If a bank uses a "Beacon Score or FICO Score" to automatically decline someone, does it make it a credit scoring system and if so, what would you list for the reasons in a decline situation?
If it is not a credit scoring system is it still judgmental with a decline based on a score? What reasons should you list for a client having a low "Beacon Score: on the adverse action notice if it is not a credit scoring system. If Beacon Score is not made up of age, does that exempt it from being a credit scoring system? How do we ensure the Beacon Score is not made up of any discriminating factors or the applicant's age? Thanks

When you use a Beacon or FICO score, you should also be getting the reasons from that system. They provide you with a list of reasons which you then pass on to the customer.

These scores are not "credit scoring" for purposes of Regulation B because it doesn't meet the definition in the Reg. However, that only means that it must not consider age. The companies that provide these scores should provide you with assurances that the scores do not contain elements that could be considered discriminatory. In fact, the scores are based on information in the credit history.

Lucy, We are still a little confused! One consultant said that if you automatically declined based on the Beacon Score, you would have to send a credit scoring adverse action letter with the reasons noted that were on the bottom of the credit bureau report. But they also said that it would not be a credit scoring system that had to be revalidated unless it was based on age. Are you saying that you feel it doesn't mandate a credit scoring adverse action form at all if we use an automatic decline based on score too? Or that it just doesn't have to be revalidated since it would not be an empirically derived credit score?

Let's separate the definition of credit scoring from adverse action. The Beacon and FICO scores are not "demonstrabily and statistically sound, empirically derived credit scoring systems" (DSS,EDCSS) because they are not based on your empirical data. That standard is relaxing. But for Reg B purposes, you need to pass the credit score test IF the system considers age. The credit bureau scores, the developers assure us, do not consider age. Therefore you don't need to worry about meeting the Reg B definition. That eliminates your concerns about revalidation.

Adverse action reasons is a different matter entirely. You need to give the principal and specific reasons why you denied an application. Saying the customer scored low is not enough. Therefore, the reasons you give must be taken from the Beacon or FICO system if that score play a role in denial.

Lucy, We do now understand the difference but still need to know, should our Adverse Action form state we used a credit scoring sustem and we list the reasons at the bottome of the credit report up to four or should we use a regular adverse action form and if the reasons are not close to the model, we will type in the specific reasons in the other category?

Look at the definition of credit scoring systems in the Commentary to Reg B. It says there that credit scoring systems that are NOT empirically derived, demonstrably and statistically sound are "judgmental systems." FICO and Beacon are not DSS, EDCSS, therefore they are judgmental systems. Therefore, you would use the standard adverse action letter, listing the factors that affected the score as the reasons for denial.

------------------
The opinions expressed are mine and not those of my employer