New consumer credit score rules a ‘headache’

Federal regs require alarm companies to explain to consumers why they were turned down
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Thursday, October 13, 2011

VIENNA, Va.—Strict new federal regulations governing how companies inform consumers that their credit scores were used to reject them will result in higher labor costs and other problems for alarm companies, said a legal advisor to the Central Station Alarm Association, which is based here.

The new requirements took effect this summer, and are a part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, a response to the economic recession. They essentially mean that security companies will have to spend more time and effort explaining to consumers why their poor credit ratings led to their being turned down as customers, said attorney John Prendergast, an advisor to the CSAA.

“The unfortunate thing is, because of sharp practices on Wall Street, it’s going to translate into an additional headache for companies that are trying to take the rational approach of using credit reports and credit information in making a decision about their customers,” Prendergast, who is with the Washington, D.C.-based firm of Blooston, Mordkofsky, Dickens, Duffy & Prendergast, told Security Systems News.

He predicts alarm companies will have to hire more staff to follow the rules, or companies may no longer rely on credit scores and end up with customers who aren’t credit-worthy.
He and his associate, Sal Taillefer, explained that the new regulations apply to the adverse action notices and risk-based pricing notices that companies who use consumer credit scores in their customer-selection process already are mandated by federal law to send out.

Adverse action notices must be sent to customers rejected because of their credit rating. Risk-based pricing notices must be sent to customers if the company plans to charge them monitoring fees that are more than it charges other customers who have good credit.

Prendergast said he doesn’t believe many alarm companies use risk-based pricing. However, security companies typically turn down potential customers with poor credit.
Notifying such customers has been relatively simple up until now, Prendergast said.

“It used to be you could pretty much send a letter saying, ‘Dear Blank: We decline to take your business because your credit report reflected deficiencies. Have a nice day,’” he said.
But now, Taillefer said, the new regulations require companies to tell consumers “what the [credit score] number was, what the range was of possible scores the number could have been, and the key factors that adversely affected those scores.”

Prendergast said there are as many as nine factors that can affect credit scores, but a company must choose four. “It’s going to have to decide which four of those [nine] areas, so-called black marks, are the most significant,” he said.

Now, “someone is going to have to take the time to sit down and go over this [credit] report, pick out those four factors, and write a report to the customer saying, ‘Dear John Doe, Your score was this, out of a possible range of this, and these are the four factors in your credit report we considered.’ … It’s a very customized report now.”

He predicted company employees will “burn half an hour just to turn down a customer, or maybe longer.”

Also, he said, the new detailed explanations are likely to open companies up to more complaints or possible lawsuits from consumers who feel they were wrongly turned down.

Some companies have their own methods for evaluating the credit-worthiness of potential customers, but those are subject to the new regulations too, Taillefer said.

“If you have your own proprietary scoring system that you use, you would have to give that up,” he said. The companies would have to make public to consumers the proprietary method used to score them, he and Prendergast said.

It’s unclear what the penalties are for not following the law, Taillefer said, but he said the new Consumer Financial Protection Bureau could instigate an enforcement action.

Prendergast said he believes many smaller companies may be unaware of the law, which also is explained in detail in the summer 2011 issue of the CSAA Dispatch magazine, but that larger companies with legal staff know about it.

Stuart Dean, VP of corporate communications for Orem, Utah-based Pinnacle Security, one of the leading summer-sales-model companies, told SSN: “We’re certainly aware of the new law and we’re following the very strict new guidelines.”

He declined to go into details of how the company is doing that, saying that’s proprietary information. However, Dean added, “In following those guidelines, there’s no doubt there’s significant cost ramifications and it required us to absolutely increase our head count.”

Prendergast urged alarm companies to use the updated adverse action and risk-based pricing notice forms published by the Federal Register to send to customers. “That way,” he said, “you don’t have to worry that the report you’re generating for the turn-down customer is not going to be compliant with the new law.”