The Federal Reserve Board and the Federal Trade Commission have jointly issued final rules under the Fair Credit Reporting Act (FCRA) to implement the risk-based pricing notice requirement that was added to the FCRA by the FACT Act. The final rules were issued on December 22, 2009, and become effective on January 1, 2011.
The rules apply to all consumer credit, whether secured or unsecured, and whether open-end or closed-end. Generally, they require 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 information in the report, grants credit to the consumer on "material terms" that are "materially less favorable" than the most favorable terms obtained by "a substantial portion" of the creditors consumers.
The notice must inform the consumer that the credit terms offered were based on information in a consumer report. It also must include certain other information, such as a statement that such credit terms may be less favorable than the terms offered to consumers with better credit histories. A risk-based pricing notice containing similar information also is required when an account review results in an increase in the consumer's annual percentage rate (APR) based on information in a consumer report. Other highlights of the new rules include:
- Brokers and other intermediaries are not required to provide risk-based pricing notices. The rules only require that notices be provided by the creditor to whom an obligation is initially payable.
- For credit cards, "material terms" generally mean the APR for purchases. For other forms of credit, "material terms" generally mean the APR required to be disclosed in the TILA disclosure statement or account-opening disclosures. For credit with no disclosed APR, "material terms" mean the financial term that varies based on consumer report information and has the most significant impact on consumers, such as a utility deposit or a charge card annual fee.
- The rules do not define what constitutes "a substantial portion" of consumers. While that determination is to be made by creditors based on their own circumstances, the Fed and FTC expect creditors will consider "a substantial portion" to constitute more than a de minimus percentage but not necessarily a majority.
- To determine which consumers must receive a risk-based pricing notice, a creditor can use a case-by-case method in which it compares the material terms offered to a particular consumer to the material terms offered to other consumers for a specific credit product. It also may use one of the alternate methods detailed in the rules. For creditors that use credit scores to set material terms, the rules provide a credit proxy method under which the creditor must determine a cutoff score tied to the percentage of consumers who have historically received credit on the most favorable terms and then send a notice to any consumer with a credit score below the cutoff. For a creditor that sets material terms by assigning consumers to pricing tiers, the rules contain a tiered-pricing method under which the creditor must provide a notice to any consumer not in the top tier or tiers. A special rule allows a credit card issuer to determine which consumers must receive a notice on an offer-by-offer basis and, for offers with multiple possible APRs, only requires a notice to be sent to a consumer who did not receive the lowest APR available under a particular offer.
- An offer of credit made to a consumer in a prescreened solicitation does not trigger the risk-based pricing notice requirement even if the material terms offered to that consumer are less favorable than those offered to others. A notice is also not required when a consumer will receive an adverse action notice or, in response to a prescreened solicitation that offers specific material terms, applies for and receives those terms even if other consumers have received more favorable terms. However, if a prescreened solicitation offers a range of possible material terms, a notice must be sent when a consumer applies and does not receive the most favorable terms offered, such as the lowest APR for credit card purchases. As an alternative to sending risk-based pricing notices, a creditor has the option of providing a prescribed "exception notice" containing the consumer’s credit score and certain related information to every consumer who requests credit and not just those who would have been entitled to receive a risk-based pricing notice.
- The risk-based pricing notice must be provided before consummation for closed-end credit or before the first transaction for open-end credit, but not earlier than when the approval is communicated for either type of credit. For account reviews, the notice must generally be provided at the time notice of an APR increase is given. An exception for open-end credit granted by telephone or in person to finance a contemporaneous purchase (often called "instant credit") allows the notice to be provided in the creditor's first mailing to the consumer following credit approval or within 30 days after the approval decision, whichever is earlier. Another exception for auto lending allows the lender to rely on a dealer to provide the notice.
- A safe harbor is created for creditors using the rules' model forms. The FCRA does not provide a private right of action for violations of the risk-based pricing notice requirement and makes such violations subject to regulatory enforcement actions only.