DON’T IMPLEMENT YOUR RISK-BASED PRICING NOTICE WITHOUT CONSIDERING DODD-FRANK
The January 1, 2011 implementation date of the FCRA Risk-Based Pricing Notice is fast approaching. The current Risk-Based Pricing Rule gives creditors several alternative approaches to compliance (see discussion below). To avoid an expensive “re-do,” before selecting a compliance approach, creditors need to consider Dodd-Frank Act changes that will be effective in July.
Dodd-Frank Section 1100F requires creditors to include a consumer’s unique credit score in both an adverse action notice and a risk-based pricing notice when the creditor relies upon a consumer report to make its credit decision. At present, these Dodd-Frank changes must be implemented by July 21, 2011.
The current Risk-Based Pricing model form does not contemplate or accommodate inclusion of a consumer’s credit score. Thus, it appears that the Federal Reserve Board and Federal Trade Commission should quickly change the Risk-Based Pricing Rule before July 21 to reflect the new Dodd-Frank requirements. (Issuance of the Final Rule in its present form was far from “quick.” The Risk-Based Pricing law was passed in 2003, but the Rule was not finally published until January 2010.)
The Current Risk-Based Pricing Rule in a Nutshell:
Compliance required by January 1, 2011
The final Risk-Based Pricing Rule generally requires a creditor to provide a risk-based pricing notice to certain consumers when, based on information in a consumer report, the creditor grants credit for personal, family or household purposes “on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that” creditor. In other words, consumers must be notified when their credit reports have been used to set the terms (e.g., interest rate) of the credit offered to them and those terms are less favorable than terms offered by the same creditor to consumers with better credit histories.
Key Aspects of the Risk-Based Pricing Rule
Who Must Give a Notice?
• Only persons using consumer report information to establish the credit terms of an extension of credit for a personal, family or household purpose must provide the notice. The Rule does not apply to insurers, landlords or other non-lenders that use consumer reports. The Rule does not apply to commercial or business credit.
• Only persons to whom the obligation is initially payable must provide the notice. This includes automobile dealers engaging in “three-party financing” and mortgage originators engaging in “tablefunding.”
Who Gets a Notice?
• Creditors must use one of the three alternative methods provided in the Risk-Based Pricing Rule to determine which consumers must receive a risk-based pricing notice: Direct Comparison Method, Credit Score Proxy Method or Tiered Pricing Method. Credit card issuers have additional alternatives. Each one of these methods requires establishing a procedure for analyzing which consumers should be provided a notice.
• Notice is not required to be provided to guarantors, co-signers, sureties or endorsers for another consumer who applies and is approved for credit.
• Where there are co-borrowers, one notice may be sent if the co-borrowers reside at the same address. Separate notices must be sent if the co-borrowers have different addresses.
When Must a Notice Be Provided?
• Generally, notice must be provided before consummation of the transaction (in the case of open-end credit, before the first transaction is made), but not earlier than the time the decision to approve an application for, or a grant, extension, or other provision of, credit is communicated to the consumer by the person required to give the notice.
• For account reviews, notice must be provided to the consumer at the time the decision to increase the Annual Percentage Rate based on a consumer report is communicated to the consumer by the creditor, or if no notice of the increase in the APR is provided to the consumer prior to the effective date of the change (to the extent permitted by law), not later than five days after the effective date of the change in the APR.
• For automobile lenders, when a lender grants, extends or otherwise provides credit to a consumer for the purpose of financing the purchase of an automobile from a dealer or other party that is not affiliated with the lender, any requirement to provide a risk-based pricing notice is satisfied if the lender arranges to have the dealer or other party provide a notice to the consumer on its behalf and maintains reasonable policies and procedures to verify that the dealer or other party provides such notice to the consumer within the applicable time periods.
Content and Form of the Notice.
• The Risk-Based Pricing Rule lists specific requirements governing what must be included in a notice. The Agencies have provided a model form. Use of the model form is optional, but appropriate use of the model form will be deemed a “safe harbor” for purposes of complying with the risk-based pricing notice requirements.
Exceptions to Risk-Based Pricing Notice Requirements.
• Application for specific terms – a creditor is not required to provide a notice to a consumer if a consumer applies for specific material terms and the consumer is granted those terms, unless those terms were specified by the creditor using a consumer report after the consumer applied for or requested credit and after the creditor obtained the consumer report.
• Adverse Action Notice – a creditor is not required to provide a risk-based pricing notice to the consumer if the creditor provides an adverse action notice to the consumer. [Reminder: Dodd-Frank requires changes in the adverse action notice as well.]
• Prescreened solicitations – a creditor is not required to provide a notice to the consumer if the person obtains a consumer report in compliance with the prescreened list requirements in the FCRA, including making a firm offer of credit. This exception applies even if the creditor makes other firm offers of credit to other consumers on more favorable terms.
• Credit Score Exception Notices (CSEN) – There are two different types of CSEN that may be provided to consumers, depending upon the circumstances: a Mortgage CSEN (which applies to credit secured by 1-4 units of residential real property) and a Credit Score Disclosure (which applies to all other credit). Note: this exception may not be used in connection with account reviews. Based on this CSEN exception, a creditor is not required to provide a risk-based pricing notice if the creditor provides to all consumers who request credit both their credit score and a CSEN. In the case of a Mortgage CSEN, consumers must also be provided with the “Notice to Home Loan Applicant.” Model CSEN forms are available. These notices must be provided as soon as reasonably practicable after the credit score has been obtained, but in any event at or before the consummation of a closed-end loan or before the first transaction under an open-end credit plan. In the case of a Mortgage CSEN, the notice must be provided at the same time as the Notice to Home Loan Applicant.
Our Recommendation: We believe that reliance on the CSEN exception is the most efficient alternative for many creditors at this time. While it requires giving a notice to all consumers (not just to those consumers to whom credit was granted “on material terms that are materially less favorable than the most favorable material terms available to a substantial portion of consumers” of the creditor), it does not require implementing a process at this time that will be costly and likely will need to be changed when Section 1100F of Dodd Frank is implemented.
Copyright 2010 Gordon Feinblatt, LLC. DODD-FRANK SURVIVAL GUIDE is intended for informational purposes only and is not legal advice to any person, entity, or firm. The material included in DODD-FRANK SURVIVAL GUIDE is obtained from a variety of public sources. Portions of the content of this email may contain Attorney Advertising under the rules of some states. Prior results do not guarantee a similar outcome.