I. INTRODUCTION
The Federal Reserve Board (Board) has issued a final rule that implements Section 311 of the Fair and Accurate Credit Transactions Act (FACT Act) of 2003, which amends the Fair Credit Reporting Act (FCRA). The final rule generally requires a creditor to provide a consumer with a notice when, based on the consumer’s credit report, the creditor provides credit to the consumer on less favorable terms than it provides to other consumers. Consumers who receive this “risk-based pricing” notice will be able to obtain a free credit report to check the accuracy of the report. The final rule provides creditors with several methods for determining which consumers must receive risk-based pricing notices. The final rule became effective on January 1, 2011.
Risk-based pricing is the practice of setting price or other credit terms based on the consumer’s risk of nonpayment. Creditors often use consumer report information to set or adjust credit price and terms offered. Creditors that utilize risk-based pricing typically extend more favorable terms to those consumers with good histories and less favorable terms to those with poor histories.
The final rule requires that creditors provide a risk-based pricing notice when stated requirements are met. The requirements for notification apply to credit that is primarily for personal, household, or family purposes; it does not apply to business credit. Creditors must provide a risk-based pricing notice to consumers when information in consumer reports leads to the extension of credit price or terms that are materially less favorable than the most favorable price or terms offered by that creditor to a substantial portion of consumers. The notice is intended to improve consumer awareness of the information contained in their credit history, resulting in more accurate information in consumer reports. Notification of negative information can encourage consumers to check their reports for accuracy and correct any information that is not accurately reported.
II. RISK-BASED PRICING NOTICE
The final rules apply to any person that both: (i) Uses a consumer report in connection with an application for, or a grant, extension, or other provision of, credit to a consumer; and (ii) based in whole or in part on the consumer report, grants, extends, or otherwise provides credit to that 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 person. The rules clarify that the risk-based pricing notice requirements apply only in connection with credit that is primarily for personal, household, or family purposes, but not in connection with business credit.
III. DEFINITIONS
The final rules define certain key terms, including the following:
“Material Terms” means the annual percentage rate for credit that has an annual percentage rate, or, in the case of credit that does not have an annual percentage rate, as the financial term that the person varies based on the consumer report and that has the most significant financial impact on consumers, such as an annual membership fee or a deposit. For credit cards, which may have multiple annual percentage rates applicable to different features, “Material Terms” is defined generally as the annual percentage rate applicable to purchases.
“Materially Less Favorable,” as it applies to material terms, means that the terms granted or extended to a consumer differ from the terms granted or extended to another consumer from or through the same person such that the cost of credit to the first consumer would be significantly greater than the cost of credit to the other consumer.
IV. GENERAL RULE AND METHODS FOR IDENTIFYING CONSUMERS WHO MUST RECEIVE NOTICE
A person subject to the rule may determine, on a case-by-case basis, whether a consumer has received material terms that are materially less favorable than terms other consumers have received from or through that person by comparing the material terms offered to the consumer to the material terms offered to other consumers for a specific type of credit product. Because it may not be operationally feasible for many persons subject to the rule to make such direct comparisons between consumers, the final rules provide two alternative methods for determining which consumers must receive risk-based pricing notices for those persons that prefer not to compare directly the material terms offered to their consumers. Using either of the alternative methods, a person may determine when credit offered from or through that person is on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person.
Although a person may use the alternative methods, for purposes of consistency, a person must use the same method to evaluate all consumers who are granted, extended, or otherwise provided a specific type of credit product from or through that person. For example, if a creditor uses the credit score proxy method to evaluate consumers who obtain credit to finance the purchase of a new automobile, the creditor must use that method for all such consumers for new automobile loans. On the other hand, the Agencies recognize that the feasibility of these methods may vary for different types of credit products, and creditors may use different methods for different types of credit products.
The first alternative method is the credit score proxy method. A credit score is a numerical representation of a consumer’s credit risk based on information in the consumer’s credit file. The final rules permit a creditor that uses credit scores to set the material terms of credit to determine a cutoff score, representing the point at which approximately 40 percent of its consumers have higher credit scores and 60 percent of its consumers have lower credit scores, and provide a risk-based pricing notice to each consumer who has a credit score lower than the cutoff score. The final rules also provide that, in the case of credit that has been granted, extended, or provided on the most favorable material terms to more than 40 percent of consumers, a person may set its cutoff score at a point at which the approximate percentage of consumers who historically have been granted, extended, or provided credit on material terms other than the most favorable terms would receive risk-based pricing notices under this section. The final rules require periodic updating of the cutoff score.
The second alternative method is the tiered pricing method. Under this method, a creditor that sets the material terms of credit by assigning each consumer to one of a discrete number of pricing tiers, based in whole or in part on a consumer report, may use this method and provide a risk-based pricing notice to each consumer who is not assigned to the top pricing tier or tiers. The number of tiers of consumers to whom the notice is required to be given depends upon the total number of tiers.
V. APPLICATION OF RULES TO CREDIT CARD ISSUERS
The final rules set forth a special test that a credit card issuer may use to identify the circumstances in which the issuer must provide a risk-based pricing notice to consumers, as an alternative to the options discussed above. If a credit card issuer uses this option, the issuer is required to provide a risk-based pricing notice to a consumer if the consumer applies for a credit card in connection with a multiple-rate offer and, based in whole or in part on a consumer report, is granted credit at an annual percentage rate that is higher than the lowest annual percentage rate available under that offer. The final rules assume that a consumer who applies for credit in response to a multiple-rate offer is applying for the best rate available.
VI. ACCOUNT REVIEW
A creditor may periodically review the consumer report of a consumer with whom the creditor has an existing credit relationship as permitted under Section 604 of the FCRA. If a consumer’s credit history has deteriorated, the creditor may, pursuant to applicable account terms, increase the annual percentage rate applicable to that consumer’s account. The final rules generally require the creditor to provide a risk-based pricing notice to the consumer if the creditor increases the consumer’s annual percentage rate in an account review based in whole or in part on a consumer report, unless the creditor provides an adverse action notice to the consumer.
VII. CONTENT OF THE NOTICE
The final rules require the risk-based pricing notice to include a statement that the terms offered may be less favorable than the terms offered to consumers with better credit histories. The final rules also include special content requirements for the notice that must be provided in the context of account reviews.
VIII. FORM OF THE NOTICE
The final rules require the risk-based pricing notice and account review notice to be clear and conspicuous and to be provided to the consumer in oral, written, or electronic form. The final rules also state that creditors are deemed to be in compliance with the provisions requiring risk-based pricing notices and account review notices through use of the appropriate model forms. Use of the forms is optional.
IX. TIMING OF THE NOTICE
The final rules generally require a risk-based pricing notice to be provided to the consumer after the terms of credit have been set, but before the consumer becomes contractually obligated on the credit transaction. In the case of closed-end credit, the notice must be provided to the consumer before consummation of the transaction, but not earlier than the time the approval decision is communicated to the consumer. In the case of open-end credit, the notice must be provided to the consumer before the first transaction is made under the plan, but not earlier than the time the approval decision is communicated to the consumer. For account reviews, the notice must be provided at the time that the decision to increase the annual percentage rate is communicated to the consumer or, if no notice of the increase in the annual percentage rate is provided to the consumer prior to the effective date of the change (to the extent permitted by law), no later than five days after the effective date of the change in the annual percentage rate.
X. EXCEPTIONS TO THE RISK-BASED PRICING NOTICE REQUIREMENT
The final rules contain a number of exceptions to the risk-based pricing notice requirement. The final rules implement the statutory exceptions that apply: (i) When a consumer applies for, and receives, specific material terms; and (ii) when a consumer has been or will be provided a notice of adverse action under Section 615(a) of the FCRA in connection with the transaction.
In addition, the final rules create exceptions for creditors that provide consumers who apply for credit with a notice consisting of their credit score and certain additional information, in lieu of the risk-based pricing notice. For credit secured by one to four units of residential real property, a creditor may provide consumers with a notice containing the credit score disclosure required by Section 609(g) of the FCRA along with certain additional information that provides context for the credit score disclosure. This notice also describes the creditor’s use of credit scores to set the terms of credit and explains how consumers can obtain their free annual consumer reports. In the case of credit that is not secured by one to four units of residential real property, a creditor similarly may provide consumers with a notice of their credit score. The final rules also include optional model forms for use by creditors.
In some cases, a consumer’s credit file may not contain sufficient information to permit a consumer reporting agency or other person to calculate a score for that individual. In those cases, a creditor using either of the credit score disclosure exceptions described above is permitted to comply with the rules by providing an alternate narrative notice that does not include a credit score to those consumers for whom a score is not available.
The final rules also include an exception for prescreened solicitations. Under this exception, a creditor is not required to provide a risk-based pricing notice if that creditor obtains a consumer report that is a prescreened list and uses that consumer report to make a firm offer of credit to consumers, regardless of how the material terms of that offer compare to the terms that the creditor includes in other firm offers of credit.
XI. FREE CONSUMER REPORT
The risk-based pricing notice must contain a statement informing the consumer that he or she may obtain a copy of a consumer report, without charge, from the consumer reporting agency identified in the notice.
The notices provided under the credit score disclosure exceptions are not risk-based pricing notices, and therefore do not give rise to the right to a free consumer report. Instead, a consumer who receives a credit score disclosure notice that identifies a consumer reporting agency or other third party as the source of the credit score could request the free annual consumer report that is available from each of the three nationwide consumer reporting agencies.
XII. ONE NOTICE PER CREDIT EXTENSION
The final rules contain a rule of construction to clarify that, in general, only one risk-based pricing notice is required to be provided per credit extension, except in the case of a notice provided in connection with an account review. The person to whom the obligation is initially payable must provide the risk-based pricing notice, or satisfy one of the exceptions, even if the loan is assigned to a third party or if that person is not the funding source for the loan. Although legal responsibility for providing the notice rests with the person to whom the obligation is initially payable, the various parties involved in a credit extension may determine by contract which party will send the notice. Generally, purchasers or assignees of credit contracts are not subject to the risk-based pricing notice requirements, except in the case of a notice provided in connection with an account review.
XIII. MULTIPLE CONSUMERS
The final rules contain a rule of construction to clarify that in a transaction involving two or more consumers who are granted, extended, or otherwise provided credit, a person must provide a risk-based pricing notice to each consumer. If the consumers have the same address, a person may satisfy the requirements by providing a single notice addressed to both consumers. If the consumers do not have the same address, a person must provide a notice to each consumer. For credit score disclosure exception notices, a person must provide a separate notice to each consumer in a transaction involving two or more consumers who are granted, extended, or otherwise provided credit. Whether the consumers have the same address or not, the person must provide a separate notice to each consumer. Each separate notice must contain only the credit score(s) of the consumer to whom the notice is provided, and not the credit score(s) of the other consumer.
XIV. MODEL FORMS
For each of the risk-based pricing notices and alternative credit score disclosures, the Agencies have finalized model forms that are appended to the final rules as Appendices H–1 through H–5, and you can find them by going to the CFPB website (https://www.consumerfinance.gov/) and searching for Appendix H to Part 1026."