Consumers taking out auto, home mortgages, credit cards and other types of loans will be notified when they are offtered an interest rate that is higher than is customary due to their poor credit histories. This is under new rules issued on 12/23/09 than become effective on Jan., 1 2011.
Lenders traditionally offer borrowers rate and terms based on their credit reports, which reflects the borrowers' ability to repay the loans. This is called "risk-based pricing."
The new rules set forth by the Federal Reserve and the Federal Trade Commission entitle borrowers who receive pricing notifications to also be entitled to a free credit report to check the accuracy of their credit report.
Borrowers 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.
This notification is required when the lender - based on the borrowers' credit report - offers credit terms "that are materially less favorable" than the terms offered or provided to other consumers, the regulators said.
Lenders will not have to provide this notification if they offer borrowers a free credit score, Federal Reserve attorneys explained. A consumer must normally pay a fee - between $8-$11 - to obtain their credit scores, the attorney said. Credit reports don't contain credit scores, they said.
This provision, announced yesterday, is aimed at helping borrowers better understand the rates they are being offered on particular loans and to get more information about their credit reports.
Keith Dienstl is a member of the Financial Empowerment Network Team and Prime Financial Credit Services you can also visit Credit Repair Services for more information on Keith Dienstl.
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