I. INTRODUCTION
The Federal Reserve Board (FRB) has issued final regulations to implement the Fair Credit Reporting Act (FCRA) to incorporate new requirements to provide credit scores and credit score information with risk-based pricing notices and FCRA adverse action notices.
The regulations were issued pursuant to section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which requires disclosure of credit scores and information related to credit scores in:
1. Risk-based pricing notices if a credit score is used in setting the material terms of credit; and
2. FCRA adverse action notices if a credit score is used in making the decision.
II. RISK-BASED PRICING NOTICE
On January 15, 2010, final rules were published to implement the requirement that risk-based pricing notices include credit scores. Under those FCRA regulations, generally, a creditor must provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor. There are several exceptions to this requirement. For example, creditors are not required to provide a risk-based pricing notice if they provide a credit score exception notice to all borrowers.
Under the final regulation, the risk-based pricing notice must include certain credit score information:
1. A statement that a credit score is a number that takes into account information in a consumer report, that the consumer’s credit score was used to set the terms of credit offered, and that a credit score can change over time to reflect changes in the consumer’s credit history;
2. The credit score used in making the credit decision;
3. The range of possible credit scores under the model used to generate the credit score;
4. All of the key factors that adversely affected the credit score, which shall not exceed four factors, except that if one of the key factors is the number of inquiries made with respect to the consumer report, the number of key factors shall not exceed five;
5. The date on which the credit score was created; and
6. The name of the consumer reporting agency or other person that provided the credit score.
III. RISK-BASED PRICING NOTICE - QUESTIONS AND ANSWERS
1. Is this risk-based pricing credit score notice different from the credit score exception notice creditors may provide in lieu of a risk-based pricing notice?
Yes, for example, the credit score notice that must be provided with the risk-based pricing notice must include the key factors that affected the score. The credit score exception notice does not have to include those key factors.
2. Does a creditor who currently provides a credit score exception notice have to make any changes or add credit score information to that notice?
No. The final rule retains the exception notice in lieu of the general risk-based pricing notice. Thus, creditors choosing to provide the risk-based exception notice may continue to use the same notice and need not provide the key factors affecting the credit score. The Agencies in the Supplementary Information note that given the potential compliance costs and that the rulemaking authority will be transferred to the Bureau on July 21, 2011, the Agencies did not believe that “it is appropriate to make a substantial and fundamental change to the rules at this time.” (Emphasis added.)
3. If the credit score was not used in the decision, does the creditor have to provide the credit score?
No. The notice need only be provided if a credit score was used in setting the material terms of credit. However, examiners may question why a bank pulls credit scores if it is not for purposes of determining the price. In addition, even if the credit score was not a significant factor in setting the material terms of credit but was a factor, the creditor must provide the credit score notice.
4. Must guarantors and co-signers receive the risk-based pricing notice with the credit score (or the credit score exception notice)?
No. Lenders are not required to provide guarantors or co-signers either the risk-based pricing notice (or credit score exception notice) or the adverse action notice.
5. Should the lender provide the credit score of one applicant to another applicant, co-signer, or guarantor?
No. Under the final rule, as under the proposal, while lenders may use the credit score of a guarantor or co-signer in making a decision, they should not provide the credit score of one person (e.g., the guarantor) to another (e.g., the applicant). Thus, even if the guarantor’s score was a factor in the decision, the applicant should not receive the guarantor’s score.
6. If the applicant and any co-applicant reside at the same address, may the lender provide both credit scores in the same notice?
No. Whether the consumers have the same address or not, the lender must provide a separate notice to each consumer if a notice includes a credit score. Each separate notice that contains a credit score must contain only the credit score of the consumer to whom the notice is provided and not the credit score of the other consumer. The reason is privacy. If the notice does not include a credit score, separate envelopes are not necessary for co-applicants residing at the same address.
7. May the separate notices of joint applicants be inserted into a single envelope?
There is nothing in the final rule that prohibits a lender from inserting notices to each applicant into separate envelopes and then inserting those envelopes into a single envelope addressed to one address. The “insert” envelopes containing the notices should be addressed to the appropriate recipient.
8. What if the creditor uses more than one credit score?
Under the final rule, if the lender pulls two or more credit scores and uses one of them, e.g., the middle score, it should disclose that score. If it obtains two or more credit scores and uses multiple credit scores in setting the material terms of credit, e.g., by computing the average of all the credit scores, it must include one of these scores. The notice may, at the creditor’s option, disclose all the credit scores used.
9. Does a bank have to provide a score if the bank used a proprietary score?
Generally no, but it depends. Under the final rule:
10. Are scores that are not used to predict the likelihood of certain credit behaviors “credit scores?”
No. Scores such as insurance scores or scores used to predict the likelihood of false identify are not credit scores by definition. July 2011 ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice.
11. How many “key factors” must lenders disclose if “number of inquiries” was a factor?
It depends. If “number of inquiries” was one of the top four key factors, then the lender discloses four factors. If it was not one of the top four factors, but was a factor, then the lender discloses five key factors. Lenders should rely on the information provided by the credit score provider.
IV. MODEL FORMS
Model forms to be utilized in complying with the risk-based pricing notice requirements are appended to the final rules as appendices H-6 and H-7, and you can find them by going to the FDIC website (https://www.fdic.gov/) and searching for "Appendix H to Part 1022."
V. ADVERSE ACTION NOTICES – REGULATION B
A. Introduction
The Equal Credit Opportunity Act (ECOA) requires a creditor to notify a credit applicant when it has taken adverse action against the applicant. The ECOA adverse action requirements are implemented in the Board’s Regulation B. The Fair Credit Reporting Act (FCRA) also requires a person to provide a notice when the person takes an adverse action against a consumer based in whole or in part on information in a consumer report. Certain model notices in Regulation B include the content required by both the ECOA and the FCRA adverse action provisions, so that creditors can use the model notices to comply with the adverse action requirements of both statutes.
The Dodd-Frank Act amended the FCRA to require creditors to disclose on FCRA adverse action notices a credit score used in taking any adverse action and information relating to that score. The FRB has amended these model notices in Regulation B to include the disclosure of credit scores and related information if a credit score is used in taking adverse action.
The Board has adopted model adverse action notices under Regulation B to provide guidance for credit decisions based on consumer reports. While not adopted officially in Regulation B or its Commentary, the Supplementary Information to the Regulation B model forms offers additional guidance to the adverse action notice requirements, including guidance on requirements and options related to proprietary scores, multiple scores, and multiple applicants and to limitations on the transmittal of credit scores to the person to whom they are related that parallel the approach taken in the risk-based pricing credit score notice as explained above.
B. Adverse Action Notices – Questions and Answers
1. Does the credit score disclosure for adverse action notice have to be provided when a score is pulled for a reason other than credit, e.g., for purposes related to checking account opening, employment, or insurance?
Yes. The provision applies to any adverse action based in whole or in part on a credit score based on a consumer report. It is not limited to credit decisions. The question isn’t the purpose for which the score is used for a particular transaction, but whether it is used in making credit decisions. Credit scores are used in making credit decisions, even though they are also used for other purposes. However, as explained in question and answer 9 above, scores not used to make credit decisions, such as insurance scores or scores used to predict the likelihood of false identify are not credit scores by definition.
Given that the model Regulation B notice will only apply to credit decisions, it is not appropriate for non-credit adverse action notices. However, the Dodd-Frank Act only requires the information described above in the risk-based pricing credit score notices (except for the statement that the consumer’s credit score was used to set the terms of credit). In addition, the Board added optional language to the model forms that creditors may use to direct the consumer to the entity that provided the credit score for any questions about the credit score.
2. Must banks provide a Qualified score provided by ChexSystems if they use that score for purposes of deposit account opening?
Banks should check with ChexSystems. Arguably, even if these scores are “used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors” (e.g., overdraft protection or overdraft lines of credit) they may fall within the exception to the credit score rule that excludes underwriting systems that consider more than just “credit information.”
3. Must adverse action notice and credit score information be provided to consumers applying for business credit?
Yes. The FCRA adverse action and credit score notices must be provided whether the consumer has applied for consumer or business credit if the adverse action was due in whole or part to the consumer’s credit score.
4. If the loan applicant is a business, must the consumer who is a co-signer or guarantor receive an adverse action notice with the credit score information if that credit score was used in evaluating the business’s loan application?
No. Lenders are not required to provide adverse action notices to guarantors or co-signers.
5. If the loan applicant is a business, must the lender provide the FCRA adverse action notice and credit score information?
No, but if it is not clear whether the applicant is a business or consumer (e.g., in the case of a sole proprietorship, the lender should provide the notice to avoid potential violations. In addition, the lender may have to provide a notice under ECOA.
6. May a guarantor or co-signer’s credit score be disclosed in an applicant’s adverse action notice?
No. As with the risk-based pricing credit score notice, the Board believes that only the person to whom the credit score relates should receive the credit score. Thus, while an applicant must receive an adverse action notice but a guarantor or co-signer need not, the applicant should not receive the credit score of guarantors or cosigners even if their score was a factor in the adverse action.
7. Must the lender provide the Regulation B reasons for adverse action notice as well as the credit score information and key factors adversely affecting the credit score?
Lenders must still provide the Regulation B reasons for adverse action notices unless the lender is choosing instead to provide information about how to obtain the reasons for adverse action.
8. For purposes of disclosing the reasons for adverse action, may the lender refer to the credit score’s key factors if those are the reasons for the adverse action?
No. While it was suggested that the Board allow creditors to cross-reference the adverse action reasons and the key credit score factors if they were identical, the Board declined. Accordingly, the notice should contain separate lists of the reasons for the adverse action and the key factors of the credit score even if they are repetitive. Lenders who provide information about how to obtain the reasons for the adverse action notice must still include the credit score and key factors in the adverse action notice.
9. May the lender disclose the credit score information on a separate document?
No. The Board determined that providing a form with credit score information separately from an adverse action does not appear to be consistent with the legislation.
10. May lenders have to provide two credit score notices?
Yes. In the Supplementary Information, the Board states that it does not believe a creditor would comply with the FCRA adverse action notice by providing a risk-based pricing credit score exception notice or a Section 609(g) credit score notice provided to mortgage applicants on the basis that the notices provide different information and have different timing requirements than the adverse action notice. Both the Section 609(g) and the risk-based pricing credit score exception notices must be provided “as soon as reasonably practicable” (currently presumed to be within three days of application). The new provision requires that credit scores be provided with adverse action notices, which may not be sent until much later.
11. May the lender provide combined Section 609(g) and FCRA adverse action notices?
No. The Supplementary Information states that the Board does not believe a creditor would comply with the FCRA adverse action notice provisions by combining the section 609(g) notice with an adverse action notice. However, it appears that separate envelopes are not necessary so long as the timing requirements of each notice are met.
C. Model Forms
Model forms to be utilized in complying with the adverse action notices requirements are appended to the final rules as appendices C-1 to C-5 and you can find them by going to the FDIC website (https://www.fdic.gov/) and searching for “Appendix C to Part 1022.”
VI. EFFECTIVE DATES
A. Risk-Based Pricing Notice:
The effective date for the Risk-Based Pricing Notice revisions was August 15, 2011.
B. Adverse Action Notices:
The adverse action notice requirements became effective on July 21, 2011. The Agencies note that the statutory provisions are self-effectuating and must be “implemented” by the date specified in the Dodd-Frank Act (the designated transfer date, which is July 21, 2011), whether there are new rules or new model forms. However, for reasons of procedure, the Board has also said that the new Regulation B model forms become “effective” 30 days after publication in the Federal Register. While this is confusing, the bottom line is that adverse action notices must have complied by July 21, 2011.