[Federal Register Volume 69, Number 114 (Tuesday, June 15, 2004)]
[Rules and Regulations]
[Pages 33281-33285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13290]


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FEDERAL RESERVE SYSTEM

12 CFR Part 222

[Regulation V; Docket No. R-1187]


Fair Credit Reporting Act

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is publishing revisions to Regulation V, which 
implements the Fair Credit Reporting Act. The revisions add model 
notices that financial institutions may use to comply with the notice 
requirement relating to furnishing negative information contained in 
section 217 of the Fair and Accurate Credit Transactions Act of 2003 
(FACT Act). Section 217 of the FACT Act amends the FCRA to provide that 
if any financial institution extends credit and regularly and in the 
ordinary course of business furnishes information to a nationwide 
consumer reporting agency, and furnishes negative information to such 
an agency regarding credit extended to a customer, the institution must 
provide a clear and conspicuous notice about furnishing negative 
information, in writing, to the customer. Section 217 defines the term 
``financial institution'' to have the same meaning as in the privacy 
provisions of the Gramm-Leach-Bliley Act. The Board's model notices may 
be used by all financial institutions, as defined by section 217.

DATES: The rule is effective July 16, 2004.

FOR FURTHER INFORMATION CONTACT: Krista P. DeLargy, Senior Attorney, or 
David A. Stein, Counsel, Division of Consumer and Community Affairs, at 
(202) 452-3667 or 452-2412; or Thomas E. Scanlon, Counsel, Legal 
Division, at (202) 452-3594; for users of Telecommunications Device for 
the Deaf (``TDD'') only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

    On December 4, 2003, the President signed into law the FACT Act, 
which amends the FCRA. Pub. L. 108-159, 117 Stat. 1952. In general, the 
FACT Act enhances the ability of consumers to combat identity theft, 
increases the accuracy of consumer reports, and allows consumers to 
exercise greater control regarding the type and amount of marketing 
solicitations they receive. The FACT Act also restricts the use and 
disclosure of sensitive medical information. To bolster efforts to 
improve financial literacy among consumers, the FACT Act creates a new 
Financial Literacy and Education Commission empowered to take 
appropriate actions to improve the financial literacy and education 
programs, grants, and materials of the Federal government. Lastly, the 
FACT Act establishes uniform national standards in key areas of 
regulation regarding consumer report information.
    Section 217 of the FACT Act requires that if any financial 
institution (1) extends credit and regularly and in the ordinary course 
of business furnishes information to a nationwide consumer reporting 
agency, and (2) furnishes negative information to such an agency 
regarding credit extended to a customer, the institution must provide a 
clear and conspicuous notice about furnishing negative information, in 
writing, to the customer. Section 217 defines the term ``negative 
information'' to mean information concerning a customer's 
delinquencies, late payments, insolvency, or any form of default. The 
term ``credit'' is defined under the FACT Act to have the same meaning 
as in section 702 of the Equal Credit Opportunity Act, which defines 
``credit'' to mean ``the right granted by a creditor to a debtor to 
defer payment of debt or to incur debt and defer its payment or to 
purchase property or services and defer payment therefor.'' 15 U.S.C. 
1691a. The provisions in Section 217 will become effective December 1, 
2004. 69 FR 6526, (February 11, 2004).
    Section 217 specifies that an institution must provide the required 
notice to the customer prior to, or no later than 30 days after, 
furnishing the negative information to a nationwide consumer reporting 
agency. After providing the notice, the institution may submit 
additional negative information to a nationwide consumer reporting 
agency with respect to the same transaction, extension of credit, 
account, or customer without providing additional notice to the 
customer. If a financial institution has provided a customer with a 
notice prior to the furnishing of negative information, the institution 
is not required to furnish negative information about the customer to a 
nationwide consumer reporting agency. A financial institution generally 
may provide the notice about furnishing negative information on or with 
any notice of default, any billing statement, or any other materials 
provided to the customer, so long as the notice is clear and 
conspicuous. Section 217 specifically provides, however, that the 
notice may not be included in the initial disclosures provided under 
section 127(a) of the Truth in Lending Act (15 U.S.C. 1637(a)).

[[Page 33282]]

    Section 217 also provides a safe harbor for institutions concerning 
their efforts to comply with the notice requirement. Section 217 
provides that a financial institution shall not be liable for failure 
to perform the duties required by this section if, at the time of the 
failure, the institution maintained reasonable policies and procedures 
to comply with the section or the institution reasonably believed that 
the institution was prohibited by law from contacting the customer.
    Under section 217, the term ``financial institution'' is defined 
broadly to have the same meaning as in section 509 of the Gramm-Leach-
Bliley Act (GLB Act), which generally defines financial institution to 
mean ``any institution the business of which is engaging in financial 
activities as described in section 4(k) of the Bank Holding Company Act 
of 1956,'' whether or not affiliated with a bank. 15 U.S.C. 6809(3). 
Thus, the term ``financial institution'' includes not only institutions 
regulated by the Board and other federal banking agencies, but also 
includes other financial entities, such as merchant creditors and debt 
collectors that extend credit and report negative information. 16 CFR 
313.3(k), 65 FR 33646, 33655 (May 24, 2000).
    Section 217 requires the Board to publish, after notice and 
comment, a concise model notice not to exceed 30 words in length that 
financial institutions may, but are not required to, use to comply with 
the notice requirement. Under section 217, a financial institution 
shall be deemed to be in compliance with the notice requirement if the 
institution uses the Board's model notice, or uses the model notice and 
rearranges its format.
    In April 2004, the Board issued the following proposed model 
notice: ``We [may provide]/[have provided] information to credit 
bureaus about an insolvency, delinquency, late payment, or default on 
your account to include in your credit report.'' 69 FR 19123 (April 12, 
2004). The Board received approximately 50 comment letters in response 
to the proposal. Around 40 letters were submitted by financial 
institutions and their representatives. One letter was received from 
consumer representatives, two letters from government entities, and six 
letters from individuals.

II. Comments Received

Comments on the Model Notice

    Most commenters suggested that the Board revise the model notice 
language to enhance the readability and clarity of the disclosure for 
consumers. In light of these comments and its own analysis, the Board 
has revised the language of the model notice to make the disclosure 
more understandable to consumers. As discussed in more detail below, 
the final rule provides two model notices--one that may be used by a 
financial institution if the institution provides the notice in advance 
of providing negative information to a consumer reporting agency, and 
one that can be used if an institution provides the notice after 
providing negative information to a consumer reporting agency. The 
Board found it more useful to craft a precise, focused notice for each 
situation, rather than providing one model notice for use in both 
situations.
    Several commenters also requested additional guidance from the 
Board on use of the model notices. Several commenters asked the Board 
to incorporate into the regulation the safe harbor for use of the model 
notice that is contained in section 217. The safe harbor in section 217 
essentially provides that a financial institution shall be deemed to be 
in compliance with the notice requirement relating to furnishing 
negative information if the institution uses the model notice issued by 
the Board, or uses such model notice and rearranges its format. Several 
commenters also requested guidance on how financial institutions may 
rearrange the format of the model notice without losing the safe harbor 
from liability provided by the model notice. The Board has incorporated 
the safe harbor into the text of the regulation, and has provided 
additional guidance on use of the model notices.

Comments on Other Substantive Issues

    Many commenters also asked the Board to provide guidance on a 
number of substantive issues raised by section 217 that are not related 
to the contents of the model notice. For example, several commenters 
asked the Board to clarify issues relating to existing customers, such 
as whether the notice should be given to existing customers, or whether 
a substantially similar notice previously given to existing customers 
is sufficient to satisfy the notice requirement. In addition, some 
commenters asked the Board to clarify the timing of the notice. 
Consumer groups asked the Board to make clear that the notice may only 
be sent to consumers about whom there is negative information that the 
financial institution either intends to send to credit bureaus or has 
sent to credit bureaus. On the other hand, several industry commenters 
wanted clarification that the notice may be delivered at any time prior 
to the furnishing of negative information, and may be included on 
credit applications, loan closing documents, or with periodic notices 
(such as a privacy notice).
    The final rule does not address substantive issues raised by 
commenters that are not related to the contents of the model notice. 
Such issues are beyond the scope of this rulemaking. Under section 217, 
the Board was given authority to issue model notices, and certain 
guidance relating to the model notices, but was not given the authority 
to issue general regulations implementing section 217. Section 621(e) 
of the FCRA provides the banking agencies (the Board, the Office of the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation 
and the Office of Thrift Supervision) with the authority to prescribe 
joint regulations necessary to carry out the purposes of the FCRA, 
including section 217 which amends the FCRA. 15 U.S.C. 1681s(e). The 
Board will share with the other banking agencies the comments the Board 
received on substantive issues not related to the contents of the model 
notice.

III. Section by Section Analysis

Section 222.1 Purpose, Scope, and Effective Dates

    The Board proposed paragraph 222.1(b)(2) to clarify the scope of 
the Board's Regulation V, which implements the FCRA. Generally, the 
Board's Regulation V covers the institutions under the Board's 
jurisdiction. 15 U.S.C. 1681s(e). Nonetheless, the Board proposed 
paragraph (b)(2) to specify that the Board's model notice in Appendix B 
relating to furnishing of negative information may be used by all 
financial institutions (as that term is defined in section 509 of the 
GLB Act) to comply with the notice requirement contained in section 217 
of the FACT Act. The Board received no comments on the proposed 
paragraph 222.1(b)(2). The Board is adopting this provision with 
several technical revisions. The Board has revised paragraph (b)(2)(i) 
to reflect more accurately the institution's under the Board's 
jurisdiction. In addition, the Board has revised paragraph (b)(2)(ii) 
to pluralize the reference to model notices.

Appendix B--Model Notice of Furnishing Negative Information

    The Board proposed the following model notice that financial 
institutions may use to comply with the notice requirement under 
section 217 of the FACT Act: ``We [may provide]/[have provided] 
information to credit bureaus

[[Page 33283]]

about an insolvency, delinquency, late payment, or default on your 
account to include in your credit report.'' 69 FR 19123 (April 12, 
2004).

Model Notice Language

    Most commenters suggested that the Board revise the model notice 
language to enhance the readability and clarity of the disclosure for 
consumers. Many commenters provided suggested language on how the model 
notice should be revised to achieve this goal. In light of these 
comments and its own analysis, the Board has revised the language of 
the model notice to make the disclosure more useful and more 
understandable to consumers.
    Appendix B provides two model notices. Model Notice B-1 may be used 
by financial institutions that give the notice prior to furnishing 
negative information to a consumer reporting agency. This model notice 
reads: ``We may report information about your account to credit 
bureaus. Late payments, missed payments, or other defaults on your 
account may be reflected in your credit report.'' This model notice has 
a Flesch readability score of 52.1, and a Flesch-Kincaid grade level 
score of 9.3. (The proposed model notice has a Flesch readability score 
of 27.5, and a Flesch-Kincaid grade level score of 12.0.) Model Notice 
B-2 may be used by financial institutions that give the notice after 
furnishing negative information to a consumer reporting agency. This 
model notice reads: ``We have told a credit bureau about a late 
payment, missed payment or other default on your account. This 
information may be reflected in your credit report.'' This model notice 
has a Flesch readability score of 58.3, and a Flesch-Kincaid grade 
level score of 8.4.
    In commenting on the proposed model notice, both consumer groups 
and industry commenters believed that the terms ``delinquency'' and 
``insolvency'' are not readily understandable to consumers. In 
addition, several industry commenters noted that they were not aware 
that financial institutions furnished information about ``insolvency'' 
of a customer to credit bureaus. Several industry commenters suggested 
that the model notice should simply use the terms ``late payment'' and 
``default'' because they believed those terms are understandable to 
consumers, and would be sufficient to convey to the customer the types 
of negative information that the furnisher may provide. Consumer groups 
suggested including the language ``late payments, missed payments, or 
partial payments, other default or bankruptcy'' as specific examples of 
the negative information furnished by financial institutions. Model 
Notices B-1 and B-2 use the terms ``late payment(s),'' ``missed 
payment(s),'' and ``other default(s).'' The Board believes that these 
terms are understandable to consumers, and adequately convey to 
customers the types of negative information that furnishers may provide 
to consumer reporting agencies.
    Several industry commenters also believed that the proposed 
language may imply to customers that a financial institution only 
provides information about an ``insolvency, delinquency, late payment, 
or default'' to a consumer reporting agency. These commenters pointed 
out that many financial institutions report more than these four types 
of information to consumer reporting agencies; many institutions 
furnish both positive and negative information on accounts. These 
commenters suggested that the Board adopt model notice language that 
more accurately reflects the nature of a financial institution's likely 
behavior with respect to furnishing information to consumer reporting 
agencies. As revised, the Board believes that the language of Model 
Notice B-1 no longer suggests that a financial institution only 
provides information about ``insolvency, delinquency, late payment, or 
default'' to a consumer reporting agency.
    Several industry commenters suggested that the Board delete the 
last clause--``to include in your credit report''--from the proposed 
model notice because the furnisher of negative information is not 
responsible for deciding whether such information is, in fact, included 
in the relevant credit reports. The Board has revised the language of 
Model Notices B-1 and B-2 so the model notices no longer imply that 
negative information will be included in the credit report. 
Nonetheless, these model notices still include a reference to a 
customer's credit report--indicating that negative information may be 
reflected in the customer's credit report. The Board believes that it 
is important to alert customers to the possible consequences of 
negative information being furnished to credit bureaus.
    Several industry commenters asked the Board to provide multiple 
model notices that would give financial institutions options from which 
to choose when providing the required disclosures to customers. The 
Board believes that the two model notices given in Appendix B are 
sufficient. The Board notes that financial institutions may, but are 
not required to, use the model notices issued by the Board to meet the 
notice requirement contained in section 217.
    Consumer groups requested that the Board require financial 
institutions to take certain steps to the make the disclosure readily 
noticeable. These groups suggested that the Board require the 
disclosure to be on the front page of the notice or billing statement, 
and require it to be in bold face type and in larger print than the 
information that accompanies it. The Board notes that section 217 
requires financial institutions to provide the notice of furnishing 
negative information in a clear and conspicuous manner. The Board does 
not believe it is necessary to place additional format requirements on 
financial institutions that decide to use the model notices to meet the 
notice requirements.
Safe Harbor and Additional Guidance on Use of Model Notices
    Several commenters requested additional guidance from the Board on 
use of the model notices. Several commenters asked the Board to 
incorporate into the regulation the safe harbor relating to use of the 
model notice contained in the statute. In particular, section 217 
provides that a financial institution may, but is not required to, use 
the model notice issued by the Board. Section 217 also provides that a 
financial institution shall be deemed to be in compliance with the 
notice requirement relating to furnishing negative information 
contained in section 217 if the institution uses the model notice 
issued by the Board, or uses such model notice and rearrange its 
format. Several commenters believed it would be helpful to include this 
safe harbor in the text of the regulation, because many examiners and 
financial institutions use the regulation as a point of reference.
    Some commenters also requested guidance on how financial 
institutions may rearrange the format of the model notices without 
losing the safe harbor from liability provided by the model notices. In 
particular, these commenters requested clarification that the critical 
elements of the model notice's reference to late payment, default, and 
reporting to a credit bureau may be rearranged or combined with other 
language and still come within the safe harbor of the model notice, 
provided that the meaning of the model notice is retained.
    In light of these comments and its own analysis, the Board has 
revised Appendix B to incorporate the safe harbor contained in section 
217, and to provide additional guidance on the use of the model 
notices. In particular,

[[Page 33284]]

Appendix B provides that although use of the model notices is not 
required, a financial institution shall be deemed to be in compliance 
with the notice requirement if the institution properly uses the model 
notices in Appendix B. In addition, Appendix B provides that financial 
institutions may make certain changes to the language or format of the 
model notices without losing the safe harbor from liability provided by 
the model notices. Appendix B provides examples of acceptable changes, 
including rearranging the order of the references to ``late 
payment(s)'' and ``missed payment(s),'' or pluralizing the terms 
``credit bureau,'' ``credit report'' and ``account'' as used in the 
model notices. Nonetheless, Appendix B provides that changes to the 
model notices may not be so extensive as to affect the substance, 
clarity, or meaningful sequence of the language in the model notices. 
Financial institutions making such extensive revisions will lose the 
safe harbor from liability that Appendix B provides.

IV. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act, 
the Board has certified that the final revisions to Regulation V 
relating to the model notices will not have a significant economic 
impact on small entities. Section 217 of the FACT Act amends the FCRA 
to provide that if any financial institution (1) extends credit and 
regularly and in the ordinary course of business furnishes information 
to a nationwide consumer reporting agency, and (2) furnishes negative 
information to such an agency regarding credit extended to a customer, 
the institution must provide a clear and conspicuous notice about 
furnishing negative information, in writing, to the customer. Section 
217 defines the term ``financial institution'' to have the same meaning 
as in the privacy provisions of the Gramm-Leach-Bliley Act. Thus, the 
term ``financial institution'' includes not only institutions regulated 
by the Board and other federal banking agencies, but also includes 
other financial entities, such as merchant creditors and debt 
collectors that extend credit and report negative information.
    The final revisions to Regulation V would provide financial 
institutions with model notices (provided in Appendix B) that they may 
use to comply with the notice requirement under section 217 of the FACT 
Act relating to furnishing negative information. The final revisions to 
Regulation V also would provide financial institutions with additional 
guidance on how to use these model notices.
    The final revisions to Regulation V relating to the model notices 
are not expected to have a significant economic impact on small 
entities. By providing model notices and additional guidance on use of 
the model notices, the Board has minimized the burden imposed on 
financial institutions by the notice requirement contained in section 
217 of the FACT Act. A financial institution that properly uses the 
model notices in Appendix B will be deemed to be in compliance with the 
notice requirement of section 217. The Board also notes that the 
revisions to Regulation V do not require financial institutions to use 
the model notices. Financial institutions may, but are not required to, 
use the model notices in Regulation V to meet the notice requirement 
contained in section 217.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final rule under 
the authority delegated to the Board by the Office of Management and 
Budget (OMB). The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless it displays a currently valid OMB control number. The OMB 
control number for this final rule is 7100-0308.
    The collection of information involved in this rulemaking is found 
in section 217 of the FACT Act, Pub. L. 108-159, 117 Stat. 1952. This 
information is mandatory for financial institutions that furnish 
negative information to credit bureaus regarding credit extended to 
customers. The respondents are financial institutions as defined in the 
privacy provisions of the GLB Act. The term ``financial institution'' 
includes not only institutions regulated by the Board and other federal 
banking agencies, but also includes other financial entities, such as 
merchant creditors and debt collectors that extend credit and report 
negative information.
    The final revisions to Regulation V would provide financial 
institutions with model notices (provided in Appendix B) that they may 
use to comply with the notice requirement under section 217 of the FACT 
Act relating to furnishing negative information. The final revisions to 
Regulation V also would provide additional guidance to financial 
institutions on how to use these model notices.
    The estimated annual burden for financial institutions is 
approximately 240,000 hours. Financial institutions would face a one-
time burden to reprogram and update systems to include the new notice 
requirement. With respect to financial institutions, approximately 
30,000 furnish information to consumer reporting agencies. The 
estimated time to update systems is approximately 8 hours (one business 
day). In conjunction with the proposed revisions to Regulation V, the 
Board sought comment on the burden estimate for the proposed changes. 
The Board did not receive any comments specifically responding to the 
paperwork reduction analysis published with the proposed rule.

List of Subjects in 12 CFR Part 222

    Banks, banking, Holding companies, State member banks.


0
For the reasons set forth in the preamble, the Board amends Regulation 
V, 12 CFR part 222, as set forth below:

PART 222--FAIR CREDIT REPORTING (REGULATION V)

0
1. The authority citation for part 222 is revised to read as follows:

    Authority: 15 U.S.C. 1681s; Secs. 3 and 217, Pub. L. 108-159; 
117 Stat. 1953, 1986-88.


0
2. Section 222.1 is amended by adding a new paragraph (b) to read as 
follows:

Subpart A--General Provisions


Sec.  222.1  Purpose, scope, and effective dates.

* * * * *
    (b) Scope.
    (1) [reserved] (2) Institutions covered. (i) Except as otherwise 
provided in this paragraph (b)(2), the regulations in this part apply 
to banks that are members of the Federal Reserve System (other than 
national banks), branches and Agencies of foreign banks (other than 
Federal branches, Federal Agencies, and insured State branches of 
foreign banks), commercial lending companies owned or controlled by 
foreign banks, organizations operating under section 25 or 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.), and bank 
holding companies and affiliates of such holding companies (other than 
depository institutions and consumer reporting agencies).
    (ii) For purposes of Appendix B to this part, financial 
institutions as defined in section 509 of the Gramm-Leach-Bliley Act 
(12 U.S.C. 6809), may use the model notices in Appendix B to this part 
to comply with the notice requirement in section 623(a)(7) of the

[[Page 33285]]

Fair Credit Reporting Act (15 U.S.C. 1681s-2(a)(7)).
* * * * *

0
3. Part 222 is amended by adding and reserving Appendix A, and adding a 
new Appendix B to read as follows:

Appendix A to Part 222--[Reserved]



Appendix B to Part 222--Model Notices of Furnishing Negative 
Information

    a. Although use of the model notices is not required, a 
financial institution that is subject to section 623(a)(7) of the 
FCRA shall be deemed to be in compliance with the notice requirement 
in section 623(a)(7) of the FCRA if the institution properly uses 
the model notices in this appendix (as applicable).
    b. A financial institution may use Model Notice B-1 if the 
institution provides the notice prior to furnishing negative 
information to a nationwide consumer reporting agency.
    c. A financial institution may use Model Notice B-2 if the 
institution provides the notice after furnishing negative 
information to a nationwide consumer reporting agency.
    d. Financial institutions may make certain changes to the 
language or format of the model notices without losing the safe 
harbor from liability provided by the model notices. The changes to 
the model notices may not be so extensive as to affect the 
substance, clarity, or meaningful sequence of the language in the 
model notices. Financial institutions making such extensive 
revisions will lose the safe harbor from liability that this 
appendix provides. Acceptable changes include, for example,
    1. Rearranging the order of the references to ``late 
payment(s),'' or ``missed payment(s)''
    2. Pluralizing the terms ``credit bureau,'' ``credit report,'' 
and ``account''
    3. Specifying the particular type of account on which 
information may be furnished, such as ``credit card account''
    4. Rearranging in Model Notice B-1 the phrases ``information 
about your account'' and ``to credit bureaus'' such that it would 
read ``We may report to credit bureaus information about your 
account.''

Model Notice B-1

    We may report information about your account to credit bureaus. 
Late payments, missed payments, or other defaults on your account 
may be reflected in your credit report.

Model Notice B-2

    We have told a credit bureau about a late payment, missed 
payment or other default on your account. This information may be 
reflected in your credit report.

    By order of the Board of Governors of the Federal Reserve 
System, June 8, 2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-13290 Filed 6-14-04; 8:45 am]
BILLING CODE 6210-01-P