Consumers taking out credit cards, home mortgages, auto and other types of loans will be notified when they are offered higher interest rates because of their poor credit histories, under new rules issued yesterday.
Many lenders offer borrowers rates and terms based on their credit reports, which reflect the borrowers' ability to repay the loans. It's called "risk-based pricing."
Under the rules set by the Federal Reserve and the Federal Trade Commission, borrowers who receive the pricing notifications also will be entitled to a free credit report to check on the accuracy of their credit record. The rules take effect Jan. 1, 2011.
Consumers will be notified about the higher interest rates "after the terms of credit have been set, but before the consumer becomes contractually obligated on the credit transaction," according to the rules.
The notification kicks in when a lender -- based on the borrowers' credit report -- offers or provides credit on terms "that are materially less favorable" than the terms offered or provided to other consumers, the regulators said.
Lenders don't have to provide the notification if they offer borrowers a free credit score, Federal Reserve attorneys explained. Most consumers must pay a fee -- roughly between $8 and $11 -- to obtain their credit scores, the attorney said. Credit reports don't contain credit scores, they said.
Congress directed the Fed and the FTC to take the action under a 2003 law. The provisions announced yesterday are aimed at helping borrowers better understand the rates they are being offered on certain loans and to get more information about their credit reports.
Before the rules were adopted, the agencies said they received feedback in more than 80 filings from the public, industry associations, consumer groups and other interested parties.
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