§ 1022.72 General requirements for risk-based pricing notices.
(a) In general. Except as otherwise provided in this subpart, a person must provide to a consumer a notice (“risk-based pricing notice”) in the form and manner required by this subpart if the person both:
(1) Uses a consumer report in connection with an application for, or a grant, extension, or other provision of, credit to that consumer that is primarily for personal, family, or household purposes; and
(2) Based in whole or in part on the consumer report, grants, extends, or otherwise provides credit to that consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that person.
(b) Determining which consumers must receive a notice. A person may determine whether paragraph (a) of this section applies by directly comparing the material terms offered to each consumer and the material terms offered to other consumers for a specific type of credit product. For purposes of this section, a “specific type of credit product” means one or more credit products with similar features that are designed for similar purposes. Examples of a specific type of credit product include student loans, unsecured credit cards, secured credit cards, new automobile loans, used automobile loans, fixed-rate mortgage loans, and variable-rate mortgage loans. As an alternative to making this direct comparison, a person may make the determination by using one of the following methods:
(1) Credit score proxy method —
(i) In general. A person that sets the material terms of credit granted, extended, or otherwise provided to a consumer, based in whole or in part on a credit score, may comply with the requirements of paragraph (a) of this section by:
(A) Determining the credit score (hereafter referred to as the “cutoff score”) that represents the point at which approximately 40 percent of the consumers to whom it grants, extends, or provides credit have higher credit scores and approximately 60 percent of the consumers to whom it grants, extends, or provides credit have lower credit scores; and
(B) Providing a risk-based pricing notice to each consumer to whom it grants, extends, or provides credit whose credit score is lower than the cutoff score.
(ii) Alternative to the 40/60 cutoff score determination. In the case of credit that has been granted, extended, or provided on the most favorable material terms to more than 40 percent of consumers, a person may, at its option, set its cutoff score at a point at which the approximate percentage of consumers who historically have been granted, extended, or provided credit on material terms other than the most favorable terms would receive risk-based pricing notices under this section.
(iii) Determining the cutoff score —
(A) Sampling approach. A person that currently uses risk-based pricing with respect to the credit products it offers must calculate the cutoff score by considering the credit scores of all or a representative sample of the consumers to whom it has granted, extended, or provided credit for a specific type of credit product.
(B) Secondary source approach in limited circumstances. A person that is a new entrant into the credit business, introduces new credit products, or starts to use risk-based pricing with respect to the credit products it currently offers may initially determine the cutoff score based on information derived from appropriate market research or relevant third-party sources for a specific type of credit product, such as research or data from companies that develop credit scores. A person that acquires a credit portfolio as a result of a merger or acquisition may determine the cutoff score based on information from the party which it acquired, with which it merged, or from which it acquired the portfolio.
(C) Recalculation of cutoff scores. A person using the credit score proxy method must recalculate its cutoff score(s) no less than every two years in the manner described in paragraph (b)(1)(iii)(A) of this section. A person using the credit score proxy method using market research, third-party data, or information from a party which it acquired, with which it merged, or from which it acquired the portfolio as permitted by paragraph (b)(1)(iii)(B) of this section generally must calculate a cutoff score(s) based on the scores of its own consumers in the manner described in paragraph (b)(1)(iii)(A) of this section within one year after it begins using a cutoff score derived from market research, third-party data, or information from a party which it acquired, with which it merged, or from which it acquired the portfolio. If such a person does not grant, extend, or provide credit to new consumers during that one-year period such that it lacks sufficient data with which to recalculate a cutoff score based on the credit scores of its own consumers, the person may continue to use a cutoff score derived from market research, third-party data, or information from a party which it acquired, with which it merged, or from which it acquired the portfolio as provided in paragraph (b)(1)(iii)(B) until it obtains sufficient data on which to base the recalculation. However, the person must recalculate its cutoff score(s) in the manner described in paragraph (b)(1)(iii)(A) of this section within two years, if it has granted, extended, or provided credit to some new consumers during that two-year period.
(D) Use of two or more credit scores. A person that generally uses two or more credit scores in setting the material terms of credit granted, extended, or provided to a consumer must determine the cutoff score using the same method the person uses to evaluate multiple scores when making credit decisions. These evaluation methods may include, but are not limited to, selecting the low, median, high, most recent, or average credit score of each consumer to whom it grants, extends, or provides credit. If a person that uses two or more credit scores does not consistently use the same method for evaluating multiple credit scores (e.g., if the person sometimes chooses the median score and other times calculates the average score), the person must determine the cutoff score using a reasonable means. In such cases, use of any one of the methods that the person regularly uses or the average credit score of each consumer to whom it grants, extends, or provides credit is deemed to be a reasonable means of calculating the cutoff score.
(iv) Credit score not available. For purposes of this section, a person using the credit score proxy method who grants, extends, or provides credit to a consumer for whom a credit score is not available must assume that the consumer receives credit on material terms that are materially less favorable than the most favorable credit terms offered to a substantial proportion of consumers from or through that person and must provide a risk-based pricing notice to the consumer.
(v) Examples.
(A) A credit card issuer engages in risk-based pricing and the annual percentage rates it offers to consumers are based in whole or in part on a credit score. The credit card issuer takes a representative sample of the credit scores of consumers to whom it issued credit cards within the preceding three months. The credit card issuer determines that approximately 40 percent of the sampled consumers have a credit score at or above 720 (on a scale of 350 to 850) and approximately 60 percent of the sampled consumers have a credit score below 720. Thus, the card issuer selects 720 as its cutoff score. A consumer applies to the credit card issuer for a credit card. The card issuer obtains a credit score for the consumer. The consumer’s credit score is 700. Since the consumer’s 700 credit score falls below the 720 cutoff score, the credit card issuer must provide a risk-based pricing notice to the consumer.
(B) A credit card issuer engages in risk-based pricing, and the annual percentage rates it offers to consumers are based in whole or in part on a credit score. The credit card issuer takes a representative sample of the consumers to whom it issued credit cards over the preceding six months. The credit card issuer determines that approximately 80 percent of the sampled consumers received credit at its lowest annual percentage rate, and 20 percent received credit at a higher annual percentage rate. Approximately 80 percent of the sampled consumers have a credit score at or above 750 (on a scale of 350 to 850), and 20 percent have a credit score below 750. Thus, the card issuer selects 750 as its cutoff score. A consumer applies to the credit card issuer for a credit card. The card issuer obtains a credit score for the consumer. The consumer’s credit score is 740. Since the consumer’s 740 credit score falls below the 750 cutoff score, the credit card issuer must provide a risk-based pricing notice to the consumer.
(C) An auto lender engages in risk-based pricing, obtains credit scores from one of the nationwide consumer reporting agencies, and uses the credit score proxy method to determine which consumers must receive a risk-based pricing notice. A consumer applies to the auto lender for credit to finance the purchase of an automobile. A credit score about that consumer is not available from the consumer reporting agency from which the lender obtains credit scores. The lender nevertheless grants, extends, or provides credit to the consumer. The lender must provide a risk-based pricing notice to the consumer.
(2) Tiered pricing method —
(i) In general. A person that sets the material terms of credit granted, extended, or provided to a consumer by placing the consumer within one of a discrete number of pricing tiers for a specific type of credit product, based in whole or in part on a consumer report, may comply with the requirements of paragraph (a) of this section by providing a risk-based pricing notice to each consumer who is not placed within the top pricing tier or tiers, as described below.
(ii) Four or fewer pricing tiers. If a person using the tiered pricing method has four or fewer pricing tiers, the person complies with the requirements of paragraph (a) of this section by providing a risk-based pricing notice to each consumer to whom it grants, extends, or provides credit who does not qualify for the top tier (that is, the lowest-priced tier). For example, a person that uses a tiered pricing structure with annual percentage rates of 8, 10, 12, and 14 percent would provide the risk-based pricing notice to each consumer to whom it grants, extends, or provides credit at annual percentage rates of 10, 12, and 14 percent.
(iii) Five or more pricing tiers. If a person using the tiered pricing method has five or more pricing tiers, the person complies with the requirements of paragraph (a) of this section by providing a risk-based pricing notice to each consumer to whom it grants, extends, or provides credit who does not qualify for the top two tiers (that is, the two lowest-priced tiers) and any other tier that, together with the top tiers, comprise no less than the top 30 percent but no more than the top 40 percent of the total number of tiers. Each consumer placed within the remaining tiers must receive a risk-based pricing notice. For example, if a person has nine pricing tiers, the top three tiers (that is, the three lowest-priced tiers) comprise no less than the top 30 percent but no more than the top 40 percent of the tiers. Therefore, a person using this method would provide a risk-based pricing notice to each consumer to whom it grants, extends, or provides credit who is placed within the bottom six tiers.
(c) Application to credit card issuers —
(1) In general. A credit card issuer subject to the requirements of paragraph (a) of this section may use one of the methods set forth in paragraph (b) of this section to identify consumers to whom it must provide a risk-based pricing notice. Alternatively, a credit card issuer may satisfy its obligations under paragraph (a) of this section by providing a risk-based pricing notice to a consumer when:
(i) A consumer applies for a credit card either in connection with an application program, such as a direct-mail offer or a take-one application, or in response to a solicitation under 12 CFR 1026.60, and more than a single possible purchase annual percentage rate may apply under the program or solicitation; and
(ii) Based in whole or in part on a consumer report, the credit card issuer provides a credit card to the consumer with an annual percentage rate referenced in § 1022.71(n)(1)(ii) that is greater than the lowest annual percentage rate referenced in § 1022.71(n)(1)(ii) available in connection with the application or solicitation.
(2) No requirement to compare different offers. A credit card issuer is not subject to the requirements of paragraph (a) of this section and is not required to provide a risk-based pricing notice to a consumer if:
(i) The consumer applies for a credit card for which the card issuer provides a single annual percentage rate referenced in § 1022.71(n)(1)(ii), excluding a temporary initial rate that is lower than the rate that will apply after the temporary rate expires and a penalty rate that will apply upon the occurrence of one or more specific events, such as a late payment or an extension of credit that exceeds the credit limit; or
(ii) The credit card issuer offers the consumer the lowest annual percentage rate referenced in § 1022.71(n)(1)(ii) available under the credit card offer for which the consumer applied, even if a lower annual percentage rate referenced in § 1022.71(n)(1)(ii) is available under a different credit card offer issued by the card issuer.
(3) Examples.
(i) A credit card issuer sends a solicitation to the consumer that discloses several possible purchase annual percentage rates that may apply, such as 10, 12, or 14 percent, or a range of purchase annual percentage rates from 10 to 14 percent. The consumer applies for a credit card in response to the solicitation. The card issuer provides a credit card to the consumer with a purchase annual percentage rate of 12 percent based in whole or in part on a consumer report. Unless an exception applies under § 1022.74, the card issuer may satisfy its obligations under paragraph (a) of this section by providing a risk-based pricing notice to the consumer because the consumer received credit at a purchase annual percentage rate greater than the lowest purchase annual percentage rate available under that solicitation.
(ii) The same facts as in the example in paragraph (c)(3)(i) of this section, except that the card issuer provides a credit card to the consumer at a purchase annual percentage rate of 10 percent. The card issuer is not required to provide a risk-based pricing notice to the consumer even if, under a different credit card solicitation, that consumer or other consumers might qualify for a purchase annual percentage rate of 8 percent.
(d) Account review —
(1) In general. Except as otherwise provided in this subpart, a person is subject to the requirements of paragraph (a) of this section and must provide a risk-based pricing notice to a consumer in the form and manner required by this subpart if the person:
(i) Uses a consumer report in connection with a review of credit that has been extended to the consumer; and
(ii) Based in whole or in part on the consumer report, increases the annual percentage rate (the annual percentage rate referenced in § 1022.71(n)(1)(ii) in the case of a credit card).
(2) Example. A credit card issuer periodically obtains consumer reports for the purpose of reviewing the terms of credit it has extended to consumers in connection with credit cards. As a result of this review, the credit card issuer increases the purchase annual percentage rate applicable to a consumer’s credit card based in whole or in part on information in a consumer report. The credit card issuer is subject to the requirements of paragraph (a) of this section and must provide a risk-based pricing notice to the consumer.
15 U.S.C. 1638: Consumer Credit Disclosure Requirements
Learn about the disclosure requirements for consumer credit under 15 U.S.C. 1638, including key terms, compliance obligations, and consumer protections.
Published Mar 28, 2025
Consumers rely on credit for major purchases, from homes to everyday expenses. To ensure transparency, federal law requires lenders to disclose key terms before a borrower agrees to a loan. These disclosures help consumers compare offers and understand the true cost of borrowing.
One important regulation governing these requirements is 15 U.S.C. 1638, which mandates specific information be provided in consumer credit transactions. Understanding these disclosure rules is essential for both borrowers and lenders to avoid legal issues and ensure fair lending practices.
Coverage of Consumer Credit
15 U.S.C. 1638 applies to consumer credit transactions, meaning it covers credit extended primarily for personal, family, or household purposes. Business or commercial loans are excluded. The law applies to installment loans, retail financing, and credit card transactions if they involve a finance charge or require repayment in more than four installments. Mortgages, auto loans, and personal loans fall within its scope, ensuring borrowers receive standardized disclosures before committing to financial obligations.
Retail installment contracts, such as those used in furniture or appliance purchases, must also comply if they meet the statutory definition of consumer credit. Even deferred payment plans offered by merchants are covered. Courts have upheld this broad interpretation, as seen in Mourning v. Family Publications Service, Inc., 411 U.S. 356 (1973), where the Supreme Court affirmed the Federal Reserve’s authority to define credit transactions expansively under the Truth in Lending Act (TILA).
Mandatory Disclosure Items
Lenders must provide borrowers with clear and accurate information about credit terms. These disclosures help consumers make informed decisions and compare loan offers effectively. The law mandates specific disclosures, including finance charges, the annual percentage rate (APR), and the payment schedule.
Finance Charges
A finance charge represents the total cost of borrowing, including interest, fees, and other costs imposed as a condition of credit. Lenders must disclose this amount in dollars and cents to ensure borrowers understand the full expense beyond the principal. The finance charge includes origination fees, service fees, and required insurance premiums but generally excludes late fees and voluntary insurance unless they are a prerequisite for obtaining credit.
Regulation Z (12 C.F.R. Part 1026) provides further guidance on finance charges. Courts enforce strict compliance, as seen in Rodash v. AIB Mortgage Co., 16 F.3d 1142 (11th Cir. 1994), where a lender’s failure to disclose a $204.68 courier fee as part of the finance charge led to rescission rights for the borrower. Even minor omissions can result in significant legal consequences.
Annual Percentage Rate
The APR is a standardized measure of the cost of credit expressed as a yearly rate. It includes not only the nominal interest rate but also certain fees and costs, providing a comprehensive picture of borrowing expenses.
Regulation Z (12 C.F.R. § 1026.22) ensures uniformity in APR calculations. If a lender misstates the APR beyond the allowable tolerance—typically 1/8 of 1% for regular transactions and 1/4 of 1% for irregular transactions—the borrower may have grounds for legal recourse. In Smith v. Fidelity Consumer Discount Co., 898 F.2d 896 (3d Cir. 1990), the court ruled that an understated APR violated TILA, allowing the borrower to seek statutory damages.
Payment Schedule
The payment schedule disclosure informs borrowers of the number, amount, and due dates of their payments, allowing them to plan their finances. It must specify whether payments are fixed or variable and indicate any balloon payments—large lump-sum payments due at the end of the loan term.
Regulation Z (12 C.F.R. § 1026.18(g)) requires lenders to present this information clearly. In Clemmer v. Key Bank National Association, 539 F.3d 349 (6th Cir. 2008), the court found that a lender’s failure to disclose a balloon payment violated TILA, allowing the borrower to rescind the loan.
Civil Liability for Noncompliance
Lenders who fail to comply with disclosure requirements may face civil liability under TILA. Borrowers can seek damages if they demonstrate financial harm caused by incomplete or inaccurate disclosures. Courts have held that even minor inaccuracies can trigger liability, reinforcing the need for strict compliance.
Under 15 U.S.C. 1640(a), a creditor may be liable for actual damages, statutory damages, and attorney’s fees. Statutory damages are capped at $5,000 for individual actions but can be significantly higher in class-action lawsuits, where the total award may reach up to the lesser of $1 million or 1% of the creditor’s net worth.
Courts have interpreted these provisions strictly, as seen in Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50 (2004), where the Supreme Court ruled that statutory damages under TILA should be construed in favor of consumers. This decision reinforced the responsibility of lenders to ensure disclosures are accurate and complete.
Government Oversight
The Consumer Financial Protection Bureau (CFPB) is the primary agency enforcing 15 U.S.C. 1638. It oversees compliance with TILA, conducts examinations, investigates consumer complaints, and brings enforcement actions against violators. The CFPB’s authority extends to banks, mortgage lenders, auto finance companies, and other consumer lenders.
Other agencies also play a role in enforcement. The Federal Trade Commission (FTC) monitors non-bank lenders and retail credit transactions. The Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) oversee banks and financial institutions, ensuring compliance through audits and supervisory actions. These agencies can impose corrective measures, including cease-and-desist orders and monetary penalties.
Recourse for Consumers
Borrowers harmed by a lender’s failure to comply with 15 U.S.C. 1638 have several avenues for recourse. The law provides individual and collective remedies to deter deceptive practices and uphold transparency in lending.
One of the most powerful tools available to consumers is the right to rescind certain credit transactions. Under 15 U.S.C. 1635, borrowers in specific agreements, such as certain home equity loans and refinance transactions, can cancel within three business days of receiving the required disclosures. If a lender fails to provide accurate disclosures, this right extends up to three years. Courts have upheld this extended rescission period, as seen in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998).
Consumers may also pursue damages under 15 U.S.C. 1640. Borrowers can seek actual damages if they demonstrate financial harm, while statutory damages are available even if no direct loss occurred. Class-action lawsuits enhance consumer protections by allowing groups of borrowers to challenge systemic violations. The CFPB, state attorneys general, and private attorneys frequently initiate such actions, leading to significant settlements and corrective measures. In In re Ameriquest Mortgage Co. Lending Practices Litigation, a multi-state settlement required the lender to pay over $295 million in restitution for failing to properly disclose loan terms. These remedies emphasize lender accountability and provide meaningful enforcement mechanisms.
https://www.consumerfinance.gov/rules-policy/regulations/1022/72/https://legalclarity.org/15-u-s-c-1638-consumer-credit-disclosure-requirements/
