Statement of General Policy or Interpretation; Commentary on the Fair Credit Reporting Act

FEDERAL TRADE COMMISSION

16 CFR Part 600

Statement of General Policy or Interpretation; Commentary on the

Fair Credit Reporting Act

AGENCY: Federal Trade Commission.

ACTION: Proposed amendment to commentary.

-----------------------------------------------------------------------

SUMMARY: The Commission is seeking public comment on a proposed

amendment to its Commentary on the Fair Credit Reporting Act

(``FCRA''), 16 CFR Part 600. The proposed amendment clarifies the

Commission's interpretation that the FCRA requires the disclosure of

``risk scores'' to consumers by consumer reporting agencies. This

action responds to widespread interest in this issue, and various

inquiries the Commission and its staff have received about it.

DATES: Comments must be received on or before August 16, 1994. This

comment period will not be extended absent compelling circumstances.

ADDRESSES: Comments should be addressed to: Clarke Brinckerhoff,

Attorney, Division of Credit Practices, Federal Trade Commission,

Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Clarke Brinckerhoff, Attorney,

Division of Credit Practices, Federal Trade Commission, Washington, DC

20580, 202-326-3208.

SUPPLEMENTARY INFORMATION:

Background

During the late 1980s, the credit reporting industry developed a

product, called the ``risk score,'' to evaluate a consumer's credit

history for its clients. A risk score assesses the likelihood of a

particular adverse event, such as default or bankruptcy, based on

various factors in a consumer report. The result of this evaluation is

communicated by means of a numerical score.

Section 609 of the FCRA requires a consumer reporting agency, upon

receiving a request and proper identification from a consumer, to

``clearly and accurately disclose to the consumer . . . [t]he nature

and substance of all information (except medical information) in its

files on the consumer at the time of the request.'' A consumer

reporting agency also must disclose, in most instances, the sources of

the information in the consumer's file, as well as the recipients of

any consumer report on the consumer which the reporting agency has

furnished six months preceding the consumer's request (or two years, if

the report is for employment purposes).

On February 11, 1992, the Commission amended its FCRA Commentary to

state that, pursuant to section 609 of the FCRA, ``a risk score (or

other numerical evaluation, however named) that is reported by a

consumer reporting agency to a client to assist in evaluating a

consumer's eligibility for credit (or other permissible purposes) must

be disclosed (along with an explanation of the risk score)'' to a

consumer requesting disclosure of his or her credit file from the

consumer reporting agency. 57 FR 4935-36 (Feb. 11, 1992). It noted that

Congresswoman Leonor Sullivan, when introducing the conference report

on the bill that ultimately enacted the FCRA, had stated:

(The House conferees) stressed that the consumer should have

access to all information in any form which would be relayed to a

prospective employer, insurer or creditor in making a judgment as to

the worthiness of the individual's application for such benefits.* *

* It is not intended that the credit reporting firm should have a

free hand in excluding from the consumer's access information other

than medical information it just does not want to give him, but will

give to a client-user.

116 Cong Rec. 36572 (October 12, 1970) (emphasis added)

After the Commission amended the FCRA Commentary, several industry

representatives requested clarification of the revision. As part of

this process, some of these parties (as well as consumer

representatives and other interested parties) submitted informal

statements of their positions that appear on the Commission's public

record. Commissioners and Bureau of Consumer Protection staff have

discussed these issues with industry, consumer and state

representatives. During these discussions, the following three

principal issues arose concerning the applicability of the FCRA to risk

scores: (1) When a consumer reporting agency must disclose a risk

score; (2) what score(s) must be disclosed; and (3) what type of

explanation of the score, if any, must be provided as part of the

disclosure.

In response to these inquiries, the Commission proposes to expand

the discussion of risk scores in the FCRA Commentary as set forth

below.

Proposed Revision

The Commission proposes to delete the single sentence that

discusses ``risk scores'' in comment 7 to section 609 of the FCRA

Commentary, and to add a separate comment 12 to read as follows:

12. Risk scores. A consumer reporting agency must disclose to a

consumer in response to a consumer's disclosure request: (a) risk

scores (or other numerical evaluations, however named), calculated

at the time of the consumer's request; and (b) a brief statement

that explains what the risk score predicts, how the score may be

applied by its user, and how the consumer ranks against other

consumers under the scoring model. The agency must disclose this

information for each type of score, regardless of who developed the

score, that the agency has reported to its clients within the six

months preceding the date of the consumer's disclosure request (or

within two years, if for employment purposes).

Questions for Public Comment

The Commission requests public comment on this proposed revision to

the FCRA Commentary, and is particularly interested in receiving

comments on the questions that follow. Legal and policy analysis of

these questions would be particularly useful. The Commission

specifically requests comments based on reasoned analysis of provisions

of the FCRA that discuss the impact of the proposal on consumers and

the marketplace.

(1) What type of risk score disclosure is mandated under section

609 of the FCRA?

(2) Consumer reporting agencies generally calculate risk scores

only when they receive a request for such a score from a client. Is a

consumer entitled to a risk score disclosure if the consumer reporting

agency has never reported a score on that individual? Assuming some

prior risk score report is necessary to trigger the disclosure

requirement, does a risk score provided by a consumer reporting agency

only in the context of ``prescreening'' provide an appropriate trigger?

(3) If provision of a risk score to a client is an appropriate

trigger for the disclosure requirement, in what time frame, if any,

must that score have been provided? Are each of the proposed time

frames, which are based on sections 609(a)(3) and 611(d) of the FCRA,

proper and sensible? Are they unduly burdensome on credit bureaus or

insufficient to provide adequate disclosure to consumers?

(4) Risk scoring systems can be created by or for consumer

reporting agencies themselves (``generic models''), or they can be

created by or for one or more of the agency's clients (``custom

models''). Should the disclosure requirement for risk scores based on

generic models and custom models be the same?

(5) Credit files are constantly changing. New items are added while

older items become statutorily obsolete and are dropped. Because of the

dynamic nature of consumer reports, the risk score that is reported to

a creditor at any given time may differ from the score that would be

assigned to that report at a time shortly thereafter. Should

``historical'' risk scores (those actually provided to the agency's

clients) or ``current'' risk scores (calculated at the time of the

disclosure) be disclosed to consumers?

(6) A consumer reporting agency may produce a variety of different

risk scores, such as a bankruptcy risk score, a default risk score, or

other types of scores. Should the consumer reporting agency be required

to disclose to consumers each type of risk score it offers its clients

the option of purchasing, or only those scores that have actually been

provided about that consumer to one or more clients?

(7) What explanation, if any, should a consumer reporting agency

provide consumers about their risk scores? Should agencies discuss how

the score may be used by their clients? Should agencies specify how the

individual consumer ranks in regard to others? If so, should the

ranking be done by percentile or other technique? Should the Commentary

specify the precise form of explanation, or contain expanded

requirements as to the details of the explanation? Is the proposal to

require an explanation of the risk score too narrow or too broad? If

so, in what way should it be expanded or contracted?

(8) Is there some approach other than disclosure of actual risk

scores that would better inform consumers of the information about them

being reported by consumer reporting agencies? For example, might it be

more useful for a consumer reporting agency to provide a single score

to all consumers designed to show the likelihood of obtaining credit?

Would it be more helpful for the consumer to receive a list of the

elements on which the calculation of such a ``score'' is based, rather

than the actual score and explanation required by the proposal?

List of Subjects in 16 CFR Part 600

Credit, Trade practices.

For the reasons set out in the preamble, the Commission proposes to

amend title 16, chapter I, part 600 of the Code of Federal Regulations

as follows:

PART 600--STATEMENT OF GENERAL POLICY OR INTERPRETATIONS

1. The authority citation for part 600 continues to read as

follows:

Authority: 15 U.S.C. 1681s and 16 CFR 1.73.

2. In the appendix to part 600, the Commission proposes to amend

section 609 by revising comment 7 and adding a new comment 12, to read

as follows:

Appendix--Commentary on the Fair Credit Reporting Act

* * * * *

Section 609--Disclosures to Consumers

* * * * *

7. Ancillary Information

A consumer reporting agency is not required to disclose

information consisting of an audit trail of changes it makes in the

consumer's file, billing records, or the contents of a consumer

relations folder, if the information is not from consumer reports

and will not be used in preparing future consumer reports. Such data

is not included in the term ``information in the files'' which must

be disclosed to the consumer pursuant to this section. A consumer

reporting agency must disclose claims report information only if it

has appeared in consumer reports.

* * * * *

12. Risk Scores

A consumer reporting agency must disclose to a consumer in

response to a consumer's disclosure request: (a) Risk scores (or

other numerical evaluations, however named), calculated at the time

of the consumer's request; and (b) a brief statement that explains

what the risk score predicts, how the score may be applied by its

user, and how the consumer ranks against other consumers under the

scoring model. The agency must disclose this information for each

type of score, regardless of who developed the score, that the

agency has reported to its clients within the six months preceding

the date of the consumer's disclosure request (or within two years,

if for employment purposes).

* * * * *

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 94-14780 Filed 6-16-94; 8:45 am]

BILLING CODE 6750-01-M