The Federal Reserve and the Federal Trade Commission on December 22 jointly issued final rules to implement the risk-based pricing provisions in the Fair and Accurate Credit Transactions Act of 2003. The rules, which will become effective on January 1, 2011, generally require a creditor to 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 terms that are materially less favorable than the most favorable terms available to a “substantial proportion” of consumers from or through that creditor. The term “risk-based pricing” refers to the practice of adjusting the price and other terms of credit offered to a consumer to reflect the risk of nonpayment by that consumer. Information from a consumer report is generally used in evaluating the risk. Creditors that engage in risk-based pricing generally offer more favorable terms to consumers with good credit histories and less favorable terms to consumers with poor credit histories. The final rules provide two alternative means by which creditors can determine when they are offering credit on terms that are materially less favorable. The rules also include certain exceptions to the general rule, including exceptions for creditors that provide a consumer with a disclosure of the consumer’s credit score in conjunction with additional information that provides the consumer with the context to understand the relevance of the credit score.
Nutter Notes: Under the Fair and Accurate Credit Transactions Act of 2003, a person must generally provide a risk-based pricing notice to a consumer when the person uses a consumer report in connection with an application, grant, extension, or other provision of credit and, based in whole or in part on the consumer report, grants, extends, or provides credit to the consumer on terms that are materially less favorable than the most favorable terms available to a “substantial proportion” of consumers from or through that person. The risk-based pricing notice requirement is designed primarily to improve the accuracy of consumer reports by alerting consumers to the existence of negative information on their consumer reports so that consumers can, if they choose, check their consumer reports for accuracy and correct any inaccurate information. It is intended to complement the existing adverse action notice provisions of the Fair Credit Reporting Act. The agencies recognize that no single test or approach is likely to be feasible for all of the various types of creditors to which the rules apply or for the many different credit products for which risk-based pricing is used. As a result, the final rules provide alternative approaches that creditors may use to comply with the statute’s requirements. The final rules clarify that the risk-based pricing notice requirements apply only in connection with credit that is primarily for personal, family, or household purposes, but not in connection with business credit.