[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
[[Page 28966]]
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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.
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\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).
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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)).
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\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).
---------------------------------------------------------------------------
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.
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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).
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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.
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\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
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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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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