FTC Study on Credit Scores

The FTC has solicited comments on its study of the effect of credit scores on the availability of insurance and credit products. The study is mandated by the FACT Act and, like all parts of that act, must be done in short order. The study is to be conducted in cooperation with the Federal Reserve Board and HUD's Office of Fair Housing and Equal Opportunity. The study will include the impact of credit scores on a wide variety of credit products, including mortgages, auto loans, credit cards and property and hazard insurance.

The proposal asks for comments on such questions as:

How should one measure the effects of credit scores on the price of these products?
How should one measure the effects of credit scores on the availability of these products?
What system or method of decision-making should be used to compare to the use of credit scores?
What data, such as prohibited bases identified in ECOA and the Fair Housing Act, should be included in the study for evaluation?
How should the study measure a "negative or differential" treatment and how should such treatment be quantified?
How should the study consider specific factors used in the credit score and how should the study measure the specific negative impact of those factors?
How should the study determine whether there are factors that were not considered by the credit scoring system and whether the omission of those factors results in negative or differential treatment on a prohibited basis?
What resources should the study use to compile information on prohibited bases?
If specific resources of prohibited basis information are not available, what proxies should the study use?
If proxies are used, what limitations would this place on the study?
How should the study consider Census data? Should Census data be used as a proxy for other information such as race or income level?

While this study and these questions may look more suitable to work done by a PhD candidate, the study may have a significant impact on how credit scores are developed and used to make decisions. Even if you don't provide your comments to the agencies, consider the questions they ask in the context of your institution's lending activities and loan products. The questions, although posed by researchers, economists, and statisticians, go to the fundamental elements of fair lending analysis. At some point and at some level of sophistication, your fair lending program should consider the same questions.

Comments are due by August 16, 2004.

Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 7, 7/04