[Federal Register Volume 73, Number 97 (Monday, May 19, 2008)]
[Proposed Rules]
[Pages 28966-29021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10640]



[[Page 28965]]

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Part IV





Federal Reserve System





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12 CFR Part 222





Federal Trade Commission





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16 CFR Parts 640 and 698



Fair Credit Reporting Risk-Based Pricing Regulations; Proposed Rule

  Federal Register / Vol. 73, No. 97 / Monday, May 19, 2008 / Proposed 
Rules  

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FEDERAL RESERVE SYSTEM

12 CFR Part 222

[Regulation V; Docket No. R-1316]

FEDERAL TRADE COMMISSION

16 CFR Parts 640 and 698

RIN 3084-AA94


Fair Credit Reporting Risk-Based Pricing Regulations

AGENCIES: Board of Governors of the Federal Reserve System (Board) and 
Federal Trade Commission (Commission).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board and the Commission are publishing for comment 
proposed rules to implement the risk-based pricing provisions in 
section 311 of the Fair and Accurate Credit Transactions Act of 2003 
(FACT Act), which amends the Fair Credit Reporting Act (FCRA). The 
proposed rules generally require a creditor to provide a risk-based 
pricing notice to a consumer when the creditor uses a consumer report 
to grant or extend credit to the consumer on material terms that are 
materially less favorable than the most favorable terms available to a 
substantial proportion of consumers from or through that creditor. The 
proposed rules also provide for two alternative means by which 
creditors can determine when they are offering credit on material terms 
that are materially less favorable. The proposed rules also include 
certain exceptions to the general rule, including exceptions for 
creditors that provide a consumer with a disclosure of the consumer's 
credit score in conjunction with additional information that provides 
context for the credit score disclosure.

DATES: Comments must be received on or before August 18, 2008.

ADDRESSES: The Board and the Commission will jointly review all of the 
comments submitted. Therefore, you may comment to either the Board or 
the Commission and you need not send comments (or copies) to both 
agencies. Because paper mail in the Washington area and at the Board 
and the Commission is subject to delay, please submit your comments by 
electronic means whenever possible. Commenters are encouraged to use 
the title ``FACT Act Risk-Based Pricing Rule'' in addition to the 
docket or RIN number in their submission. Interested parties are 
invited to submit comments in accordance with the following 
instructions:
    Board: You may submit comments, identified by Docket No. R-1316, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at
    http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
    Commission: Comments should refer to ``FACT Act Risk-Based Pricing 
Rule, Project No. R411009,'' and may be submitted by any of the 
following methods. If, however, the comment contains any material for 
which confidential treatment is requested, it must be filed in paper 
form, and the first page of the document must be clearly labeled 
``Confidential.'' \1\
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    \1\ Commission Rule 4.2(d), 16 CFR 4.2(d). The comment must be 
accompanied by an explicit request for confidential treatment, 
including the factual and legal basis for the request, and must 
identify the specific portions of the comment to be withheld from 
the public record. The request will be granted or denied by the 
Commission's General Counsel, consistent with applicable law and the 
public interest. See Commission Rule 4.9(c), 16 CFR 4.9(c).
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     Web Site: Comments filed in electronic form should be 
submitted by clicking on the following Web link: https://secure.commentworks.com/ftc-RiskBasedPricing and following the 
instructions on the Web-based form. To ensure that the Commission 
considers an electronic comment, you must file it on the Web-based form 
at https://secure.commentworks.com/ftc-RiskBasedPricing.
     Federal eRulemaking Portal: If this notice appears at 
http://www.regulations.gov, you may also file an electronic comment 
through that Web site. The Agencies will consider all comments that 
regulations.gov forwards to the Commission.
     Mail or Hand Delivery: A comment filed in paper form 
should include ``FACT Act Risk-Based Pricing Rule, Project No. 
R411009,'' both in the text and on the envelope and should be mailed or 
delivered, with two complete copies, to the following address: Federal 
Trade Commission/Office of the Secretary, Room H-135 (Annex M), 600 
Pennsylvania Avenue, NW., Washington, DC 20580. The Commission is 
requesting that any comment filed in paper form be sent by courier or 
overnight service, if possible.

Comments on any proposed filing, recordkeeping, or disclosure 
requirements that are subject to paperwork burden review under the 
Paperwork Reduction Act should additionally be submitted to: Office of 
Management and Budget, Attention: Desk Officer for the Federal Trade 
Commission. Comments should be submitted via facsimile to (202) 395-
6974 because U.S. Postal Mail is subject to lengthy delays due to 
heightened security precautions.
    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the Commission's Web site, to the 
extent practicable, at http://www.ftc.gov/os/publiccomments.htm. As a 
matter of discretion, the Commission makes every effort to remove home 
contact information for individuals from the public comments it 
receives before placing those comments on the Commission's Web site. 
More information, including routine uses permitted by the Privacy Act, 
may be found in the Commission's privacy policy, at http://www.ftc.gov/ftc/privacy.htm.

FOR FURTHER INFORMATION CONTACT: 
    Board: David A. Stein, Managing Counsel, or Amy E. Burke, Senior 
Attorney, Division of Consumer and Community Affairs, (202) 452-3667 or 
(202) 452-2412; or Andrea K. Mitchell, Senior Attorney, Legal Division, 
(202) 452-2458, Board of Governors of the Federal Reserve System, 20th 
and C Streets, NW., Washington, DC 20551. For users of a 
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
    Commission: Kellie Cosgrove Riley, Senior Attorney, or Stacey 
Brandenburg,

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Attorney, Division of Privacy and Identity Protection, Bureau of 
Consumer Protection, (202) 326-2252, Federal Trade Commission, 600 
Pennsylvania Avenue, NW., Washington DC 20580.

SUPPLEMENTARY INFORMATION:

I. Background

    The Fair and Accurate Credit Transactions Act of 2003 (FACT Act) 
was signed into law on December 4, 2003. Public Law 108-159, 117 Stat. 
1952. In general, the FACT Act amended the Fair Credit Reporting Act 
(FCRA) to enhance the ability of consumers to combat identity theft, 
increase the accuracy of consumer reports, and allow consumers to 
exercise greater control regarding the type and amount of solicitations 
they receive.
    Section 311 of the FACT Act added a new section 615(h) to the FCRA 
to address risk-based pricing. Risk-based pricing refers to the 
practice of setting or adjusting the price and other terms of credit 
offered or extended to a particular consumer to reflect the risk of 
nonpayment by that consumer. Information from a consumer report is 
often used in evaluating the risk posed by the consumer. Creditors that 
engage in risk-based pricing generally offer more favorable terms to 
consumers with good credit histories and less favorable terms to 
consumers with poor credit histories.
    Under the new section 615(h) of the FCRA, a risk-based pricing 
notice must be provided to consumers in certain circumstances. 
Generally, a person must provide a risk-based pricing notice to a 
consumer when the person uses a consumer report in connection with an 
application, grant, extension, or other provision of credit and, based 
in whole or in part on the consumer report, grants, extends, or 
provides credit to the consumer on material terms that are materially 
less favorable than the most favorable terms available to a substantial 
proportion of consumers from or through that person.
    Section 311 is part of Title III of the FACT Act, which is entitled 
``Enhancing the Accuracy of Consumer Report Information.'' The risk-
based pricing notice requirement is designed primarily to improve the 
accuracy of consumer reports by alerting consumers to the existence of 
negative information on their consumer reports so that consumers can, 
if they choose, check their consumer reports for accuracy and correct 
any inaccurate information. \2\
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    \2\ See S. Rep. No. 108-166, at 20 (Oct. 17, 2003).
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    Section 615(h) requires the Board and the Commission (Agencies) 
jointly to issue rules implementing the risk-based pricing provisions. 
The statute requires the Agencies to address in the implementing rules 
the form, content, timing, and manner of delivery of any notices 
pursuant to section 615(h). The rules also must clarify the meaning of 
certain terms used in this section, including what are ``material'' 
credit terms and when credit terms are ``materially less favorable.'' 
Section 615(h) gives the Agencies the authority to provide exceptions 
to the notice requirement for classes of persons or transactions for 
which the Agencies determine that risk-based pricing notices would not 
significantly benefit consumers. Finally, the Agencies must provide a 
model notice that can be used to comply with section 615(h).

II. Developing the Proposed Rules

    In developing these proposed risk-based pricing rules, the Agencies 
sought to implement the statutory provisions in a manner that would be 
operationally feasible for the wide variety of entities that will be 
subject to the rules. At the outset of developing the proposed rules, 
the Agencies conducted outreach to various interested parties, 
including consumer groups, financial institutions, mortgage bankers, 
and consumer reporting agencies. The goals of this initial outreach 
were to get a broad sense of how risk-based pricing is used in 
practice, how information from consumer reports factors into risk-based 
pricing, and how interested parties believe the Agencies should 
implement these provisions.
    Based on this initial outreach, the Agencies determined that it may 
not be operationally feasible in many cases for creditors to compare 
the terms offered to each consumer with the terms offered to other 
consumers to whom the creditor has extended credit. After considering 
several approaches, the Agencies concluded that the most effective way 
to implement the statute was to develop certain tests that could serve 
as proxies for comparing the terms offered to different consumers. 
These tests could be used by creditors for which making direct 
comparisons among consumers would be difficult or infeasible.
    The Agencies then conducted additional, more in-depth outreach 
meetings with interested parties, including consumer groups, consumer 
reporting agencies, and a variety of different types of creditors, 
including large banks, small community banks, credit card issuers, 
mortgage bankers, auto finance companies, automobile dealers, private 
student loan creditors, manufactured housing lenders, and industry 
trade associations. This outreach provided the Agencies with valuable 
information about how risk-based pricing is conducted in various 
sectors of the consumer credit market. In addition, the Agencies sought 
feedback from outreach participants on a number of possible tests that 
could be used to implement the requirements of the statute. The 
Agencies' goal was to determine which tests would both identify those 
consumers who likely received materially less favorable terms than the 
terms obtained by other consumers and be operationally feasible for 
creditors to implement.
    The proposed rules reflect the Agencies' judgments as to the best 
approaches identified through these outreach efforts. As discussed more 
fully below, the Agencies recognize that no single test or approach is 
likely to be feasible for all of the various types of creditors to 
which the rules apply or for the many different credit products for 
which risk-based pricing is used. Therefore, the proposed rules provide 
a menu of approaches that creditors may use to comply with the 
statute's legal requirements. The next section provides a brief 
explanation of the proposed rules.

III. Summary of the Proposed Rules

Risk-Based Pricing Notice

    The proposed rules implement the risk-based pricing notice 
requirement of section 615(h). The proposed rules apply to any person 
that both: (i) Uses a consumer report in connection with an application 
for, or a grant, extension, or other provision of, credit to a 
consumer; and (ii) 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 terms available to a substantial proportion of consumers from 
or through that person. The proposed rules clarify that the risk-based 
pricing notice requirements apply only in connection with credit that 
is primarily for personal, household, or family purposes, but not in 
connection with business credit. For more information about the scope 
of the proposed rules, see the discussion of Sec. ----.70 in the 
Section-by-Section Analysis.

Definitions

    The proposed rules define certain key terms. Specifically, the 
proposed rules define ``material terms'' as the annual percentage rate 
for credit that has an annual percentage rate,\3\ or, in the case

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of credit that does not have an annual percentage rate, as any monetary 
terms, such as the down payment amount or deposit, that the person 
varies based on the consumer report. For credit cards, which may have 
multiple annual percentage rates applicable to different features, 
``material terms'' is defined as the annual percentage rate applicable 
to purchases. In addition, the proposed rules define ``materially less 
favorable,'' as it applies to material terms, to mean that the terms 
granted or extended to a consumer differ from the terms granted or 
extended to another consumer from or through the same person such that 
the cost of credit to the first consumer would be significantly greater 
than the cost of credit to the other consumer. For more information 
about the definitions of these and other terms used in the proposed 
rules, see the discussion of Sec. ----.71 in the Section-by-Section 
Analysis.
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    \3\ Under Regulation Z, which implements the Truth in Lending 
Act, 15 U.S.C. 1601, et seq., the annual percentage rate is a 
measure of the cost of credit, expressed as a yearly or annualized 
rate. See 12 CFR 226.14, 226.22. Regulation Z requires creditors to 
disclose accurately the cost of credit, including the annual 
percentage rate. See 12 CFR 226.5a(b)(1), 226.5b(d)(6) and (12), and 
226.18(e).
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General Rule and Methods for Identifying Consumers Who Must Receive 
Notice

    The proposed rules generally restate the statutory requirement that 
a person must provide the consumer with a notice if that person both: 
(i) Uses a consumer report in connection with an application for, or a 
grant, extension, or other provision of, credit to that consumer; and 
(ii) 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 terms available 
to a substantial proportion of consumers from or through that person. 
The proposed rules apply to a person to whom the obligation is 
initially payable (also referred to as ``the original creditor'').
    A person subject to the rule may determine, on a case-by-case 
basis, whether a consumer has received material terms that are 
materially less favorable terms than other consumers have received from 
or through that person by comparing the material terms offered to the 
consumer to the material terms offered to other consumers in similar 
transactions. It may not be operationally feasible for many persons 
subject to the rule to make such direct comparisons between consumers, 
however.
    For those persons who prefer not to compare directly the material 
terms offered to their consumers, the proposed rules provide two 
alternative methods for determining which consumers must receive risk-
based pricing notices. Using either method, a person may determine when 
credit offered from or through that person is on material terms that 
are materially less favorable than the most favorable terms available 
to a substantial proportion of consumers from or through that person.
    The first method is the credit score proxy method. A credit score 
is a numerical representation of a consumer's credit risk based on 
information in the consumer's credit file. The proposed rules permit a 
creditor that uses credit scores to set the material terms of credit to 
determine a cutoff score, representing the point at which approximately 
60 percent of its consumers have lower credit scores, and provide a 
risk-based pricing notice to each consumer who has a credit score lower 
than the cutoff score. The proposed rules require periodic updating of 
the cutoff score.
    The second method is the tiered pricing method. The proposed rules 
permit a creditor that sets the material terms of credit by assigning 
each consumer to one of a discrete number of pricing tiers, based in 
whole or in part on a consumer report, to use this method to provide a 
risk-based pricing notice to each consumer who is not assigned to the 
top pricing tier or tiers. The number of tiers of consumers to whom the 
notice is required to be given depends upon the total number of tiers. 
For more information about the general rule and the methods for 
determining which consumers must receive notices, see the discussion of 
Sec.  ----.72 in the Section-by-Section Analysis.

Application of Rule to Credit Card Issuers

    The proposed rules set forth a special test to identify 
circumstances in which a credit card issuer must provide a notice to 
consumers. A credit card issuer is required to provide a risk-based 
pricing notice to a consumer if the consumer applies for a credit card 
in connection with a multiple-rate offer and, based in whole or in part 
on a consumer report, is granted credit at a purchase annual percentage 
rate that is higher than the lowest purchase annual percentage rate 
available under that offer. The proposed rules assume that a consumer 
who applies for credit in response to a multiple-rate offer is applying 
for the best rate available. For more information about the application 
of the rule to credit card issuers, see the discussion of Sec.  ----.72 
in the Section-by-Section Analysis.

Account Review

    Some creditors conduct periodic reviews of a consumer report in 
connection with credit that has been extended to a consumer. If the 
consumer's credit history has deteriorated, the creditor may, pursuant 
to applicable account terms, increase the annual percentage rate 
applicable to that consumer's account. The proposed rules require the 
creditor to provide a risk-based pricing notice to the consumer if the 
creditor increases the consumer's annual percentage rate in an account 
review based in whole or in part on a consumer report. For more 
information about the application of the general rule to account 
reviews, see the discussion of Sec.  ----.72 in the Section-by-Section 
Analysis.

Content of the Notice

    In addition to the minimum content prescribed by section 615(h)(5) 
of the FCRA, the proposed rules require the risk-based pricing notice 
to include a statement that the terms offered may be less favorable 
than the terms offered to consumers with better credit histories. The 
Agencies believe that including such a statement in the notice could 
encourage consumers to check their consumer reports for inaccuracies. 
The proposed rules also include special content requirements for the 
notice in the context of account reviews. For more information about 
the content of the risk-based pricing notices, see the discussion of 
Sec.  ----.73 in the Section-by-Section Analysis.

Timing of the Notice

    Section 615(h)(2) of the FCRA states that the risk-based pricing 
notice may be provided at the time of an application for, or a grant, 
extension, or other provision of, credit or at the time of 
communication of an approval of an application for, or grant, 
extension, or other provision of, credit. Section 615(h)(6)(B)(v) of 
the FCRA, however, gives the Agencies broad discretion to set the 
timing requirements for the notice by rule.
    The proposed rules generally require a risk-based pricing notice to 
be provided to the consumer after the terms of credit have been set, 
but before the consumer becomes contractually obligated on the credit 
transaction. In the case of closed-end credit, the notice must be 
provided to the consumer before consummation of the transaction, but 
not earlier than the time the approval decision is communicated to the 
consumer. In the case of open-end credit, the notice must be provided 
to the consumer before the first transaction

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is made under the plan, but not earlier than the time the approval 
decision is communicated to the consumer. For account reviews, the 
notice must be provided at the time that the decision to increase the 
annual percentage rate is communicated to the consumer or, if no notice 
of the increase in the annual percentage rate is provided to the 
consumer prior to the effective date of the change in the annual 
percentage rate, no later than five days after the effective date of 
the change in the annual percentage rate. For more information about 
the timing requirements, see the discussion of Sec.  ----.73 in the 
Section-by-Section Analysis.

Exceptions to the Risk-Based Pricing Notice Requirement

    The proposed rules contain a number of exceptions to the risk-based 
pricing notice requirement. First, the proposed rules implement the 
statutory exceptions that apply: (i) When a consumer applies for, and 
receives, specific material terms; and (ii) when a consumer is 
receiving an adverse action notice under section 615(a) of the FCRA in 
connection with the transaction.
    The Agencies also have used the exception authority set forth in 
section 615(h)(6)(iii) of the FCRA to propose additional exceptions for 
classes of persons or transactions regarding which the Agencies believe 
that the notice would not significantly benefit consumers. The Agencies 
are proposing exceptions for creditors that provide consumer applicants 
with certain information, including their credit score, in lieu of the 
risk-based pricing notice.\4\ For credit secured by one to four units 
of residential real property, an exception applies when a creditor 
provides the consumer with a notice containing the credit score 
disclosure required by section 609(g) of the FCRA along with certain 
additional information that provides context for the credit score 
disclosure, describes the creditor's use of credit scores to set the 
terms of credit, and explains how a consumer can obtain his or her free 
annual consumer reports. Another proposed exception applies to credit 
that is not secured by one to four units of residential real property, 
and is thus not subject to the credit score disclosure requirements of 
section 609(g). This exception is similar to the credit score 
disclosure exception for residential real property secured credit.
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    \4\ These exceptions are distinct from the credit score proxy 
method discussed above. The credit score proxy method is one way in 
which creditors can comply with the proposed rules' requirement to 
identify those consumers who should receive a risk-based pricing 
notice. The credit score disclosure exceptions, on the other hand, 
provide consumers with a credit score and related information in 
lieu of a risk-based pricing notice. A creditor, therefore, can 
comply with the proposed rules either by using the credit score 
proxy method (or one of the other enumerated methods) to determine 
for a given class of products which consumers should receive a risk-
based pricing notice, or by providing the credit score disclosure to 
its consumers for that class of products.
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    In some cases, a consumer's credit file may not contain sufficient 
information to permit a consumer reporting agency or other person to 
calculate a score for that individual. A creditor using either of the 
credit score disclosure exceptions described above is permitted to 
comply with the regulation by providing an alternate narrative notice 
that does not include a credit score to those consumers for whom a 
score is not available.
    Finally, the Agencies have proposed an exception for prescreened 
solicitations. Under this exception, a creditor will not be required to 
provide a risk-based pricing notice if that creditor obtains a consumer 
report that is a prescreened list and uses that consumer report to make 
a firm offer of credit to the consumers, regardless of how the material 
terms of that offer compare to the terms that the creditor includes in 
other firm offers of credit. For more information about the exceptions, 
see the discussion of Sec.  ----.74 in the Section-by-Section Analysis.

Free Consumer Report

    Section 615(h)(5)(C) of the FCRA states that the risk-based pricing 
notice must contain a statement informing the consumer that he or she 
may obtain a copy of a consumer report, without charge, from the 
consumer reporting agency identified in the notice. Some industry 
representatives have interpreted this section as a reference to the 
free annual consumer report described in section 612(a) of the FCRA.\5\ 
These industry representatives do not believe that section 615(h) of 
the FCRA gives rise to a right to a separate free consumer report. 
Consumer groups, on the other hand, interpret this section as giving a 
consumer a right to a separate free consumer report.\6\ The proposed 
rule is based on the Agencies' reading of section 615(h) as giving 
consumers a right to a separate free consumer report upon receipt of a 
risk-based pricing notice.
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    \5\ See letter from Mortgage Bankers Association to the Federal 
Trade Commission (Aug. 16, 2004), available at http://www.ftc.gov/os/comments/FACTA-summaries/511461-0007.pdf and letter from American 
Bankers Association & America's Community Bankers et al., to Alan 
Greenspan and Deborah Platt Majoras (Sept. 9, 2004), available at 
http://www.mortgagebankers.org/files/ResourceCenter/FACTA/FACTARisk-BasedPricingComments9-9-04.pdf.
    \6\ See letter from National Consumer Law Center and Consumers 
Union et al., to Alan Greenspan and Deborah Platt Majoras (Feb. 2, 
2005), available at http://www.consumerlaw.org/issues/credit_reporting/ content/facta_riskbased.pdf.
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    Section 612(b) of the FCRA provides for free consumer reports to 
consumers who have received a notification pursuant to ``section 615'' 
of the FCRA. Section 615 of the FCRA includes both the adverse action 
notice requirement (section 615(a)), the risk-based pricing notice 
provision (section 615(h)), and certain other requirements. 
Accordingly, the Agencies read the reference to the free consumer 
report in section 612(b) to apply equally when notices are given under 
section 615(a) and section 615(h)(5)(C), i.e., to require in both those 
cases a free report that is separate from the free annual report.
    The notices provided under the credit score disclosure exceptions 
are not risk-based pricing notices, and therefore do not give rise to 
the right to a free consumer report. Instead, a consumer who receives a 
credit score disclosure notice that identifies a consumer reporting 
agency or other third party as the source of the credit score could 
request the free annual consumer report that is available from each of 
the three nationwide consumer reporting agencies. For more information 
about the credit score disclosure exceptions, see the discussion of 
Sec.  ----.74 in the Section-by-Section Analysis.

One Notice Per Credit Extension

    The proposed rules contain a rule of construction to clarify that, 
in general, only one risk-based pricing notice will need to be provided 
per credit extension, except in the case of a notice provided in 
connection with an account review. The person to whom the obligation is 
initially payable must provide the risk-based pricing notice, or 
satisfy one of the exceptions, even if the loan is assigned to a third 
party or if that person is not the funding source for the loan. 
Although legal responsibility for providing the notice rests with the 
person to whom the obligation is initially payable, the various parties 
involved in a credit extension could determine by contract which party 
will send the notice. Purchasers or assignees of credit contracts will 
not be subject to the risk-based pricing notice requirements. For more 
information about the rules of construction, see the discussion of 
Sec.  ----.75 in the Section-by-Section Analysis.

[[Page 28970]]

Model Forms

    Section 615(h)(6)(B)(iv) requires the Agencies to provide a model 
notice that may be used to comply with the risk-based pricing rules. 
For each of the risk-based pricing notices and alternative credit score 
disclosures, the Agencies have proposed model forms that are appended 
to the proposed rules as Appendices H-1 through H-5 of the Board's rule 
and Appendices B-1 through B-5 of the Commission's rule. For more 
information, see the discussion of the model forms in the Section-by-
Section Analysis.

IV. Section-by-Section Analysis

Section ----.70 Scope

    Proposed Sec.  ----.70 sets forth the scope of the Agencies' rules. 
Proposed paragraph (a)(1) generally tracks the statutory language from 
section 615(h)(1) of the FCRA, except that it limits coverage of the 
proposed rules to credit to a consumer that is primarily for a 
consumer's personal, family, or household purposes.
    Proposed paragraph (a)(2) provides that the risk-based pricing 
rules do not apply to persons who use consumer reports in connection 
with an application for, grant, extension, or other provision of, 
credit for business purposes. Section 615(h) of the FCRA does not 
explicitly state that it applies only to a person using a consumer 
report in connection with consumer purpose credit. Section 615(h) does, 
however, require a person using a consumer report to compare the terms 
of credit offered in a particular transaction to the most favorable 
terms available to a substantial proportion of ``consumers'' and to 
provide a notice to the ``consumer'' if the person offers or extends 
credit on materially less favorable terms. In addition, several of the 
statutory exceptions reference the ``consumer'' or ``consumers,'' 
including those in section 615(h)(3)(A) (``the consumer applied for 
specific material terms * * *'') and section 615(h)(6)(B)(iii) (``* * * 
regarding which the agencies determine that notice would not 
significantly benefit consumers''). The statute's repeated use of the 
term ``consumer,'' which section 603(c) of the FCRA defines to mean 
``an individual,'' suggests that Congress intended for the risk-based 
pricing provisions to apply only to credit that is primarily for 
personal, family, or household purposes.
    Business-purpose loans generally are made to partnerships or 
corporations, as well as to individual consumers in the case of sole 
proprietorships. The Agencies understand that business borrowers 
generally are more sophisticated than individual consumers. For 
business loans made to partnerships or corporations, a creditor may 
obtain consumer reports on the principals of the business who may serve 
as guarantors for the loan.\7\ The credit is granted or extended to the 
business entity, however, based primarily on that entity's 
creditworthiness, and that entity is primarily responsible for the 
loan. Also, when a consumer report is used in connection with a small 
business loan, the report may factor into the underwriting process 
quite differently than a consumer report utilized in connection with a 
consumer purpose loan. It may not be operationally feasible to compare 
the terms of credit granted for different business purposes because 
some types of business ventures pose a greater degree of risk than 
other types of business ventures. In addition, the Agencies believe 
that a comparison of the terms of business purpose credit to the terms 
of consumer purpose credit would not be meaningful. For example, the 
underwriting process used to set the terms for a business loan made to 
purchase a fleet of vehicles may differ substantially from the 
underwriting process used to set the terms of a single auto loan made 
to an individual consumer. The Agencies solicit comment regarding 
whether there are any circumstances under which creditors should be 
required to provide risk-based pricing notices in connection with 
credit primarily for business purposes.
---------------------------------------------------------------------------

    \7\ See FTC Staff Opinion Letter from Joel Winston to Julie L. 
Williams, J. Virgil Mattingly, William F. Kroener, III, and Carolyn 
Buck (June 22, 2001) (available at http://www.ftc.gov/os/statutes/fcra/tatelbaumw.shtm).
---------------------------------------------------------------------------

    Proposed paragraph (b) provides that compliance with either the 
Board's or the Commission's substantively identical risk-based pricing 
rules would be deemed to satisfy the requirements of the statute. Both 
the Board's and the Commission's rules would apply to the persons 
covered by paragraph (a). The Board proposes to codify its risk-based 
pricing rules at 12 CFR 222.70 et seq., and the Commission proposes to 
codify its risk-based pricing rules at 16 CFR 640. There is, however, 
no substantive difference between the two sets of rules.
    Proposed paragraph (c), consistent with the statutory language in 
section 615(h)(8), provides that the risk-based pricing rules will be 
enforced in accordance with sections 621(a) and (b) by the relevant 
federal agencies and officials identified in those sections, including 
state officials. The risk-based pricing provisions do not provide for a 
private right of action.

Section ----.71 Definitions

    Proposed Sec.  ----.71 contains definitions for the following 
terms: ``annual percentage rate'' (and the related terms ``closed-end 
credit'' and ``open-end credit plan''), ``credit,'' ``creditor,'' 
``credit card,'' ``credit card issuer,'' ``credit score,'' ``material 
terms'' (and the related term ``consummation''), and ``materially less 
favorable.''

Annual Percentage Rate

    Proposed paragraph (a) defines ``annual percentage rate'' by 
incorporating the definitions of ``annual percentage rate'' for open-
end credit plans and closed-end credit set forth in sections 226.14(b) 
and 226.22 of Regulation Z, respectively. (12 CFR 226.14(b), 12 CFR 
226.22). The concept of an annual percentage rate, as discussed later 
in this Section-by-Section analysis, is relevant to the Agencies' 
proposed definition of ``material terms.'' The Agencies believe that 
use of the Regulation Z definitions of annual percentage rate promotes 
consistency among the rules pertaining to consumer credit, including 
the rules that implement the FCRA and the Truth-in-Lending Act. 
Regulation Z prescribes two separate methods for calculating the annual 
percentage rate for credit, depending on whether that credit is open-
end or closed-end. To ensure that the correct calculation methods for 
the annual percentage rate are applied to the appropriate products, the 
proposal also incorporates the Truth-in-Lending Act's definition of 
``open-end credit plan,'' as interpreted by the Board,\8\ and the 
Regulation Z definition of ``closed-end credit.'' Paragraph (b) of the 
proposal defines ``closed-end credit'' to have the same meaning as in 
Regulation Z (12 CFR 226.2(a)(10)). Paragraph (k) of the proposal 
defines ``open-end credit plan'' to have the same meaning as set forth 
in the Truth-in-Lending Act, as implemented by the Board in Regulation 
Z and the Official Staff Commentary to Regulation Z (15 U.S.C. 1602(i), 
12 CFR 226.2(a)(20)).
---------------------------------------------------------------------------

    \8\ The Board defines the term ``open-end credit'' in Regulation 
Z, rather than ``open-end credit plan.'' 12 CFR 226.2(a)(20).
---------------------------------------------------------------------------

Credit, Creditor, Credit Card, Credit Card Issuer, and Credit Score

    Proposed paragraphs (d), (e), (f), (g), and (h) incorporate the 
FCRA's statutory definitions of ``credit,'' ``creditor,'' ``credit 
card,'' ``credit card issuer,'' and

[[Page 28971]]

``credit score.'' Each of these terms is used in the proposed rules.

Material Terms

    Proposed paragraph (i) contains three separate definitions of 
``material terms,'' depending on whether the credit is extended under 
an open-end credit plan for which there is an annual percentage rate, 
is closed-end credit for which there is an annual percentage rate, or 
is credit for which there is no annual percentage rate.
    Proposed paragraph (i)(1) defines ``material terms'' for credit 
extended under an open-end credit plan as the annual percentage rate 
required to be disclosed in the account-opening disclosures required by 
Regulation Z (12 CFR 226.6(a)(2)). The definition excludes both any 
temporary initial rate that is lower than the rate that would apply 
after the temporary rate expires and any penalty rate that would apply 
upon the occurrence of one or more specific events, such as a late 
payment or extension of credit that exceeds the credit limit. The 
annual percentage rate has historically been one of the most 
significant pricing terms for open-end credit, and it is probably the 
term that creditors most often adjust as a result of risk-based 
pricing.
    Credit cards, unlike other open-end credit products, have multiple 
annual percentage rates, including annual percentage rates for cash 
advances, balance transfers, and purchases. The Agencies believe that 
purchases are the most common type of open-end credit card transaction, 
and thus the annual percentage rate for purchases is the most commonly 
applied rate in credit card transactions. Moreover, it is one of the 
most common terms that consumers compare when shopping for credit 
cards. Therefore, for credit cards (other than those used to access a 
home equity line of credit), the proposal defines ``material terms'' as 
the annual percentage rate applicable to purchases (``purchase annual 
percentage rate''), and no other annual percentage rate.
    Similarly, proposed paragraph (i)(2) defines ``material terms'' for 
closed-end credit as the annual percentage rate required to be 
disclosed prior to consummation under the provisions of Regulation Z 
regarding closed-end credit (12 CFR 226.17(c) and 226.18(e)). This 
definition does not address temporary initial rates or penalty rates, 
because any such rates are not annual percentage rates for the purposes 
of the closed-end provisions of Regulation Z.
    The related term ``consummation'' is defined in proposed paragraph 
(c) to mean the time that a consumer becomes contractually obligated on 
a credit transaction. The proposed definition is identical to the 
definition of ``consummation'' in Regulation Z. 12 CFR 226.2(a)(13). 
Consummation is defined in the proposed rules for clarity and 
completeness.
    Most consumer credit products have an annual percentage rate, and 
it has historically been a significant factor, and often the most 
significant factor, in the pricing of credit. As discussed below, the 
Agencies have proposed a definition of ``material terms'' that 
generally focuses on a single term in order to ensure that there is a 
feasible way for creditors to identify those consumers who must receive 
risk-based pricing notices. The Agencies believe that focusing on the 
annual percentage rate is appropriate because the Agencies understand 
that when risk-based pricing occurs, it typically affects the annual 
percentage rate.
    The Agencies acknowledge that the pricing of credit products is 
complex and that the annual percentage rate is only one of the costs of 
consumer credit. In addition to the annual percentage rate(s) 
applicable to a given credit product, there may be other terms that 
affect the cost of credit, such as the amount of any down payment, 
prepayment penalties, or late fees. In addition, a single credit 
product may have a number of different rate structures, such as a 
credit card that has different annual percentage rates for purchases, 
cash advances, and balance transfers. The Agencies understand that the 
annual percentage rate is the primary term that varies as a result of 
risk-based pricing and that, for credit cards, the purchase annual 
percentage rate is the primary term that varies as a result of risk-
based pricing. Thus, the Agencies believe that, in most cases, defining 
``material terms'' with reference to the annual percentage rate will 
effectively target those consumers who are likely to have received 
credit on terms that are materially less favorable than the terms 
offered to other consumers. If creditor practices were to change in the 
future such that other terms of credit begin to vary as a result of 
risk-based pricing, the Agencies could revise the meaning of ``material 
terms.''
    To satisfy the risk-based pricing notice requirements, creditors 
must have some feasible means of comparing different credit granted to 
different consumers. The Agencies believe that it would not be 
operationally feasible for creditors to compare credit terms on the 
basis of multiple variables. For example, it is unclear how a creditor 
would compare one mortgage loan with a certain combination of annual 
percentage rate, down payment, and points and fees to another such loan 
where all three variables differ, even for the same product, such as a 
30-year fixed-rate loan. The Agencies welcome comment on whether there 
are other monetary or non-monetary terms that should be included in the 
definition of ``material terms,'' and how the comparison between terms 
granted to consumers could be conducted if multiple variables were 
taken into account.
    The Agencies solicit comment as to whether creditors vary temporary 
initial rates, penalty rates, balance transfer rates, or cash advance 
rates, on either closed-end or open-end credit, as a result of risk-
based pricing. If those rates do vary as a result of risk-based 
pricing, the Agencies request comment on whether those rates also 
should be treated as ``material terms,'' and whether it would be 
possible to apply to those rates the existing tests described in 
proposed Sec.  ----.72(b). If new tests would be required under such a 
broader definition of ``material terms,'' the Agencies solicit comment 
on what those tests might be.
    The Agencies understand that some home-secured closed-end and home-
secured open-end credit plans may charge prepayment penalties. The 
Agencies invite comment on whether creditors vary prepayment penalties 
based on information in consumer reports, and whether prepayment 
penalties should be treated as ``material terms.'' The Agencies also 
request comment on how the tests in proposed Sec.  ----.72(b) could be 
modified to account for risk-based pricing of prepayment penalties or 
whether entirely new tests would be required and, if so, what those new 
tests might be.
    Proposed paragraph (i)(3) defines ``material terms'' for credit 
with no annual percentage rate as any monetary terms that the person 
varies based on information in a consumer report, such as the down 
payment or deposit. This provision applies to creditors such as 
telephone companies or utilities that use consumer reports in extending 
credit (for example, in determining the amount of a deposit or 
prepayment requirement) but do not extend credit subject to annual 
percentage rates. This provision also applies to charge cards for which 
the annual membership fee varies based on information from a consumer 
report. The Agencies solicit comment as to whether the definition's 
reference to ``any monetary terms'' that the person varies based on 
information from a consumer report is sufficiently specific or too 
broad.

[[Page 28972]]

Materially Less Favorable Material Terms

    Proposed paragraph (j) defines ``materially less favorable,'' as it 
applies to material terms, to mean that the terms granted or extended 
to a consumer differ from the terms granted or extended to another 
consumer from or through the same person such that the cost of credit 
to the first consumer would be significantly greater than the cost of 
credit granted or extended to the other consumer. This definition 
clarifies that a comparison between one set of material terms and 
another set of material terms is generally required to satisfy the 
general rule and to identify which consumers must receive the notice.
    The statute focuses on whether the material terms granted or 
extended to a consumer are ``materially less favorable than the most 
favorable terms available to a substantial proportion of consumers'' 
from or through a particular person. Therefore, for purposes of making 
this comparison, creditors must: (1) Select the ``most favorable 
terms'' available to a group of consumers that represents a substantial 
proportion of consumers to whom the creditor extends credit; and (2) 
compare the material terms granted or extended to the individual 
consumer to the most favorable material terms granted or extended to 
the comparison group. It would not be acceptable, for example, to 
compare a consumer's material terms to an arbitrarily selected 
benchmark, such as the creditor's median or average material terms or 
to the material terms generally available to the creditor's less 
creditworthy consumers. On the other hand, a creditor should not use in 
its comparison material terms that are available to only a tiny 
percentage of its most exceptionally creditworthy consumers, such as 
very high net worth individuals.
    The proposed rules do not define what constitutes ``a substantial 
proportion'' of consumers, even though that concept is integrally 
linked to the concept of ``materially less favorable'' terms under the 
statute. The Agencies have not identified a definition of ``a 
substantial proportion'' that could reflect the widely varying pricing 
practices of creditors generally. For example, one creditor may offer 
its most favorable material terms to ninety percent of its consumers 
and materially less favorable material terms to ten percent of its 
consumers. Another creditor may offer its most favorable material terms 
to ten percent of its consumers and materially less favorable material 
terms to ninety percent of its consumers. A third creditor may offer 
its most favorable material terms to one percent of its consumers, 
slightly less favorable material terms to twenty percent of its 
consumers, and materially less favorable material terms to its 
remaining consumers. For these reasons, the Agencies do not believe it 
is appropriate to define ``a substantial proportion.'' Nonetheless, the 
Agencies expect that creditors would consider ``a substantial 
proportion'' as constituting more than a de minimis percentage, but 
that may or may not represent a majority.
    Within these limitations, however, the proposed definition provides 
guidance regarding how to determine whether a particular set of terms 
is materially less favorable. Under the proposed definition, factors 
relevant to determining the significance of a difference in the cost of 
credit include the type of credit product, the term of the credit 
extension, if any, and the extent of the difference between the 
material terms granted or extended to the individual consumer and the 
material terms granted or extended to the comparison group. 
Consideration of these factors by different creditors may result in two 
creditors reaching opposite conclusions about the materiality of the 
same difference in annual percentage rates. For example, a credit card 
issuer considering these factors may conclude that a one-quarter 
percentage point difference in the annual percentage rate is not 
material, whereas a mortgage lender may conclude that a one-quarter 
percentage point difference in the annual percentage rate is material. 
In assessing the extent of the difference between two sets of material 
terms, a creditor should consider how much the consumer's cost of 
credit would increase as a result of receiving the less favorable 
material terms and whether that difference is likely to be important to 
a reasonable consumer.
    The Agencies solicit comment on the proposed definition of 
``materially less favorable.'' In particular, the Agencies seek comment 
on whether the proposed definition is helpful, and whether the 
interrelated terms ``most favorable terms'' and ``a substantial 
proportion of consumers'' also should be defined and, if so, how they 
should be defined.

Section ----.72 General Requirements for Risk-Based Pricing Notices 
General Rule

    Proposed Sec.  ----.72 establishes the basic rules implementing the 
risk-based pricing notice requirement of section 615(h). Paragraph (a) 
states the general requirement that a person must provide the consumer 
with a notice if that person both: (i) 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 (ii) 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 terms available to a substantial proportion of 
consumers from or through that person. This paragraph mirrors the 
language in proposed Sec.  ----.70(a) and generally tracks the 
statutory language.
    Although the statute would permit various interpretations of ``from 
or through that person,'' the Agencies interpret the phrase to refer to 
the person to whom the obligation is initially payable, i.e., the 
original creditor. Under this interpretation, the original creditor is 
responsible for determining whether consumers received materially less 
favorable material terms and providing risk-based pricing notices to 
consumers, whether or not that person is the source of funding for the 
loan. When the original creditor is the source of funding for the loan, 
the consumer obtains credit from the original creditor. This occurs, 
for example, where the consumer obtains credit directly from a bank or 
finance company. When the original creditor is not the source of 
funding for the loan, however, the consumer obtains credit through the 
original creditor. This occurs, for example, where the consumer enters 
into a credit contract with an auto dealer, but the dealer does not 
fund the loan. Instead, the dealer has an agreement with a bank or 
finance company to purchase the contract. The bank or finance company 
provides the funding for the loan. The dealer immediately assigns the 
credit contract to a bank or finance company upon consummation of the 
transaction. In that case, the consumer has obtained credit through the 
auto dealer, rather than from the auto dealer.
    The Agencies recognize that this interpretation excludes from the 
scope of the proposed rules brokers and other intermediaries who do not 
themselves grant, extend, or provide credit, but who, based in whole or 
in part on a consumer report, shop credit applications to creditors 
that offer less favorable rates than other creditors. Instead the 
proposed rules require an intermediary, such as a broker, to provide 
risk-based pricing notices to consumers only when the intermediary is 
the person to whom the obligation is initially payable. The Agencies 
believe this is the most appropriate

[[Page 28973]]

interpretation of the statute, given its language and purpose.
    With respect to the statutory language, section 615(h) applies to 
the ``material terms'' granted, extended, or provided to the consumer 
based on a consumer report. An intermediary's decision regarding where 
to shop a consumer's credit application generally occurs before the 
material terms are set. Thus, at the time the application is shopped to 
various creditors, it is too early in the process to perform the direct 
comparison of material terms required by the statute, even if a 
consumer report influenced the intermediary's decision regarding where 
to shop the consumer's credit application.
    The Agencies also believe that their interpretation of the statute 
with respect to intermediaries is consistent with its purposes. For the 
reasons described below, requiring intermediaries to provide notices 
based on the creditors to which they shop a consumer's credit 
application would not provide a significant benefit to consumers; would 
likely be confusing to consumers; and would be operationally difficult, 
burdensome, and costly.
    First, a rule requiring intermediaries to provide notices when they 
shop applications to certain creditors would frequently result in the 
consumer receiving multiple risk-based pricing notices in connection 
with a single extension of credit. Under such a rule, consumers who 
work through intermediaries would in many cases receive two notices: 
The first from the intermediary when it shops the application, and the 
second from the creditor itself if the creditor grants credit to the 
consumer on materially less favorable material terms than it grants to 
a substantial proportion of its other consumers. In some cases, the 
intermediary is also the original creditor and could be required to 
provide two notices to the consumer. This scenario could arise, for 
example, in the context of an automobile loan. Under a rule requiring a 
shopping-triggered notice, if a dealer shops the consumer's application 
to finance companies that offer materially less favorable material 
terms than do other sources of financing, the dealer would be required 
to provide a notice to the consumer. In addition, an auto dealer that 
is the original creditor on the loan must provide a notice to a 
consumer who receives materially less favorable material terms than 
those received by a substantial proportion of the dealer's other 
consumers.
    The Agencies generally do not believe that a consumer would benefit 
from receiving more than one risk-based pricing notice in connection 
with a single extension of credit. The purpose of the statute is to 
notify consumers that information in their consumer reports caused them 
to receive materially less favorable material terms, and to encourage 
those consumers to check their consumer reports for possible errors. 
The Agencies do not believe that providing a consumer with a second 
notice in connection with the same extension of credit is necessary or 
beneficial to educate or motivate the consumer to obtain a copy of his 
or her credit report. For that reason, the rules of construction in 
proposed Sec.  ----.75, discussed below, codify the principle that 
generally one notice for each extension of credit is sufficient.
    Second, requiring multiple notices in connection with a single 
extension of credit would introduce significant compliance burdens and 
costs. As an operational matter, it would be difficult to establish by 
regulation appropriate criteria for determining when shopping a 
consumer's credit application to certain lenders would trigger the 
requirement to provide a risk-based pricing notice. There is no single, 
uniform method for distinguishing a prime lender from a subprime 
lender, for example, and some lenders may make both prime and subprime 
loans. In addition, requiring multiple notices in connection with a 
single extension of credit could impose significant costs on the credit 
reporting system (which costs would be passed on to consumers) in view 
of the Agencies' reading of the statute as providing consumers with a 
right to request a free consumer report upon receipt of each risk-based 
pricing notice.
    The Agencies recognize that, under the proposed rules, some 
consumers who use an intermediary will not receive a risk-based pricing 
notice, even though their consumer reports, in whole or in part, 
influenced the intermediary's decision to shop their credit 
applications only to creditors that generally offer less favorable 
material terms than other creditors. This would occur if the creditor 
to whom the application was shopped granted its most favorable material 
terms to the consumer. Under the statute, however, the same issue 
exists when a consumer applies directly to subprime lenders because the 
statute does not require a creditor to compare the material terms it 
offers to consumers to the material terms offered by other creditors. 
The Agencies solicit comment on whether intermediaries who are not 
original creditors, such as brokers, should be required to provide 
risk-based pricing notices to consumers based upon the intermediaries' 
decisions regarding the shopping of consumer credit applications to 
certain creditors and, if so, how such a requirement could be 
structured.

Direct Comparisons and Materially Less Favorable Material Terms

    Creditors may follow the general rule in determining, on a case-by-
case basis, whether a consumer has received materially less favorable 
terms than the terms a substantial proportion of consumers have 
received from or through that creditor. The general rule is flexible 
and permits the creditor to determine, consistent with its particular 
circumstances, when material terms are ``materially less favorable than 
the most favorable terms available to a substantial proportion'' of its 
consumers.
    When a creditor undertakes direct, consumer-to-consumer 
comparisons, such comparisons necessarily must account for the unique 
aspects of that creditor's business. For example, many creditors make 
pricing decisions based on a number of variables that are not based on 
information in a consumer report (e.g., debt-to-income ratio or type of 
collateral) in addition to variables that are based on information in a 
consumer report. The role each of these variables plays in the pricing 
decision may vary from creditor to creditor and product to product. 
Similarly, creditors must compare the transaction at issue with past 
transactions of a similar type, and must control for changes in 
interest rates and other market conditions over time. A particular 
method of comparison that is sensible and feasible for one creditor may 
not be sensible and feasible for another creditor. No precise 
regulatory benchmark could account for such creditor-specific and 
product-specific variations.
    Although the proposed rules do not impose a quantitative standard 
or specific methodology for determining whether a consumer is receiving 
materially less favorable terms, the determination should be made in a 
reasonable manner. The Agencies expect that creditors would provide 
risk-based pricing notices to some, but fewer than all, of the 
consumers to whom they extend credit. Under the general rule, the 
creditor would first need to identify the appropriate subset of its 
current or past consumers to compare to any given consumer. Each 
consumer would need to be compared to an adequate sample of consumers 
who have engaged in similar transactions, such as those who have 
applied for or received the particular credit product for which the 
consumer has applied. The terms offered to a

[[Page 28974]]

consumer in a 30-year fixed-rate purchase money mortgage, for example, 
cannot be compared to the terms offered to consumers who obtain auto 
loans, credit cards, student loans, or adjustable-rate mortgages. The 
creditor also would need to tailor its comparison to disregard any 
underwriting criteria that do not depend upon consumer report 
information. Such a comparison also would have to account for changes 
in the creditor's customer base, product offerings, or underwriting 
criteria over time. Similarly, adjustments would have to be made if the 
terms offered to consumers in the past are not presently offered to 
consumers.
    The Agencies recognize that, even with the flexibility provided in 
the proposed rules, it may not be feasible or practical for many 
creditors to make the direct comparisons required by the general rule. 
Many creditors are likely to encounter operational difficulties in 
determining whether a consumer report played a role in a particular 
pricing decision that was based on multiple variables, and in 
identifying an appropriate benchmark with which to compare a given 
consumer's material terms. Small creditors in particular may have 
difficulty identifying a sufficient number of comparable benchmark 
credit transactions, since those creditors may make relatively few 
loans of any given type.
    For these reasons, proposed paragraph (b) sets forth two other 
methods, the ``credit score proxy method'' and the ``tiered pricing 
method,'' that creditors can use to identify which consumers must 
receive notices for a given class of products. These two methods 
provide alternatives to the direct consumer-to-consumer comparison 
described in section 615(h) of the FCRA. Consumers identified by either 
of these two methods will be deemed to have been granted, extended, or 
otherwise provided credit on materially less favorable material terms.
    The Agencies have crafted these two methods in order to enable a 
creditor to provide the risk-based pricing notice to fewer than all 
consumers without having to make a direct comparison between the 
material terms granted to each consumer and the material terms granted 
to its other consumers. The Agencies recognize that these methods may 
not result in a precise differentiation in every case between consumers 
who received the most favorable terms and those who received materially 
less favorable terms. The Agencies believe, however, that each of these 
methods is a reasonable proxy or substitute for identifying those 
consumers who received materially less favorable terms. Permitting the 
use of proxy methods also recognizes that, at least in some cases, 
there is no reliable way to determine which consumers received 
materially less favorable terms. Moreover, through the two alternative 
methods, the Agencies can provide clear guidance regarding the meaning 
of materially less favorable material terms.
    The Agencies believe that the credit score proxy method and the 
tiered-pricing method generally will identify those consumers who 
receive materially less favorable material terms from or through a 
particular person. In applying either of these methods, however, there 
may be some instances where a consumer receives a notice, but does not 
receive material terms that are materially less favorable than the most 
favorable terms generally available to a substantial proportion of 
consumers. For example, using the credit score proxy method, a consumer 
with a credit score below the cutoff score would receive a notice even 
if he or she received the creditor's most favorable terms. It would not 
violate the rules to provide risk-based pricing notices to some 
consumers who receive the most favorable terms so long as the selection 
of those consumers results from the proper application of either of 
these two methods. Neither of these methods, however, would permit a 
creditor to provide the notice to all consumers.
    Although the proposed rules set forth two alternate methods that a 
person may use, for purposes of consistency a person must use the same 
method to evaluate all consumers who are granted, extended, or 
otherwise provided substantially similar products from or through that 
person. For example, if a creditor uses the credit score proxy method 
to evaluate consumers who obtain credit to finance the purchase of a 
new automobile, the creditor must use that method for all such 
consumers for new vehicle loans. On the other hand, the Agencies 
recognize that the feasibility of these methods may vary among 
different product lines. Thus, a person may use one method to evaluate 
consumers who obtain mortgages and the other method to evaluate 
consumers who obtain auto loans.
    The Agencies recognize that there may be other methods that would 
serve as effective proxies for identifying the appropriate consumers to 
receive the risk-based pricing notice. Based on the information 
available to the Agencies, the two methods in the proposed rules appear 
to represent the approaches that best balance effective targeting of 
the notice to those consumers who are likely to have received 
materially less favorable terms with operational feasibility. The 
Agencies solicit comment on whether there are other methods, in 
addition to those included in this proposal, that would satisfy the 
Agencies' criteria and provide other operationally feasible options for 
identifying those consumers who must receive risk-based pricing 
notices.

Credit Score Proxy Method

    Proposed paragraph (b)(1) sets forth the credit score proxy method. 
Under this method, 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 section 615(h) 
requirements by (i) determining the credit score that represents the 
point at which approximately 40 percent of its consumers have higher 
credit scores and approximately 60 percent of its consumers have lower 
credit scores, and (ii) providing a risk-based pricing notice to each 
consumer with a credit score below that cutoff score.\9\ A creditor 
that sets its material terms based in whole or in part on a credit 
score may use the credit score proxy method, and is not required to 
consider the actual credit terms offered to each consumer. Rather, that 
creditor is required only to compare the credit score of a given 
consumer with the pre-calculated cutoff score, which determines whether 
a notice is required. The Agencies believe that, all other things being 
equal, consumers with lower credit scores are likely to receive 
materially less favorable terms than consumers with higher credit 
scores when the terms are set based in whole or in part on their 
consumer reports. As a result, the Agencies believe that this method 
will target the risk-based pricing notice to those consumers who are 
likely to have received materially less favorable terms due to risk-
based pricing.
---------------------------------------------------------------------------

    \9\ The proposed rules do not require a precise cutoff point at 
the 40 percent/60 percent mark. Depending on the available data set 
and the practices of the creditor, the cutoff point may be 
approximate.
---------------------------------------------------------------------------

    The credit score proxy method focuses on only one variable, the 
consumer's credit score. A credit score obtained from an entity 
regularly engaged in the business of selling credit scores is based on 
information in a consumer report. For a creditor that obtains such a 
credit score, the credit score proxy method generally eliminates the 
influence of variables that are not derived from information in a 
consumer report, such as the consumer's income, the term of the loan, 
or the amount of any down payment. In effect, this method substitutes a 
comparison of the

[[Page 28975]]

credit scores of different consumers as a proxy for a comparison of the 
material terms offered to different consumers.
    The Agencies believe that setting the standard for the cutoff score 
at a point that requires notices to be provided to the approximately 60 
percent of a creditor's consumers with the lowest credit scores is 
appropriate and reasonable. The point at which consumers typically 
begin to receive materially less favorable material terms from a 
creditor will vary from creditor to creditor and product to product. 
The Agencies believe, however, that setting a numerical standard for 
calculating the cutoff score represents a reasonable balancing of the 
goal of providing notices to consumers most likely to benefit from them 
with the need for a clear, bright-line standard that provides certainty 
and predictability for creditors. If the Agencies did not establish a 
numerical standard for calculating the cutoff score, each creditor 
would have to determine how to calculate its own cutoff score based on 
its own consumer base, which would involve a complex analysis that may 
be difficult to implement. In addition, setting a numerical standard 
for determining the cutoff score should enhance the ability of 
regulators to enforce compliance against creditors using this method.
    The Agencies solicit comment on whether the credit score proxy 
method generally will result in risk-based pricing notices being 
provided to consumers who are likely to have received materially less 
favorable terms due to risk-based pricing. The Agencies also request 
comment on whether setting the cutoff score at approximately the point 
at which 40 percent of a creditor's consumers have higher scores and 60 
percent have lower scores is appropriate and workable, or whether a 
different point, such as the point at which 50 percent of a creditor's 
consumers have higher scores and 50 percent have lower scores, would be 
more appropriate. The Agencies also solicit comment regarding any 
empirical data regarding the point at which consumers typically begin 
to receive materially less favorable material terms and that may 
suggest the most appropriate point at which to set the cutoff score.
    Proposed paragraph (b)(1)(ii) describes two methods for determining 
the cutoff score. In general, creditors will be required to use the 
sampling approach set forth in paragraph (b)(1)(ii)(A). The sampling 
approach provides that 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 otherwise 
provided credit for a given class of products. When a creditor's 
customer base or underwriting standards vary significantly among 
different classes of products, it may be necessary to calculate 
separate cutoff scores for each class of products based on 
representative samples of consumers offered that type of credit. For 
example, a creditor with a varied portfolio of credit products may have 
to calculate separate cutoff scores for mortgages, credit cards, 
automobile loans, and student loans.
    The Agencies recognize that the sampling approach will not be 
feasible for some creditors, such as new entrants to the credit 
business, entities that introduce new credit products, or entities that 
have just started to use risk-based pricing and have not yet developed 
a representative sample of consumers. Proposed paragraph (b)(1)(ii)(B) 
permits such creditors initially to determine the appropriate cutoff 
score based on information from appropriate market research or relevant 
third-party sources for similar products, such as information from 
companies that develop credit scores. For example, one major provider 
of credit scores publishes a chart on its web site showing the 
distribution of credit scores across the U.S. population. In addition, 
proposed paragraph (b)(1)(ii)(B) permits a creditor that acquires a 
credit portfolio as a result of a merger or acquisition to determine 
the cutoff score based on information it received from the merged or 
acquired party.
    Proposed paragraph (b)(1)(ii)(C) addresses the recalculation of 
cutoff scores. In general, persons using the sampling approach will 
need to recalculate their cutoff scores at least every two years. A 
person whose cutoff score was determined using the secondary source 
approach in paragraph (b)(1)(ii)(B), however, will be required to 
recalculate its cutoff score based on a representative sample of its 
own consumers within one year after it begins using a cutoff score 
derived from third-party source data. If, however, a person using the 
secondary source approach does not grant, extend, or otherwise provide 
credit to a sufficient number of new consumers during that one-year 
period, and therefore lacks sufficient data with which to recalculate 
its cutoff score after one year, the person will be permitted to 
continue to use a cutoff score derived from third-party source data 
until it grants, extends, or otherwise provides credit to a sufficient 
number of new consumers and is able to collect sufficient data on which 
to base the recalculation.
    The distribution of credit scores for a creditor's customer base 
may shift over time, so it is important to recalculate the cutoff score 
from time to time. The time period between recalculations, however, 
should be long enough to avoid requiring continual sampling and to 
minimize the risk of introducing distortions, such as seasonal 
variations, into the data used to calculate the cutoff score as a 
result of having abbreviated sampling periods. The Agencies solicit 
comment on the recalculation requirements, specifically regarding 
whether two years, as opposed to a shorter or longer period, is the 
appropriate interval at which the recalculation generally should be 
conducted under the sampling approach. The Agencies also solicit 
comment on whether one year is the appropriate period of time within 
which a person using the secondary source approach must recalculate its 
cutoff score using the sampling approach.
    Proposed paragraph (b)(1)(ii)(D) addresses the situation where a 
creditor uses two or more credit scores in setting the material terms 
of credit. Some creditors may request credit scores from multiple 
sources and may use more than one of those scores in connection with 
the underwriting process. Proposed paragraph (b)(1)(ii)(D) states that 
if a person using the credit score proxy method generally uses two or 
more scores in setting the material terms of credit granted, extended, 
or otherwise provided to a consumer, the person must determine the 
appropriate cutoff score based on how the person evaluates the multiple 
credit scores when making credit decisions. For example, if a creditor 
generally purchases two scores for each consumer and uses the average 
of those two scores when setting the material terms of credit, it must 
use the average of its consumers' scores when calculating its cutoff 
score.
    Some creditors that use multiple scores, however, may not 
consistently use the same method for evaluating those scores. For 
example, a creditor may sometimes use the average score and other times 
use the high score in its credit evaluation. In these circumstances, 
the proposed rules require that the creditor use reasonable means to 
determine the appropriate cutoff score and provide a safe harbor to a 
creditor that uses either a method that the creditor regularly uses or 
the average credit score for each consumer as the means of calculating 
the cutoff score.
    Some consumers, particularly those with limited credit histories, 
may not

[[Page 28976]]

have credit scores. There is no way to compare those consumers to the 
cutoff score. A person using the credit score proxy method may 
sometimes grant, extend, or otherwise provide credit to such a consumer 
for whom a credit score is not available. Under those circumstances, 
proposed paragraph (b)(1)(iii) provides that the person using the 
credit score proxy method must assume that a consumer for whom a credit 
score is not available receives credit on material terms that are 
materially less favorable than the most favorable credit terms offered 
to a substantial proportion of consumers, and provide a risk-based 
pricing notice to that consumer. The Agencies believe this assumption 
is appropriate because consumers for whom a credit score is not 
available are likely to receive less favorable terms than those offered 
to other consumers. The Agencies solicit comment on whether this 
assumption is appropriate. The Agencies also solicit comment on 
whether, if no credit score is available, there are other reasonable 
means by which a person may determine whether the consumer received 
materially less favorable credit terms.
    Proposed paragraph (b)(1)(iv) provides an example of how a credit 
card issuer could apply the credit score proxy method. The credit card 
issuer in this hypothetical example calculates a cutoff score of 720. 
The Agencies expect that cutoff scores will vary for different 
creditors, depending on the type of credit score used and the score 
distributions of each creditor's customer base. For example, among 
creditors using the same scoring model, a subprime-only creditor would 
likely have a lower cutoff score than a creditor that makes both prime 
and subprime loans, or a creditor that makes only prime loans.

Tiered Pricing Method

    Proposed paragraph (b)(2) sets forth the tiered pricing method for 
determining which consumers should receive a risk-based pricing notice. 
The general rule in proposed paragraph (b)(2)(i) provides that a person 
that sets the material terms of credit granted, extended, or otherwise 
provided to a consumer by placing the consumer within one of a discrete 
number of pricing tiers, based in whole or in part on a consumer 
report, may use the tiered pricing method. Pricing tiers may be 
reflected, for example, in a rate sheet that lists different rates 
available to the consumer depending upon information in a consumer 
report, such as the consumer's credit score, among other factors. The 
only factor that a person using this method must consider is tiers with 
different annual percentage rates, or, in the case of credit for which 
there is no annual percentage rate, other monetary terms that the 
person varies based on consumer report information such as the down 
payment or deposit. For example, if a lender offers automobile loans 
for which the annual percentage rate will be set at seven, nine, or 
eleven percent based in whole or in part on information from a consumer 
report, the lender would only need to consider which annual percentage 
rate pricing tier applies to a consumer in order to determine whether 
the consumer should receive a risk-based pricing notice, even if 
factors other than the consumer report influence the annual percentage 
rate received by the consumer.
    Proposed paragraph (b)(2)(i) describes the application of the 
tiered pricing method when a person using this method has four or fewer 
pricing tiers. In order to comply with the tiered pricing method in 
those circumstances, the person must provide a risk-based pricing 
notice to each consumer who does not qualify for the top, or lowest-
priced, tier.
    Proposed paragraph (b)(2)(ii) describes the application of the 
tiered pricing method when a person using this method has five or more 
tiers. In this circumstance, a person using the tiered pricing method 
may comply with the rule by sending a risk-based pricing notice to each 
consumer who does not qualify for the top two (lowest-priced) tiers, 
plus any other tier that represents at least the top 30 percent but no 
more than the top 40 percent of the total number of tiers. The example 
provided in this paragraph explains that in the case of a person with 
nine pricing tiers, a notice would need to be provided to all consumers 
who are not priced in the top three tiers.
    The Agencies recognize that creditors may use different pricing 
tiers for different types of products, such as automobile loans and 
boat loans. If a creditor uses different pricing tiers for different 
products, a separate analysis will be required for each product for 
which different tiers apply. If the same tiers apply regardless of the 
product, then a creditor need not distinguish between those products.
    The tiered pricing method focuses only on the number and percentage 
of tiers, not on the number or percentage of consumers who are assigned 
to each tier. A test that took into consideration the number of 
consumers within each tier could be extremely complicated and difficult 
to administer. The Agencies solicit comment on whether the tiered 
pricing method should take into account the percentage of consumers 
placed in each tier and how that could be accomplished without creating 
undue burdens or introducing excessive complexity to the tiered pricing 
method.
    The Agencies have considered the possibility that creditors may 
attempt to circumvent the tiered pricing method by establishing an 
additional tier or tiers for which no consumers will likely qualify. A 
creditor using the tiered pricing method is not permitted to consider 
tiers for which no consumers have qualified nor are reasonably expected 
to qualify. For example, if a creditor's underwriting standards 
prohibit lending to consumers with credit scores below 640, the 
creditor would not be able to use any pricing tiers that correlate with 
scores below 640. Similarly, a creditor should not consider a top tier 
that is available only to consumers with perfect or near-perfect credit 
and which the creditor rarely, if ever, uses. The Agencies solicit 
comment on whether and how the tiered pricing method could be subject 
to such circumvention by creditors and whether the proposed rules 
should be modified to prevent circumvention.

Credit Cards

    Proposed paragraph (c) sets forth the special requirements 
applicable to credit card issuers. Proposed paragraph (c)(1) generally 
requires a credit card issuer to provide a risk-based pricing notice to 
a consumer if: (i) The consumer applies for a credit card in connection 
with an application program, such as a direct-mail or take-one offer, 
or a pre-screened solicitation, for which more than a single possible 
purchase annual percentage rate may apply; and (ii) based in whole or 
in part on that consumer's consumer report, the card issuer provides a 
credit card to the consumer with a purchase annual percentage rate that 
is higher than the lowest purchase annual percentage rate available 
under that application or solicitation. The Agencies are basing the 
proposed rule on the assumption that when a credit card issuer offers a 
range of rates within a single solicitation or offer, the consumer 
applies for the best rate available under that offer.
    Proposed paragraph (c)(2) describes those circumstances in which a 
credit card issuer is not required to provide a risk-based pricing 
notice. Under this provision, a credit card issuer is not required to 
provide a risk-based pricing notice to a consumer if the consumer 
applies for a credit card for which the creditor provides a single 
purchase annual percentage rate (excluding temporary and penalty 
rates). In

[[Page 28977]]

addition, a credit card issuer is not required to provide a risk-based 
pricing notice to a consumer if the consumer is offered the lowest 
purchase annual percentage rate available under the credit card offer 
for which the consumer applied, even if a lower rate is available from 
that issuer under a different credit card offer. These interpretations 
are consistent with the statutory exception in section 615(h)(3)(A) of 
the FCRA, which provides that a risk-based pricing notice is not 
required if a consumer applies for, and receives, specific material 
terms, unless those terms were initially specified by the person after 
the transaction was initiated by the consumer and after the person 
obtained a consumer report. In each of the cases described in the 
proposed rules, the consumer applies for specific material terms and 
receives them, regardless of what other offers may be available to 
consumers from or through that credit card issuer. Proposed paragraph 
(c)(3) sets forth an example of the application of the risk-based 
pricing rules to a credit card solicitation containing multiple 
possible purchase annual percentage rates.

Account Review

    Proposed paragraph (d) describes how the risk-based pricing rules 
apply to the account review process. Proposed paragraph (d)(1) provides 
that a person must provide a risk-based pricing notice to a consumer if 
it: (i) Uses a consumer report in connection with a review of credit 
that has been extended to the consumer; and (ii) based in whole on in 
part on that consumer report, increases the annual percentage rate. 
Proposed paragraph (d)(2) illustrates this provision's applicability to 
credit card accounts. If a credit card issuer periodically obtains 
consumer reports in order to review the terms of the credit it has 
extended to consumers, and based on such a review increases the 
purchase annual percentage rate applicable to a consumer's card, then 
it must provide that consumer with a risk-based pricing notice.

Section ----.73 Content, Form, and Timing of Risk-Based Pricing Notices

    Proposed Sec.  ----.73 establishes the content, form, and timing 
for risk-based notices required to be given. These proposed rules apply 
whether the creditor makes the direct, consumer-to-consumer comparisons 
described in the general rule, or uses one of the proxy methods. 
Proposed paragraph (a)(1) states the general content requirements. 
Paragraphs (a)(1)(ii), (a)(1)(v), (a)(1)(vi), and (a)(1)(vii) generally 
implement the statutory minimum content requirements in section 
615(h)(5) of the FCRA, to which the Agencies have added certain 
supplemental information as described below to provide additional 
context to consumers.
    Terms based on consumer report. Proposed paragraph (a)(1)(ii) 
requires the notice to contain a statement informing the consumer that 
the terms offered, such as the annual percentage rate, have been set 
based on information from a consumer report. This statement generally 
tracks the statutory requirement in section 615(h)(5)(A) of the FCRA, 
except that the Agencies also propose to require that the notice 
include the annual percentage rate as an example of the terms offered. 
The Agencies believe that this example will help consumers to 
understand how the terms of credit offered to them may be affected by 
information in a consumer report.
    Identity of consumer reporting agency. Proposed paragraph (a)(1)(v) 
implements the statutory requirement in paragraph 615(h)(5)(B) of the 
FCRA. This paragraph requires the risk-based pricing notice to state 
the identity of each consumer reporting agency that furnished a 
consumer report used in the credit decision. The statutory language 
refers to ``the consumer reporting agency'' furnishing the report. The 
Agencies have expanded this statutory minimum content by requiring that 
the name of each consumer reporting agency that furnished a consumer 
report that was used in the credit decision, not just one consumer 
reporting agency, be disclosed on the notice. The Agencies believe that 
it is important to inform a consumer that multiple consumer reports 
were used in the credit decision, because the consumer may wish to 
check each of those reports for errors.
    Copy of consumer report. Proposed paragraph (a)(1)(vi) implements 
the statutory requirement in paragraph 615(h)(5)(C) of the FCRA that 
the notice include a statement informing the consumer that the consumer 
may obtain a copy of a consumer report without charge from the consumer 
reporting agency identified in the risk-based pricing notice. Proposed 
paragraph (a)(1)(vi) requires the notice to include a statement that 
federal law gives the consumer the right to obtain a consumer report 
from the consumer reporting agency or agencies identified in the notice 
without charge for 60 days after receipt of the notice.
    Although section 615(h) does not set forth a 60-day time period, 
the proposed 60-day time period is consistent with the time limit 
contained in the adverse action notice provisions in section 612(b) of 
the FCRA. Any right to a free consumer report arising under section 
612(b) is valid for 60 days after the consumer receives the notice that 
gives rise to that right. Incorporation of this 60-day rule is 
consistent with the Agencies' reading of the statute as giving 
consumers who receive a risk-based pricing notice the right to a free 
consumer report separate from the free annual report. The Agencies 
believe that it is important that the risk-based pricing notice let 
consumers know that their right to a free report expires after 60 days 
so that consumers will be encouraged to request any free reports to 
which they may be entitled in a timely manner. The Agencies solicit 
comment on whether it is appropriate to require disclosure of the 60-
day period in the notice.
    Consumer reporting agency contact information. Proposed paragraph 
(a)(1)(vii) implements the statutory requirement in paragraph 
615(h)(5)(D) of the FCRA that the risk-based pricing notice include the 
contact information specified by the consumer reporting agency 
identified in the notice for obtaining the free consumer report 
referenced in the notice. The notice must include a statement informing 
the consumer how to obtain the free consumer report from the consumer 
reporting agency or agencies identified in the notice and providing 
contact information specified by each consumer reporting agency. The 
Agencies also have clarified that the notice should include a toll-free 
number, if applicable, for each consumer reporting agency.
    Consumer report explanation. In addition to the minimum content 
requirements imposed by the statute and in some cases supplemented by 
the Agencies, the proposal also requires that the risk-based pricing 
notice contain additional background information regarding consumer 
reports. Proposed paragraph (a)(1)(i) requires a statement explaining 
that a consumer report includes information about a consumer's credit 
history and the type of information included in that history. This 
general background information describing consumer reports will provide 
additional context that may be helpful to consumers who lack 
familiarity with consumer reports and what they contain.
    Less favorable terms. Proposed paragraph (a)(1)(iii) requires the 
notice to state that the terms offered to the consumer may be less 
favorable than the terms offered to consumers with better credit 
histories. This statement relates the general information about credit 
history and credit pricing to the specific consumer. Absent this 
statement, some consumers may assume that the general

[[Page 28978]]

information has no relevance to them. This statement is designed to 
carry out the statutory purpose of prompting consumers to check their 
consumer reports for any errors.
    The proposed rules do not require the notice to state that the 
terms offered to the consumer ``are'' or ``will be'' less favorable 
than the terms offered to other consumers. Such a statement would not 
be accurate in certain cases because the creditor may not be able to 
precisely distinguish consumers who received the most favorable terms 
from those who did not. For example, if a creditor applies the credit 
score proxy method, some consumers may receive a risk-based pricing 
notice even if they receive the most favorable terms available from 
that creditor. This may occur, for instance, because factors other than 
the consumer report, such as income or down payment amount, also 
influenced the pricing decision.
    The Agencies solicit comment on whether the notice should state 
that the terms ``may be'' less favorable, as proposed, or should use a 
different phrase, such as that the terms ``are likely to be'' less 
favorable. The Agencies request comment on what language would best 
serve the dual goals of most accurately describing the probability that 
the consumer received materially less favorable material terms and most 
effectively prompting consumers to obtain and review their consumer 
reports.
    Errors, disputes, and information sources. Proposed paragraph 
(a)(1)(iv) requires that the notice contain 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. The Agencies believe 
that this additional information may prompt consumers to check their 
consumer reports for any errors and may be helpful to consumers who 
lack familiarity with their ability to correct mistakes on their 
consumer reports. Proposed paragraph (a)(1)(viii) requires the notice 
to include a statement directing the consumer to the web sites of the 
Board and the Commission to obtain more information about consumer 
reports.
    Account review notices. Proposed paragraph (a)(2) sets forth the 
content requirements for any risk-based pricing notice required to be 
given as a result of the use of a consumer report in account review. 
The proposal requires this notice to include a statement that the 
person sending the notice has conducted a review of the account based 
in whole or in part on information from a consumer report and a 
statement informing the consumer that as a result of that review the 
annual percentage rate on the account has been increased. Consistent 
with the general risk-based pricing notice and with section 615(h)(5), 
the remaining content of the notice must: (i) State that a consumer 
report includes information about a consumer's credit history and the 
type of information included in that credit history; (ii) state 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; (iii) state the identity 
of each consumer reporting agency that furnished a consumer report used 
in the account review; (iv) state that federal law gives the consumer a 
right to obtain a free copy of his or her consumer report from that 
consumer reporting agency for 60 days after receipt of the notice; (v) 
inform the consumer how to obtain such a consumer report; and (vi) 
direct the consumer to the web sites of the Board and the Commission to 
obtain more information about consumer reports.
    Format. Proposed paragraph (b) sets forth the format requirements 
for risk-based pricing notices. Proposed paragraph (b)(1)(i) requires 
that risk-based pricing notices be clear and conspicuous. Proposed 
paragraph (b)(1)(ii) specifies that persons subject to the rule are 
permitted to make the disclosures in writing, orally, or 
electronically. This is consistent with section 615(h)(1) of the FCRA, 
which permits the risk-based pricing notice to be provided to the 
consumer in writing, orally, or electronically.
    Proposed paragraph (b)(2) references the model forms of the risk-
based pricing notices required by Sec.  ----.72(a) and (c), and by 
Sec.  ----.72(d), which are contained in Appendices H-1 and H-2 of the 
Board's rule and Appendices B-1 and B-2 of the Commission's rule. 
Appropriate use of these model forms will be deemed to be a safe harbor 
for compliance with the risk-based pricing notice requirements. Use of 
these model forms is optional.
    Timing. Proposed paragraph (c) sets forth the timing requirements 
for providing risk-based pricing notices in connection with extensions 
of closed-end and open-end credit, as well as credit account reviews. 
For closed-end transactions, proposed paragraph (c)(1) requires the 
notice to be provided to the consumer before consummation of the 
transaction, but not earlier than the time the decision to approve an 
application for, or a grant, extension, or other provision of, credit 
is communicated to the consumer by the person required to give the 
notice. For open-end credit, proposed paragraph (c)(2) requires the 
notice to be provided to the consumer before the first transaction is 
made under the plan, but not earlier than the time the decision to 
approve an application for, or a grant, extension, or other provision 
of credit is communicated to the consumer. Finally, for account 
reviews, proposed paragraph (c)(3) requires that the notice be provided 
to the consumer at the time the decision to increase the annual 
percentage rate based on a consumer report is communicated to the 
consumer by the person required to give the notice, or if no notice of 
the increase in the annual percentage rate is provided to the consumer 
prior to the effective date of the change in the annual percentage 
rate, no later than five days after the effective date of the change in 
the annual percentage rate.
    Section 615(h)(2) of the FCRA states that the risk-based pricing 
notice may be provided at the time of application or at the time that 
the approval of an application for credit is communicated to the 
consumer. The Agencies considered whether to allow the risk-based 
pricing notice to be provided at the time of application, but rejected 
that approach. Instead, the Agencies have concluded that the notice 
generally should be provided no earlier than the time when approval is 
communicated to the consumer. The Agencies have proposed this approach 
for several reasons.
    First, an application notice generally would have to be provided to 
all consumer applicants before a consumer report is reviewed and would 
have to be completely generic. The general rule, however, requires 
persons engaged in risk-based pricing to differentiate between 
consumers and to provide notice to those consumers who receive 
materially less favorable material terms than other consumers. The 
Agencies believe that requiring the notice to be provided later than 
the time of application gives effect to the general rule and ensures 
that risk-based pricing notices are provided only to those consumers 
who may receive materially less favorable material terms.
    Second, the Agencies believe that a completely generic and 
depersonalized notice provided at the time of application may not be 
effective in communicating to consumers the importance of the consumer 
report in potentially establishing the terms of credit. The Agencies 
believe that such a notice is less likely to be noticed, read, and 
acted upon by consumers than a more targeted, personalized notice.

[[Page 28979]]

    Third, permitting the notice to be provided at the time of 
application would likely increase significantly the number of risk-
based pricing notices provided to consumers compared to the number of 
notices that would be provided later in the credit process. If, 
consistent with the Agencies' reading of the statute, receipt of a 
risk-based pricing notice entitles the consumer to a free copy of his 
or her consumer report, then permitting application notices could 
greatly expand the number of free reports to which consumers may be 
entitled in ways that could be costly for all parties, including 
consumers, and offer little or no benefit to consumers. Accordingly, 
the proposed rules specify that the earliest that the risk-based 
pricing notice may be provided would be at the time that approval of 
the extension of credit is communicated to the consumer.
    Finally, the Agencies also believe that the notice is likely to 
have the most utility if it is provided early enough in a transaction 
that it encourages a consumer to check his or her consumer report for 
inaccuracies. For this reason, the proposal requires that the notice be 
given prior to consummation of any closed-end transaction or prior to 
the first transaction under any open-end plan. The Agencies understand 
that for some transactions there may be very little time between 
approval of an application and either consummation or the first 
transaction under the plan. For example, a credit card account may be 
opened quickly. For other types of credit, there may be more time 
between approval of the application and either consummation or the 
first transaction under the plan. In those cases, a consumer may be 
more likely to check his or her consumer report for errors and, after 
reviewing the consumer report, may decide not to go forward with the 
transaction until any errors in the consumer report are corrected. The 
Agencies solicit comment on whether there are any circumstances in 
which the notice should be permitted to be provided after consummation 
or after the first transaction under the plan, and whether a notice 
provided after consummation or after the first transaction under the 
plan would be effective for consumers.

Section ----.74 Exceptions

    Proposed Sec.  ----.74 sets forth a number of exceptions to the 
general requirements regarding risk-based pricing notices. Each 
exception is discussed below.

Statutory Exceptions

    Proposed paragraph (a) provides that notice is not required if the 
consumer applied for specific material terms and was granted those 
terms, unless those terms were initially specified by the person after 
the transaction was initiated by the consumer and after that person 
obtained a consumer report. This exception implements the statutory 
exception in FCRA section 615(h)(3)(A). This proposed exception 
clarifies that ``specific material terms'' means a single material term 
or set of material terms, such as a single annual percentage rate, and 
not a range of alternatives, such as an offer that gives multiple 
annual percentage rates or a range of annual percentage rates. The 
example in proposed paragraph (a)(ii) explains that if a consumer 
receives a firm offer of credit from a credit card issuer with a single 
rate, based in whole or in part on a consumer report, a risk-based 
pricing notice is not required to be provided if the consumer applies 
for and receives a credit card with that advertised rate. This is the 
result because the creditor set the material terms of the offer before, 
not after, the consumer applied for or requested the credit.
    Proposed paragraph (b) provides that a risk-based pricing notice is 
not required if a creditor has provided or will provide an adverse 
action notice to the consumer under FCRA section 615(a) in connection 
with the transaction. This exception implements the statutory exception 
in FCRA section 615(h)(3)(B). The proposed exception applies to any 
risk-based pricing notices otherwise required under the general rule, 
the rule applicable to credit card issuers, or the rule applicable upon 
account review, so long as an adverse action notice has been or will be 
provided to the consumer pursuant to section 615(a) of the FCRA.

Prescreened Solicitations Exception

    Proposed paragraph (c) provides an exception to the general risk-
based pricing rule when consumer reports are used to set the terms in a 
prescreened solicitation (firm offer of credit). Proposed paragraph 
(c)(1) states that a person is not required to provide a risk-based 
pricing notice if that person (i) obtains a consumer report that is a 
prescreened list as described in section 604(c)(2) of the FCRA, and 
(ii) uses that consumer report for the purpose of making a firm offer 
of credit to the consumer, as described in section 603(l) of the FCRA. 
This exception applies regardless of the terms the creditor may offer 
to other consumers in other firm offers of credit. In other words, a 
creditor is not required to provide a risk-based pricing notice to a 
consumer to whom it sends a particular prescreened solicitation just 
because the creditor sends prescreened solicitations that offer 
materially more favorable material terms to another group of consumers.
    The Agencies note that this exception applies only when a consumer 
report is used to set the terms offered in a prescreened solicitation 
to a consumer at the pre-application stage, and does not eliminate the 
requirement to provide a risk-based pricing notice later in connection 
with the credit extension, pursuant to proposed Sec.  ----.72. For 
example, a firm offer of credit may contain several possible rates and, 
if a consumer applies in response to the offer and does not receive the 
lowest rate, the creditor generally is required to provide a risk-based 
pricing notice to that consumer.
    The Agencies believe that requiring a notice in connection with 
prescreened solicitations will not significantly benefit consumers, but 
will impose substantial burdens on creditors and the credit reporting 
system. The Agencies understand that only about one half of one percent 
of consumers who receive prescreened solicitations respond to them. 
Therefore, for the vast majority of consumers who are not interested in 
obtaining credit via the prescreened solicitation, a risk-based pricing 
notice would have no relevance.\10\ Moreover, a requirement for 
creditors to provide notices to all consumers who receive certain 
prescreened solicitations and the corresponding availability of free 
consumer reports for each of those consumers would impose a significant 
burden on creditors and the credit reporting system.
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    \10\ Whether a prescreened solicitation is made ``in connection 
with an application for, or a grant, extension, or other provision 
of credit''--and, thus, whether it is covered by section 615(h)--
could depend on the circumstances of a particular solicitation, 
including whether a specific consumer actually applies for credit in 
response to the solicitation. Because the Agencies have created an 
exception for prescreened solicitations based on their finding, 
pursuant to section 615(h)(6)(B)(iii), that there is no significant 
benefit to consumers, the Agencies do not need to reach the issue of 
whether such solicitations are ``in connection with'' an application 
for credit.
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    This exception also is consistent with the Agencies' determination 
that the appropriate time for providing a notice is no earlier than the 
time the decision to approve the credit application, or to grant, 
extend, or provide credit, is communicated to the consumer. At the time 
a creditor sends a prescreened solicitation, however, the consumer has

[[Page 28980]]

not made an application or otherwise indicated any interest in the 
credit.
    Finally, the exception also is consistent with the rule of 
construction that consumers should receive only one risk-based pricing 
notice per credit transaction. See detailed discussion of proposed 
Sec.  ----.75 below. Absent this exception, some consumers who respond 
to prescreened solicitations would receive multiple notices in 
connection with the transaction: The first at the time they receive the 
solicitation, and the second when they respond to the solicitation but 
do not receive the most favorable terms offered in that solicitation 
(e.g., when the solicitation offers more than one possible annual 
percentage rate). The Agencies find that there is no significant 
benefit to consumers from receiving more than one notice, and more than 
one opportunity to obtain free consumer reports, in connection with a 
single extension of credit.

Credit Score Disclosure Exceptions

    The Agencies are proposing three exceptions to the risk-based 
pricing notice requirement for creditors that provide a credit score 
disclosure to consumers. Each exception is described more fully below. 
The credit score disclosure generally will include the consumer's 
credit score, along with explanatory information regarding the score 
and information regarding the use of consumer reports and scores in the 
underwriting process. Under this exception, a creditor will provide 
this disclosure to all consumers and will not need to apply a test to 
determine which consumers likely were offered or received materially 
less favorable material terms. The Agencies also have proposed an 
alternate form of the notice to be provided to consumers for whom 
credit scores are unavailable. As discussed below, the Agencies are 
proposing these exceptions under section 615(h)(6)(iii) of the FCRA, 
which gives the Agencies the authority to create exceptions to the 
risk-based pricing notice requirement for classes of persons or 
transactions regarding which the Agencies determine that the notice 
would not significantly benefit consumers.

Credit Score Disclosure Exception for Credit Secured by Residential 
Real Property

    Proposed paragraph (d) provides an exception to the risk-based 
pricing notice requirement for creditors offering loans secured by one 
to four units of residential real property. This exception permits 
creditors offering loans to consumers that are secured by residential 
real property (purchase money mortgages, mortgage refinancings, home-
equity lines of credit, and home-equity plans) to comply with the 
regulations by adding certain supplemental disclosures regarding the 
use of consumer reports to the credit score disclosure they already are 
required to provide to consumers pursuant to section 609(g) of the 
FCRA. These creditors could provide this integrated notice to all 
consumers in connection with loans secured by real property, and would 
not be required to do a comparison of terms offered to different 
consumers, as is required by the general rule.
    Proposed paragraph (d)(1) sets forth the requirements that a 
creditor must meet to avail itself of the exception and states that a 
creditor is not required to provide a risk-based pricing notice if it 
complies with this subsection. Paragraph (d)(1)(i) provides that in 
order to qualify for the exception, the credit requested by the 
consumer must involve an extension of credit secured by one to four 
units of residential real property.
    Proposed paragraph (d)(1)(ii) sets forth the contents of the notice 
that must be provided to the consumer in order for a creditor to 
qualify for the exception. Proposed paragraphs (d)(1)(ii)(A)-
(d)(1)(ii)(C) require disclosure of certain background information 
regarding consumer reports and credit scores, including: (i) A 
statement that a consumer 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; 
(ii) 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; 
and (iii) 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. The Agencies believe that this background information will 
provide helpful context for consumers who may otherwise lack 
familiarity with consumer reports and credit scores and how they are 
used.
    Proposed paragraph (d)(1)(ii)(D) requires the notice to include all 
of the information required to be disclosed to the consumer pursuant to 
section 609(g) of the FCRA. Section 609(g) requires disclosure of: (i) 
The current credit score of the consumer or the most recent credit 
score of the consumer that was previously calculated for a purpose 
related to the extension of credit; (ii) the date on which that score 
was created; (iii) the name of the person or entity that provided the 
credit score or credit file on which the credit score was created; (iv) 
the range of possible credit scores under the model used; and (v) up to 
four key factors that adversely affected the consumer's credit score 
(or up to five factors if the number of enquiries made with respect to 
that consumer report is one of the factors).
    A person relying upon the exception set forth in proposed paragraph 
(d) generally is required to provide to the consumer a credit score 
that was used in connection with the credit decision. If, however, a 
person uses a credit score that was not created by a consumer reporting 
agency, such as a proprietary score, that person is permitted to 
satisfy the exception either by providing the proprietary score to the 
consumer or by providing to the consumer a credit score and associated 
information it obtains from an entity regularly engaged in the business 
of selling credit scores. In addition, a person that does not use a 
credit score in its credit evaluation process is permitted to rely on 
this exception by purchasing and providing to the consumer a credit 
score and associated information it obtains from an entity regularly 
engaged in the business of selling credit scores. This approach is 
consistent with the approach taken in section 609(g) of the FCRA and 
provides consumers with relevant summary information from their 
consumer reports. The Agencies request comment on the types of entities 
from which a creditor should be permitted to purchase credit scores for 
use under this exception in circumstances where the creditor does not 
otherwise use credit scores in the credit evaluation process.
    For many consumers, a disclosure of the credit score number alone 
will provide no indication of whether that credit score is favorable, 
unfavorable, or about average when compared to the credit scores of 
other consumers. Therefore, proposed paragraph (d)(1)(ii)(E) contains 
the additional requirement that the notice disclose by clear and 
readily understandable means either a distribution of credit scores 
(i.e., the proportion of consumers who have scores within the specified 
ranges) or a statement about how the consumer's credit score compares 
to the scores of other consumers. This additional information will 
provide important context to help consumers understand their credit 
scores. Any distribution or comparison of scores should reflect the 
population of consumers who have been scored under the model used by 
the person providing the score. If that information is not available 
from the person providing the score, or if the

[[Page 28981]]

creditor is disclosing a proprietary score, then the creditor may base 
the distribution or comparison on its own consumers who have been 
scored using the model.
    If a creditor chooses to disclose the credit score distribution, 
this information can be presented in the form of a bar graph containing 
a minimum of six bars, or by a different form of graphical presentation 
that is clear and readily understandable. If a credit score has a range 
of 1 to 100, the distribution must be disclosed using that same 1 to 
100 scale. For a creditor using the bar graph, each bar must illustrate 
the percentage of consumers with credit scores within the range of 
scores reflected by that bar. A creditor is not required to prepare its 
own bar graph; use of a bar graph obtained from the person providing 
the credit score that meets the requirements of this paragraph will be 
deemed compliant. The Agencies understand that some credit score 
vendors make such graphs available to interested persons, such as at a 
Web site. The Agencies believe that providing a graphical depiction of 
how the consumer's credit score compares to those of other consumers is 
an effective way of communicating this important contextual information 
to consumers that they can use to evaluate their individual 
circumstances.
    Alternatively, the notice can inform the consumer by clear and 
readily understandable means how his or her credit score compares to 
the scores of other consumers. As discussed more fully in the Model 
Forms section below, a concise narrative statement informing the 
consumer that his or her credit score ranks higher than a specified 
percentage of consumers is a clear and readily understandable means of 
providing this information.
    The Agencies request comment on whether requiring disclosure of 
either the distribution of credit scores or how a consumer's credit 
score compares to the scores of other consumers will be helpful to 
consumers, and whether such a requirement will be unduly burdensome to 
industry or costly to implement. The Agencies also solicit comment as 
to whether the bar graph form of the disclosure contained in this 
proposal is the simplest and most useful form of the disclosure for 
consumers, or whether there are different graphical or other means that 
would provide greater consumer benefit. The Agencies also solicit 
comment on whether the rule should set forth other examples of specific 
methods of presenting the score distribution or score comparison, such 
as a narrative, a statement of the midpoint of scores, or different 
forms of graphical presentation.
    Proposed paragraph (d)(1)(ii)(F) requires the notice to include 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. The Agencies 
believe that this statement may encourage consumers who otherwise will 
not be aware of their right to dispute errors to do so.
    Proposed paragraphs (d)(1)(ii)(G) and (d)(1)(ii)(H) require the 
credit score disclosure to provide the consumer with information about 
how to obtain his or her consumer report. The notice must state 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, and provide contact 
information for the centralized source from which consumers can obtain 
their free annual reports. Finally, proposed paragraph (d)(1)(ii)(I) 
requires the notice to include a statement directing the consumer to 
the Web sites of the Board and the Commission to obtain more 
information about consumer reports.
    Unlike a risk-based pricing notice given under proposed Sec.  --
--.72, the notice provided with the credit score disclosure under this 
exception does not give rise to an independent right to a free consumer 
report for several reasons. First, the exception notice is not a risk-
based pricing notice under section 615(h) of the FCRA. Therefore, the 
Agencies' reading that receipt of a risk-based pricing notice will 
trigger a free consumer report under section 612(b) of the FCRA does 
not apply. Second, under this exception, consumers will receive, in 
addition to the free credit scores they currently receive, specific 
information to enable consumers to compare their credit scores to the 
credit scores of other consumers. Finally, consumers who receive free 
credit scores will have other opportunities to obtain free consumer 
reports, such as the free annual reports available from the centralized 
source, if they have not already done so in anticipation of entering 
into a residential real property transaction.
    The Agencies propose to create this exception under FCRA section 
615(h)(6)(iii), which gives the Agencies authority to create exceptions 
to the risk-based pricing notice requirement for classes of persons or 
transactions regarding which the Agencies determine that the risk-based 
pricing notice will not significantly benefit consumers. For the 
reasons discussed below, the Agencies believe that a separate risk-
based pricing notice will not provide a significant benefit to 
consumers who receive a credit score disclosure that satisfies the 
exception.
    The credit score disclosure required by section 609(g) of the FCRA 
provides to the consumer free of charge his or her credit score, which 
is an important piece of individualized information about the 
consumer's credit history. The notice required to qualify for the 
exception will augment the section 609(g) notice by integrating the 
score disclosure with the additional information that will provide 
consumers with context for understanding how their credit scores may 
affect the terms of the offer and how their credit scores compare with 
the credit scores of other consumers. The Agencies believe it is better 
for consumers to receive all of this information at the same time in a 
single disclosure, rather than piecemeal in different notices.
    In addition, a consumer who discovers that his or her credit score 
ranks less favorably than the credit scores of other consumers may have 
a greater motivation to check his or her consumer report for errors 
than a consumer who receives the more generic information about 
consumer reports that will be included in a risk-based pricing notice. 
The credit score disclosure and notice will encourage consumers to 
check their consumer reports and will contain the contact information 
that the consumer needs in order to obtain his or her free annual 
consumer reports. By providing a consumer with such specific 
information about his or her own credit history and how it compares to 
the credit histories of other consumers, the credit score disclosure 
and notice likely will provide consumers with equal or greater value 
than the more generic information a consumer will receive in a risk-
based pricing notice. Furthermore, this specific information can be 
provided to consumers without the need for creditors to determine 
whether the terms of some offers are materially less favorable than the 
terms of other offers. Finally, a consumer will obtain this valuable 
information without having to take action to request a consumer report 
from a consumer reporting agency, something many consumers may fail to 
do. Thus, the Agencies believe that consumers who receive this 
information integrated with the section 609(g) notice will not 
significantly benefit from also receiving a separate risk-based pricing 
notice.

[[Page 28982]]

    Proposed paragraph (d)(2) sets forth the form that the credit score 
disclosure must take in order to satisfy the exception. The notice must 
be clear and conspicuous, provided on or with the notice required by 
section 609(g) of the FCRA, and segregated from other information 
provided to the consumer. The notice also must be provided to the 
consumer in writing in a form retainable by the consumer. The 
requirement that the notice be in writing is satisfied if it is 
provided in electronic form in accordance with the consumer consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
    Proposed paragraph (d)(3) describes the timing requirements for the 
notice that will satisfy the exception. The notice is required to be 
provided to the consumer concurrently with the notice required by 
section 609(g) of the FCRA, but in any event at or before consummation 
of a transaction in the case of closed-end credit or before the first 
transaction is made under an open-end credit plan. Section 609(g) of 
the FCRA states that the notice required by that subsection must be 
provided to the consumer ``as soon as reasonably practicable.'' The 
Agencies understand that industry practice is generally to provide the 
credit score disclosure within three business days of obtaining a 
credit score and will expect the integrated disclosure generally to be 
provided within the same timeframe.
    Proposed paragraph (d)(4) states that a model form of the notice 
described in paragraph (d)(1)(ii), consolidated with the notice 
required by section 609(g) of the FCRA, is contained in Appendix H-3 of 
the Board's rules and Appendix B-3 of the Commission's rules. 
Appropriate use of this model form will be deemed to be a safe harbor 
for compliance with the exception. Use of the model form is optional.

Credit Score Disclosure Exception for Non-Mortgage Credit

    Proposed paragraph (e)(1) sets forth a credit score disclosure 
exception for loans that are not secured by one to four units of 
residential real property, for which creditors are not required to 
provide the section 609(g) notice. This exception can be used, for 
example, by auto lenders, credit card issuers, and student loan 
companies. Creditors offering loans that are not secured by residential 
real property can comply with the regulations by disclosing a 
consumer's credit score along with certain additional information.
    This exception is similar to the exception proposed for credit 
secured by residential real property. As discussed in more detail 
below, consistent with the exception for credit secured by residential 
real property set forth in proposed paragraph (d), the Agencies propose 
this exception under the authority conferred by FCRA section 
615(h)(6)(iii) to create exceptions to the risk-based pricing notice 
requirement for classes of persons or transactions regarding which the 
Agencies determine that the risk-based pricing notice will not 
significantly benefit consumers. Creditors can provide this notice to 
all consumers in connection with loans that are not secured by real 
property, without performing a comparison of the terms offered to 
different consumers.
    Proposed paragraph (e)(1) sets forth the requirements that a 
creditor must meet in order to satisfy the exception and states that a 
person is not required to provide a risk-based pricing notice if it 
complies with this subsection. Proposed paragraph (e)(1)(i) states that 
in order to qualify for the exception, the credit requested by the 
consumer must involve credit other than an extension of credit secured 
by one to four units of residential real property. Thus, a creditor 
that is obligated to give the notice required by FCRA section 609(g)(1) 
cannot use this exception, but will need to use the exception described 
in proposed paragraph (d).
    Proposed paragraph (e)(1)(ii) requires that the person provide a 
notice to the consumer that includes certain specified content in order 
to satisfy the exception. Proposed paragraphs (e)(1)(ii)(A)-
(e)(1)(ii)(C) require the notice to include contextual information 
identical to that required in proposed paragraphs (d)(1)(ii)(A)-
(d)(1)(ii)(C) for credit secured by residential real property.
    Proposed paragraph (e)(1)(ii)(D) requires disclosure of the current 
credit score of the consumer or the most recent credit score of the 
consumer that was previously calculated for a purpose related to the 
extension of credit. As with the exception under proposed paragraph 
(d), a person using this exception generally is required to provide a 
credit score that was used in connection with the credit decision. Also 
consistent with the proposed exception for credit secured by 
residential real property, a person that uses a credit score that was 
not created by a consumer reporting agency, such as a proprietary 
score, is permitted to satisfy the exception either by providing the 
proprietary score to the consumer or by providing to the consumer a 
credit score and associated information it obtains from an entity 
regularly engaged in the business of selling credit scores. Similarly, 
a creditor that does not use a credit score in its credit evaluation 
process is permitted to rely on this exception by purchasing and 
providing to the consumer a credit score and associated information it 
obtains from an entity regularly engaged in the business of selling 
credit scores.
    Proposed paragraph (e)(1)(ii)(E) requires disclosure of the range 
of possible credit scores under the model used to generate the credit 
score disclosed to the consumer. This is consistent with the disclosure 
that would be provided under proposed paragraph (d) as part of the 
section 609(g) disclosure given to consumers of credit secured by 
residential real property.
    Proposed paragraph (e)(1)(ii)(F) requires that the notice disclose 
by clear and readily understandable means either a distribution of 
credit scores (i.e., the proportion of consumers who have scores within 
the specified ranges) or a statement about how the consumer's credit 
score compares to the scores of other consumers. As with the exception 
in proposed paragraph (d), the distribution of credit scores can be 
presented in the form of a bar graph containing a minimum of six bars, 
or by a different form of graphical presentation that is clear and 
readily understandable. For those creditors using bar graphs, each bar 
must illustrate the percentage of consumers with credit scores within 
the range of scores reflected by that bar. Use of a bar graph obtained 
from the person providing the credit score that meets the requirements 
of this paragraph will comply with this requirement. Alternatively, the 
notice can inform the consumer by clear and readily understandable 
means how his or her credit score compares to the scores of other 
consumers. As discussed more fully in the Model Forms section below, a 
concise narrative statement informing the consumer that his or her 
credit score ranks higher than a specified percentage of consumers is a 
clear and readily understandable means of providing this information. 
As discussed above in connection with proposed paragraph (d), the 
Agencies request comment on the usefulness and form of this requirement 
and whether there are better alternatives.
    Proposed paragraphs (e)(1)(ii)(G)-(e)(1)(ii)(H) require disclosure 
of additional information regarding the credit score that is consistent 
with what is required to be disclosed pursuant to section 609(g) for 
credit secured by residential real property. Proposed paragraph 
(e)(1)(ii)(G) states that the notice must contain the date on which the 
credit score was created. Proposed

[[Page 28983]]

paragraph (e)(1)(ii)(H) requires the creditor to disclose the name of 
the consumer reporting agency or other person that provided the credit 
score. The Agencies solicit comment on whether the disclosures of the 
score creation date and the source of the score will be beneficial to 
consumers or will impose undue burdens on industry.
    Unlike the notice required by section 609(g), the Agencies are not 
proposing to require this notice to contain up to four key factors that 
adversely affected the credit score. The Agencies believe that 
disclosure of the key factors that affected the credit score may not be 
helpful to many consumers. Among other things, the short summary 
descriptions of the four factors that are usually given may not be 
useful to consumers, and the list of factors does not effectively 
convey the importance of each factor. For example, a consumer with a 
high credit score will still receive four factors, even if some of 
those factors may not have had a significant adverse effect on that 
consumer's credit score. Although disclosure of the four factors is 
required by section 609(g), and, for that reason, is included in the 
notice to be provided when credit is secured by residential real 
property, it is not necessary for the Agencies to require the 
disclosure of the key factors in this notice.
    The Agencies solicit comment on whether requiring disclosure of the 
key factors in this notice will be helpful to consumers or will impose 
undue burdens on industry. The Agencies also solicit comment on whether 
including the four key factors in this notice will simplify compliance 
with the rules by making the content of this notice more similar to the 
content of the notice for credit secured by residential real property.
    Proposed paragraphs (e)(1)(ii)(I)-(e)(1)(ii)(L) are identical to 
proposed paragraphs (d)(1)(ii)(F)-(d)(1)(ii)(I) and require that the 
notice: contain a statement that the consumer is encouraged to verify 
the accuracy of the consumer report information and has the right to 
dispute any inaccurate information in the consumer report; provide the 
consumer with information about how to obtain his or her consumer 
report; and include a statement directing the consumer to the web sites 
of the Board and the Commission to obtain more information about 
consumer reports.
    For reasons similar to those discussed above in connection with 
proposed paragraph (d), the notice provided with the credit score 
disclosure under this exception will not give rise to an independent 
right to a free consumer report for the following reasons. First, the 
exception notice is not a risk-based pricing notice under section 
615(h) of the FCRA. Therefore, the Agencies' reading that receipt of a 
risk-based pricing notice will trigger a free consumer report under 
section 612(b) of the FCRA does not apply. Second, under this 
exception, consumers will receive free credit scores, which themselves 
are consumer reports, along with specific information to enable 
consumers to compare their credit scores with the credit scores of 
other consumers. Third, it would not be equitable to provide some 
consumers both free credit scores and free consumer reports, while 
other consumers will only obtain free consumer reports. Finally, 
consumers who receive free credit scores would have other opportunities 
to obtain free consumer reports, such as the free annual reports 
available from the centralized source.
    The Agencies propose to create this exception under FCRA section 
615(h)(6)(iii), which gives the Agencies authority to create exceptions 
to the risk-based pricing notice requirement for classes of persons or 
transactions regarding which the Agencies determine that the risk-based 
pricing notice will not significantly benefit consumers. For the 
reasons discussed below, the Agencies believe that a separate risk-
based pricing notice will not provide a significant benefit to 
consumers who receive a credit score disclosure that satisfies this 
exception.
    The notice required to qualify for the exception provides consumers 
with their credit scores without charge along with contextual 
information to help consumers understand how their credit scores may 
affect the terms of the offer and how their credit scores compare to 
the credit scores of other consumers. The credit score disclosure 
provides tangible value to consumers because free credit scores 
typically are not available to consumers in connection with non-
mortgage transactions. Consumer reporting agencies and other sellers of 
credit scores typically charge consumers between $6 and $10 for a 
credit score.
    The credit score disclosure and notice provides a consumer with 
specific information about his or her own credit history that will 
likely be more effective than the more generic information about 
consumer reports that will be included in a risk-based pricing notice. 
A consumer who discovers that his or her credit score is less favorable 
than the credit scores of other consumers may have a greater motivation 
to check his or her consumer report for errors than a consumer who 
receives a more generic risk-based pricing notice. The credit score 
disclosure and notice will encourage consumers to check their consumer 
reports and will contain the contact information that a consumer needs 
in order to obtain his or her free annual consumer reports. By 
providing a consumer with such specific information about his or her 
own credit history and how it compares to the credit histories of other 
consumers, the credit score disclosure and notice likely will provide 
consumers with equal or greater value than the more generic information 
a consumer will receive in a risk-based pricing notice. Furthermore, 
this specific information can be provided to consumers without the need 
for creditors to determine whether the terms of some offers are 
materially less favorable than the terms of other offers.
    Finally, the credit score disclosure will be provided to the 
consumer without requiring the consumer to take any action to obtain 
his or her score. By contrast, a consumer who receives a risk-based 
pricing notice will have to take action to request his or her consumer 
report. In this respect, the credit score disclosure exception is 
superior to a risk-based pricing notice because consumers often do not 
take action to exercise their rights with regard to consumer reports.
    Proposed paragraph (e)(2) sets forth the form that the credit score 
notice must take in order to satisfy the exception. These requirements 
are similar to the form prescribed for the exception in proposed 
paragraph (d). The notice must be clear and conspicuous and segregated 
from other information provided to the consumer. The notice also must 
be provided to the consumer in writing in a form retainable by the 
consumer. The requirement that the notice be in writing will be 
satisfied if the notice is provided in electronic form in accordance 
with the consumer consent and other applicable provisions of the E-Sign 
Act.
    Proposed paragraph (e)(3) describes the timing requirements for the 
notice that would satisfy the exception. The notice 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 of a 
transaction in the case of closed-end credit or before the first 
transaction is made under an open-end credit plan. This timing 
requirement is intended to be consistent with the timing requirement 
for the exception for loans secured by residential real property.

[[Page 28984]]

    Proposed paragraph (e)(4) states that a model form of the notice 
described in paragraph (e)(1)(ii) is contained in Appendix H-4 of the 
Board's rules and Appendix B-4 of the Commission's rules. Appropriate 
use of this model form will be deemed to be a safe harbor for 
compliance with the exception. Use of the model form is optional.

Credit Score Disclosure Exception--No Credit Score Available

    The Agencies recognize that a creditor may not be able to obtain a 
credit score for each consumer for whom it obtains a consumer report. 
This might occur, for example, when a creditor obtains the consumer 
report for an individual who has only a limited credit history with few 
trade lines. A consumer report that contains such limited data may not 
produce sufficient information to permit the computation of a score.
    Proposed paragraph (f) creates an exception to the risk-based 
pricing notice requirement for creditors that regularly use the credit 
score disclosure exceptions in proposed paragraph (d) or (e), but are 
unable to provide the notices described in those paragraphs to a 
consumer because a credit score is not available for that consumer. To 
take advantage of this exception, the creditor must provide a notice 
meeting the requirements of paragraph (f)(1)(ii).
    The Agencies believe that consumers with limited credit histories 
will benefit from receiving a notice indicating that they do not have a 
credit score because there is insufficient information in their 
consumer reports. In addition, the Agencies also believe that this 
exception is appropriate because a creditor that otherwise uses the 
credit score disclosure exception should not be required to use a 
different analysis for those consumers for whom no credit score is 
available. Requiring creditors to undertake a different analysis in 
these circumstances could impose significant burdens on creditors that 
exceed any benefits to consumers from such a requirement. In addition, 
it is unclear what type of analysis would be feasible in those 
circumstances. The Agencies believe that it is important, however, that 
a notice be provided to individuals for whom credit scores are not 
available. Consumers who have limited credit histories are likely to 
receive less favorable terms than those offered to other consumers and 
should be encouraged to check their consumer reports for accuracy.
    Proposed paragraph (f)(1) sets forth the requirements for the 
exception that applies when no credit score is available. Proposed 
paragraph (f)(1)(i) states that in order to qualify for the exception, 
the person must regularly obtain credit scores from a consumer 
reporting agency and provide credit score disclosures to consumers in 
accordance with the exceptions in paragraphs (d) or (e) of this 
section, and must be unable to obtain a credit score for the particular 
consumer from the consumer reporting agency from which the person 
regularly obtains credit scores. This exception is only available to 
creditors that regularly use one of the credit score disclosure 
exceptions.
    Proposed paragraph (f)(1)(ii) clarifies that a person may qualify 
for this exception only if that person does not obtain a credit score 
from another consumer reporting agency in connection with granting, 
extending, or otherwise providing credit to the consumer. A person is 
not required, however, to seek a credit score from another consumer 
reporting agency if the consumer reporting agency from which that 
person regularly obtains credit scores does not provide a credit score 
for a particular consumer. In addition, a person that regularly 
requests a particular type of credit score from a consumer reporting 
agency to provide to consumers to satisfy the requirements of 
paragraphs (d) or (e) of this section need not obtain or seek to obtain 
a different type of credit score if the score that it regularly obtains 
is not available. For example, a person that regularly requests a 
credit score from a consumer reporting agency that is based on 
traditional forms of data, such as credit card, mortgage, and 
installment loan accounts, need not request a different score that 
takes into consideration non-traditional forms of data, such as rental 
payment history, telephone service payment history, and utility service 
payment history.
    Proposed paragraph (f)(1)(iii) requires that the person provide a 
notice to the consumer that contains certain specified content. 
Consistent with the exceptions proposed under paragraphs (d) and (e), 
the notice must include: (i) A statement that the person was not able 
to obtain a credit score about the consumer from a consumer reporting 
agency, which must be identified by name, which may be the result of 
insufficient information regarding the consumer's credit history; (ii) 
a statement that a consumer report includes information about a 
consumer's credit history; (iii) 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 if the consumer's credit 
history changes; (iv) a statement that credit scores are important 
because consumers with higher credit scores generally obtain more 
favorable credit terms; and (v) 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. The notice also must include 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, and provide 
the consumer with information about how to obtain his or her consumer 
report. The notice must inform the consumer 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, and will give contact information for 
the centralized source from which consumers can obtain their free 
annual reports. This notice does not give rise to an independent right 
to a free consumer report because it is not a risk-based pricing notice 
provided under section 615(h) of the FCRA. Finally, the notice includes 
a statement directing the consumer to the Web sites of the Board and 
the Commission to obtain more information about consumer reports.
    As with the exceptions proposed in paragraphs (d) and (e), the 
Agencies believe that the notice required by this exception provides 
individualized information that will be more useful to consumers with 
limited credit histories than the more generalized risk-based pricing 
notice. A consumer for whom a credit score is not available will be 
told that a score could not be obtained generally because of 
insufficient information regarding the consumer's credit history. This 
notice will help the consumer to understand how his or her limited 
credit history might affect the consumer's ability to obtain credit, 
and the terms of such credit, in the absence of a credit score. The 
Agencies believe that providing a personalized notice to a consumer 
that no credit score is available and that he or she has a limited 
credit history gives a consumer more specific information about his or 
her particular circumstances than the consumer would receive in a risk-
based pricing notice. This notice might provide the consumer with 
greater reason to check his or her consumer report to see what 
information it contains and to correct any inaccuracies than the more 
generic risk-based pricing notice will provide. For these reasons, the 
Agencies believe that a consumer who receives this personalized notice 
containing specific information

[[Page 28985]]

regarding his or her limited credit history will not significantly 
benefit from also receiving a separate risk-based pricing notice.
    Proposed paragraph (f)(2) illustrates this exception with an 
example. The example describes a person that uses consumer reports to 
set the material terms of non-mortgage credit provided to consumers, 
and who regularly requests credit scores from a particular consumer 
reporting agency and provides those credit scores to consumers to 
satisfy the exception set forth in proposed paragraph (e). The consumer 
reporting agency provides a consumer report on a particular consumer 
that contains one trade line, but does not provide a credit score on 
that consumer. If the creditor does not obtain a credit score from 
another consumer reporting agency and, based in whole or in part on 
information in a consumer report, extends credit to the consumer, the 
creditor may provide the notice described under paragraph (f)(1)(iii) 
in order to satisfy its obligations under this subsection. If, however, 
the person obtains a credit score from another consumer reporting 
agency in connection with offering credit to the consumer, that person 
may not rely on the exception in paragraph (f) of this section, but 
must satisfy the requirements of paragraph (e) and disclose the score 
obtained.
    Proposed paragraph (f)(3) sets forth the form that the notice must 
take in order to satisfy the exception for circumstances where a credit 
score is not available. These requirements are similar to the form 
prescribed for the exceptions in proposed paragraphs (d) and (e). The 
notice must be clear and conspicuous and segregated from other 
information provided to the consumer. The notice also must be provided 
to the consumer in writing in a form retainable by the consumer. The 
requirement that the notice be in writing will be satisfied if the 
notice were provided in electronic form in accordance with the consumer 
consent and other applicable provisions of the E-Sign Act.
    Proposed paragraph (f)(4) describes the timing requirements for the 
notice that will satisfy the exception. The notice must be provided to 
the consumer as soon as reasonably practicable after the credit score 
has been requested, but in any event at or before consummation of a 
transaction in the case of closed-end credit or before the first 
transaction is made under an open-end credit plan. This timing 
requirement is intended to be consistent with the timing requirements 
for the exceptions in proposed paragraphs (d) and (e).
    Proposed paragraph (f)(5) states that a model form of the notice 
described in paragraph (f)(1)(iii) is contained in Appendix H-5 of the 
Board's rules and Appendix B-5 of the Commission's rules. Appropriate 
use of this model form will be deemed to be a safe harbor for 
compliance with the exception. Use of the model form is optional.

Request for Comment on Proposed Exceptions

    The Agencies request comment on all of the proposed exceptions to 
the requirement to provide risk-based pricing notices and on whether 
any other exceptions would be appropriate. In particular, the Agencies 
solicit comment regarding a possible exception for credit extended in 
connection with a private banking relationship available only to high 
net worth consumers.

Section ----.75 Rules of Construction

    Proposed paragraph Sec.  ----.75 sets forth two rules of 
construction. Proposed paragraph (a) states that a consumer generally 
is entitled to no more than one risk-based pricing notice under 
proposed paragraph Sec.  ----.72(a) or (c) or one notice under proposed 
paragraph Sec.  ----.74(d), (e), or (f), for each grant, extension, or 
other provision of credit. The statute focuses on the material terms 
granted or extended to a consumer, and consumers receive only a single 
material term or set of material terms in each extension of credit. 
Therefore, the Agencies generally do not interpret the statute as 
requiring the consumer to receive more than one risk-based pricing 
notice in connection with a single extension of credit. Moreover, the 
Agencies do not believe that consumers would benefit by receiving 
multiple notices or multiple free consumer reports in connection with a 
single credit extension. For example, for an auto loan, the auto dealer 
and the financing source or assignee may conduct separate underwriting. 
In that circumstance, the Agencies believe that a consumer should 
receive only one risk-based pricing notice for the credit extension if 
the consumer receives materially less favorable terms. One notice is 
sufficient to encourage a consumer to check his or her consumer report 
for any errors. Even if a consumer has previously received a risk-based 
pricing notice, another notice may be required as a result of account 
review, if the conditions set forth in proposed paragraph Sec.  --
--.72(d) have been met.
    Proposed paragraph (b) sets forth the rules governing multi-party 
transactions. Proposed paragraph (b)(1) states that the person to whom 
the loan obligation is initially payable must provide a risk-based 
pricing notice under Sec.  ----.72 or comply with the notice 
requirements of the exceptions under Sec.  ----.74, even if that person 
immediately assigns the loan to a third party and is not the source of 
funding for the loan. Correspondingly, proposed paragraph (b)(2) 
clarifies that a purchaser or assignee of a credit contract with a 
consumer is not required to provide the risk-based pricing notice or 
satisfy the conditions for one of the exceptions, even if that 
purchaser or assignee provides the funding for the loan.
    Proposed paragraph (b)(3) illustrates the rules of construction 
with several examples pertaining to auto finance transactions. The 
first example in paragraph (b)(3)(i) addresses a transaction in which a 
consumer obtains credit through an auto dealer to finance the purchase 
of an automobile, and the auto dealer is the original creditor under a 
retail installment sales contract. Even if the auto dealer immediately 
assigns the loan to a bank or finance company, the auto dealer must 
provide the risk-based pricing notice to the consumer, or satisfy the 
requirements for one of the exceptions in Sec.  ----.74. The bank or 
finance company, as an assignee, would have no duty to provide a risk-
based pricing notice to the consumer.
    The second example in paragraph (b)(3)(ii) addresses the situation 
where the bank or finance company, and not the auto dealer, is the 
person to whom the loan obligation is initially payable. In that case, 
the bank or finance company must provide the risk-based pricing notice 
to the consumer, or satisfy the requirements for one of the exceptions 
in Sec.  ----.74. The auto dealer, under these circumstances, would 
have no duty to provide a risk-based pricing notice to the consumer.

Model Forms

    Proposed Appendix H of the Board's rules and Appendix B of the 
Commission's rules contain model forms that the Agencies prepared to 
facilitate compliance with the regulations. Two of the model forms are 
for risk-based pricing notices and three of the model forms are for use 
in connection with the credit score disclosure exceptions. Each of the 
model forms is designated for use in a particular set of circumstances 
as indicated by the title of that model form. Model forms H-1 and B-1 
are for use in complying with the general risk-based pricing notice 
requirements in Sec.  ----.72. Model forms H-2 and B-2 are for risk-
based pricing notices given in connection with account review. Model 
forms H-3 and B-3 are for use in

[[Page 28986]]

connection with the credit score disclosure exception for loans secured 
by residential real property. Model forms H-4 and B-4 are for use in 
connection with the credit score disclosure exception for loans that 
are not secured by residential real property. Model forms H-5 and B-5 
are for use in connection with the credit score disclosure exception 
when no credit score is available for a consumer. Each form, including 
its format, language, and other elements, is designed to communicate 
key information in a clear and readily understandable manner.
    Although the Agencies have not tested the proposed model forms with 
consumers, the design of the model forms has been informed by consumer 
testing undertaken in connection with the interagency short-form 
privacy notice project and the Board's review of its credit card 
disclosure rules under the Truth in Lending Act.\11\ In addition, the 
Agencies tested the proposed model forms using two widely available 
readability tests, the Flesch reading ease test and the Flesch-Kincaid 
grade level test, each of which generates a readability score.\12\ 
Proposed Model Form H-1 and proposed Model Form B-1 have Flesch reading 
ease scores of 62.0, and Flesch-Kincaid grade level scores of 8.9. 
Proposed Model Form H-2 and proposed Model Form B-2 have Flesch reading 
ease scores of 64.2, and Flesch-Kincaid grade level scores of 8.4. 
Proposed Model Form H-3 and proposed Model Form B-3 (excluding the 
third page of the notice, which is language mandated by section 
609(g)(1)(D) of the FCRA) have Flesch reading ease scores of 63.2, and 
Flesch-Kincaid grade level scores of 8.3. Proposed Model Form H-4 and 
proposed Model Form B-4 have Flesch reading ease scores of 63.2, and 
Flesch-Kincaid grade level scores of 8.3. Proposed Model Form H-5 and 
proposed Model Form B-5 have Flesch reading ease scores of 55.0, and 
Flesch-Kincaid grade level scores of 9.8.
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    \11\ See 72 FR 32,948, 32,951 (June 14, 2007) (Truth in 
Lending); 72 FR 14,940, 14,944 (Mar. 29, 2007) (Privacy).
    \12\ The Flesch reading ease test generates a score between zero 
and 100, where the higher score correlates with improved 
readability. The Flesch-Kincaid grade level test generates a 
numerical assessment of the grade-level at which the text is 
written. The Flesch-Kincaid readability tests are widely used by 
government agencies to evaluate readability levels of consumer 
communications.
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    Use of the model forms by creditors is optional. If a creditor does 
use an appropriate Appendix H or Appendix B model form, or modifies a 
form in accordance with the regulations or the instructions to the 
appendix, that creditor shall be deemed to be acting in compliance with 
the provisions of paragraphs Sec.  ----.72 and Sec.  ----.73, or Sec.  
----.74, as applicable, of this regulation. It is intended that 
appropriate use of model form H-3 or model form B-3 also will be 
compliant with the disclosure that may be required under section 609(g) 
of the FCRA.
    A creditor may change the forms by rearranging the format without 
modifying the substance of the disclosures and still rely upon the safe 
harbor. Rearrangement of the model forms may not be so extensive as to 
affect materially the substance, clarity, comprehensibility, or 
meaningful sequence of the forms. Creditors making revisions with that 
effect will lose the benefit of the safe harbor for appropriate use of 
Appendix H or Appendix B model forms. As the Agencies have learned from 
consumer testing on privacy notices and credit card disclosures, format 
changes can have a significant effect on consumer comprehension.\13\ 
Creditors, however, are not required to undertake consumer testing to 
compare consumer comprehension of a revised form with consumer 
comprehension of the relevant model form when rearranging the format of 
a model form. The Agencies recognize that some format changes will not 
have a material adverse effect on the model forms, and may even enhance 
consumer comprehension. A creditor may use different colors or shading 
in its notice, include graphics or icons in its notice, such as a 
corporate logo or insignia, or make corrections or updates to telephone 
numbers, mailing addresses, or web site addresses that may change over 
time.
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    \13\ See 72 FR 32,948 (June 14, 2007) (proposed revisions to 
credit card disclosures); 72 FR 14,940 (March 29, 2007) (proposed 
short-form privacy notice).
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    In addition, a creditor may use clear and readily understandable 
means, other than the bar graph set forth in model forms H-3 and H-4 of 
the Board's rules and B-3 and B-4 of the Commission's rules, to 
disclose the distribution of credit scores. Other clear and readily 
understandable means may include a different form of graphical 
presentation of the distribution. Alternatively, a creditor may include 
a short narrative statement such as that set forth in model forms H-3 
and H-4 of the Board's rules and B-3 and B-4 of the Commission's rules 
to disclose how a consumer's credit score compares to the scores of 
other consumers. This statement should be simple and concise; a 
paragraph-length narrative description about the credit score 
distribution, such as a narrative description of the information 
represented in the bar graph set forth in the model forms, would not 
satisfy the clear and readily understandable standard.
    The Agencies solicit comment on the design and content of the 
proposed model forms. The Agencies also request comment on whether the 
proposed model forms and the accompanying instructions provide 
creditors with an appropriate degree of flexibility to change the forms 
without losing the compliance safe harbor. For example, the Agencies 
solicit comment on whether the instructions should permit creditors 
using proposed Model Form H-4 or Model Form B-4 to include the four key 
factors, even though not required by the proposed rules.

Request for Comment

    The Agencies solicit comment on all aspects of the proposal. In 
particular, the Agencies invite comment on the methods contained in the 
proposal that creditors may use to identify which consumers must 
receive risk-based pricing notices, and the approach of providing 
creditors with several options for complying with the rules. The 
Agencies also solicit comment on any other operationally feasible tests 
or approaches that would enable creditors to distinguish consumers who 
must receive notices from consumers who should not receive notices that 
commenters believe should be added to the options contained in the 
proposed rules. The Agencies also solicit comment on the 
appropriateness of the proposed exceptions, and whether any additional 
or different exceptions should be adopted. Finally, the Agencies 
solicit comment on the form and content of each of the proposed model 
forms.

V. Regulatory Analysis

A. Paperwork Reduction Act

1. Request for Comment on Proposed Information Collection
    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA) (44 U.S.C. 3506; 5 CFR part 1320, Appendix A.1), the 
Board and the Commission may not conduct or sponsor, and a respondent 
is not required to respond to, an information collection unless it 
displays a currently valid Office of Management and Budget (OMB) 
control number.
    In accordance with the PRA, the Board has reviewed the proposed 
rule under the authority delegated by OMB. The proposed rule contains 
requirements subject to the PRA. The collections of information that 
would be required by this proposed rule are found

[[Page 28987]]

in 12 CFR 222.72(a), (c), and (d); and 222.74(d), (e), and (f). The 
Board's OMB control number is 7100-0308.\14\
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    \14\ The information collections (ICs) in this rule will be 
incorporated with the Board's Disclosure Requirements Associated 
with Regulation V (OMB No. 7100-0308). The burden estimates provided 
in this rule pertain only to the ICs associated with this proposed 
rulemaking. The current OMB inventory for Regulation V is available 
at: http://www.reginfo.gov/public/do/PRAMain.
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    The information collection requirements contained in this joint 
notice of proposed rulemaking will be submitted by the Commission to 
OMB for review and approval under the PRA. The requirements are found 
in 16 CFR 640.72(a), (c), and (d); and 640.74(d), (e), and (f).
    Comments are invited on:
    (a) Whether the collection of information is necessary for the 
proper performance of the Agencies' functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collection, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record.
    Comments should be addressed to:
    Board: You may submit comments, identified by R-1316, by any of the 
following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments on the http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: 202-452-3819 or 202-452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
    Commission: Comments should refer to ``FACT ACT Risk-Based Pricing 
Rule: Project No. R411009,'' and may be submitted by any of the 
following methods. However, if the comment contains any material for 
which confidential treatment is requested, it must be filed in paper 
form, and the first page of the document must be clearly labeled 
``Confidential.'' \15\
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    \15\ FTC Rule 4.2(d), 16 CFR 4.2(d). The comment must be 
accompanied by an explicit request for confidential treatment, 
including the factual and legal basis for the request, and must 
identify the specific portions of the comment to be withheld from 
the public record. The request will be granted or denied by the 
Commission's General Counsel, consistent with applicable law and the 
public interest. See FTC Rule 4.9(c), 16 CFR 4.9(c).
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     Web Site: Comments filed in electronic form should be 
submitted by clicking on the following web link: https://secure.commentworks.com/ftc-RiskBasedPricing and following the 
instructions on the Web-based form. To ensure that the Commission 
considers an electronic comment, you must file it on the Web-based form 
at https://secure.commentworks.com/ftc-RiskBasedPricing.
     Federal eRulemaking Portal: If this notice appears at 
http://www.regulations.gov, you may also file an electronic comment 
through that Web site. The Commission will consider all comments that 
regulations.gov forwards to it.
     Mail or Hand Delivery: A comment filed in paper form 
should include ``FACT ACT Risk-Based Pricing Rule: Project No. 
R411009,'' both in the text and on the envelope and should be mailed or 
delivered, with two complete copies, to the following address: Federal 
Trade Commission/Office of the Secretary, Room H-135 (Annex M), 600 
Pennsylvania Avenue, NW., Washington, DC 20580. The Commission is 
requesting that any comment filed in paper form be sent by courier or 
overnight service, if possible.
    Comments on any proposed filing, recordkeeping, or disclosure 
requirements that are subject to paperwork burden review under the 
Paperwork Reduction Act should additionally be submitted to: Office of 
Management and Budget, Attention: Desk Officer for the Federal Trade 
Commission. Comments should be submitted via facsimile to (202) 395-
6974 because U.S. Postal Mail is subject to lengthy delays due to 
heightened security precautions.
    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the Commission's Web site, to the 
extent practicable, at http://www.ftc.gov/os/publiccomments.htm. As a 
matter of discretion, the Commission makes every effort to remove home 
contact information for individuals from the public comments it 
receives before placing those comments on the Commission's Web site. 
More information, including routine uses permitted by the Privacy Act, 
may be found in the Commission's privacy policy, at http://www.ftc.gov/ftc/privacy.htm.
2. Proposed Information Collection
    Title of Information Collection: Fair Credit Reporting Risk-Based 
Pricing Notices and Disclosure Exceptions.
    Frequency of Response: On occasion.
    Affected Public: Any creditor that engages in risk-based pricing 
and uses a consumer report to set the terms on which credit is extended 
to consumers.
    Board: For purposes of the PRA, the Board is estimating the burden 
for entities regulated by the Board, Office of the Comptroller of the 
Currency, Federal Deposit Insurance Corporation, Office of Thrift 
Supervision, National Credit Union Administration, and the U.S. 
Department of Housing and Urban Development (collectively, the 
``federal financial regulatory agencies''). Such entities are 
identified in section 621(b)(1)-(3) of the FCRA, 15 U.S.C. 1681s(b)(1)-
(3), and may include, among others, state member banks, national banks, 
insured nonmember banks, savings associations, federally-chartered 
credit unions, and other mortgage lending institutions.
    Commission: For purposes of the PRA, the Commission is estimating 
the burden for entities that extend credit to consumers for personal, 
household, or family purposes, and are subject to administrative 
enforcement by the FTC pursuant to section 621(a)(1) of the FCRA (15 
U.S.C. 1681s(a)(1)). These businesses include, among others, non-bank 
mortgage lenders, consumer lenders, utilities, state-chartered credit 
unions, and automobile dealers and

[[Page 28988]]

retailers that directly extend credit to consumers for personal, non-
business uses.
    Abstract: Proposed Sec.  ----.72(a) generally requires a creditor 
to provide a risk-based pricing notice to a consumer if that creditor 
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 terms available to a 
substantial proportion of consumers from or through that creditor. In 
addition, proposed Sec.  ----.72(c), generally requires a credit card 
issuer to provide a risk-based pricing notice to a consumer if: (1) The 
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 226.5a, and 
more than one possible purchase annual percentage rate may apply under 
the program or solicitation; and (2) based in whole or in part on a 
consumer report, the credit card issuer provides a credit card to the 
consumer with a purchase annual percentage rate that is greater than 
the lowest purchase annual percentage rate available under that 
application or solicitation.
    Proposed Sec.  ----.72(d) sets forth the rule applicable to account 
reviews. That paragraph generally requires a creditor to provide a 
risk-based pricing notice to a consumer if the creditor: (1) Uses a 
consumer report in connection with a review of credit that has been 
extended to the consumer; and (2) based in whole or in part on the 
consumer report, increases the annual percentage rate (the purchase 
annual percentage rate in the case of a credit card).
    Proposed Sec.  ----.73 describes the content, form and timing of 
the notice requirements found in Sec.  ----.72(a), (c), and (d). 
Appropriate use of the model forms contained in Appendices H-1 and B-1 
may be used to satisfy the notice requirements in Sec.  ----.72(a) or 
(c). Likewise, appropriate use of the model forms contained in 
Appendices H-2 and B-2 may be used to satisfy the notice requirements 
in Sec.  ----.72(d).
    Proposed Sec.  ----.74(a) and (b) implement exceptions to the risk-
based pricing notice requirements that are set forth in section 
615(h)(3) of the FCRA. Proposed Sec.  ----.74(a) states that in general 
a creditor is not required to provide a risk-based pricing notice to 
the consumer if the consumer applies for specific material terms and is 
granted those terms, unless those terms were specified by the creditor 
using the consumer report after the consumer applied for or requested 
credit and after the creditor obtained the consumer report. Proposed 
Sec.  ----.74(b) states that a creditor is not required to provide a 
risk-based pricing notice to the consumer if the creditor provides an 
adverse action notice to the consumer pursuant to section 615(a) of the 
FCRA.
    Proposed Sec.  ----.74(c) provides an exception from the risk-based 
pricing notice requirement for a creditor that uses a consumer report 
for the purpose of making a prescreened solicitation, also known as a 
firm offer of credit, to the consumer.
    Proposed Sec.  ----.74(d), (e), and (f) provides additional 
exceptions for creditors that provide their consumers with an 
alternative credit score disclosure notice. In the case of credit 
secured by one to four units of residential real property, an exception 
applies under Sec.  ----.74(d) for creditors that provide the consumer 
with a notice containing the credit score disclosure required by 
section 609(g) of the FCRA along with certain additional information 
that provides context for the credit score disclosure. Appropriate use 
of the model forms contained in Appendices H-3 and B-3 may be used to 
satisfy the notice requirements in Sec.  ----.74(d).
    Proposed Sec.  ----.74(e) creates an exception similar to the 
exception in proposed Sec.  ----.74(d) for credit that is not secured 
by one to four units of residential real property, and is thus not 
subject to the credit score disclosure requirements of section 609(g). 
As with the credit score disclosure exception that applies to credit 
secured by residential real property, this disclosure will provide 
consumers with specific information about their own credit histories in 
the form of individual credit scores, as well as certain additional 
information that provides context for the credit score disclosure. 
Appropriate use of the model forms contained in Appendices H-4 and B-4 
may be used to satisfy the notice requirements in Sec.  ----.74(e).
    Proposed Sec.  ----.74(f) permits creditors that regularly use the 
credit score disclosure exceptions in proposed Sec.  ----.74(d) or (e), 
but are unable to provide the notices described in those paragraphs to 
a consumer because a credit score is not available for that consumer, 
to provide an alternative notice to that consumer. Appropriate use of 
the model forms contained in Appendices H-5 and B-5 may be used to 
satisfy the notice requirements in Sec.  ----.74(f).
    Estimated Burden:
    To ease creditors' burden and cost of complying with the notice and 
disclosure requirements the Agencies have provided model forms in 
Appendices H and B of the proposed regulations.
    Board:
    The Board believes that since financial institutions are familiar 
with the existing provisions of section 615 of the FCRA, which require 
specific disclosures in connection with adverse action notices whenever 
a lender uses a credit report to either deny credit, or to make a 
counteroffer to the credit applicant that is rejected, implementation 
of the proposed requirements should not be overly burdensome.
    The Board estimates that there are 18,173 respondents regulated by 
the federal financial regulatory agencies potentially affected by the 
new notice and disclosure requirements. The Board estimates that the 
18,173 respondents would take, on average, 40 hours (1 business week) 
to reprogram and update systems, provide employee training, and modify 
model notices with respondent information \16\ to comply with proposed 
requirements. This one-time annual burden is estimated to be 725,600 
hours. In addition, the Board estimates that, on a continuing basis, 
respondents would take 5 hours a month to modify and distribute notices 
to consumers. This annualized burden is estimated to be 1,090,380 
hours. The Board estimates the total annual burden to be 1,815,980 
hours.
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    \16\ These modifications may include corrections or updates to 
telephone numbers, mailing addresses, or Web site addresses that may 
change over time, the addition of graphics or icons, such as the 
creditor's corporate logo, the alteration of the shading or color 
contained in the model forms, and the use of a different form of 
graphical presentation to depict the distribution of credit scores.
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    Commission:
    Number of respondents:
    As discussed above, the proposed regulations require creditors to 
provide a risk-based pricing notice to a consumer when the creditor 
uses a consumer report in connection with an application for, or a 
grant, extension, or other provision of credit, and, based in whole or 
in part on the consumer report, grants, extends, or provides credit to 
the consumer on material terms that are materially less favorable than 
the most favorable terms available to a substantial proportion of 
consumers from or through that person. Given the broad scope of 
creditors, it is difficult to determine precisely the number of them

[[Page 28989]]

that are subject to the Commission's jurisdiction and that engage in 
risk-based pricing. As a whole, the entities under the Commission's 
jurisdiction are so varied that there are no general sources that 
provide a record of their existence, and they include many small 
entities for which there is no formal tracking method. Nonetheless, 
Commission staff estimates that the proposed regulations will affect 
approximately 199,500 creditors subject to the Commission's 
jurisdiction.\17\ The Commission invites comment and information about 
the categories and number of creditors subject to its jurisdiction.
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    \17\ This estimate derives in part from an analysis of the 
figures obtained from the North American Industry Classification 
System (NAICS) Association's database of U.S. businesses. See http://www.naics.com/search.htm. Commission staff identified categories of 
entities under its jurisdiction that also directly provide credit to 
consumers. Those categories include retail, vehicle dealers, 
consumer lenders, and utilities. The estimate also includes state-
chartered credit unions, which are subject to the Commission's 
jurisdiction. See 15 U.S.C. 1681s. For the latter category, 
Commission staff relied on estimates from the National Credit Union 
Administration for the number of non-federal credit unions. See 
http://www.ncua.gov/news/quick_facts/Facts2007.pdf. For purposes of 
estimating the burden, Commission staff made the conservative 
assumption that all of the included entities engage in risk-based 
pricing.
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    Estimated Hours Burden:
    As detailed below, Commission staff estimates that the average 
annual information collection burden during the three-year period for 
which OMB clearance is sought will be 14,630,000 hours (rounded). The 
estimated annual labor cost associated with this burden is $236,870,000 
(rounded).
    Commission staff believes that because creditors already are 
familiar with the existing provisions of section 615 of the FCRA, which 
require specific disclosures in connection with adverse action notices 
whenever a lender uses a credit report to deny credit, implementation 
of the proposed requirements should not be overly burdensome. The 
proposed rule also offers several different ways that entities can 
perform a risk-based pricing analysis, allowing them to choose the 
method that is least burdensome and best-suited to their particular 
business model. Additionally, the proposed rule provides a model risk-
based pricing notice that entities can use, thereby significantly 
limiting the time and effort required by them to comply with the 
proposed rule.
    Commission staff believes that during the first year that the 
proposed rule is in effect businesses likely will develop automated or 
other processes for determining whether a consumer should receive a 
risk-based pricing notice. Commission staff estimates that it will take 
businesses, on average, forty (40) hours (1 business week) to reprogram 
and update their systems to incorporate the new notice requirements, to 
provide employee training, and to modify model notices with respondent 
information to comply with the proposed requirements. This one-time 
burden in the aggregate would be 7,980,000 hours (199,500 creditors x 
40 hours) (rounded to the nearest thousand) for the first year. In 
addition, Commission staff estimates that, on a continuing basis, 
businesses would need five (5) hours per month to modify and distribute 
notices to consumers. This annual burden is estimated to be 11,970,000 
hours (rounded to the nearest thousand). Commission staff estimates the 
average annual burden over the three-year PRA clearance sought will be 
14,630,000 hours [(7,980,000 / 3) + 11,970,000].
    Estimated Cost Burden:
    Commission staff derived labor costs by applying appropriate 
estimated hourly cost figures to the burden hours described above. It 
is difficult to calculate with precision the labor costs associated 
with the proposed regulations, as they entail varying compensation 
levels of clerical, management, and/or technical staff among companies 
of different sizes. In calculating the cost figures, Commission staff 
assumes that managerial and/or professional technical personnel will 
develop procedures for conducting the risk-based pricing analyses, 
adapt the written notices as necessary, and train staff, at an hourly 
rate of $38.93.\18\ To distribute and update the notices, Commission 
staff assumes that personnel involved in sales and similar 
responsibilities will update and distribute the notices at an hourly 
rate of $11.14.\19\
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    \18\ This cost is derived from the median hourly wage for 
management occupations found in the 2006 National Occupational 
Employment and Wage Estimates of the Bureau of Labor Statistics.
    \19\ This cost is derived from the median hourly wage for sales 
and related occupations found in the 2006 National Occupational 
Employment and Wage Estimates of the Bureau of Labor Statistics.
---------------------------------------------------------------------------

    Based on the above estimates and assumptions, the estimated average 
annual labor cost for all categories of covered entities under the 
proposed regulations is $236,870,000 (rounded to the nearest thousand) 
[((40 hours x $38.93) + (180 hours x $11.14)) x 199,500 / 3].
    Commission staff does not anticipate that compliance with the 
proposed rule will require any new capital or other non-labor 
expenditures. The proposed rule provides a simple and concise model 
notice that creditors may use to comply, and as creditors already are 
providing notices to consumers in the adverse action context under the 
FCRA, they are likely to have the necessary resources to generate and 
distribute these risk-based pricing notices. Similarly, those creditors 
who provide 609(g) notices may incorporate the risk-based pricing 
notice into their existing 609(g) notices. Thus, any capital or non-
labor costs associated with compliance would be negligible.

B. Regulatory Flexibility Act

    Board: The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
requires an agency either to provide an initial regulatory flexibility 
analysis with a proposed rule or certify that the proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. The proposed regulations cover certain banks, other 
depository institutions, and non-bank entities that extend credit to 
consumers. The Small Business Administration (SBA) establishes size 
standards that define which entities are small businesses for purposes 
of the RFA.\20\ The size standard to be considered a small business is: 
$165 million or less in assets for banks and other depository 
institutions; and $6.5 million or less in annual revenues for the 
majority of non-bank entities that are likely to be subject to the 
proposed regulations. The Board requests public comment in the 
following areas.
---------------------------------------------------------------------------

    \20\ U.S. Small Business Administration, Table of Small Business 
Size Standards Matched to North American Industry Classification 
System Codes, available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------

1. Reasons for the Proposed Rule
    Section 311 of the FACT Act (which amends section 615 of the FCRA 
by adding a new subsection (h)) requires the Agencies to prescribe 
regulations jointly to implement the duty of users of consumer reports 
to provide risk-based pricing notices in certain circumstances. 
Specifically, the regulations must address, but are not limited to, the 
following aspects of section 615(h) of the FCRA: (i) The form, content, 
time, and manner of delivery of any risk-based pricing notice; (ii) 
clarification of the meaning of terms used in section 615(h), including 
what credit terms are material, and when credit terms are materially 
less favorable; (iii) exceptions to the risk-based pricing notice 
requirement for classes of persons or transactions regarding which the 
Agencies determine that notice would

[[Page 28990]]

not significantly benefit consumers; (iv) a model notice that may be 
used to comply with section 615(h); and (v) the timing of the risk-
based pricing notice, including the circumstances under which the 
notice must be provided after the terms offered to the consumer were 
set based on information from a consumer report. The Agencies are 
issuing the proposed regulations to fulfill their statutory duty to 
implement the risk-based pricing notice provisions of section 615(h) of 
the FCRA.
2. Statement of Objectives and Legal Basis
    The SUPPLEMENTARY INFORMATION above contains this information. The 
legal basis for the proposed regulations is section 311 of the FACT 
Act.
3. Description of Small Entities to Which the Regulation Applies
    The proposed regulations apply to any person that both (i) uses a 
consumer report in connection with an application for, or a grant, 
extension, or other provision of, credit to a consumer that is 
primarily for personal, family, or household purposes; and (ii) based 
in whole or in part on the consumer report, grants, extends, or 
otherwise provides credit to the consumer on material terms that are 
materially less favorable than the most favorable terms available to a 
substantial proportion of consumers from or through that person. The 
proposed regulations do not apply to any person that uses a consumer 
report in connection with an application for, or a grant, extension, or 
other provision of, credit to a consumer or to any other applicant 
primarily for a business purpose.
    The total number of small entities likely to be affected by the 
proposal is unknown because the Agencies do not have data on the number 
of small entities that use consumer reports for risk-based pricing in 
connection with consumer credit. The risk-based pricing provisions of 
the FACT Act have broad applicability to persons who use consumer 
reports and engage in risk-based pricing in connection with the 
provision of consumer credit.
    Based on estimates compiled by the federal bank and thrift 
regulatory agencies \21\ in connection with a recent proposed rule, 
there are approximately 6,208 depository institutions that could be 
considered small entities and that are potentially subject to the 
proposed rule.\22\ The available data are insufficient to estimate the 
number of non-bank entities that would be subject to the proposed rule 
and that are small as defined by the SBA. Such entities would include 
non-bank mortgage lenders, auto finance companies, automobile dealers, 
other non-bank finance companies, telephone companies, and utility 
companies.
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    \21\ The Office of the Comptroller of the Currency, Board, 
Federal Deposit Insurance Corporation, and Office of Thrift 
Supervision.
    \22\ The estimate includes 948 national banks, 1,448 
institutions regulated by the Board, 3,400 FDIC-insured state 
nonmember banks, and 412 savings associations. See 72 FR 70944, 
70961-70967 (Dec. 13, 2007).
---------------------------------------------------------------------------

    It also is unknown how many of these small entities that meet the 
SBA's size standards and are potentially subject to the proposed 
regulations engage in risk-based pricing based in whole or in part on 
consumer reports. The proposed regulations do not impose any 
requirements on small entities that do not use consumer reports or that 
do not engage in risk-based pricing of consumer credit on the basis of 
consumer reports.
    The Board invites comment regarding the number and type of small 
entities that would be affected by the proposed rule.
4. Projected Reporting, Recordkeeping and Other Compliance Requirements
    The compliance requirements of the proposed regulations are 
described in detail in the SUPPLEMENTARY INFORMATION above.
    The proposed regulations generally require a person to provide a 
risk-based pricing notice to a consumer when that person uses a 
consumer report to grant or extend credit to the consumer on material 
terms that are materially less favorable than the most favorable terms 
available to a substantial proportion of consumers from or through that 
person. A person can identify consumers to whom it must provide the 
notice by directly comparing the material terms offered to its 
consumers or by using one of two alternative methods specified in the 
proposed regulations. The proposed regulations also include several 
exceptions to the general rule, including exceptions that would allow a 
person otherwise subject to the risk-based pricing notice requirement 
to provide a consumer with a credit score disclosure in conjunction 
with additional information that provides context for the credit score 
disclosure.
    A person would need to determine if it engages in risk-based 
pricing, based in whole or in part on consumer reports, in connection 
with the provision of consumer credit. A person that does engage in 
such risk-based pricing would need to analyze the regulations. Subject 
to the exceptions set forth in the proposed rule, the person generally 
would need to establish procedures for identifying those consumers to 
whom it must provide risk-based pricing notices. These procedures could 
involve either applying the general rule and performing a direct 
comparison among the terms offered to the person's consumers or 
utilizing one of the alternative methods set forth in the proposed 
regulations. Persons required to provide risk-based pricing notices 
also would need to design, generate, and provide those notices to the 
consumers that they have identified. Alternatively, a person that 
complies with the regulations by providing notices that meet the 
requirements of any of the credit score disclosure exceptions would 
need to design, generate, and provide those notices to its consumers.
    The Board seeks information and comment on any costs, compliance 
requirements, or changes in operating procedures arising from the 
application of the proposed rule to small institutions.
5. Identification of Duplicative, Overlapping, or Conflicting Federal 
Regulations
    The Board has not identified any federal statutes or regulations 
that would duplicate, overlap, or conflict with the proposed 
regulations. The proposed credit score disclosure for credit secured by 
residential real property has been designed to work in conjunction with 
the existing requirements of section 609(g) of the FCRA. The Board 
seeks comment regarding any statutes or regulations, including state or 
local statutes or regulations, that would duplicate, overlap, or 
conflict with the proposed regulations.
6. Discussion of Significant Alternatives
    The Board welcomes comments on any significant alternatives, 
consistent with section 311 of the FACT Act, that would minimize the 
impact of the proposed regulations on small entities.
    Commission: The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-
612, requires that the Commission provide an Initial Regulatory 
Flexibility Analysis (IRFA) with a proposed rule and a Final Regulatory 
Flexibility Analysis (FRFA) with the final rule, unless the Commission 
certifies that the rule will not have a significant economic impact on 
a substantial number of entities. See 5 U.S.C. 603-605. The Commission 
has determined that it is appropriate to publish an IRFA in order to 
inquire into the impact of the proposed rule on small entities. 
Therefore, the Commission has prepared the following analysis:

[[Page 28991]]

1. Description of the Reasons That Action by the Agency Is Being Taken
    Section 311 of the FACT Act (which amends section 615 of the FCRA 
by adding a new subsection (h)) requires the Agencies jointly to 
prescribe rules to implement the duty of users of consumer reports to 
provide risk-based pricing notices in certain circumstances. 
Specifically, the rules must address, but are not limited to, the 
following aspects of section 615(h) of the FCRA: (i) The form, content, 
time, and manner of delivery of any risk-based pricing notice; (ii) 
clarification of the meaning of terms used in section 615(h), including 
what credit terms are material, and when credit terms are materially 
less favorable; (iii) exceptions to the risk-based pricing notice 
requirement for classes of persons or transactions regarding which the 
Agencies determine that notice would not significantly benefit 
consumers; (iv) a model notice that may be used to comply with section 
615(h); and (v) the timing of the risk-based pricing notice, including 
the circumstances under which the notice must be provided after the 
terms offered to the consumer were set based on information from a 
consumer report. The Agencies are issuing the proposed rules to fulfill 
their statutory duty to implement the risk-based pricing notice 
provisions of section 615(h) of the FCRA.
2. Statement of Objectives of and Legal Basis for the Proposed Rule
    The SUPPLEMENTARY INFORMATION above contains information concerning 
the objectives of the proposed rule. The legal basis for the proposed 
rule is section 311 of the FACT Act.
3. Description of Small Entities to Which the Proposed Rule Will Apply
    The proposed rule applies to any creditor that both (i) uses a 
consumer report in connection with an application for, or a grant, 
extension, or other provision of, credit to a consumer that is 
primarily for personal, family, or household purposes; and (ii) based 
in whole or in part on the consumer report, grants, extends, or 
otherwise provides credit to the consumer on material terms that are 
materially less favorable than the most favorable terms available to a 
substantial proportion of consumers from or through that creditor. The 
proposed rule does not apply to any creditor that uses a consumer 
report in connection with an application for, or a grant, extension or 
other provision of, credit primarily for a business purpose.
    The total number of small entities likely to be affected by the 
Commission's proposal is unknown, because the Commission does not have 
data on the number of small entities that use consumer reports for 
risk-based pricing in connection with consumer credit. Moreover, the 
entities under the Commission's jurisdiction are so varied that there 
is no way to identify them in general and, therefore, no way to know 
how many of them qualify as small businesses. Generally, the entities 
under the Commission's jurisdiction that also are covered by section 
311 include state-chartered credit unions, non-bank mortgage lenders, 
auto dealers, and utility companies. The available data, however, is 
not sufficient for the Commission to realistically estimate the number 
of small entities, as defined by the U.S. Small Business Administration 
(SBA), that the Commission regulates and that would be subject to the 
proposed rule.\23\ The Commission invites comment and information 
regarding the number and type of small entities affected by the 
proposed rule.
---------------------------------------------------------------------------

    \23\ Under the SBA's size standards, many creditors, including 
the majority of non-bank entities that are likely to be subject to 
the proposed regulations and are subject to the Commission's 
jurisdiction, are considered small if their average annual receipts 
do not exceed $6.5 million. Auto dealers have a higher size standard 
of $26.5 million in average annual receipts for new car dealers and 
$21 million in average annual receipts for used car dealers. A list 
of the SBA's size standards for all industries can be found in the 
SBA's Table of Small Business Size Standards Matched to North 
American Industry Classification Codes, which is available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------

4. Projected Reporting, Recordkeeping and Other Compliance Requirements
    The compliance requirements of the proposed rules are described in 
detail in the SUPPLEMENTARY INFORMATION above.
    The proposed rule generally requires a creditor to provide a risk-
based pricing notice to a consumer when that creditor uses a consumer 
report to grant or extend credit to the consumer on material terms that 
are materially less favorable than the most favorable terms available 
to a substantial proportion of consumers from or through that creditor. 
A creditor can identify consumers to whom it must provide the notice by 
directly comparing the material terms offered to its consumers or by 
using one of the two alternative methods specified in the proposed 
rule. The proposed rule also includes several exceptions to the general 
rule, including exceptions that would allow a creditor otherwise 
subject to the risk-based pricing notice requirement to provide a 
consumer with a credit score disclosure in conjunction with additional 
information that provides context for the credit score disclosure.
    The proposed rule will involve some expenditure of time and 
resources for entities to comply, although Commission staff anticipates 
that the costs will not be significant. Most of the costs will be 
incurred initially as entities develop systems for determining which of 
their consumers should receive risk-based pricing notices and as they 
train staff to comply with the rule. In calculating these costs, 
Commission staff assumes that for all entities managerial and/or 
professional technical personnel will handle the initial aspects of 
compliance with the proposed rule, and that sales associates or 
administrative personnel will handle any ongoing responsibilities.
    To minimize these costs, the proposed rule offers several different 
ways that businesses can perform a risk-based pricing analysis, 
allowing businesses to choose the method that is least burdensome and 
best-suited to their particular business model. Additionally, 
Commission staff believes that, as creditors, most of the covered 
entities are familiar already with the existing provisions of section 
615 of the FCRA, which require specific disclosures in connection with 
adverse action notices whenever a creditor uses a credit report to deny 
credit. Commission staff anticipates that many businesses already have 
systems in place to handle the existing requirements under section 615 
and that they will be able to incorporate the risk-based pricing notice 
requirements into those systems. As for any continuing costs such as 
those involved in preparing and distributing the notices, the proposed 
rule provides a model risk-based pricing notice, thereby significantly 
limiting the ongoing time and effort required by businesses to comply 
with the rule.
    For these reasons, Commission staff does not expect that the costs 
associated with the proposed rule will place a significant burden on 
small entities. Nonetheless, the Commission requests information and 
comment on any costs, compliance requirements, or changes in operating 
procedures arising from the application of the proposed rule to small 
businesses.
5. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules
    The Commission has not identified any federal statutes, rules, or 
policies that would duplicate, overlap, or conflict with the proposed 
rule. The proposed credit score disclosure for credit secured by 
residential real property has been designed to work in conjunction with 
the existing requirements of section 609(g) of the

[[Page 28992]]

FCRA. The Commission invites comment and information about any statutes 
or rules, including state or local statutes or rules, which would 
duplicate, overlap, or conflict with the proposed rule.
6. Discussion of Significant Alternatives to the Proposed Rule
    The compliance requirements of the proposed rules are described in 
detail in the SUPPLEMENTARY INFORMATION above. The requirements provide 
flexibility so that a covered entity, regardless of its size, may 
tailor its practices to its individual needs. For example, the rule 
identifies several different ways that an entity can perform a risk-
based pricing analysis, allowing each entity to choose the approach 
that fits best with its business model. A small business may find it 
easiest to make individual, consumer-to-consumer comparisons. If it 
uses a tiered system to determine a consumer's interest rate, however, 
then it may prefer to use the tiered pricing method to conduct the 
risk-based pricing analysis. Alternatively, a business may find the 
credit score disclosure notice to be least burdensome, and opt for that 
approach to comply with the rule. By providing a range of options, the 
Agencies have sought to help businesses of all sizes reduce the burden 
or inconvenience of complying with the proposed rule.
    Similarly, the proposed rule provides model notices and model 
credit score disclosures to facilitate compliance. By using these model 
notices, businesses qualify for a safe harbor. They are not required to 
use the model notices, however, as long as they provide a notice that 
effectively conveys the required information, these businesses simply 
would not receive the benefit of the safe harbor. Having this option, 
again, provides businesses of all sizes flexibility in how to comply 
with the proposed rule.
    Notwithstanding the Agencies' efforts to consider the impact of the 
proposed rule on small entities, the Commission welcomes comments on 
any significant alternatives, consistent with section 311 of the FACT 
Act, which would minimize the impact of the proposed rules on small 
entities.

VI. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Pub. L. 102, section 
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The Board invites comment on how to 
make this proposed regulation easier to understand. For example:
     Have we organized the material to suit your needs? If not, 
how could this material be better organized?
     Are the requirements in the regulation clearly stated? If 
not, how could the regulation be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes to the format would make the regulation 
easier to understand?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?
     What else could we do to make the regulation easier to 
understand?

List of Subjects

12 CFR Part 222

    Banks, Banking, Consumer protection, Fair Credit Reporting Act, 
Holding companies, Privacy, Reporting and recordkeeping requirements, 
State member banks.

16 CFR Part 640

    Consumer reporting agencies, Consumer reports, Credit, Fair Credit 
Reporting Act, Trade practices.

16 CFR Part 698

    Consumer reporting agencies, Consumer reports, Credit, Fair Credit 
Reporting Act, Trade practices.

Board of Governors of the Federal Reserve System

    12 CFR Chapter II.

Authority and Issuance

    For the reasons discussed in the joint preamble, the Board of 
Governors of the Federal Reserve System proposes to amend chapter II of 
title 12 of the Code of Federal Regulations by amending 12 CFR part 222 
as follows:

PART 222--FAIR CREDIT REPORTING (REGULATION V)

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

    Authority: 15 U.S.C. 1681b, 1681c, 1681m and 1681s; Secs. 3, 
214, and 216, Pub. L. 108-159, 117 Stat. 1952.

    2. Add Subpart H to part 222 to read as follows:
Subpart H--Duties of Users Regarding Risk-Based Pricing
Sec.
222.70 Scope.
222.71 Definitions.
222.72 General requirements for risk-based pricing notices.
222.73 Content, form, and timing of risk-based pricing notices.
222.74 Exceptions.
222.75 Rules of construction.

Subpart H--Duties of Users Regarding Risk-Based Pricing


Sec.  222.70  Scope.

    (a) Coverage. (1) In general. This subpart applies to any person 
that both--
    (i) Uses a consumer report in connection with an application for, 
or a grant, extension, or other provision of, credit to a consumer that 
is primarily for personal, family, or household purposes; and
    (ii) Based in whole or in part on the consumer report, grants, 
extends, or otherwise provides credit to the 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.
    (2) Business credit excluded. This subpart does not apply to any 
person that uses a consumer report in connection with an application 
for, or a grant, extension, or other provision of, credit to a consumer 
or to any other applicant primarily for a business purpose.
    (b) Relation to Federal Trade Commission rules. These rules were 
developed jointly with the Federal Trade Commission (Commission) and 
are substantively identical to the Commission's risk-based pricing 
rules in 16 CFR part 640. Both rules apply to the covered person 
described in paragraph (a) of this section. Compliance with either the 
Board's rules or the Commission's rules satisfies the requirements of 
the statute.
    (c) Enforcement. The provisions of this subpart will be enforced in 
accordance with the enforcement authority set forth in sections 621(a) 
and (b) of the FCRA.


Sec.  222.71  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Annual percentage rate has the same meaning as in 12 CFR 
226.14(b) with respect to an open-end credit plan and as in 12 CFR 
226.22 with respect to closed-end credit.
    (b) Closed-end credit has the same meaning as in 12 CFR 
226.2(a)(10).
    (c) Consummation means the time that a consumer becomes 
contractually obligated on a credit transaction.
    (d) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).

[[Page 28993]]

    (e) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (f) Credit card has the same meaning as in 15 U.S.C. 1681a(r)(2).
    (g) Credit card issuer has the same meaning as in 15 U.S.C. 
1681a(r)(1)(A).
    (h) Credit score has the same meaning as in 15 U.S.C. 
1681g(f)(2)(A).
    (i) Material terms means--
    (1) (i) In the case of credit extended under an open-end credit 
plan, the annual percentage rate required to be disclosed under 12 CFR 
226.6(a)(2), excluding both any temporary initial rate that is lower 
than the rate that will apply after the temporary rate expires and any 
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;
    (ii) In the case of a credit card (other than a credit card that is 
used to access a home equity line of credit), the annual percentage 
rate that applies to purchases (``purchase annual percentage rate'') 
and no other annual percentage rate;
    (2) In the case of closed-end credit, the annual percentage rate 
required to be disclosed prior to consummation under 12 CFR 226.17(c) 
and 226.18(e); and
    (3) In the case of credit for which there is no annual percentage 
rate, such as credit extended to consumers by a telephone company or a 
utility, any monetary terms that the person varies based on information 
in a consumer report, such as the down payment or deposit.
    (j) Materially less favorable means, when applied to material 
terms, that the terms granted or extended to a consumer differ from the 
terms granted or extended to another consumer from or through the same 
person such that the cost of credit to the first consumer would be 
significantly greater than the cost of credit granted or extended to 
the other consumer. For purposes of this definition, factors relevant 
to determining the significance of a difference in cost include the 
type of credit product, the term of the credit extension, if any, and 
the extent of the difference between the material terms granted or 
extended to the two consumers.
    (k) Open-end credit plan has the same meaning as in 15 U.S.C. 
1602(i), as interpreted by the Board of Governors of the Federal 
Reserve System in Regulation Z (12 CFR part 226) and the Official Staff 
Commentary to Regulation Z (Supplement I to Part 226).


Sec.  222.72  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 when consumers must receive a notice. A person may 
make a determination under paragraph (a) of this section by directly 
comparing the material terms offered to each consumer and the material 
terms offered to other consumers in similar types of transactions. As 
an alternative to making this direct comparison, a person may make the 
determination for a given class of products 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 that represents the point at which 
approximately 40 percent of its consumers have higher credit scores and 
approximately 60 percent of its consumers have lower credit scores 
(hereafter referred to as the ``cutoff score''); and
    (B) Providing a risk-based pricing notice to each consumer whose 
credit score is lower than the cutoff score.
    (ii) 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 appropriate cutoff score by 
considering the credit scores of all or a representative sample of the 
consumers to whom it has granted, extended, or otherwise provided 
credit for a given class of products, such as mortgages, credit cards, 
or auto loans.
    (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 
appropriate cutoff score based on information derived from appropriate 
market research or relevant third-party sources for similar products, 
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 appropriate cutoff score based on 
information from the merged or acquired party.
    (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)(ii)(A) of this 
section. A person using the credit score proxy method using market 
research, third-party data, or information from a merged or acquired 
party as permitted by paragraph (b)(1)(ii)(B) of this section generally 
must calculate its own cutoff score(s) based on the credit scores of 
its own consumers in the manner described in paragraph (b)(1)(ii)(A) of 
this section within one year after it begins using a cutoff score 
derived from data supplied by third-party sources. If such a person 
does not grant, extend, or otherwise provide credit to new consumers 
during that one-year period, and therefore lacks any 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 
third-party source data as provided in paragraph (b)(1)(ii)(B) until it 
grants, extends, or otherwise provides credit to new consumers and is 
able to collect data on which to base the recalculation.
    (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 otherwise provided to a consumer must determine 
the appropriate 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. 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 appropriate cutoff 
score using a reasonable means. In such cases, use of either one of the 
methods that the person regularly uses or the average credit score of 
each consumer is deemed

[[Page 28994]]

to be a reasonable means of calculating the cutoff score.
    (iii) Lack of availability of a credit score. For purposes of this 
section, a person using the credit score proxy method who grants, 
extends, or otherwise 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.
    (iv) 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 3 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, 720 is an appropriate cutoff score for 
this card issuer. 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 provides 
a risk-based pricing notice to the consumer.
    (B) An auto lender engaged 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 extends 
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 otherwise provided to a 
consumer by placing the consumer within one of a discrete number of 
pricing tiers, 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 who does not qualify for the 
top tier (that is, the lowest-priced tier). For example, a creditor 
that uses a tiered pricing structure with annual percentage rates of 8, 
10, 12, and 14 percent would comply by providing the risk-based pricing 
notice to all consumers who are granted credit at annual percentage 
rates of 10, 12, and 14 percent, based in whole or in part on 
information from their consumer reports.
    (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 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 creditor 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 placed within the 
bottom six tiers.
    (c) Application to credit card issuers. (1) In general. Except as 
otherwise provided by this subpart, a credit card issuer 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--
    (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 226.5a, 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 a purchase 
annual percentage rate that is greater than the lowest purchase annual 
percentage rate available under that 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 creditor 
provides a single purchase annual percentage rate, excluding both 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 purchase 
annual percentage rate available under the credit card offer for which 
the consumer applied, even if a lower purchase annual percentage rate 
is available under a different credit card offer issued by the credit 
card issuer.
    (3) Example. 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 credit 
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, the credit card issuer 
must provide 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. On the other hand, if the credit card issuer provided a 
credit card to the consumer at a purchase annual percentage rate of 10 
percent, the credit card issuer would not be required to provide a 
risk-based pricing notice to that 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 purchase annual percentage rate in the 
case of a credit card).

[[Page 28995]]

    (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.


Sec.  222.73  Content, form, and timing of risk-based pricing notices.

    (a) Content of the notice. (1) In general. The risk-based pricing 
notice required by Sec.  222.72(a) or (c) must include:
    (i) A statement informing the consumer that a consumer report (or 
credit report) includes information about the consumer's credit history 
and the type of information included in that history;
    (ii) A statement informing the consumer that the terms offered, 
such as the annual percentage rate, have been set based on information 
from a consumer report;
    (iii) A statement informing the consumer that the terms offered may 
be less favorable than the terms offered to consumers with better 
credit histories;
    (iv) 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;
    (v) The identity of each consumer reporting agency that furnished a 
consumer report used in the credit decision;
    (vi) A statement that federal law gives the consumer the right to 
obtain a copy of a consumer report from that consumer reporting agency 
without charge for 60 days after receipt of the notice;
    (vii) A statement informing the consumer how to obtain such a 
consumer report from the consumer reporting agency identified in the 
notice and providing contact information (including a toll-free 
telephone number, where applicable) specified by the consumer reporting 
agency; and
    (viii) A statement directing consumers to the Web sites of the 
Federal Reserve Board and Federal Trade Commission to obtain more 
information about consumer reports.
    (2) Account review. The risk-based pricing notice required by Sec.  
222.72(d) must include:
    (i) A statement informing the consumer that a consumer report (or 
credit report) includes information about the consumer's credit history 
and the type of information included in that credit history;
    (ii) A statement that the person has conducted a review of the 
account based in whole or in part on information from a consumer 
report;
    (iii) A statement informing the consumer that as a result of the 
review, the annual percentage rate on the account has been increased 
based on information from a consumer report;
    (iv) 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;
    (v) The identity of each consumer reporting agency that furnished a 
consumer report used in the account review;
    (vi) A statement that federal law gives the consumer the right to 
obtain a copy of a consumer report from that consumer reporting agency 
without charge for 60 days after receipt of the notice;
    (vii) A statement informing the consumer how to obtain such a 
consumer report from the consumer reporting agency identified in the 
notice and providing contact information (including a toll-free 
telephone number, where applicable) specified by the consumer reporting 
agency; and
    (viii) A statement directing consumers to the web sites of the 
Federal Reserve Board and Federal Trade Commission to obtain more 
information about consumer reports.
    (b) Form of the notice. (1) In general. The risk-based pricing 
notice required by Sec.  222.72(a), (c), or (d) must be:
    (i) Clear and conspicuous; and
    (ii) Provided to the consumer in oral, written, or electronic form.
    (2) Model forms. A model form of the risk-based pricing notice 
required by Sec.  222.72(a) and (c) is contained in Appendix H-1 of 
this part. Appropriate use of Model Form H-1 is deemed to comply with 
the requirements of Sec.  222.72(a) and (c). A model form of the risk-
based pricing notice required by Sec.  222.72(d) is contained in 
Appendix H-2 of this part. Appropriate use of Model Form H-2 is deemed 
to comply with the requirements of Sec.  222.72(d). Use of the model 
forms is optional.
    (c) Timing. A risk-based pricing notice must be provided to the 
consumer--
    (1) In the case of a grant, extension, or other provision of 
closed-end credit, before consummation of the transaction, but not 
earlier than the time the decision to approve an application for, or a 
grant, extension, or other provision of, credit is communicated to the 
consumer by the person required to provide the notice;
    (2) In the case of credit granted, extended, or provided under an 
open-end credit plan, before the first transaction is made under the 
plan, but not earlier than the time the decision to approve an 
application for, or a grant, extension, or other provision of, credit 
is communicated to the consumer by the person required to provide the 
notice; or
    (3) In the case of a review of credit that has been extended to the 
consumer, at the time the decision to increase the annual percentage 
rate (purchase annual percentage rate in the case of a credit card) 
based on a consumer report is communicated to the consumer by the 
person required to provide the notice, or if no notice of the increase 
in the annual percentage rate is provided to the consumer prior to the 
effective date of the change in the annual percentage rate, no later 
than five days after the effective date of the change in the annual 
percentage rate.


Sec.  222.74  Exceptions.

    (a) Application for specific terms. (1) In general. A person is not 
required to provide a risk-based pricing notice to the consumer under 
Sec.  222.72(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 the 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, based in whole or in part upon the consumer's creditworthiness 
as reflected in a consumer report.
    (2) Example. A consumer receives a solicitation from a credit card 
issuer that is a firm offer of credit. The terms of the solicitation 
are based in whole or in part on information from a consumer report 
that the credit card issuer obtained in accordance with the FCRA's 
provisions regarding firm offers of credit. 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

[[Page 28996]]

consumer applied for specific material terms and was granted those 
terms. Although the credit card issuer specified the material term or 
terms in the firm offer of credit based in whole or in part on a 
consumer report, the credit card issuer specified that term or those 
terms 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 Sec.  222.72(a), (c), 
or (d) if the person provides an adverse action notice to the consumer 
pursuant to 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 
Sec.  222.72(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, as described in section 603(l) of the 
FCRA, without regard to the material terms that the person includes in 
other firm offers of credit.
    (2) 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 based 
on differences in the material terms of two or more firm offers of 
credit.
    (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 the consumer under Sec.  222.72(a) or (c) if:
    (i) The credit requested by the consumer involves 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 the consumer a notice that contains the 
following--
    (A) A statement informing the consumer 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 informing the consumer 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 all consumers 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 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) 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 sites of the Federal 
Reserve Board and Federal Trade Commission 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 of a transaction in the case of 
closed-end credit or before the first transaction is made under an 
open-end credit plan.
    (4) 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 Sec.  222.74(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 the consumer under Sec.  222.72(a) or (c) if:
    (i) The credit requested by the consumer involves an extension of 
credit other than 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 the consumer a notice that contains the 
following--
    (A) A statement informing the consumer 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 informing the consumer 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 all consumers 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

[[Page 28997]]

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 consumer 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 consumer 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 sites of the Federal 
Reserve Board and Federal Trade Commission 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 of a transaction in the case of closed-end 
credit or before the first transaction is made under an open-end credit 
plan.
    (4) 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 Sec.  222.74(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 the consumer under 
Sec.  222.72(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 otherwise provides credit based in whole or in part 
on information in a consumer report;
    (ii) Does not obtain a credit score from another consumer reporting 
agency in connection with granting, extending, or otherwise providing 
credit to the consumer; and
    (iii) Provides to the consumer a notice that contains the 
following--
    (A) A statement informing the consumer 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 informing the consumer 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 informing the consumer that credit scores are 
important because consumers with higher credit scores generally obtain 
more favorable credit terms;
    (D) A statement informing the consumer 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 the person was not able to obtain a credit 
score about the consumer 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 sites of the Federal 
Reserve Board and Federal Trade Commission 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 otherwise 
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 otherwise 
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 Sec.  222.74(f). Use of the model form is optional.


Sec.  222.75  Rules of construction.

    For purposes of this subpart, the following rules of construction 
apply:
    (a) One notice per credit extension. A consumer is entitled to no 
more than one risk-based pricing notice under

[[Page 28998]]

Sec.  222.72(a) or (c), or one notice under Sec.  222.74(d), (e), or 
(f), for each grant, extension, or other provision of credit. 
Notwithstanding the foregoing, even if a consumer has previously 
received a risk-based pricing notice in connection with a grant, 
extension, or other provision of credit, another risk-based pricing 
notice is required if the conditions set forth in Sec.  222.72(d) have 
been met.
    (b) Multi-party transactions. (1) Initial creditor. The person to 
whom a credit obligation is initially payable must provide the risk-
based pricing notice described in Sec.  222.72(a) or (c), or satisfy 
the requirements for and provide the notice required under one of the 
exceptions in Sec.  222.74(d), (e), or (f), even if that person 
immediately assigns the credit agreement to a third party and is not 
the source of funding for the credit.
    (2) Purchasers or assignees. A purchaser or assignee of a credit 
contract with a consumer is not subject to the requirements of this 
subpart and is not required to provide the risk-based pricing notice 
described in Sec.  222.72(a) or (c), or satisfy the requirements for 
and provide the notice required under one of the exceptions in Sec.  
222.74(d), (e), or (f).
    (3) Examples. (i) A consumer obtains credit to finance the purchase 
of an automobile. If the auto dealer is the person to whom the loan 
obligation is initially payable, such as where the auto dealer is the 
original creditor under a retail installment sales contract, the auto 
dealer must provide the risk-based pricing notice to the consumer (or 
satisfy the requirements for and provide the notice required under one 
of the exceptions noted above), even if the auto dealer immediately 
assigns the loan to a bank or finance company. The bank or finance 
company, which is an assignee, has no duty to provide a risk-based 
pricing notice to the consumer.
    (ii) A consumer obtains credit to finance the purchase of an 
automobile. If a bank or finance company is the person to whom the loan 
obligation is initially payable, the bank or finance company must 
provide the risk-based pricing notice to the consumer (or satisfy the 
requirements for and provide the notice required under one of the 
exceptions noted above) based on the terms offered by that bank or 
finance company only. The auto dealer has no duty to provide a risk-
based pricing notice to the consumer.
    3. In Part 222, Appendix H is added to read as follows:

Appendix H--Model Forms for Risk-Based Pricing and Credit Score 
Disclosure Exception Notices

    1. This appendix contains two model forms for risk-based pricing 
notices and three model forms for use in connection with the credit 
score disclosure exceptions. Each of the model forms is designated 
for use in a particular set of circumstances as indicated by the 
title of that model form.
    2. Model form H-1 is for use in complying with the general risk-
based pricing notice requirements in Sec.  222.72. Model form H-2 is 
for risk-based pricing notices given in connection with account 
review. Model form H-3 is for use in connection with the credit 
score disclosure exception for loans secured by residential real 
property. Model form H-4 is for use in connection with the credit 
score disclosure exception for loans that are not secured by 
residential real property. Model form H-5 is for use in connection 
with the credit score disclosure exception when no credit score is 
available for a consumer. All forms contained in this appendix are 
models; their use is optional.
    3. A creditor may change the forms by rearranging the format 
without modifying the substance of the disclosures. The 
rearrangement of the model forms may not be so extensive as to 
materially affect the substance, clarity, comprehensibility, or 
meaningful sequence of the forms. Creditors making revisions with 
that effect will lose the benefit of the safe harbor for appropriate 
use of Appendix H model forms. A creditor is not required to conduct 
consumer testing when rearranging the format of the model forms. 
Acceptable changes include, for example:
    a. Corrections or updates to telephone numbers, mailing 
addresses, or Web site addresses that may change over time.
    b. The addition of graphics or icons, such as the creditor's 
corporate logo.
    c. Alteration of the shading or color contained in the model 
forms.
    d. Use of a different form of graphical presentation to depict 
the distribution of credit scores.
    4. If a creditor uses an appropriate Appendix H model form, or 
modifies a form in accordance with the above instructions, that 
creditor shall be deemed to be acting in compliance with the 
provisions of Sec.  222.72 and Sec.  222.73, or Sec.  222.74, as 
applicable, of this regulation. It is intended that appropriate use 
of model form H-3 also will be compliant with the disclosure that 
may be required under section 609(g) of the FCRA.

H-1 Model form for risk-based pricing notice
H-2 Model form for account review risk-based pricing notice
H-3 Model form for credit score disclosure exception for credit 
secured by one to four units of residential real property
H-4 Model form for credit score disclosure exception for loans not 
secured by residential real property
H-5 Model form for credit score disclosure exception for loans where 
credit score is not available

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Federal Trade Commission

16 CFR Chapter I

    For the reasons discussed in the joint preamble, the Federal Trade 
Commission proposes to amend chapter I, title 16, Code of Federal 
Regulations, as follows:
    1. Add new part 640 to read as follows:

PART 640--DUTIES OF CREDITORS REGARDING RISK-BASED PRICING

Sec.
640.1 Scope.
640.2 Definitions.
640.3 General requirements for risk-based pricing notices.
640.4 Content, form, and timing of risk-based pricing notices.
640.5 Exceptions.
640.6 Rules of construction.

    Authority: Pub. L. 108-159, sec. 311; 15 U.S.C. 1681m(h).


Sec.  640.1  Scope.

    (a) Coverage. (1) In general. This part applies to any person that 
both--
    (i) Uses a consumer report in connection with an application for, 
or a grant, extension, or other provision of, credit to a consumer that 
is primarily for personal, family, or household purposes; and
    (ii) Based in whole or in part on the consumer report, grants, 
extends, or otherwise provides credit to the 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.
    (2) Business credit excluded. This part does not apply to any 
person that uses a consumer report in connection with an application 
for, or a grant, extension, or other provision of, credit to a consumer 
or to any other applicant primarily for a business purpose.
    (b) Relation to Board of Governors of the Federal Reserve System 
rules. The rules in this part were developed jointly with the Board of 
Governors of the Federal Reserve System (Board) and are substantively 
identical to the Board's risk-based pricing rules in 12 CFR 222. Both 
rules apply to the covered person described in paragraph (a) of this 
section. Compliance with either the Board's rules or the Commission's 
rules satisfies the requirements of the statute.
    (c) Enforcement. The provisions of this part will be enforced in 
accordance with the enforcement authority set forth in sections 621(a) 
and (b) of the FCRA.


Sec.  640.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Annual percentage rate has the same meaning as in 12 CFR 
226.14(b) with respect to an open-end credit plan and as in 12 CFR 
226.22 with respect to closed-end credit.
    (b) Closed-end credit has the same meaning as in 12 CFR 
226.2(a)(10).
    (c) Consummation means the time that a consumer becomes 
contractually obligated on a credit transaction.
    (d) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (e) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (f) Credit card has the same meaning as in 15 U.S.C. 1681a(r)(2).
    (g) Credit card issuer has the same meaning as ``card issuer'' in 
15 U.S.C. 1681a(r)(1)(A).
    (h) Credit score has the same meaning as in 15 U.S.C. 
1681g(f)(2)(A).
    (i) Material terms means--
    (1)(i) In the case of credit extended under an open-end credit 
plan, the annual percentage rate required to be disclosed under 12 CFR 
226.6(a)(2), excluding both any temporary initial rate that is lower 
than the rate that will apply after the temporary rate expires and any 
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;
    (ii) In the case of a credit card (other than a credit card that is 
used to access a home equity line of credit), the annual percentage 
rate that applies to purchases (``purchase annual percentage rate'') 
and no other annual percentage rate;
    (2) In the case of closed-end credit, the annual percentage rate 
required to be disclosed prior to consummation under 12 CFR 226.17(c) 
and 226.18(e); and
    (3) In the case of credit for which there is no annual percentage 
rate, such as credit extended to consumers by a telephone company or a 
utility, any monetary terms that the person varies based on information 
in a consumer report, such as the down payment or deposit.
    (j) Materially less favorable means, when applied to material 
terms, that the terms granted or extended to a consumer differ from the 
terms granted or extended to another consumer from or through the same 
person such that the cost of credit to the first consumer would be 
significantly greater than the cost of credit granted or extended to 
the other consumer. For purposes of this definition, factors relevant 
to determining the significance of a difference in cost include the 
type of credit product, the term of the credit extension, if any, and 
the extent of the difference between the material terms granted or 
extended to the two consumers.
    (k) Open-end credit plan has the same meaning as in 15 U.S.C. 
1602(i), as interpreted by the Board in Regulation Z (12 CFR part 226) 
and the Official Staff Commentary to Regulation Z (Supplement I to Part 
226).


Sec.  640.3  General requirements for risk-based pricing notices.

    (a) In general. Except as otherwise provided in this part, a person 
must provide to a consumer a notice (``risk-based pricing notice'') in 
the form and manner required by this part 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 when consumers must receive a notice. A person may 
make a determination under paragraph (a) of this section by directly 
comparing the material terms offered to each consumer and the material 
terms offered to other consumers in similar types of transactions. As 
an alternative to making this direct comparison, a person may make the 
determination for a given class of products 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 that represents the point at which 
approximately 40 percent of its consumers have higher credit scores and 
approximately 60 percent of its consumers have lower credit scores 
(hereafter referred to as the ``cutoff score''); and
    (B) Providing a risk-based pricing notice to each consumer whose 
credit score is lower than the cutoff score.
    (ii) 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 appropriate cutoff score by 
considering the credit scores of all or a representative sample of the

[[Page 29008]]

consumers to whom it has granted, extended, or otherwise provided 
credit for a given class of products, such as mortgages, credit cards, 
or auto loans.
    (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 
appropriate cutoff score based on information derived from appropriate 
market research or relevant third-party sources for similar products, 
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 appropriate cutoff score based on 
information from the merged or acquired party.
    (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)(ii)(A) of this 
section. A person using the credit score proxy method using market 
research, third-party data, or information from a merged or acquired 
party as permitted by paragraph (b)(1)(ii)(B) of this section generally 
must calculate its own cutoff score(s) based on the credit scores of 
its own consumers in the manner described in paragraph (b)(1)(ii)(A) of 
this section within one year after it begins using a cutoff score 
derived from data supplied by third-party sources. If such a person 
does not grant, extend, or otherwise provide credit to new consumers 
during that one-year period, and therefore lacks any 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 
third-party source data as provided in paragraph (b)(1)(ii)(B) until it 
grants, extends, or otherwise provides credit to new consumers and is 
able to collect data on which to base the recalculation.
    (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 otherwise provided to a consumer must determine 
the appropriate 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. 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 appropriate cutoff 
score using a reasonable means. In such cases, use of either one of the 
methods that the person regularly uses or the average credit score of 
each consumer is deemed to be a reasonable means of calculating the 
cutoff score.
    (iii) Lack of availability of a credit score. For purposes of this 
section, a person using the credit score proxy method who grants, 
extends, or otherwise 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.
    (iv) 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 3 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, 720 is an appropriate cutoff score for 
this card issuer. 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 provides 
a risk-based pricing notice to the consumer.
    (B) An auto lender engaged 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 extends 
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 otherwise provided to a 
consumer by placing the consumer within one of a discrete number of 
pricing tiers, 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 who does not qualify for the 
top tier (that is, the lowest-priced tier). For example, a creditor 
that uses a tiered pricing structure with annual percentage rates of 8, 
10, 12, and 14 percent would comply by providing the risk-based pricing 
notice to all consumers who are granted credit at annual percentage 
rates of 10, 12, and 14 percent, based in whole or in part on 
information from their consumer reports.
    (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 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 creditor 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 placed within the 
bottom six tiers.
    (c) Application to credit card issuers. (1) In general. Except as 
otherwise provided by this part, a credit card issuer 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 part if--
    (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 226.5a, 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

[[Page 29009]]

provides a credit card to the consumer with a purchase annual 
percentage rate that is greater than the lowest purchase annual 
percentage rate available under that 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 creditor 
provides a single purchase annual percentage rate, excluding both 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 purchase 
annual percentage rate available under the credit card offer for which 
the consumer applied, even if a lower purchase annual percentage rate 
is available under a different credit card offer issued by the credit 
card issuer.
    (3) Example. 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 credit 
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, the credit card issuer 
must provide 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. On the other hand, if the credit card issuer provided a 
credit card to the consumer at a purchase annual percentage rate of 10 
percent, the credit card issuer would not be required to provide a 
risk-based pricing notice to that 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 part, 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 part 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 purchase annual percentage rate 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.


Sec.  640.4  Content, form, and timing of risk-based pricing notices.

    (a) Content of the notice. (1) In general. The risk-based pricing 
notice required by Sec.  640.3(a) or (c) must include:
    (i) A statement informing the consumer that a consumer report (or 
credit report) includes information about the consumer's credit history 
and the type of information included in that history;
    (ii) A statement informing the consumer that the terms offered, 
such as the annual percentage rate, have been set based on information 
from a consumer report;
    (iii) A statement informing the consumer that the terms offered may 
be less favorable than the terms offered to consumers with better 
credit histories;
    (iv) 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;
    (v) The identity of each consumer reporting agency that furnished a 
consumer report used in the credit decision;
    (vi) A statement that federal law gives the consumer the right to 
obtain a copy of a consumer report from that consumer reporting agency 
without charge for 60 days after receipt of the notice;
    (vii) A statement informing the consumer how to obtain such a 
consumer report from the consumer reporting agency identified in the 
notice and providing contact information (including a toll-free 
telephone number, where applicable) specified by the consumer reporting 
agency; and
    (viii) A statement directing consumers to the web sites of the 
Board and Commission to obtain more information about consumer reports.
    (2) Account review. The risk-based pricing notice required by Sec.  
640.3(d) must include:
    (i) A statement informing the consumer that a consumer report (or 
credit report) includes information about the consumer's credit history 
and the type of information included in that credit history;
    (ii) A statement that the person has conducted a review of the 
account based in whole or in part on information from a consumer 
report;
    (iii) A statement informing the consumer that as a result of the 
review, the annual percentage rate on the account has been increased 
based on information from a consumer report;
    (iv) 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;
    (v) The identity of each consumer reporting agency that furnished a 
consumer report used in the account review;
    (vi) A statement that federal law gives the consumer the right to 
obtain a copy of a consumer report from that consumer reporting agency 
without charge for 60 days after receipt of the notice;
    (vii) A statement informing the consumer how to obtain such a 
consumer report from the consumer reporting agency identified in the 
notice and providing contact information (including a toll-free 
telephone number, where applicable) specified by the consumer reporting 
agency; and
    (viii) A statement directing consumers to the Web sites of the 
Board and Commission to obtain more information about consumer reports.
    (b) Form of the notice. (1) In general. The risk-based pricing 
notice required by Sec.  640.3(a), (c), or (d) must be:
    (i) Clear and conspicuous; and
    (ii) Provided to the consumer in oral, written, or electronic form.
    (2) Model forms. A model form of the risk-based pricing notice 
required by Sec.  640.3(a) and (c) is contained in 16 CFR Part 698, 
Appendix B. Appropriate use of Model Form B-1 is deemed to comply with 
the requirements of Sec.  640.3(a) and (c). A model form of the risk-
based pricing notice required by Sec.  640.3(d) is contained in 
Appendix B-2. Appropriate use of Model Form B-2 is deemed to comply 
with the requirements of Sec.  640.3(d). Use of the model forms is 
optional.

[[Page 29010]]

    (c) Timing. A risk-based pricing notice must be provided to the 
consumer--
    (1) In the case of a grant, extension, or other provision of 
closed-end credit, before consummation of the transaction, but not 
earlier than the time the decision to approve an application for, or a 
grant, extension, or other provision of, credit, is communicated to the 
consumer by the person required to provide the notice;
    (2) In the case of credit granted, extended, or provided under an 
open-end credit plan, before the first transaction is made under the 
plan, but not earlier than the time the decision to approve an 
application for, or a grant, extension, or other provision of, credit 
is communicated to the consumer by the person required to provide the 
notice; or
    (3) In the case of a review of credit that has been extended to the 
consumer, at the time the decision to increase the annual percentage 
rate (purchase annual percentage rate in the case of a credit card) 
based on a consumer report is communicated to the consumer by the 
person required to provide the notice, or if no notice of the increase 
in the annual percentage rate is provided to the consumer prior to the 
effective date of the change in the annual percentage rate, no later 
than five days after the effective date of the change in the annual 
percentage rate.


Sec.  640.5  Exceptions.

    (a) Application for specific terms. (1) In general. A person is not 
required to provide a risk-based pricing notice to the consumer under 
Sec.  640.3(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 the 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, based in whole or in part upon the consumer's creditworthiness 
as reflected in a consumer report.
    (2) Example. A consumer receives a solicitation from a credit card 
issuer that is a firm offer of credit. The terms of the solicitation 
are based in whole or in part on information from a consumer report 
that the credit card issuer obtained in accordance with the FCRA's 
provisions regarding firm offers of credit. 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 material term or terms in the firm offer of credit based 
in whole or in part on a consumer report, the credit card issuer 
specified that term or those terms 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 Sec.  640.3(a), (c), or 
(d) if the person provides an adverse action notice to the consumer 
pursuant to 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 
Sec.  640.3(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, as described in section 603(l) of the 
FCRA, without regard to the material terms that the person includes in 
other firm offers of credit.
    (2) 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 based 
on differences in the material terms of two or more firm offers of 
credit.
    (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 the consumer under Sec.  640.3(a) or (c) if:
    (i) The credit requested by the consumer involves 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 the consumer a notice that contains the 
following--
    (A) A statement informing the consumer 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 informing the consumer 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 all consumers 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 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) 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 sites of the Board 
and Commission 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;

[[Page 29011]]

    (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 of a transaction in the case of 
closed-end credit or before the first transaction is made under an 
open-end credit plan.
    (4) 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 B-3 of 16 CFR part 
698. Appropriate use of Model Form B-3 is deemed to comply with the 
requirements of Sec.  640.3(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 the consumer under Sec.  640.3(a) or (c) if:
    (i) The credit requested by the consumer involves an extension of 
credit other than 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 the consumer a notice that contains the 
following--
    (A) A statement informing the consumer 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 informing the consumer 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 all consumers 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 consumer 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 consumer 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 sites of the Board 
and Commission 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 of a transaction in the case of closed-end 
credit or before the first transaction is made under an open-end credit 
plan.
    (4) Model form. A model form of the notice described in paragraph 
(e)(1)(ii) of this section is contained in Appendix B-4 in 16 CFR part 
698. Appropriate use of Model Form B-4 is deemed to comply with the 
requirements of Sec.  640.5(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 the consumer under 
Sec.  640.3(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 otherwise provides credit based in whole or in part 
on information in a consumer report;
    (ii) Does not obtain a credit score from another consumer reporting 
agency in connection with granting, extending, or otherwise providing 
credit to the consumer; and
    (iii) Provides to the consumer a notice that contains the 
following--
    (A) A statement informing the consumer 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 informing the consumer 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 informing the consumer that credit scores are 
important because consumers with higher credit scores generally obtain 
more favorable credit terms;
    (D) A statement informing the consumer 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 the person was not able to obtain a credit 
score about the consumer 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

[[Page 29012]]

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 sites of the Board 
and Commission 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 otherwise 
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 otherwise 
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 B-5 in 16 CFR part 
698. Appropriate use of Model Form B-5 is deemed to comply with the 
requirements of Sec.  640.5(f). Use of the model form is optional.


Sec.  640.6  Rules of construction.

    For purposes of this part, the following rules of construction 
apply:
    (a) One notice per credit extension. A consumer is entitled to no 
more than one risk-based pricing notice under Sec.  640.3(a) or (c), or 
one notice under Sec.  640.5(d), (e), or (f), for each grant, 
extension, or other provision of credit. Notwithstanding the foregoing, 
even if a consumer has previously received a risk-based pricing notice 
in connection with a grant, extension, or other provision of credit, 
another risk-based pricing notice is required if the conditions set 
forth in Sec.  604.3(d) have been met.
    (b) Multi-party transactions. (1) Initial creditor. The person to 
whom a credit obligation is initially payable must provide the risk-
based pricing notice described in Sec.  604.3(a) or (c), or satisfy the 
requirements for and provide the notice required under one of the 
exceptions in Sec.  640.5(d), (e), or (f), even if that person 
immediately assigns the credit agreement to a third party and is not 
the source of funding for the credit.
    (2) Purchasers or assignees. A purchaser or assignee of a credit 
contract with a consumer is not subject to the requirements of this 
part and is not required to provide the risk-based pricing notice 
described in Sec.  640.3(a) or (c), or satisfy the requirements for and 
provide the notice required under one of the exceptions in Sec.  
640.5(d), (e), or (f).
    (3) Examples. (i) A consumer obtains credit to finance the purchase 
of an automobile. If the auto dealer is the person to whom the loan 
obligation is initially payable, such as where the auto dealer is the 
original creditor under a retail installment sales contract, the auto 
dealer must provide the risk-based pricing notice to the consumer (or 
satisfy the requirements for and provide the notice required under one 
of the exceptions noted above), even if the auto dealer immediately 
assigns the loan to a bank or finance company. The bank or finance 
company, which is an assignee, has no duty to provide a risk-based 
pricing notice to the consumer.
    (ii) A consumer obtains credit to finance the purchase of an 
automobile. If a bank or finance company is the person to whom the loan 
obligation is initially payable, the bank or finance company must 
provide the risk-based pricing notice to the consumer (or satisfy the 
requirements for and provide the notice required under one of the 
exceptions noted above) based on the terms offered by that bank or 
finance company only. The auto dealer has no duty to provide a risk-
based pricing notice to the consumer.

PART 698--MODEL FORMS AND DISCLOSURES

    2. Revise the authority citation in part 698 to read as follows:

    Authority: 15 U.S.C. 1681e, 1681g, 1681j, 1681m, 1681s, and 
1681s-3; Pub. L. 108-159, sections 211(d), 214(b), and 311; 117 
Stat. 1952.

    3. Amend Sec.  698.1 by revising paragraph (b) to read as follows:


Sec.  698.1  Authority and purpose.

* * * * *
    (b) Purpose. The purpose of this part is to comply with sections 
607(d), 609(c), 609(d), 612(a), 615(d), 615(h) and 624 of the Fair 
Credit Reporting Act, as amended by the Fair and Accurate Credit 
Transactions Act of 2003, and sections 211(d) and 214(b) of the Fair 
and Accurate Credit Transactions Act of 2003.
    4. In part 698, Appendix B is added to read as follows:

Appendix B--Model Forms for Risk-Based Pricing and Credit Score 
Disclosure Exception Notices

    1. This appendix contains two model forms for risk-based pricing 
notices and three model forms for use in connection with the credit 
score disclosure exceptions. Each of the model forms is designated 
for use in a particular set of circumstances as indicated by the 
title of that model form.
    2. Model form B-1 is for use in complying with the general risk-
based pricing notice requirements in Sec.  640.2 of this chapter. 
Model form B-2 is for risk-based pricing notices given in connection 
with account review. Model form B-3 is for use in connection with 
the credit score disclosure exception for loans secured by 
residential real property. Model form B-4 is for use in connection 
with the credit score disclosure exception for loans that are not 
secured by residential real property. Model form B-5 is for use in 
connection with the credit score disclosure exception when no credit 
score is available for a consumer. All forms contained in this 
appendix are models; their use is optional.
    3. A creditor may change the forms by rearranging the format 
without modifying the substance of the disclosures. The 
rearrangement of the model forms may not be so extensive as to 
materially affect the substance, clarity, comprehensibility, or 
meaningful sequence of the forms. Creditors making revisions with 
that effect will lose the benefit of the safe harbor for appropriate 
use of Appendix B model forms. A creditor is not required to conduct 
consumer testing when rearranging the format of the model forms. 
Acceptable changes include, for example:
    a. Corrections or updates to telephone numbers, mailing 
addresses, or web site addresses that may change over time.
    b. The addition of graphics or icons, such as the creditor's 
corporate logo.
    c. Alteration of the shading or color contained in the model 
forms.

[[Page 29013]]

    d. Use of a different form of graphical presentation to depict 
the distribution of credit scores.
    4. If a creditor uses an appropriate Appendix B model form, or 
modifies a form in accordance with the above instructions, that 
creditor shall be deemed to be acting in compliance with the 
provisions of 16 CFR 660.3, 660.4, and 660.5, as applicable. It is 
intended that appropriate use of model form B-3 also will be 
compliant with the disclosure that may be required under section 
609(g) of the FCRA.

B-1 Model form for risk-based pricing notice
B-2 Model form for account review risk-based pricing notice
B-3 Model form for credit score disclosure exception for credit 
secured by one to four units of residential real property
B-4 Model form for credit score disclosure exception for loans not 
secured by residential real property
B-5 Model form for credit score disclosure exception for loans where 
credit score is not available
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[[Page 29021]]


    By order of the Board of Governors of the Federal Reserve 
System, May 8, 2008.
Jennifer J. Johnson,
Secretary of the Board.
    By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. E8-10640 Filed 5-16-08; 8:45 am]
BILLING CODE 6210-01-P; 6750-01-P