In addition to the Furnisher Rule and the Red Flags Rule, another recent addition to Fair Credit Reporting has been Risk-Based Pricing. This change is expressed as a joint agency rule adopted in 2011. (law: 15 U.S.C. Section 1681m(h) and regulation: 12 C.F.R. Section 1022.70.)
This is the Rule that requires us to provide consumers with a notice when a company grants credit on “material terms that are materially less favorable than the most favorable terms available to a substantial proportion of the consumers.” Quite a mouthful!
What the FTC and the Federal Reserve Board were trying to get at is to require creditors that use consumer reports to alert consumers to negative information in a consumer report that affected the terms of credit granted.
This is accomplished by either (i) providing a Risk-Based Pricing Notice (“RBP Notice”) only to those consumers who received materially less favorable terms, also known as “risk-based pricing;” or (ii) providing all consumers notice of their credit scores by means of a disclosure (“Credit Score Disclosure”). The RBP Notice alternative can take one of three forms—a direct comparison, a credit score proxy model or a tiered pricing model. (These three approaches are each technical and deserve careful analysis in deciding which one to adopt.) The alternative of providing all consumers the Credit Score Disclosure presumes that the creditor obtains credit scores from a credit reporting agency.
We at Sirote developed a simple risk-based pricing “decision tree,” Essentially it is:
- Does the company use credit reports, and if so does it engage in risk-based pricing as part of the business model?
- If not, there is no notice to be given.
- If so (and our experience is that many creditors do engage in it) an RBP Notice or Credit Score Disclosure is required.
- Note: there are some exceptions to this requirement including (i) when the credit applied for is on specific terms, (ii) an adverse action notice is required and given, or (iii) the credit offered results from a prescreened solicitation.
- If the Credit Score Disclosure is given, then it must be given to all consumers.
- If the RBP Notice is given, then it is only to be given to consumers who have “suffered” risk-based pricing—and one of the three techniques mentioned above should be used.
The silver lining in all of this is that the credit reporting agencies offer solutions for their customers, and this tends to take the worry out of compliance. So, my really simple take-away about risk-based pricing is:
Practice Pointer: If the company engages in risk-based pricing, make absolutely certain that you (i) fall under an exception, or (ii) are either giving the RBP Notice to consumers so affected or the Credit Score Disclosure to all consumers.
The Risk-Based Pricing Rule was one that the industry has learned to deal with fairly routinely. But, as easy as it is, compliance should not be overlooked.