Risk-Based Pricing Notices

by Timothy Raty, DocuTech Compliance Specialist

On December 22, 2009 the Federal Reserve and the Federal Trade Commission (the “Agencies”) released new and finalized rules for risk-based pricing notices, which will become effective on January 1, 2011.

The Federal Reserve Board has implemented part of these new regulations in 12 CFR §222 et el. The Federal Trade Commission has placed the rest in 16 CFR §§640 & 698. A comprehensive analysis of these regulations was provided by the Federal Reserve Board, entitled Fair Credit Reporting Risk-Based Pricing Regulations.

A detailed analysis of these rules is beyond the scope of this article, particularly since such an analysis has been done by the Federal Reserve (at 203 pages in length). However, the following is a summary of the requirements that affect the basic disclosure (e.g. when it needs to be given, what it should contain, etc.)


What does this new regulation require?

It requires a “user” who is taking adverse action against a consumer, based on a consumer report, to disclose a risk-based pricing notice.


Who does the regulation apply to?

They apply to any person that both uses a consumer report in connection with an application for, or a grant, extension, or other provision of credit and, based on in whole or in part on this report, grants credit to that consumer which is less favorable than the most favorable terms available to a good portion of other consumers served by the creditor. This also applies if the consumer is using the credit primarily for personal, family, or household purposes.

Finally, it applies to the person to whom the obligation is initially payable (also referred to as `the original creditor’)  and the notice requirement only applies in connection with business credit.


What format should the notice contain and what should it contain?

It can be given either orally, in writing, or electronically. If written, it should be written in a clear and conspicuous form. Although compliance will automatically be ascertained by use of the Agencies’ model forms, these are only optional.

15 USCA §1681m [a] & [h][5] requires that the notice provides: 

1. A statement informing the consumer that the terms of the credit are based on information from a consumer report,
2. The name, address, and telephone number of the agency,
3. A statement that the reporting agency did not make the decision for the adverse action and is unable to provide the consumer the specific reasons for why such action was taken,
4. That the consumer can obtain a free copy of the report from the agency and that there is a 60-day period for obtaining this copy, and
5. That the consumer can dispute with the agency the accuracy of completeness of any information in the report furnished.
   

The Federal Reserve and Trade Commission also requires the notice to contain a statement that the terms offered may be less favorable than those offered to consumers with better credit histories.

When does the notice need to be given?

In general, the notice needs to be provided to the consumer after the terms of credit have been set, but before the consumer becomes contractually obligated to the transaction.

There are, however, two different rules for closed-end and open end credit:

For closed-end credit, the notice must not be provided earlier than when the consumer is told that the transaction has been approved, but it must be given before consummation of the transaction.

For open-end credit, the same rule applies, except that the notice must be provided before the first transaction is made under the plan.

Are there any exceptions to giving this notice?

There are several exceptions:

1. A creditor may provide a notice containing the credit score disclosure required by 15 USCA §1681g, along with certain additional information that provides context for the credit score disclosure, for credit secured by one-to-four units of residential real property.
2. For credit secured by property that is not one-to-four residential units, a creditor may provide a notice containing the consumer’s credit score and certain additional information that is specified in the final rules.
   
   

Under the above two exceptions, if a consumer’s credit file does not contain sufficient information to assess a credit score, a creditor may provide “an alternate narrative notice that does not include a credit score.”


Can the consumer be charged for obtaining a copy of the consumer report?

No. The notice must contain a statement that informs the consumer that he or she may obtain a copy of the consumer report from the consumer reporting agency, without charge.


How many times must the notice be given for each credit extension and what if there are two or more consumers to a transaction?

Only one notice is required per credit extension, except when provided in connection with an account review.  When two consumers are involved, a notice must be given to each individual.


Are there any model forms?

Yes. The Agencies have appended these forms to the final rules as Appendices H-1 through H-5 of the Board’s rule and Appendices B-1 through B-5 of the Commission’s rule. The quickest way to access these forms is through the Fair Credit Reporting Risk-Based Pricing Regulations, pg. 152-159.