On July 6, 2011, the Federal Trade Commission ("FTC") and Federal Reserve Board ("Board") announced final changes to the risk-based pricing rule, which requires creditors to disclose credit score information to consumers when a credit score is used to set or adjust credit terms. The new rule identifies the specific information that must be disclosed and provides model forms of notice. Since January 1, 2011, the risk-based pricing rule has required creditors to provide consumers with a risk-based pricing notice when credit is provided on less favorable terms than provided to other consumers based on a consumer's credit report. Generally, to compensate for the higher risk of default, creditors offer credit to consumers with poor credit histories on less favorable, e.g. more expensive, terms than consumers with strong credit histories.
Under Section 615(a) of the Fair Credit Reporting Act ("FCRA"), creditors must provide adverse action notices when a consumer's credit application is denied, in whole or in part, on information in a consumer report. The risk-based pricing rule, under FCRA Section 615(h), was designed to cover circumstances not addressed by Section 615(a), including when credit is not denied but is offered on less favorable terms. The risk-based pricing rule apples to consumer credit, which is defined as credit primarily for personal, household, or family purposes and business credit is excluded. The FTC and the Board jointly published regulations implementing the risk-based pricing provisions on January 15, 2010, with a compliance date of January 1, 2011.
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), signed into law on July 21, 2010, amended Section 615(h) to require the inclusion of additional content in the disclosure to consumers in the risk-based pricing notices. Specifically, if a credit score is used in making the credit decision, the creditor must disclose that score and certain information relating to the credit score. The effective date of the Dodd-Frank amendment is July 21, 2011.
The Consumer Financial Protection Bureau ("CFPB") will have rulewriting authority for Section 615(h) beginning on July 21, 2011, the same date that the Dodd-Frank Act amendment becomes effective. As a result, the FTC and the Board issued amendments and accompanying model forms to incorporate the additional content required by the Dodd-Frank Act under their existing authority. Compliance with the new rule is mandatory thirty days after publication in the Federal Register.
The new rule requires the disclosure of:
- the credit score used in the decision making
- the range of possible credit scores under the model used to generate the credit score
- key factors that adversely affect the credit score which shall not exceed four key factors unless one factor is the number of enquiries made with respect to the consumer report, in which case the number of key factors shall not exceed five
- the date on which the credit score was created, and
- the name of the consumer reporting agency or other person that provided the credit score.
Two model forms have been issued to provide the additional content in:
- a general risk-based pricing notice if a credit score of the consumer is used in setting the material terms of credit, and
- if a credit score of the consumer whose extension of credit is under review is used in increasing the annual percentage rate.