The Federal Reserve Board and Federal Trade Commission have finalized changes to their rules implementing the Fair Credit Reporting Act (FCRA) requirement for creditors to include a disclosure of a consumer’s credit score and related information in risk-based pricing notices. In a separate final rule, the Fed has made changes to the combined FCRA and Regulation B (Equal Credit Opportunity Act (ECOA)) model adverse action notices to include a similar disclosure.
The final rules are intended to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that amended the FCRA’s risk-based pricing and adverse action notice requirements to mandate the disclosure of credit score information.
The final rules will be effective and compliance mandatory 30 days after their publication in the Federal Register. However, in the background discussion to the final rules, the Fed and FTC indicate that, because the FCRA amendments become effective on the “designated transfer date,” currently set as July 21, 2011, creditors are required to provide the content mandated by the amendments as of July 21, even though the implementing rules and model forms will not be effective at that time.
Risk-Based Pricing Notices. The FCRA requires a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report in connection with a credit application and, based on the report, grants credit on terms that are materially less favorable than the most favorable terms obtained by a substantial portion of consumers. Under the final rules issued by the Fed and FTC to implement the FCRA risk-based notice requirement, which became effective on January 1, 2011, the notice is also required when an account review results in an increase in the consumer’s annual percentage rate, based on a consumer report.
The final rules require the following additional information to be included in a risk-based pricing notice: (1) the credit score used, (2) the range of possible credit scores under the model used to generate the credit score, (3) all of the key factors that adversely affected the credit score (not to exceed four factors, unless one factor is the number of inquiries made with respect to the report, in which case the key factors may not exceed five), (4) the date on which the credit score was created, (5) the name of the consumer reporting agency or other person providing the score, and (6) a prescribed statement explaining credit scores.
In a change from the proposals, the final rules require the prescribed statement to include a disclosure that the credit score was used in setting the credit terms. This change is reflected in the model forms of the risk-based pricing notice included in the final rules. The model forms also contain optional contact information for the entity that provided the credit score, language that was not part of the proposals.
The credit score disclosure is not required when a creditor uses only the credit score of a guarantor, co-signer, surety, or endorser to set credit terms for the consumer to whom it extends credit or whose account is being reviewed. The background discussion contains guidance on the application of the rules to proprietary scores, auto dealers in three-party financing transactions, and multiple credit scores, and how the safe harbor can be retained by creditors who wish to provide the credit score information by using an attachment to the current model forms of risk-based pricing notices.
Adverse Action Notices. The FCRA also requires a person taking adverse action based in whole or in part on a consumer report to provide an adverse action notice. In credit transactions, the FCRA notice is typically combined with the adverse action notice required by the ECOA. The Fed’s other final rule amends the combined ECOA/FCRA model adverse action notices in Reg. B to add the same six items described above for risk-based pricing notices (without a disclosure in the prescribed statement that the credit score was used in setting credit terms) and an optional disclosure of contact information for the entity that provided the credit score.
The final rule amends the Reg. B Official Staff Commentary to provide that the “key factors” disclosure does not satisfy the ECOA requirement for the creditor to disclose the specific reasons for taking adverse action. Although one or more factors that adversely affect a consumer’s credit score may be the same as one or more of the specific reasons for taking adverse action, some of those reasons may be unrelated to the credit score (such as reasons related to a consumer’s income, employment, or residency).
The background discussion includes guidance on the application of the adverse action final rule to proprietary scores, multiple credit scores, and reports from multiple consumer reporting agencies. It also confirms that the requirement to disclose credit score information in FCRA adverse action notices also applies to adverse action decisions not related to credit.