The Last Piece of the FACT Act Puzzle
Risk-based pricing provisions go into effect Jan. 1, 2011.
Last December, the Federal Reserve Board and Federal Trade Commission jointly issued final rules to implement the risk-based pricing (RBP) provisions of Section 311 of the Fair and Accurate Credit Transactions (FACT) Act, which amended the federal Fair Credit Reporting Act in 2003. The RBP rules represent the final piece of the FACT Act rule-making puzzle. Federal credit unions should follow the Fed’s rules and state-chartered credit unions should follow the FTC’s almost identical rules. The rules go into effect on Jan. 1, 2011.
The RBP regulations apply to consumer credit (primarily for personal, family, or household purposes), and only the original creditor is responsible for providing the notice (i.e., the creditor to whom the obligation is initially payable).
A credit union must provide an RBP notice when it:
- Uses a consumer report in connection with a consumer’s credit application or extension; and
- Grants or extends credit (based at least in part on that report) to the consumer on “material terms” (e.g., annual percentage rate or APR) that are “materially less favorable” (higher cost for credit) than the most favorable terms available to a substantial portion of the credit union’s members.
The regulation includes model forms credit unions may use to comply with these notice requirements. Credit unions may make changes to these forms so long as they don’t change the substance, clarity, and sequence of the notices.
Methods for determining who receives notice
The regulation provides alternative methods for determining which consumers must receive an RBP notice. The credit union must use the same method to evaluate all consumers receiving a specific type of credit (e.g., auto loans, mortgages, etc.), but may vary the methods among different products, for example:
- Consumer-to-consumer comparison. This method involves comparing each consumer to an adequate sample of consumers who are offered a specific type of credit.
- Credit score proxy method. A credit union that uses credit scores to set material terms may comply with the RBP notice requirements by determining the credit score that represents the point at which approximately 40% of its members have higher scores and approximately 60% of its members have lower scores, and providing an RBP notice to members with a score below this point.
- Tiered-pricing method. A credit union may place the member within one of a discrete number of pricing tiers based on a consumer report. A notice must be sent to those consumers who don’t qualify for the top tier (lowest-priced) for a four or fewer tier system, or the top two tiers for a five or more tier system, as well as additional tiers that comprise between 30% to 40% of the total number of tiers.
- Alternative approach for credit cards. Credit card issuers may use one of the methods described above or a special method for credit cards that allows the card issuer to determine which consumers must receive a notice on an offer-by-offer basis.
Content, form, and timing of notice
A credit union must generally provide an RBP notice before the consummation of the credit transaction, or the first transaction for credit cards or other open-end credit, but no earlier than when it tells the consumer the credit is approved. The RBP notice must include:
- A statement that a consumer report includes information about a consumer’s credit history and what that entails;
- A statement that the terms offered are based on information from that consumer report;
- A statement that the terms offered “may” be less favorable than those offered other consumers with better credit histories;
- A statement that the consumer has the right to dispute any inaccurate information in the report;
- A list of each consumer reporting agency that furnished a report used in the credit decision;
- An explanation that the consumer may obtain a free consumer report from that agency within 60 days after receipt of the notice, which would be in addition to the free credit report that consumers already can receive under the FACT Act amendments to the Fair Credit Reporting Act;
- A description of how to obtain the free report from the consumer reporting agency, along with the toll-free number, if applicable, for each agency; and
- A statement directing consumers to the Federal Trade Commission or Federal Reserve Board websites for more information about consumer reports.
The regulation also applies to the account review process. A credit union must provide an RBP notice if it reviews a consumer’s credit account and—based on credit report information—increases the APR on that account. A credit card issuer also must provide a notice if it periodically obtains consumer reports to review the terms of the credit it has extended to a consumer and, based on that review, increases the APR.
Notices issued in response to account review must include the same basic information as notices provided for credit applicants, such as a statement that a consumer report includes information about the consumer’s credit history. You must provide these notices at the time you communicate to the consumer your decision to increase the APR, or no more than five days after the increase if no such notice is provided, if permitted by law. These notices also give consumers the right to a free credit report.
Exceptions to the rule
The regulation sets forth a number of exceptions to RBP notice requirements. A credit union will not have to provide an RBP notice if:
- The consumer applies for and is granted specific terms for credit, unless those terms were specified after the credit was applied for and after the credit union obtained a consumer report.
- The credit union provides an adverse action notice under Section 615(a) of the Fair Credit Reporting Act.
- The credit union obtains a consumer report that is a prescreened list and uses that report to make a firm offer of credit to a consumer, regardless of whether the material terms of the offer differ from those that the credit union includes in firm offers of credit to other consumers.
- The credit union provides a credit score disclosure instead of the RBP notice. The disclosure would contain the consumer’s credit score along with explanatory information regarding the score, and information regarding the use of consumer reports and scores in the underwriting process.
- The credit union adds certain supplemental disclosures to the already required credit score disclosure for mortgage loans.
- When a credit score is unavailable, the credit union provides a credit score disclosure (minus the score) with additional information regarding the consumer’s right to obtain a copy of his credit reports and verify the accuracy of the information they contain.
This article only provides a snapshot of the RBP regulations. For more details, visit the Credit Union National Association’s (CUNA) e-Guide to Federal Laws and Regulations (cuna.org, select “regulations & compliance”).
VALERIE Y. MOSS is director of compliance information for CUNA.