Consumer Compliance Outlook

§ 1022.74 Exceptions.

(1) In general. A person is not required to provide a risk-based pricing notice to the consumer under § 1022.72(a) or (c) if the consumer applies for specific material terms and is granted those terms, unless those terms were specified by the person using a consumer report after the consumer applied for or requested credit and after the person obtained the consumer report. For purposes of this section, “specific material terms” means a single material term, or set of material terms, such as an annual percentage rate of 10 percent, and not a range of alternatives, such as an annual percentage rate that may be 8, 10, or 12 percent, or between 8 and 12 percent.

(2) Example. A consumer receives a firm offer of credit from a credit card issuer. The terms of the firm offer are based in whole or in part on information from a consumer report that the credit card issuer obtained under the FCRA’s firm offer of credit provisions. The solicitation offers the consumer a credit card with a single purchase annual percentage rate of 12 percent. The consumer applies for and receives a credit card with an annual percentage rate of 12 percent. Other customers with the same credit card have a purchase annual percentage rate of 10 percent. The exception applies because the consumer applied for specific material terms and was granted those terms. Although the credit card issuer specified the annual percentage rate in the firm offer of credit based in whole or in part on a consumer report, the credit card issuer specified that material term before, not after, the consumer applied for or requested credit.

(b) Adverse action notice. A person is not required to provide a risk-based pricing notice to the consumer under § 1022.72(a), (c), or (d) if the person provides an adverse action notice to the consumer under section 615(a) of the FCRA.

(c) Prescreened solicitations —

(1) In general. A person is not required to provide a risk-based pricing notice to the consumer under § 1022.72(a) or (c) if the person:

(i) Obtains a consumer report that is a prescreened list as described in section 604(c)(2) of the FCRA; and

(ii) Uses the consumer report for the purpose of making a firm offer of credit to the consumer.

(2) More favorable material terms. This exception applies to any firm offer of credit offered by a person to a consumer, even if the person makes other firm offers of credit to other consumers on more favorable material terms.

(3) Example. A credit card issuer obtains two prescreened lists from a consumer reporting agency. One list includes consumers with high credit scores. The other list includes consumers with low credit scores. The issuer mails a firm offer of credit to the high credit score consumers with a single purchase annual percentage rate of 10 percent. The issuer also mails a firm offer of credit to the low credit score consumers with a single purchase annual percentage rate of 14 percent. The credit card issuer is not required to provide a risk-based pricing notice to the low credit score consumers who receive the 14 percent offer because use of a consumer report to make a firm offer of credit does not trigger the risk-based pricing notice requirement.

(d) Loans secured by residential real property – credit score disclosure —

(1) In general. A person is not required to provide a risk-based pricing notice to a consumer under § 1022.72(a) or (c) if:

(i) The consumer requests from the person an extension of credit that is or will be secured by one to four units of residential real property; and

(ii) The person provides to each consumer described in paragraph (d)(1)(i) of this section a notice that contains the following:

(A) A statement that a consumer report (or credit report) is a record of the consumer’s credit history and includes information about whether the consumer pays his or her obligations on time and how much the consumer owes to creditors;

(B) 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;

(C) A statement that the consumer’s credit score can affect whether the consumer can obtain credit and what the cost of that credit will be;

(D) The information required to be disclosed to the consumer pursuant to section 609(g) of the FCRA;

(E) The distribution of credit scores among consumers who are scored under the same scoring model that is used to generate the consumer’s credit score using the same scale as that of the credit score that is provided to the consumer, presented in the form of a bar graph containing a minimum of six bars that illustrates the percentage of consumers with credit scores within the range of scores reflected in each bar or by other clear and readily understandable graphical means, or a clear and readily understandable statement informing the consumer how his or her credit score compares to the scores of other consumers. Use of a graph or statement obtained from the person providing the credit score that meets the requirements of this paragraph (d)(1)(ii)(E) is deemed to comply with this requirement;

(F) A statement that the consumer is encouraged to verify the accuracy of the information contained in the consumer report and has the right to dispute any inaccurate information in the report;

(G) A statement that Federal law gives the consumer the right to obtain copies of his or her consumer reports directly from the consumer reporting agencies, including a free report from each of the nationwide consumer reporting agencies once during any 12-month period;

(H) Contact information for the centralized source from which consumers may obtain their free annual consumer reports; and

(I) A statement directing consumers to the Web site of the Bureau to obtain more information about consumer reports.

(2) Form of the notice. The notice described in paragraph (d)(1)(ii) of this section must be:

(i) Clear and conspicuous;

(ii) Provided on or with the notice required by section 609(g) of the FCRA;

(iii) Segregated from other information provided to the consumer, except for the notice required by section 609(g) of the FCRA; and

(iv) Provided to the consumer in writing and in a form that the consumer may keep.

(3) Timing. The notice described in paragraph (d)(1)(ii) of this section must be provided to the consumer at the time the disclosure required by section 609(g) of the FCRA is provided to the consumer, but in any event at or before consummation in the case of closed-end credit or before the first transaction is made under an open-end credit plan.

(4) Multiple credit scores —

(i) In general. When a person obtains two or more credit scores from consumer reporting agencies and uses one of those credit scores in setting the material terms of credit granted, extended, or otherwise provided to a consumer, for example, by using the low, middle, high, or most recent score, the notice described in paragraph (d)(1)(ii) of this section must include that credit score and the other information required by that paragraph. When a person obtains two or more credit scores from consumer reporting agencies and uses multiple credit scores in setting the material terms of credit granted, extended, or otherwise provided to a consumer, for example, by computing the average of all the credit scores obtained, the notice described in paragraph (d)(1)(ii) of this section must include one of those credit scores and the other information required by that paragraph. The notice may, at the person’s option, include more than one credit score, along with the additional information specified in paragraph (d)(1)(ii) of this section for each credit score disclosed.

(ii) Examples.

(A) A person that uses consumer reports to set the material terms of mortgage credit granted, extended, or provided to consumers regularly requests credit scores from several consumer reporting agencies and uses the low score when determining the material terms it will offer to the consumer. That person must disclose the low score in the notice described in paragraph (d)(1)(ii) of this section.

(B) A person that uses consumer reports to set the material terms of mortgage credit granted, extended, or provided to consumers regularly requests credit scores from several consumer reporting agencies, each of which it uses in an underwriting program in order to determine the material terms it will offer to the consumer. That person may choose one of these scores to include in the notice described in paragraph (d)(1)(ii) of this section.

(5) Model form. A model form of the notice described in paragraph (d)(1)(ii) of this section consolidated with the notice required by section 609(g) of the FCRA is contained in appendix H-3 of this part. Appropriate use of Model Form H-3 is deemed to comply with the requirements of § 1022.74(d). Use of the model form is optional.

(e) Other extensions of credit – credit score disclosure —

(1) In general. A person is not required to provide a risk-based pricing notice to a consumer under § 1022.72(a) or (c) if:

(i) The consumer requests from the person an extension of credit other than credit that is or will be secured by one to four units of residential real property; and

(ii) The person provides to each consumer described in paragraph (e)(1)(i) of this section a notice that contains the following:

(A) A statement that a consumer report (or credit report) is a record of the consumer’s credit history and includes information about whether the consumer pays his or her obligations on time and how much the consumer owes to creditors;

(B) 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;

(C) A statement that the consumer’s credit score can affect whether the consumer can obtain credit and what the cost of that credit will be;

(D) The current credit score of the consumer or the most recent credit score of the consumer that was previously calculated by the consumer reporting agency for a purpose related to the extension of credit;

(E) The range of possible credit scores under the model used to generate the credit score;

(F) The distribution of credit scores among consumers who are scored under the same scoring model that is used to generate the consumer’s credit score using the same scale as that of the credit score that is provided to the consumer, presented in the form of a bar graph containing a minimum of six bars that illustrates the percentage of consumers with credit scores within the range of scores reflected in each bar, or by other clear and readily understandable graphical means, or a clear and readily understandable statement informing the consumer how his or her credit score compares to the scores of other consumers. Use of a graph or statement obtained from the person providing the credit score that meets the requirements of this paragraph (e)(1)(ii)(F) is deemed to comply with this requirement;

(G) The date on which the credit score was created;

(H) The name of the consumer reporting agency or other person that provided the credit score;

(I) A statement that the consumer is encouraged to verify the accuracy of the information contained in the consumer report and has the right to dispute any inaccurate information in the report;

(J) A statement that Federal law gives the consumer the right to obtain copies of his or her consumer reports directly from the consumer reporting agencies, including a free report from each of the nationwide consumer reporting agencies once during any 12-month period;

(K) Contact information for the centralized source from which consumers may obtain their free annual consumer reports; and

(L) A statement directing consumers to the Web site of the Bureau to obtain more information about consumer reports.

(2) Form of the notice. The notice described in paragraph (e)(1)(ii) of this section must be:

(i) Clear and conspicuous;

(ii) Segregated from other information provided to the consumer; and

(iii) Provided to the consumer in writing and in a form that the consumer may keep.

(3) Timing. The notice described in paragraph (e)(1)(ii) of this section must be provided to the consumer as soon as reasonably practicable after the credit score has been obtained, but in any event at or before consummation in the case of closed-end credit or before the first transaction is made under an open-end credit plan.

(4) Multiple credit scores.

(i) In general. When a person obtains two or more credit scores from consumer reporting agencies and uses one of those credit scores in setting the material terms of credit granted, extended, or otherwise provided to a consumer, for example, by using the low, middle, high, or most recent score, the notice described in paragraph (e)(1)(ii) of this section must include that credit score and the other information required by that paragraph. When a person obtains two or more credit scores from consumer reporting agencies and uses multiple credit scores in setting the material terms of credit granted, extended, or otherwise provided to a consumer, for example, by computing the average of all the credit scores obtained, the notice described in paragraph (e)(1)(ii) of this section must include one of those credit scores and the other information required by that paragraph. The notice may, at the person’s option, include more than one credit score, along with the additional information specified in paragraph (e)(1)(ii) of this section for each credit score disclosed.

(ii) Examples. The manner in which multiple credit scores are to be disclosed under this section are substantially identical to the manner set forth in the examples contained in paragraph (d)(4)(ii) of this section.

(5) Model form. A model form of the notice described in paragraph (e)(1)(ii) of this section is contained in appendix H-4 of this part. Appropriate use of Model Form H-4 is deemed to comply with the requirements of § 1022.74(e). Use of the model form is optional.

(f) Credit score not available —

(1) In general. A person is not required to provide a risk-based pricing notice to a consumer under § 1022.72(a) or (c) if the person:

(i) Regularly obtains credit scores from a consumer reporting agency and provides credit score disclosures to consumers in accordance with paragraphs (d) or (e) of this section, but a credit score is not available from the consumer reporting agency from which the person regularly obtains credit scores for a consumer to whom the person grants, extends, or provides credit;

(ii) Does not obtain a credit score from another consumer reporting agency in connection with granting, extending, or providing credit to the consumer; and

(iii) Provides to the consumer a notice that contains the following:

(A) A statement that a consumer report (or credit report) includes information about the consumer’s credit history and the type of information included in that history;

(B) 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 in response to changes in the consumer’s credit history;

(C) A statement that credit scores are important because consumers with higher credit scores generally obtain more favorable credit terms;

(D) A statement that not having a credit score can affect whether the consumer can obtain credit and what the cost of that credit will be;

(E) A statement that a credit score about the consumer was not available from a consumer reporting agency, which must be identified by name, generally due to insufficient information regarding the consumer’s credit history;

(F) A statement that the consumer is encouraged to verify the accuracy of the information contained in the consumer report and has the right to dispute any inaccurate information in the consumer report;

(G) A statement that Federal law gives the consumer the right to obtain copies of his or her consumer reports directly from the consumer reporting agencies, including a free consumer report from each of the nationwide consumer reporting agencies once during any 12-month period;

(H) The contact information for the centralized source from which consumers may obtain their free annual consumer reports; and

(I) A statement directing consumers to the Web site of the Bureau to obtain more information about consumer reports.

(2) Example. A person that uses consumer reports to set the material terms of non-mortgage credit granted, extended, or provided to consumers regularly requests credit scores from a particular consumer reporting agency and provides those credit scores and additional information to consumers to satisfy the requirements of paragraph (e) of this section. That consumer reporting agency provides to the person a consumer report on a particular consumer that contains one trade line, but does not provide the person with a credit score on that consumer. If the person does not obtain a credit score from another consumer reporting agency and, based in whole or in part on information in a consumer report, grants, extends, or provides credit to the consumer, the person may provide the notice described in paragraph (f)(1)(iii) of this section. If, however, the person obtains a credit score from another consumer reporting agency, the person may not rely upon the exception in paragraph (f) of this section, but may satisfy the requirements of paragraph (e) of this section.

(3) Form of the notice. The notice described in paragraph (f)(1)(iii) of this section must be:

(i) Clear and conspicuous;

(ii) Segregated from other information provided to the consumer; and

(iii) Provided to the consumer in writing and in a form that the consumer may keep.

(4) Timing. The notice described in paragraph (f)(1)(iii) of this section must be provided to the consumer as soon as reasonably practicable after the person has requested the credit score, but in any event not later than consummation of a transaction in the case of closed-end credit or when the first transaction is made under an open-end credit plan.

(5) Model form. A model form of the notice described in paragraph (f)(1)(iii) of this section is contained in appendix H-5 of this part. Appropriate use of Model Form H-5 is deemed to comply with the requirements of § 1022.74(f). Use of the model form is optional.

An Overview of the Credit Score Disclosure Requirements for Risk-Based Pricing Notices

By Laura Gleason, Senior Consumer Regulations Analyst, Federal Reserve Bank of Philadelphia On January 15, 2010, the Board of Governors of the Federal Reserve System (Board) and the Federal Trade Commission (FTC) jointly issued final rules implementing the risk-based pricing requirements under the Fair Credit Reporting Act (FCRA) (January 2010 Final Rules). These rules generally require a creditor to provide a consumer applying for credit with a notice when, based on the consumer’s credit report, the creditor provides credit to the consumer on less favorable terms than it provides to other consumers. 1 The final rule was effective January 1, 2011. Outlook reviewed these requirements in detail in An Overview of the Risk-Based Pricing Implementing Regulations, published in the fourth quarter 2010 issue, 2 and in a webinar titled Risk-Based Pricing Notices on February 16, 2011. 3 On July 21, 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 1100F of the Dodd-Frank Act amended the FCRA to require disclosure of credit scores and information relating to credit scores for both risk-based pricing and FCRA adverse action notices. On July 15, 2011, the Board and the FTC jointly issued final rules to implement section 1100F for risk-based pricing notices (July 2011 Final Rules). This article reviews the credit score disclosure requirements for risk-based pricing notices that were added under the Dodd-Frank Act. 4

CREDIT SCORE DISCLOSURE REQUIREMENTS FOR RISK-BASED PRICING NOTICES

When Must a Credit Score and Information Relating to a Credit Score Be Disclosed on a Risk-Based Pricing Notice?

A creditor must disclose a consumer’s credit score and information relating to a credit score on a risk-based pricing notice when the score of the consumer to whom the creditor extends credit or whose extension of credit is under review is used in setting the material terms of credit. 5 The use of the credit score does not have to be the sole or primary factor in setting the terms of credit to be subject to the disclosure requirement — it need only be a factor. If the creditor did not use a credit score at all in setting the material credit terms, the creditor is not required to disclose the consumer’s credit score or information relating to a credit score. 6

What Information Must Be Disclosed?

• A statement that a credit score is a number that takes into account information in a consumer report, that the consumer’s credit score was used to set the terms of credit offered, and that a credit score can change over time to reflect changes in the consumer’s credit history;
• The credit score used by the creditor in making the credit decision;
• The range of possible credit scores under the model used to generate the credit score;
• The key factors that adversely affected the credit score (discussed below);
• 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. 7

Creditors generally must disclose no more than four key factors. However, if one key factor is the number of inquiries made with respect to the consumer report, this factor must be disclosed and may constitute a fifth factor. If a creditor is using a credit score purchased from a consumer reporting agency, the consumer reporting agency is in the best position to identify the key factors that affected the score. Thus, the creditor could rely on the information from the consumer reporting agency in its disclosure to consumers.

How Many Credit Scores Must Be Disclosed?

When a creditor uses multiple credit scores in setting the terms of credit, the creditor must disclose any one of those scores. Alternatively, the creditor, at its option, may disclose multiple scores used in setting the material terms of credit. If a creditor obtained multiple credit scores, but used only one score, only that score must be disclosed. For example, if the creditor regularly requests scores from several consumer reporting agencies and uses only the lowest score, then the lowest score must be disclosed.

What Types of Credit Scores Must Be Disclosed?

A creditor must disclose “the credit score used by the person in making the credit decision” on a risk-based pricing notice. 8 “Credit score” has the same meaning used in §609(f)(2)(a) of the FCRA.

Most credit scores that meet the FCRA definition are scores that creditors obtain from consumer reporting agencies. The FCRA credit score definition specifically excludes some — but not all — proprietary scores. The definition of credit score does not include any mortgage score or rating of an automated underwriting system that considers one or more factors in addition to credit information, including the loan-to-value ratio, the amount of down payment, or the financial assets of a consumer. Thus, if a creditor uses a proprietary score that is based on one or more of these factors in addition to information obtained from a consumer reporting agency, this proprietary score is not a credit score and thus does not need to be disclosed to the consumer. In contrast, if a creditor uses a proprietary score that only includes information acquired from a consumer reporting agency in setting the material terms of credit or reviewing the account, the proprietary score would be a credit score for purposes of the FCRA and would be required to be disclosed to the consumer.

If a creditor uses both a proprietary score that does not meet the definition of a credit score and a credit score from a consumer reporting agency in setting the material terms of credit or reviewing the account, the creditor would disclose the credit score from the consumer reporting agency. Similarly, if a creditor uses a credit score from a consumer reporting agency as an input to a proprietary score, but that proprietary score itself is not a credit score, the creditor would disclose the credit score from the consumer reporting agency. 9

No Credit Score. In some cases, a creditor that provides risk-based pricing notices to consumers may try to obtain a credit score for an applicant, but the applicant may have insufficient credit history for the consumer reporting agency to generate a credit score. In these instances, the creditor cannot and is not required to disclose credit score information if an applicant has no credit score. 10

Multiple Consumers. In some cases, a creditor may use the credit score of a guarantor or co-signer, but not the credit score of the consumer to whom it extends credit or whose extension of credit is under review. A creditor may be required to provide a risk-based pricing notice to the consumer to whom it extends credit or whose application is under review but is not required to provide a risk-based pricing notice to the guarantor or cosigner. When a creditor uses the credit score only of a guarantor or cosigner to set the terms of credit for the consumer to whom it extends credit or whose extension of credit is under review, a person shall not include a credit score in the general risk-based pricing notice or account review notice provided to the consumer. 11

In a transaction involving two or more borrowers, a creditor must provide a general risk-based pricing notice or an account review notice to all of the coborrowers and not only to the borrower whose credit score was used in setting the material terms of credit. 12 Whether the consumers have the same address or not, a creditor must provide a separate notice to each consumer if a notice includes a credit score(s). Each separate notice that includes a credit score(s) must contain only the credit score(s) of the consumer to whom the notice is provided and not the credit score(s) of the other consumer. If the consumers have the same address and the notice does not include a credit score(s), a creditor may provide a single notice addressed to both consumers. 13

Risk-Based Pricing Model Forms

The Board and the FTC’s joint rulemaking under the FCRA includes model forms for risk-based pricing notices that require credit score disclosures. 14 Model Form H-6 of the Board’s rules and Model Form B-6 of the FTC’s rules may be used when a creditor used a credit score in deciding upon an initial extension of credit. Model Form H-7 of the Board’s rules and Model Form B-7 of the FTC’s rules may be used when a creditor used a credit score during an account review.

Credit Score Disclosure Exception to Risk-Based Pricing Notice

The January 2010 Final Rules included a compliance option in which a creditor may choose to send a credit score exception notice to all credit applicants instead of providing a risk-based pricing notice to certain consumers. The agencies clarified in the July 2011 Final Rules that creditors may continue to provide credit score exception notices to all credit applicants in lieu of providing risk-based pricing notices to some consumers. 15

Effective Date

The requirements for disclosing credit scores and related information under section 1100F of the Dodd- Frank Act became effective on July 21, 2011. The effective date for the regulations issued by the Board and the FTC was August 15, 2011. 16

CONCLUSION

Creditors should ensure that their risk-based pricing notices comply with these new requirements. Specific issues and questions about consumer compliance matters should be raised with your primary regulator.

• 1 http://www.federalreserve.gov/newsevents/press/bcreg/20091222b.htm
• 2 http://bit.ly/rb-article
• 3 http://tinyurl.com/rb-webinar
• 4 The Board also published adverse action model notices to reflect the new credit score disclosure requirements for FCRA adverse action notices. These model notices were published under Regulation B and may be used to fulfill both the Equal Credit Opportunity Act and FCRA adverse action notice requirements. See 76 Fed. Reg. 41,590, 41,598 (July 15, 2011). The Board’s announcement and the Federal Register notices are available at http://1.usa.gov/score-rule.
• 5 12 C.F.R. §222.73(a)(1)(ix) (risk-based pricing); 12 C.F.R. §222.73(a)(2)(ix) (account review)
• 6 76 Fed. Reg. at 41,606
• 7 12 C.F.R. §222.73(a)(1)(ix) (risk-based pricing notice); 12 C.F.R. §222.73(a)(2)(ix) (account review notice)
• 8 12 C.F.R. §222.73(a)(1)(ix)(B) (risk-based pricing notice); 12 C.F.R. §222.73(a)(2)(ix)(B) (account review notice)
• 9 76 Fed. Reg. at 41,605
• 10 76 Fed. Reg. at 41,610
• 11 76 Fed. Reg. at 41,607
• 12 76 Fed. Reg. at 41,609
• 13 12 C.F.R. §222.75(c)(1)
• 14 The risk-based pricing notice forms with credit score disclosures are available at http://bit.ly/credit-score-forms.
• 15 76 Fed. Reg. at 41,607-08
• 16 76 Fed. Reg. at 41,611

In This Issue

• An Overview of the Credit Score Disclosure Requirements for Risk-Based Pricing Notices
• The Federal Reserve Board’s Interim Final Rule on Valuation Independence
• The New Dollar Threshold for Regulation Z Coverage
• News from Washington: Regulatory Updates
• On the Docket: Recent Federal Court Opinions
• Regulatory Calendar
• Calendar of Events Q3 2011

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