Section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Fair Credit Reporting Act (15 USC § 1681 and following) to require that new disclosures about a consumer's credit score be included in both adverse action notices and risk-based pricing notices. These amendments to the Fair Credit Reporting Act will become effective on July 21 2011.
Under Section 1100F, both adverse action notices and risk-based pricing notices must include "a numerical credit score... used by [the] person" taking the action that triggers the notice. In addition to the score itself, the notices must include:
the range of possible credit scores in the model used;
all of the key factors that adversely affected the score;
the date on which the score was created; and
the name of the person or entity that provided the score or the information used to calculate the score.
On March 1 the Board of Governors of the Federal Reserve System issued a proposal to provide guidance on implementing the new requirements for advance action notices, and the Federal Reserve and the Federal Trade Commission (FTC) jointly issued proposed regulations addressing risk-based pricing notices.
Adverse action notices
Section 615(a) of the Fair Credit Reporting Act has long required that users of consumer reports provide adverse action notices when they take adverse action against a consumer "based in whole or in part on any information contained in a consumer report". No binding regulatory guidance or model forms have ever been issued under Section 615(a), but the Federal Reserve has long included the elements of a Fair Credit Reporting Act adverse action notice in the model forms that it publishes for compliance under the Equal Credit Opportunity Act and Regulation B, 12 CFR pt 202, Appendix C. The Federal Reserve's proposal would amend the model forms in Appendix C of Regulation B to include the additional information required by Section 1100F.
A complexity of the new forms is that Regulation B requires the creditor to disclose the specific reasons that the adverse action was taken (12 CFR § 202.9(a)(2)(i)), and Section 1100F requires the creditor to disclose the key factors that adversely affected the credit score. The Federal Reserve noted that although these reasons may be similar, they may also be very different. The model forms provide for a separate disclosure of both sets of reasons, which increases the length of the form and may be confusing to consumers.
The model language proposed by the Federal Reserve contemplates credit scores that are obtained from a consumer reporting agency. The proposal does not discuss the obligations of a creditor that creates and uses an internal, proprietary credit score based on information obtained from a reporting agency.
Risk-based pricing notices
The risk-based pricing notice requirement in Section 615(h) of the Fair Credit Reporting Act was added in 2003 as part of the Fair and Accurate Credit Transactions Act. However, the regulations implementing the statutory requirement did not become mandatory until January 1 2011. The Federal Reserve and the FTC – which currently have joint rulemaking authority with respect to this part of the Fair Credit Reporting Act – have now proposed to modify the rule to include the Section 1100F requirements.
The proposal amends the risk-based pricing notice regulation to require the disclosure of the additional items of information as set forth in Section 1100F, as well as an explanatory statement about credit scores. The proposal also adopts two new model forms, which include the Section 1100F information, that creditors can use to comply with the rule.
The proposal also provides several helpful clarifications:
The creditor need not disclose the Section 1100F credit score information if the creditor uses credit report information, but not any numerical credit score.
The creditor need only disclose one credit score, even if it obtains multiple credits scores, on a single consumer.
The creditor must provide separate risk-based pricing notices to each applicant if there are joint applicants, with only the credit score of the individual to whom the notice is addressed. However, if the creditor obtains a credit score only on a guarantor or endorser, it need not provide any credit score information in the risk-based pricing notice.
Importantly, the Federal Reserve and the FTC have proposed to retain the separate exceptions to the risk-based pricing notice, including the exception that allows creditors to provide a separate credit score disclosure in lieu of providing risk-based pricing notices (see § _.74(d)-(e)). As a result, creditors will continue to have that flexibility to provide credit score notices instead of risk-based pricing notices.
Effective date and comments
Section 1100F is effective on July 21 2011 and the Federal Reserve and the FTC have proposed to have the regulatory changes be effective on the same date. That leaves little time for creditors to make the necessary changes and creditors may want to consider requesting a delayed effective date – particularly with respect to the risk-based pricing notices, where the agencies have broader rulemaking authority.
Both proposals were published in the Federal Register on March 15 and comments are due on April 14 2011.
For further information on this topic please contact John K Van De Weert or James A Huizinga at Sidley Austin LLP by telephone (+1 212 839 5300), fax (+1 212 839 5599) or email (email@example.com or firstname.lastname@example.org).
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