InfoBytes Special Alert, May 8, 2008
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FRB and FTC Issue Long-Awaited Risk-Based Pricing Notice Proposal
The Federal Reserve Board (FRB) and Federal Trade Commission (FTC) today announced a proposal to implement the last remaining major regulation pending under the Fair and Accurate Credit Transactions Act of 2003 (FACTA) - the requirement for creditors to provide a consumer with a risk-based pricing notice when they offer or provide credit to the consumer on terms less favorable than the terms available to other consumers.
The rules would apply when a creditor adjusts the cost of credit based on information in a consumer’s credit report.Section 311 of FACTA added a new Section 615(h) to the Fair Credit Reporting Act (FCRA). The provision requires that the notice be provided when a creditor offers or provides “credit 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 proposal would generally require that a risk-based pricing notice be provided after the terms of credit have been set, but before the consumer becomes contractually obligated on a closed-end loan or before the first transaction in an open-end plan.
Creditors could avoid providing an individualized risk-based pricing notice to those consumers who receive “materially less favorable” terms by instead providing a notice to all consumers “as soon as reasonably practicable” after obtaining the credit score. This alternative notice would include the consumer’s credit score and a bar chart or other explanation that shows how the consumer’s score compares to the scores of other consumers. That notice would also identify the consumer reporting agency or other person that provided the score and include other information. For loans secured by 1-4-family residential real property, the notice would be combined with the existing credit-score notice required by another provision of FACTA, which also shows the main factors on which the consumer lost points in the credit-scoring system.
For creditors that choose to provide a risk-based pricing notice, the “material terms” of the extension of credit would be defined as the annual percentage rate (APR) for products that have an APR and other monetary terms, such as the amount of a deposit, for credit that does not have an APR such as telephone service. Creditors would have two alternatives, besides directly comparing the material terms offered to different consumers individually, for determining which consumers would be entitled to a notice. They could provide notices to:
- Consumers with credit scores below a cutoff that represents about 60% of the creditor’s consumers; or
- Consumers who do not qualify for the lowest- or lower-priced tiers.
The FACTA provision includes a required disclosure of the consumer’s right to a free credit report. Although lenders had argued that this is simply a reference to the right provided elsewhere in FACTA to an annual free credit file disclosure, the agencies interpret it as conferring a right to an additional free file disclosure for any consumer who receives a risk-based pricing notice. The alternative up-front notice to all applicants, however, would not trigger a right to a free report because that notice is not a risk-based pricing notice.
Comments on the proposal will be due 90 days after publication in the Federal Register, which is expected shortly.
For a copy of the proposed rules, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080508a1.pdf. For a copy of the agencies’ respective press releases, plesae see http://www.federalreserve.gov/newsevents/press/bcreg/20080508a.htm (FRB) and http://www.ftc.gov/opa/2008/05/factfyi.shtm (FTC).