FTC Testifies on Credit Scoring

In testimony presented today before the House Banking and Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit, the Federal Trade Commission said that it "supports the disclosure of credit scores and information regarding those scores in a context that is useful and meaningful to consumers." According to the testimony, "consumers want to obtain their credit scores and understand the process by which their scores were generated."

The Commission testimony, delivered by Peggy Twohig, Assistant Director for Financial Practices in the FTC's Bureau of Consumer Protection, summarized what the FTC learned from its July 1999 public forum on credit scoring. It also identified recent industry initiatives to provide consumers with information and addressed the Commission's position regarding disclosure of credit scoring information to consumers.

According to the testimony, "[t]he Commission believes that credit scoring and other automated systems can be of great benefit to consumers. With credit scoring, lending decisions are likely to be more objective, faster and less costly than traditional 'judgmental' decisions." Additional benefits include "greater consistency in lending decisions," as well as better quality decisions, because the models rely on factors that have been shown to be predictive of creditworthiness. Nevertheless, the increased use of credit scoring, particularly in mortgage lending decisions, has heightened consumers' concerns and their desire to obtain access to their scores. "With sufficient knowledge about the score and what it means, consumers may use that information as a valuable shopping tool."

The testimony noted that the term "credit score" may have multiple meanings. "It is important for consumers to understand that they have not been simply assigned one, universal credit score' based on information contained in their credit report," the testimony states. "[I]ndividual creditors do not necessarily rely upon the same credit score to make their individual credit decisions." Credit scores are sometimes based only on information in a credit report, and sometimes based on additional information, such as credit application data. The testimony also indicated that credit scores may be used not only to determine whether a consumer qualifies for a particular product, but also to assess what price a consumer will pay for the loan - a practice commonly known as risk-based pricing.

According to the testimony, discussions at the public forum indicated that consumers are concerned "primarily with being able to obtain their credit scores and understand the process by which their scores were generated." While pointing out that "[s]everal key industry players have acted recently to bring more transparency to credit scoring and automated underwriting systems," the testimony notes that "[t]he Commission encourages the continuation of these efforts."

The Commission vote authorizing the testimony was 5-0.

(FTC File No. P994810)