Final Risk-Based Pricing Credit Score Disclosure Rule
September 9, 2011
In January 2010 the Federal Reserve Board and the Federal Trade Commission (the “Agencies”) issued the risk-based pricing regulation (“Risk-Based Pricing Rule”) pursuant to the Fair and Accurate Credit Transactions Act (“FACT Act”).
Section 311 of the FACT Act (which added section 615(h), 15 U.S.C. 1681m(h) to the Fair Credit Reporting Act, requires certain disclosures in connection with the provision of consumer credit if a consumer report is used and the credit is extended on terms that are materially less favorable than what is available to most of the creditor’s other consumers . Where an application for credit is denied, the existing rules regarding adverse action notices continue to apply; the Risk-Based Pricing Rule is intended to be a complementary rule covering those situations where consumers are adversely affected but otherwise are not entitled to helpful information about the role of their credit reports in the credit decision.
Section 1100F of the Dodd-Frank Act adds an additional requirement: if a creditor or other covered person uses the consumer’s credit score in setting the material terms of credit, the creditor must also disclose the score itself and certain information relating to the credit score. To implement the new requirement, the Agencies issued a new rule on July 15, 2011 (the “Credit Score Rule”) , which prescribes additions to the risk-based pricing notice. The credit score disclosure applies both to decisions to grant credit as well as to extension of credit that is under review. The Credit Score Rule includes both the Federal Reserve Board’s version, which this Bulletin reviews, as well as the FTC’s version, which are essentially identical. Both were effective as of August 15, 2011.
In a separate rulemaking, the Federal Reserve Board published a final rule amending commentary and model notices to Regulation B (which implements the Equal Credit Opportunity Act) to incorporate Section 1100F. That amendment incorporates the credit score disclosure to Regulation B’s adverse action notices when a credit score is used as a basis for the adverse action. See CBA’s Regulatory Compliance Bulletin published simultaneously with this Bulletin.
“Use” of a Score
The additional credit score and related information must be disclosed only if the consumer’s credit score is used in setting the material terms of credit . A creditor that uses a credit report (and is required to furnish the risk-based pricing notice) but does not use a credit score need not furnish the additional credit score notice. If the credit score was used as described, then the additional contents are required even if the score was not a significant factor in setting the credit terms.
The Agencies addressed in the preamble to the Credit Score Rule whether an automobile dealer is deemed to use a credit report in indirect automobile finance lending situations. Where the dealer submits a loan application to a lender (or multiple lenders), who then conducts the underwriting on the purchaser/borrower, the dealer could still be required to provide the general risk-based pricing notice because it is deemed to have “used” a consumer report. In footnote 9 to the preamble, the Agencies clarify that it is not the responsibility of the financing source or sources to provide the notice because consumers might be in a position to receive multiple risk-based pricing notices in the transaction from unfamiliar companies. Under this analysis, if the credit source used the consumer’s credit score in setting the terms of credit, then the dealer is required to comply with the Credit Score Rule and not the financial sources.
As to guarantors and other third parties, the general rule is that credit score disclosure is required only if the credit score of the consumer to whom credit is extended or reviewed is used and the other conditions apply. If the creditor uses the credit score of a guarantor, co-signer, surety, or endorser but not the consumer obtaining the credit, the credit score information need not be furnished. However, under the Risk-Based Notice Rule, if the creditor only uses the consumer report or credit score of the guarantor, co-signer, surety, or endorser, the general risk-based notice requirement would still apply, even though the credit score disclosure would not apply.
Content of Notice
New subsections 12 CFR 222.73(a)(1)(ix) and (a)(2)(ix) set forth the additional contents in a risk-based pricing notice pertaining to a consumer’s credit score: (1) the credit score used; (2) the range of possible credit scores under the model used to generate the score; (3) all of the key factors that adversely affected the credit score, but not more than four, except that if one of the key factors is the number of inquiries made, then not more than five; (4) the date that the credit score was created; and (5) the name of the consumer reporting agency or other person that provided the credit score. Also disclosed is a statement that a credit score is a number that takes into account information in a consumer report, and that a credit score can change over time to reflect changes in the consumer’s credit history.
In the preamble to the Credit Score Rule the Board and FTC note that it is the top four key factors (or five as noted) that must be disclosed, while the Dodd-Frank Act requires “all” of the key factors but up to four . Creditors subject to this rule may rely on and disclose the key factors as provided by a consumer reporting agency without verification. The Agencies acknowledge that creditors might not have access to the factors, and note that creditors can either seek to secure access to the factors in their contracts with consumer reporting agencies, or send credit score disclosure exception notices to all consumers as permitted under Section 222.74(e) of the Risk-Based Pricing Rule.
The definition of a credit score is the FCRA definition: section 609(f)(2)(A) of FCRA defines a credit score to mean: “a numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors . . ..” Certain proprietary scores developed by creditors or for specific creditors (in contrast to those developed by consumer reporting agencies or companies such as FICO) might not be covered by the rule if the scores are not used to predict credit behavior, such as insurance scores, scores used to predict the likelihood of false identity, and scores that incorporate factors other than credit information (such as mortgage loan-to-value ratio, the amount of down payment, or the financial assets of a consumer) .
The Agencies in the preamble to the rule offer the following guidance as to proprietary scores. If a creditor uses only a proprietary score that is considered a credit score, the creditor should disclose the proprietary score. Thus if a creditor uses a proprietary score that includes only information acquired from a consumer reporting agency, the proprietary score is a credit score that is disclosable. If a creditor uses both a proprietary score that does not need to be disclosed and a credit score from a consumer reporting agency, the latter needs to be disclosed. If a creditor uses a credit score from a consumer reporting agency as an input to a proprietary score (that itself is not a credit score), the score from the consumer reporting agency must be disclosed. Where both a disclosable proprietary score and a credit score from a consumer reporting agency are used, the creditor may choose which credit score to disclose.
Multiple Credit Scores
A creditor might use more than one credit score in setting the material terms of credit, but the Dodd-Frank Act only requires disclosure of a single score and related information. The Credit Score Rule does not require, but it does allow, creditors to disclose all the credit scores used. Any of the scores may be disclosed, including a disclosable proprietary score regardless of whether only one of multiple scores pulled is used or multiple scores were used to create a single score. In either instance, the creditor may disclose only one of the scores. Also, a creditor is not required (as some commenters requested) to disclose the lowest score.
For privacy reasons, whether multiple co-borrowers have the same address or not, a creditor must provide a separate notice to each consumer if the notice includes a credit score. Each separate notice that includes a credit score must contain only the credit score of the consumer to whom the notice is provided, and not the score of the other consumer. If the consumers have the same address and the notice does not include a credit score, a single notice to both consumers is permitted.
The Appendix to the rule includes model forms that maybe used in different circumstances. Use of the model forms is optional, but if a creditor appropriately uses a model form or modifies a form in accordance with the rules or the instructions to the appendix, that creditor will benefit from a compliance safe harbor. The safe harbor is retained even if the format of the model forms is rearranged or technical modifications are made to the language as long as the substance of the disclosures is unchanged.
In a separate rulemaking, the Board amended commentary and model forms to its Regulation B, which implements the Equal Credit Opportunity Act. That amendment is discussed in a separate CBA Regulatory Compliance Bulletin.
- The text of the Risk-Based Pricing Rule is set forth at 12 CFR Section 222.70 et seq and the Federal Register version is available by clicking here.
- While the Dodd-Frank Act confers upon the new Consumer Financial Protection Bureau the responsibility to write regulations under the relevant provision of the Fair Credit Report Act, that authority was not vested until July 21, 2011, rendering it necessary for the Board and FTC to finalize this rule before that date in order to give affected entities time to comply.
- The Credit Score Rule does not amend or affect the existing credit score exception notice under 12 CFR 222.74(e), which allows a creditor to furnish, in lieu of the risk-based pricing notice, a notice to all consumer applicants that contains prescribed information regarding credit scores, including the consumer’s credit score.
- Section 609(f)(2)(B) of the FCRA defines the term “key factors” as “all relevant elements or reasons adversely affecting the credit score for the particular individual, listed in the order of their importance based on their effect on the credit score.”
- See Section 609(f)(2)(A)(ii) of the FCRA.
The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.
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