Consumer Financial Protection Bureau Releases Study Showing Consumers Receive Different Credit Score Information Than Lenders

Share Article

In an effort to determine if consumers are being disadvantaged by the current credit scoring system, the Consumer Financial Protection Bureau (CFPB) has conducted and released a study that shows a large number of consumers are being disadvantaged by the current system. The Lending Circle, who works with borrowers and finds the best match and best loan product for them, examines the situation.

The Lending Circle, a Division of Sunovis Financial

“When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision,” Richard Cordray, the CFPB’s director said in a statement.

Consumer credit watchdog group the Consumer Financial Protection Bureau (CFPB) has just released a study showing that as many as 20% of consumers are receiving credit scores that differ from those received by lenders from the major credit reporting agencies.

Credit scores are used to determine how likely a consumer is to default on a loan. Credit agencies that have developed the algorithms to compute these scores are facing scrutiny as the accuracy of scores is being widely questioned. Because the scores are used so broadly, small discrepancies can have far reaching impacts on consumers. Consumers may be denied credit, or offered substandard terms based on incorrect credit score data, the study concluded.

“When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision,” Richard Cordray, the CFPB’s director said in a statement.

The CFPB study was conducted using more than 200,000 random files obtained from the three major credit reporting bureaus.

Issues arise because consumers do not have access to the true scores being provided to lenders. In addition, there are 49 different types of FICO scores that can be requested by lenders, from those specifically designed for mortgages, to those for student loans, telecommunications, auto loans, and many other specific areas. By contrast, consumers can buy their FICO score from the credit agencies, however the score they receive is an educational score which may not be correlated with the scores lenders see.

Lenders typically group borrowers into one of 4 credit quality groups based on their credit scores. The CFPB study found that the different scoring models used by lenders can erroneously place borrowers in a wrong credit quality group as much as 27% of the time. Additionally, the research revealed that the educational scores received by consumers can also vary, especially for consumers who are in the upper 50% of credit scores.

The findings indicate that consumers should not rely on the educational scores they purchase from credit agencies as a basis for critical decisions regarding applying for credit. Because the consumer is not seeing the true score, there is no way to determine beforehand if the score they see is dramatically different from the one a lender will see. Consumers should always assume that the score they have access to is significantly different from the one the lender sees.

An additional concern is that consumers who underestimate their true credit score may shy away from applying for credit at all. This may mean that they delay purchasing a home, a car, or starting a business. In addition, the consumer could end up accepting less favorable loan terms than they are entitled to, which seems to be especially true for those with the highest credit scores, among the most likely to see their scores grouped incorrectly. In the case of large loans such as mortgages and small business loans, this problem can cost the borrowers tens of thousands of dollars over the life of the loan.

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Kathy Heshelow
Visit website