reasons for the negative action, together with specifics on the credit score and information applied in the decision-making process. Offering this transparency guarantees that consumers in the non-traditional financing environment may grasp the elements affecting their creditworthiness. Furthermore, the adverse action letter offers details on how to get a free copy of the credit report applied in the decision, therefore enabling consumers to check and fix any errors possibly causing the denial.
Once annually, another FCRA clause supporting fairness in credit scoring for non-traditional loans requires equal access to free credit reports from the three main credit bureaus--Equifax, Experian, and TransUnion. Reviewing credit reports often is crucial for consumers looking at non-traditional loan choices to make sure all the information there is correct and current. Frequent review of their reports lets customers see possible mistakes or obsolete data that can compromise their credit score or qualifyability for non-traditional loans.
