[Federal Register Volume 75, Number 10 (Friday, January 15, 2010)]
[Rules and Regulations]
[Pages 2724-2784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-30678]
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Part III
Federal Reserve System
12 CFR Part 222
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Federal Trade Commission
16 CFR Parts 640 and 698
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Fair Credit Reporting Risk-Based Pricing Regulations; Final Rule
Federal Register / Vol. 75 , No. 10 / Friday, January 15, 2010 /
Rules and Regulations
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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: Final rules.
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SUMMARY: The Board and the Commission are jointly issuing final 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 final 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 final 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 final 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: These rules are effective on January 1, 2011.
FOR FURTHER INFORMATION CONTACT:
Board: David A. Stein, Managing Counsel; Amy B. Henderson, Senior
Attorney; or Mandie K. Aubrey, Attorney, Division of Consumer and
Community Affairs, (202) 452-3667 or (202) 452-2412; or Kara L.
Handzlik, Attorney, Legal Division, (202) 452-3852, 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: Manas Mohapatra and Katherine White, Attorneys,
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 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. 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.
It is meant to complement the existing adverse action notice provisions
of the FCRA.\1\
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\1\ Under Sec. 615(a) of the FCRA, creditors that deny a
consumer's application for credit, based in whole or in part on
information in a consumer report, must provide an adverse action
notice to that consumer. Where a creditor does not reject an
applicant with impaired credit, however, but instead offers credit
on less favorable terms, the creditor generally is not required to
provide an adverse action notice. The Senate Committee on Banking,
Housing, and Urban Affairs cited concerns that the adverse action
notification construct had been made obsolete in certain
circumstances and found this problematic because the adverse action
notice is the ``primary tool the FCRA contains to ensure that
mistakes in credit reports are discovered.'' See S. Rep. No. 108-
166, at 20 (Oct. 17, 2003).
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Section 615(h) requires the Board and the Commission (the 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).
The Agencies published proposed regulations that would implement
these risk-based pricing provisions on May 19, 2008 (73 FR 28966). The
comment period closed on August 18, 2008. The Agencies received more
than 80 comment letters regarding the proposal from banks and other
creditors, industry trade associations, consumer groups, a trade
association representing consumer reporting agencies, and others.
II. Developing the Final Rules
In developing the risk-based pricing rules, the Agencies sought to
implement the statutory provisions in a manner that would provide a
substantial benefit to consumers and be operationally feasible for the
wide variety of entities subject to the rules. Based on in-depth
outreach with interested parties undertaken before issuing the proposed
rules, the Agencies determined that it would 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. The Agencies considered several
approaches and 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. The Agencies' goal
was to determine which tests would both identify those consumers who
likely received materially less favorable terms than the
[[Page 2725]]
terms obtained by other consumers and be operationally feasible for
creditors to implement. The tests that satisfied these criteria were
included in the proposed rules.
The final rules retain the tests the Agencies identified in the
proposal as the best approaches for meeting the statute's requirements
with some revisions made in response to the comments received on the
proposal. As noted in the proposal, 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
final 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 final rules.
III. Summary of the Final Rules \2\
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\2\ The Board is placing the final regulations implementing
section 311 in the part of their regulations that implements the
FCRA--12 CFR part 222. For ease of reference, the discussion in the
SUPPLEMENTARY INFORMATION section uses the numerical suffix of each
of the Board's regulations. The FTC also is placing the final
regulations and guidelines in the part of its regulations
implementing the FCRA, specifically 16 CFR part 640. However, the
FTC uses different numerical suffixes that equate to the numerical
suffixes discussed in the SUPPLEMENTARY INFORMATION section as
follows: suffix .70 = FTC suffix .1, suffix .71 = FTC suffix .2,
suffix .72 = FTC suffix .3, suffix .73 = FTC suffix .4, suffix .74 =
FTC suffix .5, and suffix .75 = FTC suffix .6.
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Risk-Based Pricing Notice
The final rules implement the risk-based pricing notice requirement
of section 615(h). The final 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
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 final rules, see
the discussion of Sec. ----.70 in the Section-by-Section Analysis.
Definitions
The final rules define certain key terms. Specifically, the final
rules define ``material terms'' as the annual percentage rate for
credit that has an annual percentage rate,\3\ or, in the case of credit
that does not have an annual percentage rate, as the financial term
that the person varies based on the consumer report and that has the
most significant financial impact on consumers, such as an annual
membership fee or a deposit. For credit cards, which may have multiple
annual percentage rates applicable to different features, ``material
terms'' is defined generally as the annual percentage rate applicable
to purchases. In addition, the final 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 final 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 final rules state 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 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. The final rules apply to the 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 than terms 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 for a
specific type of credit product. Because it may not be operationally
feasible for many persons subject to the rule to make such direct
comparisons between consumers, the final rules provide two alternative
methods for determining which consumers must receive risk-based pricing
notices for those persons that prefer not to compare directly the
material terms offered to their consumers. Using either of the
alternative methods, 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 alternative 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 final 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 40 percent of its consumers have higher credit scores and
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 final rules also provide that, in the case
of credit that has been granted, extended, or provided on the most
favorable material terms to more than 40 percent of consumers, a person
may set its cutoff score at a point at which the approximate percentage
of consumers who historically have been granted, extended, or provided
credit on material terms other than the most favorable terms would
receive risk-based pricing notices under this section. The final rules
require periodic updating of the cutoff score.
The second alternative method is the tiered pricing method. Under
this method, 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, may use this method and
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 alternative methods for determining which consumers must receive
notices, see the discussion of Sec. ----.72 in the Section-by-Section
Analysis.
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Application of Rule to Credit Card Issuers
The final rules set forth a special test that a credit card issuer
may use to identify the circumstances in which the issuer must provide
a risk-based pricing notice to consumers, as an alternative to the
options discussed above. If a credit card issuer uses this option, the
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 an annual percentage rate referenced in
Sec. ----.71(n)(1)(ii) that is higher than the lowest annual
percentage rate referenced in Sec. ----.71(n)(1)(ii) available under
that offer. The final 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
A creditor may periodically review the consumer report of a
consumer with whom the creditor has an existing credit relationship as
permitted under section 604 of the FCRA. If a 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 final rules generally 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, unless the creditor
provides an adverse action notice to the consumer. 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 final 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 final rules also include special content requirements for the
notice that must be provided 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.
Form of the Notice
The final rules require the risk-based pricing notice and account
review notice to be clear and conspicuous and to be provided to the
consumer in oral, written, or electronic form. The final rules also
state that creditors are deemed to be in compliance with the provisions
requiring risk-based pricing notices and account review notices through
use of the appropriate model forms. Use of the forms is optional. For
more information about the form of these notices, see the discussion of
Sec. ----.73 in the Section-by-Section Analysis.
Timing of the Notice
The final 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 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 (to the extent permitted by law), no later
than five days after the effective date of the change in the annual
percentage rate. The final rules explain how the required notices may
be delivered in the case of certain automobile lending transactions and
also include an exception to the general timing rules in the case of
contemporaneous purchase credit (instant credit). 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 final rules contain a number of exceptions to the risk-based
pricing notice requirement. The final rules implement the statutory
exceptions that apply: (i) When a consumer applies for, and receives,
specific material terms; and (ii) when a consumer has been or will be
provided a notice of adverse action under section 615(a) of the FCRA in
connection with the transaction.
In addition, the Agencies have used their exception authority set
forth in section 615(h)(6)(iii) of the FCRA to create exceptions for
creditors that provide consumers who apply for credit with a notice
consisting of their credit score and certain additional information, in
lieu of the risk-based pricing notice. For credit secured by one to
four units of residential real property, a creditor may provide
consumers 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. This notice also
describes the creditor's use of credit scores to set the terms of
credit and explains how consumers can obtain their free annual consumer
reports. In the case of credit that is not secured by one to four units
of residential real property, a creditor similarly may provide
consumers with a notice of their credit score and certain additional
information specified in the final rules. The final rules also include
optional model forms for use by creditors.
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. In those cases, a creditor using
either of the credit score disclosure exceptions described above is
permitted to comply with the rules by providing an alternate narrative
notice that does not include a credit score to those consumers for whom
a score is not available.
The final rules also include an exception for prescreened
solicitations. Under this exception, a creditor is not 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 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. The final rules are
based on the Agencies' reading of section 615(h) as giving
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consumers a right to a separate free consumer report upon receipt of a
risk-based pricing notice.
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 final rules contain a rule of construction to clarify that, in
general, only one risk-based pricing notice is required 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 may determine by contract which party
will send the notice. Generally, purchasers or assignees of credit
contracts are not subject to the risk-based pricing notice
requirements, except in the case of a notice provided in connection
with an account review. For more information about the rules of
construction, see the discussion of Sec. ----.75 in the Section-by-
Section Analysis.
Multiple Consumers
The final rules contain a rule of construction to clarify that in a
transaction involving two or more consumers who are granted, extended,
or otherwise provided credit, a person must provide a risk-based
pricing notice to each consumer. If the consumers have the same
address, a person may satisfy the requirements by providing a single
notice addressed to both consumers. If the consumers do not have the
same address, a person must provide a notice to each consumer.
For credit score disclosure exception notices, a person must
provide a separate notice to each consumer in a transaction involving
two or more consumers who are granted, extended, or otherwise provided
credit. Whether the consumers have the same address or not, the person
must provide a separate notice to each consumer. Each separate notice
must contain only the credit score(s) of the consumer to whom the
notice is provided, and not the credit score(s) of the other consumer.
For more information about the rules of construction, see the
discussion of Sec. ----.75 in the Section-by-Section Analysis.
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 finalized model forms that are appended
to the final 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 set forth the scope of the Agencies' rules.
Proposed paragraph (a)(1) generally tracked the statutory language from
section 615(h)(1) of the FCRA, except that it limited 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) provided that the risk-based pricing
rules do not apply to persons who use consumer reports in connection
with an application for, or 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. However, 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.\4\ 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. In addition, credit is not granted, extended, or provided to a
guarantor; rather a guarantor simply supports, and assumes liability
for, the credit granted, extended, or provided to the consumer. 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.
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\4\ 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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Most commenters agreed that the coverage of the proposed rule,
including the exclusion of business purpose credit, was appropriate.
Some commenters requested that the Agencies clarify that the rules do
not apply to consumer leases. Consumer leases generally are not treated
as ``credit'' under the Equal Credit Opportunity Act (ECOA) and the
Board's Regulation B (12 CFR 202.1 et seq.), which implements the
ECOA.\5\ Thus, the rule does not apply to consumer lease transactions.
The final rules retain paragraph (a) substantively as proposed.
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\5\ In Brothers v. First Leasing, 724 F.2d 789 (9th Cir.), cert.
denied, 105 S. Ct. 121 (1984), the U.S. Court of Appeals for the
Ninth Circuit held that consumer leases as defined by the Consumer
Leasing Act are subject to the ECOA. However, the Board believes
Congress did not intend the ECOA to cover lease transactions unless
the transaction results in a ``credit sale'' as defined in the TILA
and Regulation Z. Congress has consistently viewed lease and credit
transactions as distinct financial transactions and has treated them
separately under the Consumer Credit Protection Act.
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Proposed paragraph (b) provided 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. The
Board proposed to codify its risk-based pricing rules at 12 CFR 222.70
et seq., and the Commission proposed to codify its risk-based pricing
rules at 16 CFR 640 et seq. Proposed paragraph (c), consistent with the
statutory language in section 615(h)(8), provided that the risk-based
pricing rules would be enforced in accordance with sections 621(a) and
(b) by the relevant federal agencies and officials identified in those
sections, including state officials. Under the statute and proposed
rules, the risk-based pricing provisions would not provide for a
[[Page 2728]]
private right of action. The Agencies did not receive comments on
proposed paragraphs (b) or (c). Therefore, paragraphs (b) and (c) are
adopted substantively as proposed in the final rules, with minor
changes for clarity.
Section ----.71 Definitions
Proposed Sec. ----.71 contained 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.'' These definitions are retained in the final rules, with
certain revisions as discussed below.
Annual Percentage Rate and Related Terms
Proposed paragraph (a) defined ``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). Paragraph (b) of the proposal defined ``closed-end credit'' to
have the same meaning as in Regulation Z (12 CFR 226.2(a)(10)).
Paragraph (k) of the proposal defined ``open-end credit plan'' to have
the same meaning as set forth in the Truth in Lending Act (TILA), 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)).
The Agencies received one comment in support of the definition of
``annual percentage rate'' and no comments regarding ``closed-end
credit'' and ``open-end credit plan.'' The Agencies believe that use of
the Regulation Z definitions promotes consistency among the rules
pertaining to consumer credit, including the rules that implement the
FCRA and the TILA. Therefore, the definitions of ``annual percentage
rate,'' ``closed-end credit,'' and ``open-end credit plan'' are adopted
as proposed in the final rules, but renumbered as paragraphs (b), (c),
and (p), respectively.
Consummation
Proposed paragraph (c) defined the term ``consummation'' to mean
the time that a consumer becomes contractually obligated on a credit
transaction. The proposed definition was identical to the definition of
``consummation'' in Regulation Z. 12 CFR 226.2(a)(13). The Agencies
received no comments on this definition. In the final rules, the
definition of ``consummation'' is substantively the same as in the
proposal, but the text has been revised (and redesignated as paragraph
(e)) so that the term is defined to have the same meaning as in 12 CFR
226.2(a)(13). This is consistent with other definitions in the final
rules that cross-reference existing definitions.
Credit, Creditor, Credit Card, Credit Card Issuer, and Credit Score
Proposed paragraphs (d), (e), (f), (g), and (h) incorporated the
FCRA's statutory definitions of ``credit,'' ``creditor,'' ``credit
card,'' ``credit card issuer,'' and ``credit score.'' The Agencies
received few comments on these definitions, all of which incorporate
existing statutory definitions. They are adopted as proposed in the
final rules as paragraphs (h), (i), (j), (k), and (l).
Material Terms
Proposed paragraph (i) contained three separate definitions of
``material terms,'' depending on whether the credit (1) is extended
under an open-end credit plan for which there is an annual percentage
rate, (2) is closed-end credit for which there is an annual percentage
rate, or (3) is credit for which there is no annual percentage rate.
Proposed paragraph (i)(1) defined ``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. The definition excluded 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. For credit cards (other than
those used to access a home equity line of credit), the proposal
defined ``material terms'' as the annual percentage rate applicable to
purchases (``purchase annual percentage rate''), and no other annual
percentage rate.
Proposed paragraph (i)(2) defined ``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 did not
address temporary initial rates or penalty rates because, for purposes
of the closed-end provisions of Regulation Z, a penalty rate is not
included in the calculation of the annual percentage rate and a
temporary initial rate is but one component of a single annual
percentage rate for the transaction.
Most commenters supported defining material terms as the annual
percentage rate for credit extended under an open-end credit plan and
closed-end credit and, in the case of credit cards, the purchase annual
percentage rate. Some commenters, however, suggested that the
definition should include certain additional terms, such as fees or a
down payment, depending upon the particular loan product. A consumer
group commenter suggested that the definition should not be limited to
a single term, but instead should be defined as any change to a credit
transaction that is based upon a consumer's credit history or credit
score.
For practical and operational reasons, Sec. Sec. ----.71(i)(1) and
(i)(2) are adopted largely as proposed as renumbered Sec. Sec. --
--.71(n)(1) and (n)(2), but with certain substantive revisions as
discussed below. The Agencies recognize that the pricing of credit
products is complex and that the annual percentage rate is only one of
the costs of consumer credit. However, the Agencies have adopted 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.
Based on the comments received, extensive outreach to interested
parties, and their own analysis, the Agencies conclude that it would
not be 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 given 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.
Focusing on the annual percentage rate is appropriate because 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. The Agencies understand that the
annual percentage rate is the primary term that varies as a result of
risk-based pricing. For credit cards, which often have multiple annual
percentage rates applicable to purchases, cash advances, and balance
transfers, purchases are the most common type of transaction. The
Agencies understand that the annual percentage rate applicable to
purchases is the primary term that varies as a result of risk-based
pricing. Thus, the Agencies conclude that, in most cases, defining
``material terms'' with reference to the annual percentage rate (or the
purchase annual percentage rate, in the case of credit cards) will
effectively
[[Page 2729]]
target those consumers who are likely to have received credit on terms
that are materially less favorable than the terms offered to other
consumers.
One commenter requested clarification regarding whether the
definition of ``material terms'' for credit cards in Sec. --
--.71(n)(1)(ii) excludes the temporary initial annual percentage rate
and penalty annual percentage rate, as are excluded in Sec. --
--.71(n)(1)(i), the definition applicable to credit extended under an
open-end credit plan. Section ----.71(n)(1)(ii) is a specific
application of the general definition of ``material terms'' for credit
extended under an open-end credit plan to a specific type of product,
credit cards, that frequently has multiple annual percentage rates
applicable to different balances. Therefore, the exclusions in Sec. --
--.71(n)(1)(i) of the final rules apply to all credit extended under an
open-end credit plan, including credit cards.
Upon further analysis, the Agencies also have added ``any fixed
annual percentage rate option for a home equity line of credit'' as an
additional exclusion from Sec. ----.71(n)(1)(i). Most annual
percentage rates for home equity lines of credit are variable. Some
creditors, however, also offer a fixed annual percentage rate option,
which may be exercised on some portion of the advances. In these
arrangements, the variable annual percentage rate is the most
significant pricing term. Therefore, the Agencies have excluded the
fixed annual percentage rate option from the definition. Finally, the
Agencies have changed the citations in Sec. ----.71(n)(1)(i) of the
final rules to reflect amendments to Regulation Z made subsequent to
the proposed rule.\6\
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\6\ 74 FR 5244 (Jan. 29, 2009).
---------------------------------------------------------------------------
In response to one commenter's suggestion, the Agencies have
excluded charge cards from Sec. ----.71(n)(1)(ii). Under Regulation Z,
a ``charge card'' is defined as a credit card on an account for which
no periodic rate is used to compute a finance charge. 12 CFR
226.2(a)(15). This exclusion reflects the fact that charge cards do not
have an annual percentage rate. As discussed below, material terms of
charge cards are addressed in paragraph (n)(3).
Another commenter suggested that the rule should account for
situations where a credit card has no purchase annual percentage rate.
The final rules provide that in those instances, material terms means
``the annual percentage rate that varies based on information in a
consumer report and that has the most significant financial impact on
consumers.'' For example, if a credit card product does not permit
purchases, but allows for balance transfers and cash advances, the
material term would be whichever of the two annual percentage rates
varies based on information in a consumer report and has the most
significant impact on consumers.
Proposed paragraph (i)(3), renumbered as paragraph (n)(3) in the
final rules, defined ``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.
Some commenters agreed with the definition, but other commenters
suggested that ``any monetary terms'' should be limited to a single
monetary term. For the same operational concerns that led the Agencies
to focus exclusively on the annual percentage rate, the Agencies agree
that the third prong of the definition should focus on a single
significant term. Thus, in the final rules, ``material terms'' for
credit with no annual percentage rate is defined as ``the financial
term that varies based on information in a consumer report and that has
the most significant financial impact on consumers.'' By way of
example, the final rules clarify that, depending upon the creditor's
business and pricing practices, a significant financial term may
include a deposit required by a telephone company or utility or an
annual membership fee required to obtain a charge card.
Materially Less Favorable Material Terms
Proposed paragraph (j) defined ``materially less favorable,'' when
applied to material terms, to mean that the terms granted, extended, or
otherwise provided 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 clarified that a comparison between one set of material
terms and another set of material terms generally would be required to
satisfy the general rule and to identify which consumers must receive
the notice.
Some commenters stated that the definition of ``materially less
favorable'' was generally appropriate, but other commenters believed
the Agencies should define the term with more objective criteria. The
Agencies believe the definition of ``materially less favorable''
provides sufficient guidance regarding how to determine whether a
particular set of terms is materially less favorable. Thus, the
Agencies are adopting the definition of ``materially less favorable''
substantively as proposed as renumbered paragraph (o), with some
revisions for clarity. The phrase ``or otherwise provided'' has been
added to the definition to track the language of the statute. As noted
in the supplementary information to the proposal, 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, extended, or otherwise provided to the consumer and the
material terms granted, extended, or otherwise provided to the
comparison group.
Suggested Definitions
Two commenters suggested that terms such as ``consumer'' should
also be defined in the final rules. For clarity and consistency, the
final rules add definitions of the following terms by reference to the
FCRA's statutory definitions: ``adverse action'' is defined in
paragraph (a); ``consumer'' is defined in paragraph (d); ``consumer
report'' is defined in paragraph (f); ``consumer reporting agency'' is
defined in paragraph (g); ``firm offer of credit'' is defined in
paragraph (m); and ``person'' is defined in paragraph (q).
Section ----.72 General Requirements for Risk-Based Pricing Notices
General Rule
Proposed Sec. ----.72 established the basic rules implementing the
risk-based pricing notice requirement of section 615(h). Paragraph (a)
stated 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 mirrored the
language in proposed Sec. ----.70(a) and generally tracked the
statutory language. In the final rules, paragraph (a) is adopted as
proposed.
The proposed rules did not define what constitutes ``a substantial
proportion'' of consumers. Some commenters stated that this term was
too subjective and should be defined. The Agencies, however, do not
believe
[[Page 2730]]
it is appropriate to define ``a substantial proportion'' because no
definition of ``a substantial proportion'' could reflect the widely
varying pricing practices of creditors. 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, while another 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.
While each creditor's ``substantial proportion'' determination is
an individual decision, the Agencies expect that creditors will
consider ``a substantial proportion'' as constituting more than a de
minimis percentage, but that may or may not represent a majority. The
Agencies caution that creditors should not automatically apply the
proportions set forth in the proxy methods when determining what
constitutes ``a substantial proportion'' for purposes of making a
direct comparison. Rather, creditors should determine what constitutes
``a substantial proportion'' based on their own circumstances.
Although the statute would permit various interpretations of ``from
or through that person,'' the Agencies in the proposal interpreted 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 would be responsible for determining whether
consumers received materially less favorable material terms and
providing risk-based pricing notices to such consumers, whether or not
that person is the source of funding for the loan. The Agencies
recognized that this interpretation would exclude from the scope of the
proposed rules brokers and other intermediaries who do not themselves
grant, extend, or provide credit to consumers, 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.
Many commenters generally agreed that it is appropriate to require
the original creditor to provide the risk-based pricing notice, rather
than a broker or other intermediary. Some commenters, however,
suggested that the Agencies require intermediaries to provide the
notices in certain contexts, such as automobile or mortgage lending,
instead of the original creditor. Others recommended that the Agencies
allow either the original creditor or the intermediary to provide the
notice.
The Agencies continue to believe that it is appropriate to require
the original creditor, but not a broker or other intermediary, to
provide the risk-based pricing notice. 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.
Moreover, 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. The Agencies believe that, in
general, a consumer would not benefit from receiving more than one
risk-based pricing notice in connection with a single extension of
credit and requiring multiple notices would increase compliance burdens
and costs.
In certain situations, automobile dealers serve as the original
creditor, but extend credit contingent on the ability to assign the
loan to a third-party--a process known as ``three-party financing.'' A
typical three-party automobile financing transaction involves an
automobile dealer, a consumer, and a third-party creditor or financing
source. In these transactions, the dealer sells a vehicle to a
consumer, the consumer signs a retail installment sale contract with
the dealer, and the dealer assigns the contract to a third-party
financing source that has notified the dealer that it will purchase the
consumer's contract on specified terms. The third-party financing
source then services the debt directly with the customer.
Some commenters asserted that in three-party financing
transactions, automobile dealers are not engaged in risk-based pricing
and therefore should not be subject to the requirements of the rules.
These commenters stated that, although the dealer obtains a consumer's
credit report in a three-party financing transaction, it does so in
order to determine which third-party creditors to send the consumer's
credit application, and not to set the terms of the retail installment
sale contract. According to these commenters, the rate offered to the
consumer by the automobile dealer is not based on the consumer's
credit-worthiness, but rather on the combination of the ``buy'' rate--
the wholesale rate at which the third-party creditor has indicated it
will purchase the consumer's loan (which is determined, in part, by the
third-party creditor's underwriting standards)--and the retail margin
the dealer has been able to negotiate with the consumer. These
commenters stated that in such circumstances, the automobile dealer is
not engaged in risk-based pricing because it is the third-party
creditor, not the dealer, who analyzes the consumer's credit-
worthiness.
The Agencies disagree with the commenters' contention that three-
party financing does not involve risk-based pricing by the automobile
dealer. In the examples provided by the commenters, the automobile
dealer uses a consumer report in connection with an application for
credit to determine which third-party financing source it will attempt
to assign the retail installment sale contract, and on what material
terms. The material terms of the sales contract--specifically the
annual percentage rate of the automobile loan--are based, in part, on
the ``buy'' rate offered or expected to be offered by the third-party
financing source. The automobile dealer's use of a consumer report to
determine which third-party financing source is likely to purchase the
retail installment sale contract and at what ``buy rate,'' and to set
the annual percentage rate based in part on the ``buy rate,'' is
conduct that fits squarely within the description of risk-based pricing
in Sec. ----.72(a) of the final rules. Thus, automobile dealers that
are original creditors in a three-party financing transaction must
provide risk-based pricing notices to consumers, in accordance with the
rules.
Commenters also suggested that the Agencies allow the original
creditor to provide a risk-based pricing notice to all consumers who
apply for credit, including those who did not receive materially less
favorable terms. However, the statute's general rule does not suggest
that a notice should be provided to every consumer who applies for
credit. Moreover, the risk-based pricing notice requirement was
designed to be a substitute for adverse action notices when a consumer
received less favorable credit terms based on his or her consumer
report, rather than being denied credit.\7\ The
[[Page 2731]]
Agencies believe that providing a notice to all consumers who apply for
credit would diminish the impact of notifying a subset of consumers
that they received credit on less than the best terms based on
information in a consumer report. Providing a notice to all consumers
who apply for credit would also have the effect of allowing consumers
to receive a free consumer report whenever they applied for credit. For
the foregoing reasons, the Agencies conclude that a person that uses a
consumer report to grant, extend, or otherwise provide credit on
material terms that are materially less favorable than the most
favorable terms available to a substantial proportion of consumers is
required to provide a risk-based pricing notice only to those consumers
who receive materially less favorable terms.
---------------------------------------------------------------------------
\7\ S. Rept. No. 108-166 (Oct. 17, 2003) at 20 provides: ``Under
current law, a consumer is only provided an adverse action notice
when the consumer does not qualify for credit or rejects a
counteroffer made by a creditor. * * * [D]espite the many benefits
of risk-based pricing, it has made the current adverse action
notification construct obsolete in certain circumstances. This is
problematic in as much as the adverse action notice is the primary
tool the FCRA contains to ensure that mistakes in credit reports are
discovered.''
---------------------------------------------------------------------------
Under the final rules, a person is required to provide notice only
to consumers to whom it ``grants, extends, or otherwise provides
credit.'' Except as discussed below, this generally refers to any
consumer who applies and is approved for credit. A person does not
grant, extend, or otherwise provide credit to a consumer who merely
acts as a guarantor, co-signer, surety, or endorser for another
consumer who applies and is approved for credit. As noted above, a
guarantor, co-signer, surety, or endorser simply supports, and assumes
liability for, credit granted, extended, or provided to a consumer, but
does not itself receive a grant, extension, or other provision of
credit.
Some commenters requested that the Agencies clarify whether a
notice is required when a person grants credit, but a consumer does not
accept the credit. As explained below in the discussion of Sec. --
--.73(c), a person is generally only required to provide a notice
before consummation in the case of closed-end credit and before the
first transaction in the case of open-end credit. A person may grant
credit to a consumer, and the consumer may reject the offer of credit
before a notice is required to be provided. Thus, some consumers who
are granted credit may not receive a notice if they decline that credit
before they are given the notice. In practice, however, some of these
consumers may receive risk-based pricing notices if creditors provide
notices at the time the decision to grant, extend, or provide credit is
communicated to the consumer.\8\
---------------------------------------------------------------------------
\8\ However, where a consumer applies for specific credit terms
and the creditor makes a counteroffer which the consumer does not
accept, the creditor must provide an adverse action notice to the
consumer. See 12 CFR 202.2(c)(1)(i).
---------------------------------------------------------------------------
Determining Which Consumers Must Receive a Notice
The Agencies proposed three methods that a person could use to
determine which consumers must receive a risk-based pricing notice. The
proposed direct comparison method would permit a person to apply the
statutory test and determine on a case-by-case basis whether a consumer
received from the person materially less favorable terms than the terms
a substantial proportion of consumers received from that person. The
Agencies also proposed two proxy methods: the credit score proxy method
and the tiered pricing method. Under the credit score proxy method, a
person could comply with the rules 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. Under the tiered pricing method, 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 could comply with the rules by providing a risk-based pricing
notice to those consumers who are not placed in the person's best
pricing tier or tiers. Consumers identified by either of these two
alternative methods would be deemed to have been granted, extended, or
otherwise provided credit on materially less favorable material terms.
Commenters supported the Agencies' decision to provide several
methods for determining which consumers must receive a risk-based
pricing notice. Many commenters believed the three methods were
appropriate.
One commenter suggested an alternative method for determining which
consumers must receive a risk-based pricing notice. This commenter
suggested that the Agencies permit a method whereby creditors would
determine the median annual percentage rate of consumers who received a
particular type of product over a period of time and provide the notice
to those receiving an annual percentage rate less favorable than that
median. This suggestion was not adopted because it poses certain
practical difficulties. Because rates fluctuate over time, sometimes
quite dramatically, the median would have to be recalculated and
recalibrated relatively frequently to retain an accurate measure of the
median annual percentage rate. This would likely be impractical in many
cases.
Direct Comparisons and Materially Less Favorable Material Terms
Under the proposed rule, creditors could determine, on a case-by-
case basis, whether a consumer had received materially less favorable
terms than the terms a substantial proportion of consumers have
received from or through that creditor. The Agencies acknowledged that
when a creditor undertakes direct, consumer-to-consumer comparisons,
such comparisons necessarily must take into account the unique aspects
of that creditor's business. Creditors would have to compare the
transaction at issue with past transactions of a similar type and
control for changes in interest rates and other market conditions over
time. In addition, the Agencies recognized that a particular method of
comparison that is sensible and feasible for one creditor may not be
sensible and feasible for another creditor. Thus, the Agencies did not
propose a quantitative standard or specific methodology for determining
whether a consumer is receiving materially less favorable terms.
Nevertheless, the Agencies stated that the determination should be
made in a reasonable manner and outlined their expectations for
creditors who use this method. The creditor would first need to
identify the appropriate subset of its current or past consumers to
compare to any given consumer. The subset would need to be an adequate
sample of consumers who have applied for a specific type of credit
product. 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 would expect that creditors would
provide risk-based pricing notices to some, but fewer than all, of the
consumers to whom they extend credit.
Many commenters believed the direct comparison method would likely
be impractical for most creditors. Some stated that the method was too
subjective. Commenters nevertheless recommended that the option should
be retained in the final rules. Industry
[[Page 2732]]
commenters also requested clarification regarding the phrases ``similar
types of transactions'' and ``given class of products.'' Some of those
commenters suggested that the Agencies provide reasonable flexibility
to creditors when classifying a ``given class of products.'' They also
suggested that the Agencies provide a better definition of the term.
One commenter suggested that the Agencies use either the term ``similar
types of transactions'' or ``given class of products,'' rather than
both terms.
In the final rules, Sec. ----.72(b) is generally adopted as
proposed, with certain changes. The Agencies have substituted the term
``specific type of credit product'' for the proposed terms ``similar
types of transactions'' and ``given class of products'' in the final
rules in order to eliminate ambiguity in the terminology. The final
rules define the term ``specific type of credit product'' to mean ``one
or more credit products with similar features that are designed for
similar purposes.'' The final rules also provide examples of what
constitutes a specific type of credit product, such as student loans,
new auto loans, used auto loan, and others. The Agencies have also made
non-substantive changes for clarity.
The Agencies recognize that different creditors' consideration of
various factors when making direct comparisons 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.
Creditors may use one of the alternative methods, set forth below,
if they determine the direct comparison method is not practical. The
Agencies note that although a person may use the alternative methods,
for purposes of consistency a person must use the same method to
evaluate all consumers who are granted, extended, or otherwise provided
a specific type of credit product 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 automobile loans. On the other hand, the Agencies recognize
that the feasibility of these methods may vary for different types of
credit products, and creditors may use different methods for different
types of credit products.
Credit Score Proxy Method
Proposed Sec. ----.72(b)(1) set forth the credit score proxy
method for determining which consumers should receive risk-based
pricing notices. That subsection discussed the credit score proxy
method; how to determine the cutoff score when using this method and
how to recalculate that cutoff score; how to determine the cutoff score
when using two or more credit scores; and how to determine a cutoff
score when a credit score is not available. In the final rules, the
credit score proxy method is adopted generally as proposed. However,
the final rules contain some modifications from the proposal, as
discussed below, made in response to comments received and the
Agencies' own analysis.
General Rule
Proposed paragraph (b)(1)(i) set 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, would comply with the rules 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 using the credit
score proxy method would not be required to consider the actual credit
terms offered to each consumer. Rather, that creditor would only have
to compare the credit score of a given consumer with the pre-calculated
cutoff score to determine whether a notice is required.
---------------------------------------------------------------------------
\9\ The proposed rules did not require precision in the
calculation of the 40 percent/60 percent cutoff point. Depending on
the available data set and the practices of the creditor, the cutoff
point may be approximate.
---------------------------------------------------------------------------
The credit score proxy method focused on a single 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 would eliminate
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 would
substitute a comparison of the credit scores of different consumers as
a proxy for a comparison of the material terms offered to different
consumers.
Commenters' suggestions regarding an appropriate cutoff point
varied, but many suggested that the Agencies modify the proposed 40
percent/60 percent cutoff score point. Many commenters generally
believed the cutoff score should be at a point where less than 60
percent of consumers receive the risk-based pricing notice. For
example, some commenters believed the point at which a cutoff score is
set should be where 50 percent of consumers have higher credit scores
and 50 percent have lower credit scores, such that only those 50
percent of consumers with lower credit scores receive the risk-based
pricing notice. The Agencies continue to 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 who
have the lowest credit scores is appropriate and reasonable. For
example, one major credit score developer has published a national
distribution of its scores, which indicates that approximately 40
percent of consumers receive scores that would likely enable them to
qualify for the most favorable terms available.\10\ Thus, the final
rules retain as the cutoff score the point at which approximately 40
percent of a creditor's consumers have higher credit scores and
approximately 60 percent of its consumers have lower credit scores.
---------------------------------------------------------------------------
\10\ See Credit Basics: National Distribution of FICO Scores.
Retrieved June 3, 2009. http://www.myfico.com/CreditEducation/CreditScores.aspx (showing that 40 percent of consumers have FICO
scores of 750 or higher).
---------------------------------------------------------------------------
One commenter requested greater flexibility to determine the cutoff
score where the creditor could demonstrate that the 40 percent/60
percent cutoff score did not reflect the creditor's own lending
experience. In the final rules, a new Sec. ----.72(b)(1)(ii) is
adopted to address such situations and an example is added under Sec.
----.72(b)(1)(v)(B) to demonstrate this alternative.
In the case of credit that has been granted, extended, or provided
on the most favorable material terms to more than 40 percent of
consumers, Sec. ----.72(b)(1)(ii) of the final rules permits a person
to set its cutoff score
[[Page 2733]]
at a point at which the approximate percentage of consumers who
historically have been granted, extended, or provided credit on
material terms other than the most favorable terms would receive risk-
based pricing notices under this section. A creditor may determine the
consumers who historically have been granted, extended, or provided
credit on certain terms by using either the sampling approach or the
secondary source approach in Sec. ----.72(b)(1)(iii), as discussed
below. For example, a credit card issuer may take a representative
sample of consumers to whom it granted, extended, or provided credit
over the preceding six months and determine that approximately 80
percent of those consumers received credit at its lowest annual
percentage rate, and 20 percent received credit at a higher annual
percentage rate. Approximately 80 percent of the sampled consumers have
a credit score at or above 750 (on a scale of 350 to 850), and 20
percent have a credit score below 750. Accordingly, the card issuer
selects 750 as its cutoff score. A creditor that acquires a credit
portfolio as a result of a merger or acquisition also may apply this
alternative approach using information it obtained from the party from
which it acquired the portfolio regarding the percentage of consumers
who historically received the most favorable material terms in that
portfolio, as discussed below. A creditor is permitted, but not
required, to use this alternative approach to the credit score proxy
method. A creditor may always use the 40 percent/60 percent approach to
determining its cutoff score, although, as noted above, the creditor
must use the same approach to evaluate all consumers who are granted,
extended, or otherwise provided a specific type of credit product from
or through that person.
This alternative approach may reduce the number of risk-based
pricing notices provided to consumers who are granted, extended, or
provided credit on the most favorable material terms as compared with
strictly applying the 40 percent/60 percent approach. In the example
provided above, for instance, the creditor may provide notices only to
the 20 percent of consumers who actually received credit on material
terms other than the most favorable terms. If the same creditor had
used the credit score proxy method, the creditor would have to provide
notices to approximately 60 percent of consumers, many of whom likely
would have received credit on the most favorable terms. The Agencies
believe it is appropriate to minimize, where possible, the number of
consumers who receive risk-based pricing notices and also receive the
creditor's most favorable terms. However, to avoid undermining the
basic purpose of the statute, the alternative approach does not permit
risk-based pricing notices to be provided to more than approximately 60
percent of consumers. Thus, if credit has been granted, extended, or
provided on the most favorable material terms to less than 40 percent
of a creditor's consumers, a creditor may not use the alternative
approach.
Finally, one commenter requested that the Agencies clarify that the
appropriate population to consider when setting the cutoff score is
``accepted applicants.'' The language in the final rules is revised to
clarify the appropriate population to consider when setting the cutoff
score in a manner that more closely tracks the language of the statute.
Thus, the appropriate population to consider is consumers to whom the
creditor grants, extends, or otherwise provides credit, regardless of
whether those consumers decide to accept and use the credit.
Determining the Cutoff Score
Proposed paragraph (b)(1)(ii) described two methods for determining
the cutoff score. In general, creditors would be required to use a
sampling approach. Under this approach, a person that currently uses
risk-based pricing with respect to the credit products it offers would
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. Where a creditor's customer
base or underwriting standards varied significantly among different
classes of credit products, such as mortgages, credit cards, automobile
loans, and student loans, the proposal would have required creditors to
calculate separate cutoff scores for different classes of products
based on representative samples of consumers offered that type of
credit.
The Agencies recognized that the sampling approach would 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. Thus, the Agencies proposed to
allow 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. In addition, the Agencies
proposed to permit a creditor that acquired 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.
The Agencies received few comments regarding these provisions, and
they are generally adopted as proposed in renumbered paragraphs
(b)(1)(iii)(A) and (b)(1)(iii)(B) in the final rules, with minor
changes. An acquisition of a portfolio could be the result of a person
either merging with or acquiring a party or acquiring a portfolio, but
not the previous owner of the portfolio. Therefore, the language
stating that a person may determine its cutoff score based on
information from a ``merged or acquired party'' has been revised in the
final rules to state that the cutoff score may be based on information
from a ``party which it acquired, with which it merged, or from which
it acquired the portfolio.''
The Agencies note that all of these approaches to determining the
cutoff score apply to the 40 percent/60 percent cutoff score proxy
method. A person using the alternative to the 40/60 percent cutoff
score proxy method, however, may only make its determination of the
cutoff score either using the sampling approach or, if a person
acquires a credit portfolio as a result of a merger or acquisition, by
basing its determination on information from the party which it
acquired, with which it merged, or from which it acquired the
portfolio.
Recalculation of Cutoff Scores
Proposed paragraph (b)(1)(ii)(C) addressed the recalculation of
cutoff scores. As explained in the proposal, the Agencies understand
that the distribution of credit scores for a creditor's customer base
may shift over time. It is important to recalculate the cutoff score
from time to time, but the time period between recalculations should be
long enough so that the rule does not require continual sampling. On
the other hand, the Agencies also indicated in the proposal that, to
obtain a representative sample, the creditor must use an appropriate
sampling period in order to minimize the risk of introducing
distortions, such as seasonal variations, into the sampling. Therefore,
the Agencies proposed to require persons using the sampling approach to
recalculate their cutoff scores at least every two years.
As proposed, a person who used secondary sources to determine its
cutoff score, however, generally would
[[Page 2734]]
be required to recalculate its cutoff score based on a representative
sample of its own consumers within one year after it began using a
cutoff score derived from market research, third-party data, or
information from a merged or acquired party. If, however, a person
using the secondary source approach did not grant, extend, or otherwise
provide credit to a sufficient number of new consumers during that one-
year period, and therefore lacked sufficient data with which to
recalculate its cutoff score after one year, the proposal would have
permitted the person to continue to use a cutoff score derived from
secondary sources until it granted, extended, or otherwise provided
credit to a sufficient number of new consumers and was able to collect
sufficient data on which to base the recalculation.
Many commenters believed that re-assessing the cutoff score every
two years, or every year when a cutoff score is derived from market
research, third-party data, or information from a merged or acquired
party, was appropriate. Commenters generally agreed with allowing the
use of secondary sources to identify the cutoff score in the
circumstances proposed, and some suggested that the Agencies allow
creditors to use such secondary sources in all circumstances.
The general two-year reassessment requirement for cutoff scores is
retained in the final rules. However, the final rules have been revised
to reflect the language change discussed above regarding certain
secondary sources, which provides that a person may determine its
cutoff score based on information from a ``party which it acquired,
with which it merged, or from which it acquired a portfolio.'' The
final rules also are revised with regard to situations where a person
is permitted to use a cutoff score derived from market research, third-
party data, or information from a party which it acquired, with which
it merged, or from which it acquired a portfolio. In those situations,
if a person does not grant, extend, or provide credit to new consumers
during the one-year period such that the person lacks sufficient data
with which to recalculate a cutoff score, the person may continue to
use market research, third-party data, or information from a party
which it acquired, with which it merged, or from which it acquired a
portfolio until it obtains sufficient data. However, the Agencies want
to ensure that a creditor engaging in risk-based pricing for new
customers does not continue to use a cutoff score based on market
research, third-party data, or information from a party which it
acquired, with which it merged, or from which it acquired a portfolio
for an indefinite period of time. Therefore, renumbered paragraph
(b)(1)(iii)(C) of the final rules provides that if the person has
granted, extended, or provided credit to some new consumers within two
years, the person must recalculate the cutoff score using the sampling
approach described in paragraph (b)(1)(iii)(A).
Use of Two or More Credit Scores
Proposed paragraph (b)(1)(ii)(D) addressed the situation where a
creditor uses two or more credit scores in setting the material terms
of credit. The proposal stated that if a person using the credit score
proxy method generally used 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 purchased two scores
for each consumer and used the average of those two scores when setting
the material terms of credit, the proposal would have required the
creditor to use the average of its consumers' scores when calculating
its cutoff score. In circumstances where creditors did not consistently
use the same method for evaluating multiple scores, however, the
proposed rules would have required the creditor to use a reasonable
means for determining the appropriate cutoff score and provided a safe
harbor for a creditor that used either a method that the creditor
regularly used or the average credit score for each consumer as the
means of calculating the cutoff score.
The Agencies received few comments regarding this paragraph, and it
is generally adopted as proposed as renumbered paragraph
(b)(1)(iii)(D), with minor changes.
Credit Score Not Available
For a consumer that does not have a credit score, proposed
paragraph (b)(1)(iii) provided 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.
A few commenters objected to the Agencies' assumption that
consumers without credit scores are likely to receive less favorable
terms and should receive a risk-based pricing notice, while one
commenter believed the assumption was correct. Another commenter
believed the Agencies should make an exception to the default rule in
instances where the presumption is incorrect. The Agencies continue to
believe the assumption regarding consumers without credit scores is
appropriate. Initiatives undertaken to promote the use of non-
traditional data, such as utility, telecommunications, and rental
housing data, in consumer reports and credit scoring support the
Agencies' belief that consumers who lack credit scores may have greater
difficulty obtaining credit, or obtaining credit on the most favorable
terms available. Although there may be isolated cases where a consumer
without a credit score obtains the most favorable terms, the Agencies
do not believe that an exception is warranted in such cases because the
notice would provide information to the consumer that may be relevant
to the consumer for future transactions, where the most favorable terms
may not be offered if the consumer has no credit score. Thus, the
substance of this provision is adopted as proposed in renumbered
paragraph (b)(1)(iv) of the final rules, with a change in title and
other non-substantive revisions.
The proposal included examples of how a credit card issuer and an
auto lender could apply the credit score proxy method. The Agencies
have retained these examples in the final rules, and added another
example of a credit card issuer to illustrate the alternative approach
discussed above.
Tiered Pricing Method
Proposed paragraph (b)(2) set 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) provided 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 could be
reflected 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. For example, if a
creditor 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 creditor 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-
[[Page 2735]]
based pricing notice, even if factors other than the consumer report
influence the annual percentage rate received by the consumer.
Proposed paragraph (b)(2)(ii) described the application of the
tiered pricing method when a person using this method has four or fewer
pricing tiers. Proposed paragraph (b)(2)(iii) described the application
of the tiered pricing method when a person using this method has five
or more tiers. Each paragraph provided an example to illustrate the
application of the tiered pricing method.
Some commenters suggested that the Agencies change the number of
pricing tiers for which a notice must be sent. Those commenters
generally believed that consumers falling into a greater number of the
top, or lower-priced, tiers should not receive a risk-based pricing
notice. Several commenters agreed with the Agencies' proposal to focus
only on the number and percentage of tiers, rather than the number or
percentage of consumers who are assigned to each tier. One commenter,
however, suggested that the Agencies should allow creditors to consider
the percentage of accepted consumers assigned to each tier and adjust
the numbers of tiers receiving a notice accordingly.
In the proposal, the Agencies 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. The Agencies stated that a creditor using the tiered
pricing method would not be permitted to consider tiers for which no
consumers have qualified nor are reasonably expected to qualify, and
requested comment on whether the proposed rules should be modified to
prevent circumvention. Commenters generally did not believe creditors
would seek to circumvent the tiered pricing method by establishing an
additional tier or tiers for which no consumers will likely qualify.
Section ----.72(b)(2), the tiered pricing method, is generally
adopted as proposed in the final rules, with some non-substantive
changes. Under the final rules, where there are four or fewer pricing
tiers, a person must provide a risk-based pricing notice to each
consumer who does not qualify for the top, or lowest-priced, tier.
Where there are five or more pricing tiers, a person using the tiered
pricing method must send 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. As noted in the
proposal, creditors may use different pricing tiers for different types
of credit products, such as automobile loans and boat loans. If a
creditor uses different pricing tiers for different products, a
separate analysis is 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.
Credit Cards
Proposed paragraph (c) set forth special provisions applicable to
credit card issuers. Proposed paragraph (c)(1) generally would have
required a credit card issuer to provide a risk-based pricing notice to
a consumer if: (i) the consumer applied 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 provided 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.
Proposed paragraph (c)(2) described those circumstances in which a
credit card issuer would not have been required to provide a risk-based
pricing notice. Under this provision, a credit card issuer would not be
required to provide a risk-based pricing notice to a consumer if the
consumer applied for a credit card for which the creditor provides a
single purchase annual percentage rate (excluding temporary and penalty
rates). In addition, a credit card issuer would not be 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.
Proposed paragraph (c)(3) set forth an example of the application of
the risk-based pricing rules to a credit card solicitation containing
multiple possible purchase annual percentage rates.
The proposed rule was based 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. Some industry commenters challenged this assumption, stating
that consumers are applying for the best rate for which they qualify
within the range of rates in the offer of credit. However, if the
Agencies were to adopt this suggestion, then no consumers who apply for
credit cards would receive risk-based pricing notices. The Agencies do
not believe this would be consistent with the purpose of the statute.
Accordingly, the final rules are based on the assumption that a
consumer applies for the best rate available under a credit card offer.
Some commenters requested that the Agencies clarify whether all of
the risk-based pricing and exception notice options, including the
credit score proxy and tiered pricing methods, would be available to
credit card issuers. The final rules have been revised to clarify that
credit card issuers may comply with the rules by using either the
special method for credit card issuers or any of the other methods
permitted by the rules. When using the special method for credit cards,
a card issuer determines which consumers must receive a notice on an
offer-by-offer basis. However, if a credit card issuer opts to use the
credit score proxy method or the tiered pricing method, it must
determine which consumers must receive a notice through an analysis of
the issuer's entire portfolio, rather than on an offer-by-offer basis.
The Agencies have also revised the language that states that a
credit card issuer using this option must make its determination
regarding whether a risk-based pricing notice is required to be
provided to a consumer based solely on a purchase annual percentage
rate. There may be instances where an issuer offers a credit card that
does not have a purchase annual percentage rate, such as credit cards
that may only be used for cash advances or balance transfers. To
clarify that credit card issuers may also apply these special
provisions to credit cards that do not have a purchase annual
percentage rate, the final rules refer to the ``annual percentage rate
referenced in Sec. ----.71(n)(1)(ii)'' rather than the ``purchase
annual percentage rate.'' The annual percentage rate to be applied in
this provision, therefore, is either the purchase annual percentage
rate or, in the case of a credit card that has no purchase annual
percentage rate, the annual percentage rate that varies based on
information in a consumer report and that has the most significant
financial impact on consumers.
The special provisions applicable to credit cards are otherwise
adopted as proposed in paragraph (c) of the final rules, with some non-
substantive changes.
Account Review
Proposed paragraph (d) described how the risk-based pricing rules
apply
[[Page 2736]]
to the account review process. Proposed paragraph (d)(1) provided 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 or in part
on that consumer report, increases the annual percentage rate. Proposed
paragraph (d)(2) illustrated this provision's applicability to credit
card accounts.
Industry commenters objected to this requirement, stating that
account review is not covered by the statute. They also argued that the
provision was not needed because adverse action notices were already
provided when annual percentage rates are increased during account
review.
Paragraph (d) of the final rules is adopted as proposed. The
legislative history indicates that the statute was meant to apply to
account reviews, as well as to new accounts.\11\ Moreover, the Agencies
acknowledge that there are circumstances where an adverse action notice
is provided to the consumer in connection with an account review that
results in a rate increase. In these circumstances, the exception for
adverse action notices, discussed below, would apply and the creditor
would not be required to provide the consumer with a risk-based pricing
account review notice. However, if an adverse action notice is not
provided to a consumer, a risk-based pricing account review notice must
be provided to the consumer.
---------------------------------------------------------------------------
\11\ See S. Rep. No. 108-166, at 20-21 (Oct. 17, 2003) (``This
section is intended to address the frequently occurring situation
where creditors review consumers' credit reports and make risk-based
adjustments to the credit terms they offer the consumer * * * The
Committee believes that consumers should receive these notices when
information in a credit report leads to a change in terms that
significantly impacts the cost of the credit offer.'')
---------------------------------------------------------------------------
Section ----.73 Content, Form, and Timing of Risk-Based Pricing Notices
Proposed Sec. ----.73 set forth the content, form, and timing
requirements for risk-based pricing notices that would apply whether
the creditor made the direct, consumer-to-consumer comparisons
described in the general rule or used one of the proxy methods.
Content
Proposed paragraph (a)(1) stated the general content requirements
for risk-based pricing notices (hereafter ``general risk-based pricing
notice''). Proposed paragraph (a)(2) set 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 an account review (hereafter ``account
review notice''). The proposal provided that the general risk-based
pricing notice must include a statement that the person sending the
notice has set the terms of credit offered, such as the annual
percentage rate, based on information from a consumer report and a
statement that those terms may be less favorable than the terms offered
to consumers with better credit histories. Similarly, the proposal
provided that the account review notice must 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 that as a result of that review the annual percentage rate on
the account has been increased. In connection with both the general
risk-based pricing notice and the account review notice, the proposal
also provided that the notices 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 credit decision or 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.
Paragraphs (a)(1) and (a)(2) are adopted as proposed in the final
rules, with minor revisions for clarity.
The proposed rules did 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. The Agencies were concerned
that such a statement would not be accurate in certain cases if the
creditor could not 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, if factors
other than the consumer report, such as income or down payment amount,
influenced the pricing decision.
Proposed paragraph (a)(1)(iii) provided that the general risk-based
pricing notice must state that the terms offered to the consumer may be
less favorable than the terms offered to consumers with better credit
histories. This statement related the general information about credit
history and credit pricing contained in the notice to the specific
consumer. Absent this statement, the Agencies were concerned that some
consumers may assume that the general information had no relevance to
them. This statement was designed to carry out the statutory purpose of
prompting consumers to check their consumer reports for any errors.
Some commenters urged the Agencies to delete the statement in
proposed paragraph (a)(1)(iii) because they believed it was negative,
potentially confusing to customers, and potentially misleading. For
example, one commenter believed that the statement erroneously implied
that other creditors would offer better terms. These commenters
suggested replacing this language with neutral language that encouraged
consumers to shop for better credit terms. Other commenters, however,
stated that the language was accurate and should be retained. In the
final rules, the Agencies have retained the phrase ``terms offered to
you may be less favorable'' because they continue to believe that it
puts consumers on notice that they should check their consumer reports
for errors and accurately depicts the reason why consumers are
receiving the notice.
Proposed paragraphs (a)(1)(vi) and (a)(2)(vi) implemented the
statutory requirement in paragraph 615(h)(5)(C) of the FCRA that the
notices 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. These
paragraphs stated that the notice must 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)
of the FCRA does not prescribe any time period within which the
consumer may obtain a free consumer report, the 60-day time period was
proposed for consistency with the time limit contained in the adverse
action notice provisions in section 612(b) of the FCRA. Under section
612(b), any right to a free consumer report is valid for 60 days
[[Page 2737]]
after the consumer receives the notice that gives rise to that right.
The Agencies believed that incorporating this 60-day time period into
the rules was appropriate in light of their 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. For these
reasons and those described below, these provisions are adopted as
proposed.
Some industry commenters urged the Agencies to read the statute as
not giving the consumer the right to a free consumer report upon
receipt of a risk-based pricing notice, arguing that section 311 of the
FACT Act did not create this right. These industry representatives
stated that section 615(h) of the FCRA does not give the consumer a
right to a separate free consumer report, but that the reference in
that section to a free consumer report refers to the free annual
consumer report described in section 612(a) of the FCRA. Consumer
groups, on the other hand, stated that section 615(h) gives a consumer
a right to a separate free consumer report upon receipt of a risk-based
pricing notice. Several commenters noted that if the Agencies believe
that receipt of a risk based pricing notice gives the consumer the
right to a free consumer report, then the 60-day time period in which
the consumer may obtain the report is appropriate.
The Agencies read the statute as creating the right to a free
consumer report upon receipt of a risk-based pricing notice and believe
60 days is an appropriate time period in which the consumer can request
the report. 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 of those cases a free report that is separate from the free
annual report.
One commenter requested that the Agencies add a provision requiring
a disclosure of each consumer's name and the date the notice was
provided in each form. The Agencies are not requiring this information
to be included in the notices. However, as discussed below, the
Agencies have included among acceptable changes to the model forms
``including the name of the consumer, transaction identification
numbers, a date, and other information that will assist in identifying
the transaction to which the form pertains.'' Therefore, a creditor may
elect to add this information to its notice.
Several commenters requested that the Agencies add other
disclosures to the notices. Some stated that the notice should contain
a more complete statement regarding why the consumer is receiving the
notice. For example, one commenter suggested the notice state that the
notice is required by Federal law. Several commenters suggested that
the notice should state that the consumer reporting agencies were not
involved in the decision to extend credit. Some commenters asked the
Agencies to add a statement to the notice to clarify that the terms of
credit may have been established based on creditworthiness criteria
other than a credit score, such as income or loan-to-value ratio. The
Agencies do not believe that these suggested additions are critical
pieces of information for the consumer. These statements also would add
to the length of the notice and potentially detract from more important
pieces of information conveyed in the notice. Therefore, these
suggestions have not been adopted.
Form
Proposed paragraph (b) set forth the format requirements for risk-
based pricing notices. Proposed paragraph (b)(1)(i) provided that risk-
based pricing notices must be clear and conspicuous. Proposed paragraph
(b)(1)(ii) specified that persons subject to the rule would be
permitted to make the disclosures in writing, orally, or
electronically.
Proposed paragraph (b)(2) referenced the model forms of the risk-
based pricing notices required by Sec. Sec. ----.72(a) and (c), and by
Sec. ----.72(d), which were contained in Appendices H-1 and H-2 of the
Board's proposed rule and Appendices B-1 and B-2 of the Commission's
proposed rule. Appropriate use of these model forms would be deemed to
be a safe harbor for compliance with the risk-based pricing notice
requirements. Use of these model forms would be optional.
The Agencies received relatively few comments regarding the format
of the risk-based pricing notices. Most of the comments received were
requests for clarification regarding how much the notices could deviate
from the model forms while still retaining the protection of the safe
harbor. The Agencies have adopted some of the suggestions made by
commenters, which are discussed below in the Section-by-Section
Analysis regarding the model forms.
Paragraph (b) is adopted as proposed.
Timing
Proposed paragraph (c) set 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, the proposal provided that the notice must 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, the proposal provided that the notice must 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, the proposal provided that the
notice must 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, no
later than five days after the effective date of the change in the
annual percentage rate.
The timing rules in paragraph (c) are generally adopted as
proposed, with several minor changes for clarification. In the case of
the provision in paragraph (c)(iii) addressing account reviews where no
notice of an increase in annual percentage rate is provided, the final
rules add the phrase ``to the extent permitted by law'' to clarify that
the timing provision applies only when an increase in the annual
percentage rate without prior notice is legally permissible.\12\ In
addition, as discussed below, two new timing provisions have been added
to the final rules to address certain auto lending transactions and
[[Page 2738]]
contemporaneous purchase credit (instant credit).
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\12\ The Agencies recognize that the Credit Card Reform Act of
2009, and the Board's implementing regulations, require notice of an
annual percentage rate increase prior to raising the rate. See 74 FR
36,077 (July 22, 2009) (interim final rule under Regulation Z).
However, there may be products other than credit cards that permit
an increase in annual percentage rate without notice. Thus, the
Agencies are retaining this provision in the final rules, with the
addition of the qualifier ``to the extent provided by law,'' to
account for potential situations or financial products, if any, that
would permit persons to increase annual percentage rate during an
account review with no notice.
---------------------------------------------------------------------------
General Comments
Two commenters believed the proposed timing requirements were
appropriate. Other commenters, however, stated that because the statute
allows for the notices to be given at the time of application, the
Agencies should require a general educational notice at application
rather than a personalized notice. Commenters also argued that this
notice should contain a reminder to obtain a free annual consumer
report, rather than create a right to a free consumer report in
addition to the free annual consumer reports.
The Agencies considered whether to allow the risk-based pricing
notice to be provided at the time of application, but have rejected
that approach. Instead, the Agencies have concluded that the notice
generally should be provided no earlier than the time when the decision
to approve the credit is communicated to the consumer. The Agencies
believe that requiring the notice to be provided later than the time of
application gives effect to the statute's general rule by ensuring that
risk-based pricing notices are provided only to those consumers who may
receive materially less favorable material terms. The Agencies believe
that a notice at the time of application is less likely to be noticed,
read, and acted upon by consumers than a more targeted, personalized
notice. The Agencies also believe that permitting the notice to be
provided at the time of application would 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. The final rules are 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. Therefore, permitting
application notices could greatly expand the number of free reports to
which consumers may be entitled. This could be costly for all parties,
and may result in costs being passed on to consumers.
Some commenters suggested that when a notice is provided upon
account review, the Agencies should require that the notice be provided
with the next periodic statement or at another later date. The Agencies
continue to believe that providing the notice no later than five days
after the effective date of the change in annual percentage rate is
appropriate, because the effectiveness of the notice may be diminished
if notice is not provided promptly after the decision to increase the
rate is made. Accordingly, the timing requirements for the account
review notice generally have been adopted as proposed, with the
addition of the language ``(to the extent permitted by law),'' as
discussed above.
Automobile Lending
Many commenters objected to the Agencies' timing requirements as
applied to indirect automobile lending. These commenters stated that
fulfilling the notice requirement at or prior to consummation would be
impossible in instances where the creditor does not know that the
dealer has placed a loan with the creditor until after the loan
documents have been signed by the consumer. The commenters believed
that the creditor should be permitted to send a notice after it
receives necessary information or within a reasonable time after
consummation, such as within 30 days or when the welcome letter is sent
to the consumer. Alternatively, some commenters argued that the dealer
arranging the loan should have the compliance responsibility.
In the final rules, the Agencies retained the general timing
requirement for automobile lending. In some cases, the creditor
directly communicates with the consumer about the transaction before
consummation. For example, a consumer may obtain credit for an
automobile purchase at a credit union or other financial institution
prior to purchasing the vehicle. In these circumstances, the creditor
should be able to provide a notice described in Sec. Sec. ----.72(a),
----.74(e), or ----.74(f) to the consumer within the time periods set
forth in paragraph (c)(1)(i) of this section, Sec. ----.74(e)(3), or
Sec. ----.74(f)(4), as applicable.
The Agencies recognize, however, that the nature of indirect
automobile lending may prevent creditors themselves from fulfilling
their compliance responsibilities prior to consummation without relying
upon the dealer or other party as an agent. In many cases, the creditor
may approve and set the terms of credit for a particular consumer
without any direct interaction with that consumer. In other
circumstances, the creditor may not receive a completed application
until after a consumer has already purchased the automobile. For
example, a consumer may purchase a car from a dealer on a Saturday and
sign the loan documents. The creditor, however, may not receive or have
a chance to review the loan documents provided by the dealer until the
creditor resumes business hours on Monday. The creditor would not have
the opportunity to communicate with the consumer before it accepts or
refuses the loan.
To account for such circumstances, the Agencies in the final rules
have provided that when a person to whom a credit obligation is
initially payable grants, extends, or otherwise provides credit to a
consumer for the purpose of financing the purchase of an automobile
from an auto dealer or other party that is not affiliated with the
person, any requirement to provide a risk-based pricing notice pursuant
to this subpart is satisfied if the person arranges to have the auto
dealer or other party provide a notice described in Sec. Sec. --
--.72(a), ----.74(e), or ----.74(f) to the consumer on its behalf
within the time periods set forth in paragraph (c)(1)(i) of this
section, Sec. ----.74(e)(3), or Sec. ----.74(f)(4), as applicable,
and maintains reasonable policies and procedures to verify that the
auto dealer or other party provides such notice to the consumer within
the applicable time periods.
The Agencies recognize that the auto dealer may not use the same
credit score that the creditor uses. For example, the dealer may obtain
a credit score from one consumer reporting agency, while the creditor
obtains a credit score from a different consumer reporting agency.
Because the auto dealer may not know which credit score the creditor
will use, it is not feasible in these circumstances to require the
dealer to disclose the same credit score that the creditor uses. Thus,
the final rules provide that if the person to whom the credit
obligation is initially payable arranges to have the auto dealer or
other party provide a notice described in Sec. ----.74(e), the
person's obligation is satisfied if the consumer receives a notice
containing a credit score obtained by the dealer or other party, even
if a different credit score is obtained and used by the person on whose
behalf the notice is provided. Moreover, because a dealer may provide a
credit score on behalf of a creditor, the dealer, as agent of the
creditor, may provide copies of any notice that it provides to a
consumer, including a credit score disclosure, to the creditor without
becoming a consumer reporting agency.
Contemporaneous Purchase Credit (Instant Credit)
Many commenters objected to the Agencies' proposed timing
requirements as applied in the context of contemporaneous purchase
credit (often referred to as ``instant credit''). These commenters
stated that providing a notice after approval but prior to the first
transaction would be infeasible and costly and would substantially
delay
[[Page 2739]]
transactions. Commenters argued that it would be difficult for
employees in the retail context to provide risk-based pricing notices
because retail employees are not trained to provide disclosures. In
addition, cash registers are not capable of printing full-sized
disclosures. Commenters also noted that providing notices at the point
of sale could be embarrassing to consumers and would raise concerns
about the disclosure of sensitive information. Some commenters
suggested that the Agencies allow the notice to be provided within a
reasonable time after the first transaction, such as when a credit card
is mailed to a consumer or within 30 days after consummation. Other
commenters suggested that the Agencies permit split notices, where the
static portions of the notices are delivered at the time of application
and the dynamic portions of the notice are delivered at a later time.
Although the Agencies generally believe that the notice is likely
to have the greatest utility if it is provided early enough in a
transaction to encourage a consumer to check his or her consumer report
for inaccuracies, the Agencies also agree with many of the concerns
raised by commenters. Accordingly, the Agencies have added a special
timing provision in the final rules for certain instant credit
scenarios. Under the final rules, when credit under an open-end credit
plan is granted, extended, or provided to a consumer in person or by
telephone for the purpose of financing the contemporaneous purchase of
goods or services, any risk-based pricing notice required to be
provided pursuant to this subpart (or the disclosures permitted under
Sec. ----.74(e) or (f)) may be provided at the earlier of: the time of
the first mailing by the person to the consumer after the decision is
made to approve the grant, extension, or other provision of open-end
credit, such as in a mailing containing the account agreement or a
credit card; or within 30 days after the decision to approve the grant,
extension, or other provision of credit. This special provision applies
only to contemporaneous purchase credit transactions by telephone or in
person. The Agencies do not believe that the same operational and
privacy concerns apply to online credit transactions. Therefore, in the
final rules, the general timing requirements apply when providing risk-
based pricing notices for online contemporaneous purchase credit
transactions.
Section ----.74 Exceptions
Proposed Sec. ----.74 set forth a number of exceptions to the
general requirements regarding risk-based pricing notices. Each
exception is discussed below.
Application for Specific Terms Exception
Proposed paragraph (a) provided that notice is not required if the
consumer applied for specific material terms and was granted those
terms. This exception does not apply if the specific material terms
were specified by the person after the consumer applied for or
requested credit and after the person obtained a consumer report. This
exception implemented the statutory exception in FCRA section
615(h)(3)(A). The proposed exception clarified 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)
explained that if a consumer received 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 would not be required if
the consumer applied for and received a credit card with that
advertised rate. This would be the result because the creditor set the
material terms of the offer before, not after, the consumer applied for
or requested the credit.
Commenters believed that the proposed exception was appropriate. In
the final rules, the application for specific terms exception in Sec.
----.74(a) is adopted as proposed, with some non-substantive changes
for clarity.
Adverse Action Exception
Proposed paragraph (b) provided 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 implemented the statutory
exception in FCRA section 615(h)(3)(B). The proposed exception applied
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.
Commenters believed that the proposed exception was appropriate. In
the final rules, the adverse action exception in Sec. ----.74(b) is
adopted as proposed, with some non-substantive changes for clarity.
Prescreened Solicitations Exception
Proposed paragraph (c) provided 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) stated 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. The proposed exception applied regardless of
the terms the creditor may offer to other consumers in other firm
offers of credit. In other words, under the proposal, a creditor would
not have been 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 more
favorable material terms to another group of consumers.
The Agencies noted that this exception applied 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 did 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 would be required to provide a
risk-based pricing notice to that consumer.
Commenters' views on the proposed exception varied. Some commenters
believed this exception was appropriate. Other commenters believed this
exception was unnecessary, arguing that because no credit is extended
as part of a prescreened solicitation, those solicitations fall outside
of the scope of the rule.
The Agencies continue to believe that requiring a notice in
connection with prescreened solicitations would not significantly
benefit consumers, but would impose substantial burdens on creditors
and the credit reporting system. Prescreened solicitations typically
are sent to many consumers who meet specific credit-granting criteria
provided by a creditor. 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
[[Page 2740]]
prescreened solicitation, a risk-based pricing notice would have no
relevance.
This exception is consistent with the Agencies' determination that
the appropriate time to provide 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, the consumer has not made an
application or otherwise indicated any interest in the credit. The
exception also is consistent with the rule of construction that
consumers should receive only one risk-based pricing notice per credit
transaction, as discussed below. Absent this exception, some consumers
who respond to prescreened solicitations would receive multiple notices
in connection with the transaction: the first when 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 also believe the prescreened solicitations exception
provides an important clarification of the statutory requirements.
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)--may
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 determine whether, and under what
circumstances, such solicitations are ``in connection with'' an
application for credit.
In the final rules, the prescreened solicitations exception in
Sec. ----.74(c) is adopted as proposed, with some non-substantive
changes to better explain the purpose of the exception.
Credit Score Disclosure Exceptions
The Agencies proposed three exceptions to the risk-based pricing
notice requirement for creditors that provide a credit score disclosure
to consumers, which are described more fully below. The credit score
disclosure generally would 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 the proposed exceptions, a creditor would provide this
disclosure to any consumer who requested an extension of credit. Thus,
a creditor would not need to apply a test to determine which consumers
likely were offered or received materially less favorable material
terms. The Agencies also proposed an alternate form of the notice to be
provided to consumers for whom credit scores are unavailable. As
discussed below, these exceptions were proposed 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.
Unlike a risk-based pricing notice given under proposed Sec. ----.72,
the notice provided with the credit score disclosure under these
proposed exceptions would not give rise to an independent right to a
free consumer report.
Proposed Credit Score Disclosure Exception for Credit Secured by
Residential Real Property
Proposed paragraph (d) provided 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 would permit
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 rules
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 any
consumer who requested credit in connection with loans secured by real
property and would not be required to compare the terms offered to
different consumers, as is required by the general rule.
Proposed paragraph (d)(1) set forth the requirements that a
creditor would be required to meet to avail itself of the exception and
stated that a creditor is not required to provide a risk-based pricing
notice if it complies with this subsection. Paragraph (d)(1)(i)
provided 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) set 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) would 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.
Proposed paragraph (d)(1)(ii)(D) would have required 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 inquiries made
with respect to that consumer report is one of the factors).
For many consumers, a disclosure of the credit score number alone
would 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) contained
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. The Agencies believed that this
information would 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 was not available from the person providing the
[[Page 2741]]
score, or if the creditor disclosed a proprietary score, then the
creditor could base the distribution or comparison on its own consumers
who have been scored using the model.
Under the proposal, if a creditor chose to disclose the credit
score distribution, this information could 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 would have to illustrate the percentage of consumers
with credit scores within the range of scores reflected by that bar. A
creditor would not be 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 would be deemed compliant.
Alternatively, the proposal would permit the notice to 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 would be a clear and
readily understandable means of providing this information.
Proposed paragraph (d)(1)(ii)(F) would have required 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.
Proposed paragraphs (d)(1)(ii)(G) and (d)(1)(ii)(H) would have
required 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) would have required 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.
Proposed paragraph (d)(2) set forth the form that the credit score
disclosure must take in order to satisfy the exception. Under the
proposal, 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 would also be
provided to the consumer in writing in a form retainable by the
consumer. The requirement that the notice be in writing would be
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) described the timing requirements for the
notice that would satisfy the exception. The notice would be 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.'' It was
the Agencies' understanding that industry practice is generally to
provide the credit score disclosure within three business days of
obtaining a credit score and the Agencies would expect the integrated
disclosure generally would be provided within the same timeframe.
Proposed paragraph (d)(4) stated that a model form of the notice
described in proposed 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.
Under the proposal, appropriate use of this model form was deemed to be
a safe harbor for compliance with the exception. Use of the model form
was optional.
Proposed Credit Score Disclosure Exception for Non-Mortgage Credit
Proposed paragraph (e)(1) set 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 could 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 could comply with the rules by disclosing a consumer's
credit score along with certain additional information.
This proposed exception was similar to the exception proposed for
credit secured by residential real property. Consistent with the
exception for credit secured by residential real property set forth in
proposed paragraph (d), the Agencies proposed this exception under the
authority conferred by FCRA section 615(h)(6)(iii). Creditors could
provide this notice to any consumer who requested credit 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) set forth the requirements that a
creditor must meet in order to satisfy the exception and stated that a
person is not required to provide a risk-based pricing notice if it
complies with this subsection. Proposed paragraph (e)(1)(i) stated 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)
could not use this exception, but would need to use the exception
described in proposed paragraph (d). Proposed paragraphs (e)(1)(ii)(A)-
(e)(1)(ii)(C) would have required the notice to include contextual
information identical to that set forth in proposed paragraphs
(d)(1)(ii)(A)-(d)(1)(ii)(C) for credit secured by residential real
property.
Proposed paragraph (e)(1)(ii)(D) would have required 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 would
be required to provide a credit score that was used in connection with
the credit decision, though a person that uses a credit score that was
not created by a consumer reporting agency, such as a proprietary
score, would be 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 would be permitted to rely on this exception by purchasing and
providing to the consumer a credit score and associated information it
obtains
[[Page 2742]]
from an entity regularly engaged in the business of selling credit
scores. Also consistent with proposed paragraph (d), proposed paragraph
(e)(1)(ii)(E) would require disclosure of the range of possible credit
scores under the model used to generate the credit score disclosed to
the consumer.
Proposed paragraph (e)(1)(ii)(F) would have required 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 could 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. Alternatively, the notice
could inform the consumer by clear and readily understandable means how
his or her credit score compares to the scores of other consumers.
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) stated that the notice must contain the date on
which the credit score was created and proposed paragraph (e)(1)(ii)(H)
required the creditor to disclose the name of the consumer reporting
agency or other person that provided the credit score.
Proposed paragraphs (e)(1)(ii)(I)-(e)(1)(ii)(L) are identical to
proposed paragraphs (d)(1)(ii)(F)-(d)(1)(ii)(I) and would have required
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. Unlike the notice required by section 609(g),
the Agencies did not propose to require this notice to contain up to
four key factors that adversely affected the credit score. The Agencies
believe that the notice provides sufficient information to enable a
consumer to evaluate his or her credit score without including the key
factors.
Proposed paragraph (e)(2) set forth the form that the credit score
notice must take in order to satisfy the exception. These requirements
are the same as the form prescribed for the exception in proposed
paragraph (d), except that the form is not provided on or with the
notice required by section 609(g) of the FCRA. Proposed paragraph
(e)(3) described the timing requirements for the notice that would
satisfy the exception, which were also consistent with the timing
requirement for the exception for loans secured by residential real
property. Proposed paragraph (e)(4) stated 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. As
with the exception for loans secured by residential real property,
appropriate use of this model form is deemed to be a safe harbor for
compliance with the exception, and use of the model form is optional.
Final Credit Score Disclosure Exceptions for Credit Secured by
Residential Real Property and Non-Mortgage Credit
Many commenters supported the two credit score disclosure
exceptions. These comments stated that the exceptions would be
effective and should be retained in the final rules. Some commenters
believed the credit score disclosure exceptions were burdensome, would
cause confusion, and exceed the Agencies' statutory authority.
The Agencies continue to believe the credit score disclosure
exceptions are appropriate as an alternative means of complying with
the rules. The credit score disclosure 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 integrates the score disclosure with 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. 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. 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, a consumer will obtain
this valuable information without having to take action to request a
consumer report from a consumer reporting agency. Finally, 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. Accordingly, the credit
score disclosure exceptions are retained in the final rules as
proposed, with certain revisions as discussed below.
Commenters supported the Agencies' conclusion that receipt of an
exception notice does not trigger a free consumer report under section
612(b) of the FCRA. When a consumer receives an exception notice, the
consumer receives a free credit score as well as specific information
to enable the consumer to compare his or her credit score to the credit
scores of other consumers. Moreover, consumers who receive free credit
scores have other opportunities to obtain free consumer reports, such
as the free annual reports.
Some commenters requested that the Agencies clarify in the final
rules that a credit score disclosure exception should only be given to
those consumers who would otherwise receive a risk-based pricing
notice. The credit score disclosure exceptions were created to provide
an alternative to the risk-based pricing notices that was potentially
simpler for compliance purposes, but that also would provide consumers
with information of equal or greater value than the information a
consumer would receive in a risk-based pricing notice. Requiring
creditors to provide credit score disclosure exception notices only to
those who would otherwise receive the risk-based pricing notices would
not be consistent with the Agencies' intent to provide a simpler
alternative that could reduce the cost and burden associated with
determining which consumers must receive notices. Thus, the final rules
retain the requirement that in order to use these exceptions to the
risk-based pricing disclosure requirements, a person must provide an
exception notice to every consumer requesting an extension of credit
for a product for which the person uses risk-based pricing, even those
who would not otherwise receive a risk-based pricing notice. To clarify
this, paragraph (d)(1)(ii) in the final rules is revised to replace the
phrase ``the consumer'' with the phrase ``each consumer described in
paragraph (d)(1)(i) of this section.'' Similarly, paragraph (e)(1)(ii)
in the final rules is revised to replace the phrase ``the consumer''
with the phrase
[[Page 2743]]
``each consumer described in paragraph (e)(1)(i) of this section,''
where ``each consumer'' is each one who requests an extension of
credit.
One commenter believed that the Agencies' statement that a creditor
must provide a credit score disclosure exception notice to ``all''
consumers was too broad, noting that some consumers may not be entitled
to receive any type of notice under the rules. The Agencies agree that
some consumers would not receive an exception notice. For instance,
some consumers may fall outside of the scope of the rule completely,
such as consumers who apply for business credit or who apply for a type
of credit for which risk-based pricing is not used.
Creditors also do not need to provide an exception notice to a
consumer if one of the other exceptions applies. For example, consumers
who apply for and receive a specific rate or who receive an adverse
action notice pursuant to the exceptions under Sec. ----.74(a) and
Sec. ----.74(b), respectively, are not entitled to a notice. The
Agencies note, however, that reliance on the other exceptions may not
be possible in certain cases because the timing rules require the
credit score disclosure exception notices to be provided to the
consumer as soon as reasonably practicable after the credit score is
obtained. For example, a mortgage lender may obtain a consumer's credit
score and, in order to meet the timing requirements, provide an
exception notice to the consumer within several days. However, the
lender may ultimately determine after a more lengthy credit
underwriting process, that it will not extend credit to the consumer
and therefore provide an adverse action notice to the consumer.
The Agencies note that for purposes of providing credit score
disclosure exception notices to a consumer as soon as reasonably
practicable after a credit score is obtained, what is a reasonably
practicable time period may be different depending on the circumstances
of the transaction and the type of credit. For example, while it may be
reasonably practicable to provide a notice to a consumer in several
days in the mortgage lending context, what is reasonably practicable in
other forms of credit may be a shorter or longer time period.
Some commenters asked the Agencies to clarify the exception notice
requirements in circumstances where more than one credit score is used
in making a credit decision. Some commenters urged the Agencies to
permit creditors to disclose a single credit score, while another
commenter suggested the Agencies permit creditors to disclose either a
single credit score or all of the credit scores used in connection with
the credit decision.
In the final rules, new Sec. Sec. ----.74(d)(4) and (e)(4) have
been adopted to clarify the credit score disclosure exception
requirements in circumstances where creditors use multiple credit
scores to make a credit decision. When a creditor obtains two or more
credit scores from consumer reporting agencies, and uses one of those
credit scores in setting the material terms of credit granted,
extended, or provided to a consumer, for example, by using the low,
middle, high, or most recent score, the notice described in paragraphs
(d)(1)(ii) or (e)(1)(ii) of this section must include that credit score
and the other information required by that paragraph. When a creditor
obtains two or more credit scores from consumer reporting agencies and
uses multiple credit scores in setting the material terms of credit
granted, extended, or provided to a consumer, for example, by computing
the average of all the credit scores obtained, the notice described in
paragraph (d)(1)(ii) or (e)(1)(ii) of this section must include one of
those credit scores and the other information required by that
paragraph. At the creditor's option, the notice may include more than
one credit score along with the additional information specified in
Sec. ----.74(d)(1)(ii) or (e)(1)(ii) for each credit score disclosed.
For example, a creditor that uses consumer reports to set the
material terms of mortgage credit granted, extended, or provided to
consumers regularly requests credit scores from several consumer
reporting agencies and uses the low score when determining the material
terms it will offer to the consumer. That creditor must disclose the
low score in the notice described in paragraph (d)(1)(ii). A creditor
that uses consumer reports to set the material terms of mortgage credit
granted, extended, or provided to consumers regularly requests credit
scores from several consumer reporting agencies, each of which it uses
in an underwriting program in order to determine the material terms it
will offer to the consumer. That creditor may choose one of these
scores to include in the notice described in paragraph (d)(1)(ii).
The Agencies believe it is appropriate to require disclosure of
only a single credit score because requiring disclosure of multiple
scores would unnecessarily increase the complexity of the notices and
increase the compliance burden for creditors. Requiring disclosure of
multiple scores in these circumstances also would require disclosure of
accompanying information for each score, which would increase the
length of the notices, especially if the creditor disclosed how the
consumer's score compared to other consumers' scores in the form of bar
graphs. Moreover, the Agencies believe consumers may not benefit from
this additional information, could be confused by the disclosure of
multiple scores, and could be less likely to read a longer form.
Many commenters asked for clarification regarding the requirement
to disclose the distribution of credit scores among consumers or how
the credit score of the consumer receiving the notice compares to the
scores of other consumers, whether in the form of a bar graph or a
narrative. Some commenters suggested the Agencies should allow for a
general disclosure about how a credit score statistically compares with
others, rather than performing the comparison for each consumer. Some
commenters mistakenly believed that both the bar graph and the
narrative comparisons were required to be included in the notices.
Other commenters suggested that the Agencies clarify how often either
the bar graph or narrative must be updated. Commenters also asked
Agencies to clarify where creditors could obtain information to make
the appropriate comparisons. Alternatively, they asked the Agencies to
publish this information.
The final rules, like the proposal, require that creditors disclose
how a consumer compares to other consumers either in bar graph or in a
narrative, but not in both forms. While creditors may obtain the
information used to make a comparison from any source, the Agencies
expect that many creditors will obtain the information from the person
from whom the credit score is obtained. The final rules do not specify
how frequently this information must be updated. Rather, the Agencies
expect that the persons providing the information to the creditors will
update the information periodically as necessary. Accordingly, the
final rules retain the requirement to compare a consumer's credit score
to the credit scores of other consumers generally as proposed, but with
some changes for clarification. Sections ----.74(d)(1)(E) and (e)(1)(F)
have been revised to clarify that the consumers who should be
considered when determining the distribution of credit scores are those
who are scored under the same scoring model that is used to generate
the consumer's credit score.
A few commenters requested clarification regarding whether
creditors
[[Page 2744]]
may use the credit score disclosure exception for credit secured by
residential real property when providing a notice involving a
transaction for a cooperative unit, regardless of whether the property
is characterized as real property under state law. For these types of
transactions, the Agencies will deem a creditor to be in compliance
with the final rules if the creditor uses either the credit score
disclosure exception for credit secured by residential real property or
the credit score disclosure exception for non-mortgage credit.
One commenter asked the Agencies to clarify that any contractual
prohibitions imposed by consumer reporting agencies are void. Section
609(g)(2)(A) of the FCRA specifically provides that any contract
provision that prohibits the disclosure of a credit score by a person
who makes or arranges loans or by a consumer reporting agency is void.
The Agencies note that section 609(g)(2)(A) is not expressly limited to
residential real property loans. Moreover, California law requires
automobile dealers that use a consumer's credit score in connection
with an application for credit to disclose that credit score to the
consumer. The Agencies understand that contract provisions prohibiting
credit score disclosures have not been invoked by consumer reporting
agencies or other persons to prevent automobile dealers from disclosing
credit scores to satisfy the requirements of California law. Similarly,
the Agencies would not expect that contractual provisions would be
invoked to prevent non-mortgage creditors from providing credit score
disclosure exception notices for non-mortgage credit.
One commenter stated that permitting creditors to disclose a credit
score from a consumer reporting agency, rather than the proprietary
score used to make the credit decision, was appropriate. Two commenters
requested that the Agencies address whether using a credit score
obtained from a consumer reporting agency is permissible both for the
credit score disclosure exception for credit secured by residential
real property and the credit score disclosure exception for non-
mortgage credit.
A person relying upon one of the exceptions set forth in Sec. Sec.
----.74(d) or (e) generally would be required to provide to the
consumer a credit score that was used in connection with the credit
decision. If, however, the 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 by providing to the
consumer either the proprietary score or 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 uses a consumer
report, but not 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.
Some commenters believed that requiring disclosure of the credit
score creation date was appropriate and would be useful to consumers.
Other commenters believed such a requirement would impose undue
burdens. The credit score creation date is required to be disclosed to
the consumer pursuant to section 609(g) of the FCRA, and this
requirement has been incorporated into the disclosure requirements for
the exception for credit secured by residential real property to ensure
that the exception notice satisfies the requirements of section 609(g).
Therefore, the Agencies have determined that it is appropriate, and not
unduly burdensome, to retain the credit score creation date requirement
for both the exception for credit secured by residential real property
and the exception for non-mortgage credit.
One commenter requested that the Agencies allow creditors to use a
credit score disclosure exception notice in lieu of an account review
disclosure. The Agencies do not believe that the reasons for permitting
exception notices in lieu of risk-based pricing notices apply in the
case of account review notices. Account review notices do not require
the creditor to make comparisons with other consumers using the direct
comparison method or one of the alternative proxy methods. The Agencies
have crafted a simple test for determining which consumers must receive
risk-based pricing notices in the context of account reviews.
Therefore, the Agencies find no compelling need to mitigate compliance
burdens in the case of account reviews. Moreover, account review
notices provide a very precise statement of the reason the consumer is
receiving the notice. Unlike a risk-based pricing notice that can only
generalize that the consumer ``may'' have received less favorable
credit terms because of information in the consumer's consumer report,
the account review notice is precise in its disclosure that the
consumer did in fact receive less favorable terms. The account review
disclosures also provide for free consumer reports. Thus, the exception
notices do not provide as good or better information than the account
review notice, and this suggestion has not been adopted in the final
rules.
Proposed Credit Score Disclosure Exception--No Credit Score Available
In the proposal, the Agencies recognized 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) created an exception to the risk-based
pricing notice requirement for creditors that regularly use one of 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 would be required to
provide a notice meeting the requirements of paragraph (f)(1)(ii).
Proposed paragraph (f)(1) set forth the requirements for the
exception that applies when no credit score is available. Proposed
paragraph (f)(1)(i) stated 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, but be unable to obtain a credit score for the particular
consumer from the consumer reporting agency from which the person
regularly obtains credit scores. Proposed paragraph (f)(1)(ii)
clarified 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 would not be 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 did 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
would not need to 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
[[Page 2745]]
consumer reporting agency that is based on traditional forms of data,
such as credit card, mortgage, and installment loan accounts, would not
have to 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) set forth the specific content of
the notice to be provided to the consumer. The notice would be required
to 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, and that this is generally due to
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 would be required 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,
and provide the consumer with information about how to obtain his or
her consumer report. The notice would 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 must give
contact information for the centralized source from which consumers can
obtain their free annual reports. Finally, the notice would include a
statement directing the consumer to the Web sites of the Board and the
Commission to obtain more information about consumer reports.
This notice, like the two credit score disclosure exception
notices, would 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. A consumer who received this personalized
notice containing specific information regarding his or her limited
credit history would not receive a separate risk-based pricing notice.
Proposed paragraph (f)(2) illustrated this exception with an
example. The example described 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
could not rely on the exception in proposed paragraph (f) of this
section, but must satisfy the requirements of paragraph (e) and
disclose the score obtained.
Proposed paragraph (f)(3) set forth the form that the notice must
take in order to satisfy the exception for circumstances where a credit
score is not available. Proposed paragraph (f)(4) described the timing
requirements for the notice that will satisfy the exception. Proposed
paragraph (f)(5) stated 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. These requirements were
intended to be consistent with the comparable requirements for the
exceptions in proposed paragraphs (d) and (e).
Final Credit Score Disclosure Exception--No Credit Score Available
Commenters generally believed the credit score disclosure exception
for circumstances where no credit score is available was appropriate.
The Agencies conclude 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. The Agencies continue to believe that 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. Therefore, paragraph (f) of the final rules
is adopted as proposed, with several non-substantive changes.
Other Suggested Exceptions
Finally, commenters requested the inclusion of certain other
exceptions in the final rules. A few commenters believed there should
be an exception for credit extended in connection with a private
banking relationship available only to high net worth consumers. One
commenter also believed accommodation loans made to owners and
executives of commercial accounts should be excepted because such loans
are made to more sophisticated borrowers who would derive little
benefit from the risk-based pricing notice. Two commenters believed
there should be an exception for non-residential mortgage transactions
with amounts financed in excess of $50,000. Another commenter suggested
the Agencies create an exception for situations where a consumer
withdraws a credit application before the creditor has provided a
notice.
The Agencies have determined that it is not appropriate to provide
exceptions from the final rules for certain transactions based on the
financial condition of a consumer or the value of the transaction. It
is challenging to define appropriate metrics to differentiate consumers
and consumer transactions based on the perceived financial
sophistication of the participating consumer. Moreover, such metrics
tend to become obsolete over time. In instances where a consumer
withdraws an application before a creditor has provided a notice, no
exception is necessary because a creditor generally is only required to
provide a risk-based pricing notice before consummation or the first
transaction under an open-end plan. For the foregoing reasons, no
further exceptions have been added to the final rules.
Section ----.75 Rules of Construction
Proposed Sec. ----.75 set forth two rules of construction.
Proposed paragraph (a) stated that a consumer generally is entitled to
no more than one risk-based pricing notice under proposed Sec. --
--.72(a) or (c) or one notice under proposed Sec. ----.74(d), (e), or
(f), for each grant, extension, or other provision of credit. Because
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, the Agencies generally did
not
[[Page 2746]]
interpret the statute as requiring the consumer to receive more than
one risk-based pricing notice in connection with a single extension of
credit. The Agencies also did not believe that consumers would benefit
by receiving multiple notices or multiple free consumer reports in
connection with a single credit extension. Rather, the Agencies
believed that one notice would be sufficient to encourage a consumer to
check his or her consumer report for any errors. However, even if a
consumer had previously received a risk-based pricing notice, another
notice would be required as a result of an account review, if the
conditions set forth in proposed Sec. ----.72(d) have been met.
Commenters generally believed that requiring only one notice per
credit extension is appropriate. Many commenters, however, believed the
Agencies should also clarify how the rule applies to transactions
involving multiple consumers, such as joint applicants. Some commenters
suggested that the Agencies require creditors to give one notice to the
primary consumer, if a primary consumer is readily apparent, as is
required with adverse action notices under Regulation B. Other
commenters suggested requiring that notice be given only to the
consumer whose credit score served as the basis for the loan terms.
Others suggested the Agencies require that a separate notice be given
to each consumer when individual credit scores are disclosed.
The one-notice-per-transaction rule of construction is adopted as
proposed in paragraph (a) of the final rules. New paragraph (c),
however, has been added to the final rules to address transactions
involving multiple consumers. Paragraph (c) clarifies that for risk-
based pricing notices, in a transaction involving two or more consumers
who are granted, extended, or otherwise provided credit, a person must
provide a notice to each consumer. If the two consumers have the same
address, a person may satisfy the requirements by providing a single
notice addressed to both consumers. If the consumers do not have the
same address, a person must provide a notice to each consumer. For
credit score disclosure exception notices, a person must provide a
separate notice to each consumer who is granted, extended, or otherwise
provided credit in a transaction involving two or more consumers.
Whether the consumers have the same address or not, the person must
provide a separate notice to each consumer. Each separate notice must
contain only the credit score(s) of the consumer to whom the notice is
provided, and not the credit score(s) of the other consumer. The final
rules include examples to illustrate the notice requirements for
multiple consumers.
Proposed paragraph (b) set forth the rules governing multi-party
transactions. Proposed paragraph (b)(1) stated 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)
clarified 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) illustrated the rules of construction with several
examples pertaining to auto finance transactions.
Commenters generally supported requiring the initial creditor,
rather than a purchaser or assignee, to provide the notice. However, as
discussed above in Sec. ----.72, some commenters disagreed with this
approach in the context of auto lending, since contracts for auto loans
are often assigned immediately after the credit is extended.
The Agencies continue to believe it is appropriate for the initial
creditor to provide a notice. Therefore, the provision requiring the
person to whom the loan obligation is initially payable to provide a
risk-based pricing notice, when appropriate, is adopted as proposed in
paragraph (b) of the final rules.
Model Forms
Proposed Appendix H of the Board's rules and Appendix B of the
Commission's rules contained model forms that the Agencies prepared to
facilitate compliance with the rules. Two of the model forms were for
risk-based pricing notices, and three of the model forms were for the
credit score disclosure exceptions. Each of the model forms was
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 were for use in
complying with the general risk-based pricing notice requirements in
Sec. ----.72. Model forms H-2 and B-2 were for risk-based pricing
notices given in connection with account review. Model forms H-3 and B-
3 were for use in connection with the credit score disclosure exception
for loans secured by residential real property. Model forms H-4 and B-4
were 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 were 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, was
designed to communicate key information in a clear and readily
understandable manner.
Although the Agencies did not test the proposed model forms with
consumers, the design of the model forms was 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 TILA.\13\ 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.\14\
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\13\ See 72 FR 32,948, 32,951 (June 14, 2007) (Truth in
Lending); 72 FR 14,940, 14,944 (Mar. 29, 2007) (Privacy).
\14\ 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.
---------------------------------------------------------------------------
Several commenters believed the model forms were appropriate to
ensure consistency and simplify compliance with the rules. One
commenter believed the Agencies should allow creditors to provide
notices in any ``clear and conspicuous'' manner while still retaining
the safe harbor and substitute model clauses for model forms. Other
commenters believed the model forms should be shorter and more
succinct.
The Agencies believe the provision for model forms is appropriate,
and that the length of the forms is appropriate in light of the content
that must be communicated to the consumer. A creditor is permitted to
change the forms by rearranging the format without modifying the
substance of the disclosures and still rely upon the safe harbor.
However, as the Agencies learned from consumer testing on privacy
notices and credit card disclosures, format changes can have a
significant effect on consumer comprehension.\15\ Therefore,
rearrangement of the model forms must not be so extensive as to affect
materially the substance, clarity, comprehensibility, or meaningful
[[Page 2747]]
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. On the other hand, some format changes will
not have a material adverse effect on the model forms, and may even
enhance consumer comprehension. A creditor is permitted to 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.
---------------------------------------------------------------------------
\15\ See 74 FR 5,244 (Jan. 29, 2009) (final revisions to credit
card disclosures); 72 FR 14,940 (March 29, 2007) (proposed short-
form privacy notice).
---------------------------------------------------------------------------
Some commenters supported providing flexibility with regard to the
content of the model forms, but asked the Agencies to clarify further
the ways in which creditors could modify the notices, while still
retaining the safe harbor. Some commenters suggested specific changes
to the model forms that the Agencies should deem permissible without
losing the safe harbor.
The Agencies agree that creditors should have some additional
flexibility to modify the content of the model forms, while still
retaining the safe harbor. Language has been added to the final rules
to clarify that technical modifications to the language of the forms
are permitted. More examples also have been added to the list of
examples of acceptable changes to the model forms: substitution of the
words ``credit'' and ``creditor'' or ``finance'' and ``finance
company'' for the terms ``loan'' and ``lender''; including pre-printed
lists of the sources of consumer reports or consumer reporting agencies
in a ``check-the-box'' format; and including the name of the consumer,
transaction identification numbers, a date, and other information that
will assist in identifying the transaction to which the form pertains.
The final rules also specifically state that unacceptable changes to
the model forms include: providing model forms on register receipts or
interspersed with other disclosures and eliminating empty lines and
extra spaces between sentences within the same section.
Some commenters asked the Agencies to clarify whether creditors
must disclose in both bar graph and narrative form the distribution of
credit scores and how a consumer's credit score compares to those
scores. A creditor is permitted to use any clear and readily
understandable means to convey this information and that information
must only be disclosed using one format. A creditor may use 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 could
include a different form of graphical presentation of the distribution.
Alternatively, a creditor could 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
must 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, does not satisfy the clear and readily understandable standard.
The model forms are adopted generally as proposed, with revisions
to address appropriate modifications that can be made to the model
forms without losing the safe harbor and other revisions for
clarification. Use of the model forms by creditors is optional. If a
creditor uses an appropriate Appendix H or Appendix B model form, or
modifies a form in accordance with the rules or the instructions to the
appendix, that creditor is deemed to be acting in compliance with the
provisions of Sec. Sec. ----.72, ----.73, or ----.74, as applicable,
of the final rules. Appropriate use of model form H-3 or model form B-3
is also intended to be compliant with the disclosure that may be
required under section 609(g) of the FCRA.
Implementation Date
Industry commenters requested that the Agencies provide a
sufficient period of time to implement the final rules. These
commenters noted that they would have to develop and update systems and
procedures to comply with the final rules. Appropriate implementation
periods suggested by various commenters were two years, 18 months, and
one year.
The Agencies have determined that 12 months is the appropriate
implementation period. The Agencies believe that this provides a
sufficient amount of time for creditors to implement the final rules.
It will allow creditors to determine the method of disclosure they will
use to implement the final rules and adjust their systems and make
other changes accordingly. Moreover, for creditors who elect to use the
credit score proxy method, this implementation period will also allow
for time to take a sample and calculate a corresponding cutoff score.
At the same time, this implementation period balances the need for
creditors to have a sufficient period of time to prepare for
implementation of the final rules with the Agencies' goal of providing
disclosures based on risk-based pricing to consumers in a timely
manner.
V. Regulatory Analysis
A. Paperwork Reduction Act
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 (the Agencies) have reviewed the final rules
and determined that they contain collections of information subject to
the PRA. The collections of information required by these rules are
found in 12 CFR 222.72(a), (c), and (d); 12 CFR 222.74(d), (e), and
(f); 16 CFR 640.72(a), (c), and (d); and 16 CFR 640.74(d), (e), and
(f).
An agency may not conduct or sponsor, and a respondent is not
required to respond to, an information collection unless it displays a
currently valid OMB control number. The Commission submitted the
information collection requirements contained in these joint final
rules to OMB for review and approval under the PRA; OMB withheld formal
action on the rule pending its further review of the joint final rule.
The Board, under its delegated authority from OMB, has approved the
implementation of this information collection; OMB control number is
7100-0308.\16\
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\16\ 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 final 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 final 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 final 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.
In the proposal, the Agencies estimated that respondents
potentially affected by the new notice and
[[Page 2748]]
disclosure requirements would take, on average, 40 hours (one business
week) to reprogram and update systems, provide employee training, and
modify model notices with respondent information to comply with
proposed requirements. In addition, the Agencies estimated that, on a
continuing basis, respondents would take five hours per month to modify
and distribute notices to consumers. The Agencies recognized that the
amount of time needed for any particular creditor subject to the
proposed requirements may be higher or lower, but believed that this
average figure was a reasonable estimate.
Comments Received:
The Agencies received two comments, one from a bank and another
from a banking trade association, in response to the PRA section of the
proposal. The commenters asserted that the time needed to update
database systems may exceed the 40 hours estimated by the Agencies. The
commenters, however, did not provide specific alternatives to this
estimate.
Burden Statement:
The Agencies continue to believe that 40 hours is a reasonable
estimate of the average amount of time to modify existing database
systems. The Agencies have provided two alternative methods which
creditors could use to determine which consumers must receive a risk-
based pricing notice. The methods are intended to simplify compliance
with the risk-based pricing requirement when it is not operationally
feasible to make direct comparisons between consumers. Moreover, the
Agencies have provided exceptions to the final rule, whereby creditors
may fulfill their compliance obligation by providing credit score
disclosures to consumers who apply for and are granted credit. Because
creditors may provide credit score disclosures to consumers without
regard to the terms offered, supplying these disclosures would
eliminate the need for a creditor to perform an analysis to determine
which consumers must receive a disclosure. The Agencies also believe
that the availability of model notices may significantly reduce the
cost of compliance with the final rules.
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:
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'') pursuant to the FCRA. 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.
Number of Respondents: 18,173.
Estimated Time per Response: 40 hours (one business week) to
reprogram and update systems, provide employee training, and modify
model notices with respondent information to comply with final
requirements. Five hours per month to modify and distribute notices to
consumers on a continuing basis.
Total Estimated Annual Burden: 1,817,300 hours.\17\
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\17\ The increase of 1,380 hours corrects a mathematical error
caused by a transposition of 1,815,980 hours published in the
proposed rules.
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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 that are subject to the Commission's
administrative enforcement pursuant to section 621(a)(1) of the FCRA
(15 U.S.C. 1681s(a)(1)). These businesses include, among others,
nonbank mortgage lenders, consumer lenders, utilities, state-chartered
credit unions, and automobile dealers and retailers that directly
extend credit to consumers for personal, non-business uses.
Number of Respondents: 199,500.\18\
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\18\ 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 Credit Union National
Association for the number of non-federal credit unions. See http://www.ncua.gov/news/quick_facts/Facts2007.pdf. For the purpose 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 Time per Response: 40 hours (1 business week) to
reprogram and update systems, provide employee training, and modify
model notices with respondent information to comply with final
requirements. Five hours per month to modify and distribute notices to
consumers on a continuing basis.
Total Estimated Annual Burden: 14,630,000 hours (rounded). The
estimated annual labor cost associated with this burden is $252,048,000
(rounded).
Total 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 final rules, 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. In
the NPRM analysis, Commission staff estimated labor cost for such
employees to be at an hourly rate of $38.93, based on 2006 Bureau of
Labor Statistics (BLS) data for management occupations. However, based
on more current available BLS data, the Commission is revising upward
the prior estimate to $42.15.\19\ Commission staff assumes that
personnel involved in sales and similar responsibilities will update
and distribute the notices. In the NPRM analysis, Commission staff used
2006 BLS data to estimate labor costs for these employees to be at an
hourly rate of $11.14. However, based on more current BLS data, the
Commission is revising upward the prior estimate to $11.69.\20\
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\19\ This cost is derived from the median hourly wage for
management occupations found in the May 2009 National Occupational
Employment and Wage Estimates of the Bureau of Labor Statistics,
Table 1.
\20\ This cost is derived from the median hourly wage for sales
and related occupations found in the May 2009 National Occupational
Employment and Wage Estimates of the Bureau of Labor Statistics,
Table 1.
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Based on the above estimates and assumptions, the estimated average
annual labor cost for all categories of covered entities under the
final rules is $252,048,000 (rounded to the nearest thousand) [{(40
hours x $42.15) + (180 hours x $11.69){time} x 199,500 / 3], or $1,263
per covered entity.\21\
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\21\ One commenter asserted that the rule was too costly. As
noted above, however, the cost per covered entity is relatively low,
particularly in comparison with the rule's benefits. These benefits
include (1) educating consumers about the role that their consumer
reports play in the pricing of credit; and (2) alerting consumers to
the existence of potentially negative information in their consumer
reports so that they may check their reports and correct any
inaccurate information. If more consumers check their credit
reports, as expected, the rule may also improve the accuracy of
credit reports generally. Thus, the Commission believes that the
benefits of the rule substantially outweigh the costs to those
engaged in risk-based pricing.
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[[Page 2749]]
Commission staff does not anticipate that compliance with the final
rules will require any new capital or other non-labor expenditures.
The Agencies have a continuing interest in the public's opinions of
our collections of information. At any time, comments regarding the
burden estimate, or any other aspect of this collection of information,
including suggestions for reducing the burden, may be sent to:
Board: Comments, identified by R-1316, may be submitted 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 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 form 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.'' \22\
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\22\ 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 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 PRA
should additionally be submitted to: Office of Information and
Regulatory Affairs, Office of Management and Budget, Attention: Desk
Officer for Federal Trade Commission. Comments should be submitted via
facsimile to (202) 395-5167 because U.S. postal mail at the OMB is
subject to 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.
B. Regulatory Flexibility Act
Board:
The Board prepared an initial regulatory flexibility analysis as
required by the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
(RFA) in connection with the proposed rule. Under section 605(b) of the
RFA, 5 U.S.C. 605(b), the regulatory flexibility analysis otherwise
required under section 604 of the RFA is not required if an agency
certifies, along with a statement providing the factual basis for such
certification, that the rule will not have a significant economic
impact on a substantial number of small entities. The rules 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.\23\ The size standard to be
considered a small business is: $175 million or less in assets for
banks and other depository institutions; and $7.0 million or less in
annual revenues for the majority of non-bank entities that are likely
to be subject to the rules. Based on its analysis and for the reasons
stated below, the Board certifies that these final rules will not have
a significant economic impact on a substantial number of small
entities.
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\23\ 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 Final 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
rules jointly 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 rules to fulfill their
statutory duty to implement the risk-based
[[Page 2750]]
pricing notice provisions of section 615(h) of the FCRA.
The SUPPLEMENTARY INFORMATION above contains information on the
objectives of the final rules.
2. Summaries of Issues Raised by Commenters
In connection with the proposed rule to implement the risk-based
pricing provisions in section 311 of the FACT Act, the Board sought
information and comment on any costs, compliance requirements, or
changes in operating procedures arising from the application of the
rule to small institutions. The Board received comments from a credit
union and from trade associations that represent both banks and credit
unions. The commenters asserted that compliance with the final rules
would increase costs. They also believed that performing an analysis to
determine which consumers must receive risk-based pricing notices would
be too burdensome and could result in small creditors providing risk-
based pricing notices to all consumers who apply for credit. These
comments, however, did not contain specific information about costs
that will be incurred or changes in operating procedures that will be
required to comply with the final rule. In general, the comments
discussed the impact of statutory requirements rather than any impact
that the Board's proposed rules themselves would generate. The Board
continues to believe that the final rules will not have a significant
impact on a substantial number of small entities.
3. Description of Small Entities to Which the Rules Apply
The 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 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 rules 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 primarily for
a business purpose.
The total number of small entities likely to be affected by the
final rules 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
Board and other federal bank and thrift regulatory agencies,\24\ there
are approximately 10,268 depository institutions that could be
considered small entities and that are potentially subject to the final
rules.\25\ The available data are insufficient to estimate the number
of non-bank entities that would be subject to the final rules 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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\24\ The Office of the Comptroller of the Currency, Board,
Federal Deposit Insurance Corporation, and Office of Thrift
Supervision.
\25\ The estimate includes 1,444 institutions regulated by the
Board and 4,357 federally-chartered credit unions, as determined by
the Board. The estimate also includes 676 national banks, 3,400
FDIC-insured state nonmember banks, and 391 savings associations.
See 74 FR 31484, 31506-31508 (Jul. 1, 2009).
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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 rules engage in
risk-based pricing based in whole or in part on consumer reports. The
rules 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.
4. Projected Reporting, Recordkeeping and Other Compliance Requirements
The compliance requirements of the rules are described in detail in
the SUPPLEMENTARY INFORMATION above.
The rules 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 rules. The rules
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 must 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 must analyze the rules. Subject to the exceptions set
forth in the final 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 rules. Persons required to provide
risk-based pricing notices also must design, generate, and provide
those notices to the consumers that they have identified.
Alternatively, a person that complies with the rules 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. In the case of automobile lending
transactions, it may also be necessary for a person to arrange to have
an auto dealer or other party provide risk-based pricing notices or
credit score disclosures to consumers on its behalf and maintain
reasonable policies and procedures to verify that the auto dealer or
other party provides such notices to consumers within applicable time
periods.
5. Steps Taken To Minimize the Economic Impact on Small Entities
The Board has sought to minimize the economic impact on small
entities by adopting rules that are consistent with those adopted by
the Commission; providing creditors with potentially less burdensome
alternatives to the direct comparison method; permitting creditors to
fulfill their compliance obligation by providing credit score
disclosures to consumers who apply for and are granted credit; and
providing model notices to ease creditors' compliance burden.
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.
[[Page 2751]]
The Commission hereby certifies that the final rule will not have a
significant economic impact on a substantial number of small business
entities. The Commission recognizes that the final rule will affect
some small business entities; however we do not expect that a
substantial number of small businesses will be affected or that the
final rule will have a significant economic impact on them.
The Commission continues to believe that a precise estimate of the
number of small entities that fall under the final rule is not
feasible. The Commission did not receive any comments relating to the
number of small entities which would be affected by the final rule. Nor
did we receive any comments on the cost and burden on small entities of
complying with the final rule. However, based on the Commission's own
experience and knowledge of industry practices, the Commission
continues to believe that the cost and burden to small entities of
complying with the final rule are minimal. Accordingly, this document
serves as notice to the Small Business Administration of the agency's
certification of no effect. Nonetheless, the Commission has decided to
publish a FRFA with the final rule. Therefore, the Commission has
prepared the following analysis:
1. Need for and Objectives of the Rule
The FTC is charged with enforcing the requirements of section 311
of the FACT Act (which amends section 615 of the FCRA by adding a new
subsection (h)) which requires that a risk-based pricing notice be
provided to consumers in certain circumstances. The rule is generally
intended to improve the accuracy of consumer reports by alerting
consumers to the existence of potentially negative information in their
consumer reports so that consumers may check their reports for accuracy
and correct any inaccurate information. In addition, section 311
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. In this action, the
FTC promulgates final rules that would implement these requirements of
the FACT Act.
2. Significant Issues Received by Public Comment
The Commission received a number of comments in response to the
proposed rule. Some of the comments addressed the effect of the
proposed rule on businesses generally, but none identified small
businesses as a particular category.
Two commenters suggested that the FTC staff has underestimated the
amount of time and effort it would take businesses of all sizes to
comply with the proposed rule. However, these commenters did not
explain why they felt the Commission's estimate that compliance with
the rule would take businesses on average 40 hours (1 business week)
during the first year, and 5 hours per month on a continuing basis
thereafter, was too low. These comments also did not offer any
alternate time estimates. As explained in the PRA section, the
Commission continues to believe that these time estimates are accurate
and they remain unchanged in the final rule.
3. Small Entities to Which the Final Rule Will Apply
The total number of small entities likely to be affected by the
final rule 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.\26\ The Commission did not receive any comments to the IRFA on
the number of small entities that will be affected by the final rule.
The final rule does 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.
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\26\ 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.
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4. Projected Reporting, Recordkeeping and Other Compliance Requirements
The final rule is a disclosure rule that 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 final rule. The final 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 final rule will involve some expenditure of time and resources
for entities to comply, although Commission staff anticipates that the
costs per entity 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. Cost
estimates for compliance with the final
[[Page 2752]]
rule are described in detail in the PRA section of this Notice.
To minimize these costs, the final 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 final
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 final rule will place a significant burden on small
entities.
5. Steps Taken To Minimize Significant Economic Impact of the Rule on
Small Entities
The Commission considered whether any significant alternatives,
consistent with the purposes of the FACT Act, could further minimize
the final rule's impact on small entities. The FTC asked for comment on
this issue and received none. The final rule provides 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. A business may prefer to deliver these notices
electronically. 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 final rule.
Similarly, the final 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 final rule.
Some commenters requested that the FTC delay implementation of the
final rule for up to two years in order that businesses may update
software, develop and implement risk-based pricing procedures, and
adequately train staff on the new rule. The agencies have set a
compliance deadline that gives all affected entities one year in which
to implement the final regulations. The Commission believes that one
year is an adequate amount of time for businesses to reprogram and
update systems to incorporate these new notice requirements, to provide
employee training, and to modify model notices with respondent
information to comply with the final rule.
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
0
For the reasons discussed in the joint preamble, the Board of Governors
of the Federal Reserve System amends 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)
0
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.
0
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 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 are
substantively identical to the Federal Trade Commission's
(Commission's) risk-based pricing rules in 16 CFR 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 (15 U.S.C. 1681m(h)).
(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:
[[Page 2753]]
(a) Adverse action has the same meaning as in 15 U.S.C.
1681a(k)(1)(A).
(b) 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.
(c) Closed-end credit has the same meaning as in 12 CFR
226.2(a)(10).
(d) Consumer has the same meaning as in 15 U.S.C. 1681a(c).
(e) Consummation has the same meaning as in 12 CFR 226.2(a)(13).
(f) Consumer report has the same meaning as in 15 U.S.C. 1681a(d).
(g) Consumer reporting agency has the same meaning as in 15 U.S.C.
1681a(f).
(h) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(i) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5).
(j) Credit card has the same meaning as in 15 U.S.C. 1681a(r)(2).
(k) Credit card issuer has the same meaning as in 15 U.S.C.
1681a(r)(1)(A).
(l) Credit score has the same meaning as in 15 U.S.C.
1681g(f)(2)(A).
(m) Firm offer of credit has the same meaning as in 15 U.S.C.
1681a(l).
(n) Material terms means--
(1) (i) Except as otherwise provided in paragraphs (n)(1)(ii) and
(n)(3) of this section, 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)(1)(ii) or 12 CFR 226.6(b)(2)(i), excluding any
temporary initial rate that is lower than the rate that will apply
after the temporary rate expires, 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, and any fixed
annual percentage rate option for a home equity line of credit;
(ii) In the case of a credit card (other than a credit card that is
used to access a home equity line of credit or a charge card), the
annual percentage rate required to be disclosed under 12 CFR
226.6(b)(2)(i) that applies to purchases (``purchase annual percentage
rate'') and no other annual percentage rate, or in the case of a credit
card that has no purchase annual percentage rate, the annual percentage
rate that varies based on information in a consumer report and that has
the most significant financial impact on consumers;
(2) In the case of closed-end credit, the annual percentage rate
required to be disclosed 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, the financial term that varies based on information in a consumer
report and that has the most significant financial impact on consumers,
such as a deposit required in connection with credit extended by a
telephone company or utility or an annual membership fee for a charge
card.
(o) Materially less favorable means, when applied to material
terms, that the terms granted, extended, or otherwise provided to a
consumer differ from the terms granted, extended, or otherwise provided
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, extended, or otherwise provided 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, extended,
or otherwise provided to the two consumers.
(p) 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 12 CFR Part 226).
(q) Person has the same meaning as in 15 U.S.C. 1681a(b).
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 which consumers must receive a notice. A person may
determine whether paragraph (a) of this section applies by directly
comparing the material terms offered to each consumer and the material
terms offered to other consumers for a specific type of credit product.
For purposes of this section, a ``specific type of credit product''
means one or more credit products with similar features that are
designed for similar purposes. Examples of a specific type of credit
product include student loans, unsecured credit cards, secured credit
cards, new automobile loans, used automobile loans, fixed-rate mortgage
loans, and variable-rate mortgage loans. As an alternative to making
this direct comparison, a person may make the determination by using
one of the following methods:
(1) Credit score proxy method--(i) In general. A person that sets
the material terms of credit granted, extended, or otherwise provided
to a consumer, based in whole or in part on a credit score, may comply
with the requirements of paragraph (a) of this section by--
(A) Determining the credit score (hereafter referred to as the
``cutoff score'') that represents the point at which approximately 40
percent of the consumers to whom it grants, extends, or provides credit
have higher credit scores and approximately 60 percent of the consumers
to whom it grants, extends, or provides credit have lower credit
scores; and
(B) Providing a risk-based pricing notice to each consumer to whom
it grants, extends, or provides credit whose credit score is lower than
the cutoff score.
(ii) Alternative to the 40/60 cutoff score determination. In the
case of credit that has been granted, extended, or provided on the most
favorable material terms to more than 40 percent of consumers, a person
may, at its option, set its cutoff score at a point at which the
approximate percentage of consumers who historically have been granted,
extended, or provided credit on material terms other than the most
favorable terms would receive risk-based pricing notices under this
section.
(iii) Determining the cutoff score--(A) Sampling approach. A person
that currently uses risk-based pricing with respect to the credit
products it offers must calculate the cutoff score by considering the
credit scores of all or a representative sample of the consumers to
whom it has granted, extended, or provided credit for a specific type
of credit product.
(B) Secondary source approach in limited circumstances. A person
that is a new entrant into the credit business, introduces new credit
products, or starts to use risk-based pricing with respect to the
credit products it currently offers may initially determine the cutoff
score based on information derived from appropriate market research or
relevant third-party sources for a specific type of credit product,
such as research or data from companies that develop credit scores. A
person that acquires a credit
[[Page 2754]]
portfolio as a result of a merger or acquisition may determine the
cutoff score based on information from the party which it acquired,
with which it merged, or from which it acquired the portfolio.
(C) Recalculation of cutoff scores. A person using the credit score
proxy method must recalculate its cutoff score(s) no less than every
two years in the manner described in paragraph (b)(1)(iii)(A) of this
section. A person using the credit score proxy method using market
research, third-party data, or information from a party which it
acquired, with which it merged, or from which it acquired the portfolio
as permitted by paragraph (b)(1)(iii)(B) of this section generally must
calculate a cutoff score(s) based on the scores of its own consumers in
the manner described in paragraph (b)(1)(iii)(A) of this section within
one year after it begins using a cutoff score derived from market
research, third-party data, or information from a party which it
acquired, with which it merged, or from which it acquired the
portfolio. If such a person does not grant, extend, or provide credit
to new consumers during that one-year period such that it lacks
sufficient data with which to recalculate a cutoff score based on the
credit scores of its own consumers, the person may continue to use a
cutoff score derived from market research, third-party data, or
information from a party which it acquired, with which it merged, or
from which it acquired the portfolio as provided in paragraph
(b)(1)(iii)(B) until it obtains sufficient data on which to base the
recalculation. However, the person must recalculate its cutoff score(s)
in the manner described in paragraph (b)(1)(iii)(A) of this section
within two years, if it has granted, extended, or provided credit to
some new consumers during that two-year period.
(D) Use of two or more credit scores. A person that generally uses
two or more credit scores in setting the material terms of credit
granted, extended, or provided to a consumer must determine the cutoff
score using the same method the person uses to evaluate multiple scores
when making credit decisions. These evaluation methods may include, but
are not limited to, selecting the low, median, high, most recent, or
average credit score of each consumer to whom it grants, extends, or
provides credit. If a person that uses two or more credit scores does
not consistently use the same method for evaluating multiple credit
scores (e.g., if the person sometimes chooses the median score and
other times calculates the average score), the person must determine
the cutoff score using a reasonable means. In such cases, use of any
one of the methods that the person regularly uses or the average credit
score of each consumer to whom it grants, extends, or provides credit
is deemed to be a reasonable means of calculating the cutoff score.
(iv) Credit score not available. For purposes of this section, a
person using the credit score proxy method who grants, extends, or
provides credit to a consumer for whom a credit score is not available
must assume that the consumer receives credit on material terms that
are materially less favorable than the most favorable credit terms
offered to a substantial proportion of consumers from or through that
person and must provide a risk-based pricing notice to the consumer.
(v) Examples. (A) A credit card issuer engages in risk-based
pricing and the annual percentage rates it offers to consumers are
based in whole or in part on a credit score. The credit card issuer
takes a representative sample of the credit scores of consumers to whom
it issued credit cards within the preceding three months. The credit
card issuer determines that approximately 40 percent of the sampled
consumers have a credit score at or above 720 (on a scale of 350 to
850) and approximately 60 percent of the sampled consumers have a
credit score below 720. Thus, the card issuer selects 720 as its cutoff
score. A consumer applies to the credit card issuer for a credit card.
The card issuer obtains a credit score for the consumer. The consumer's
credit score is 700. Since the consumer's 700 credit score falls below
the 720 cutoff score, the credit card issuer must provide a risk-based
pricing notice to the consumer.
(B) A credit card issuer engages in risk-based pricing, and the
annual percentage rates it offers to consumers are based in whole or in
part on a credit score. The credit card issuer takes a representative
sample of the consumers to whom it issued credit cards over the
preceding six months. The credit card issuer determines that
approximately 80 percent of the sampled consumers received credit at
its lowest annual percentage rate, and 20 percent received credit at a
higher annual percentage rate. Approximately 80 percent of the sampled
consumers have a credit score at or above 750 (on a scale of 350 to
850), and 20 percent have a credit score below 750. Thus, the card
issuer selects 750 as its cutoff score. A consumer applies to the
credit card issuer for a credit card. The card issuer obtains a credit
score for the consumer. The consumer's credit score is 740. Since the
consumer's 740 credit score falls below the 750 cutoff score, the
credit card issuer must provide a risk-based pricing notice to the
consumer.
(C) An auto lender engages in risk-based pricing, obtains credit
scores from one of the nationwide consumer reporting agencies, and uses
the credit score proxy method to determine which consumers must receive
a risk-based pricing notice. A consumer applies to the auto lender for
credit to finance the purchase of an automobile. A credit score about
that consumer is not available from the consumer reporting agency from
which the lender obtains credit scores. The lender nevertheless grants,
extends, or provides credit to the consumer. The lender must provide a
risk-based pricing notice to the consumer.
(2) Tiered pricing method--(i) In general. A person that sets the
material terms of credit granted, extended, or provided to a consumer
by placing the consumer within one of a discrete number of pricing
tiers for a specific type of credit product, based in whole or in part
on a consumer report, may comply with the requirements of paragraph (a)
of this section by providing a risk-based pricing notice to each
consumer who is not placed within the top pricing tier or tiers, as
described below.
(ii) Four or fewer pricing tiers. If a person using the tiered
pricing method has four or fewer pricing tiers, the person complies
with the requirements of paragraph (a) of this section by providing a
risk-based pricing notice to each consumer to whom it grants, extends,
or provides credit who does not qualify for the top tier (that is, the
lowest-priced tier). For example, a person that uses a tiered pricing
structure with annual percentage rates of 8, 10, 12, and 14 percent
would provide the risk-based pricing notice to each consumer to whom it
grants, extends, or provides credit at annual percentage rates of 10,
12, and 14 percent.
(iii) Five or more pricing tiers. If a person using the tiered
pricing method has five or more pricing tiers, the person complies with
the requirements of paragraph (a) of this section by providing a risk-
based pricing notice to each consumer to whom it grants, extends, or
provides credit who does not qualify for the top two tiers (that is,
the two lowest-priced tiers) and any other tier that, together with the
top tiers, comprise no less than the top 30 percent but no more than
the top 40 percent of the total number of tiers. Each consumer placed
within the remaining tiers must receive a risk-
[[Page 2755]]
based pricing notice. For example, if a person has nine pricing tiers,
the top three tiers (that is, the three lowest-priced tiers) comprise
no less than the top 30 percent but no more than the top 40 percent of
the tiers. Therefore, a person using this method would provide a risk-
based pricing notice to each consumer to whom it grants, extends, or
provides credit who is placed within the bottom six tiers.
(c) Application to credit card issuers--(1) In general. A credit
card issuer subject to the requirements of paragraph (a) of this
section may use one of the methods set forth in paragraph (b) of this
section to identify consumers to whom it must provide a risk-based
pricing notice. Alternatively, a credit card issuer may satisfy its
obligations under paragraph (a) of this section by providing a risk-
based pricing notice to a consumer when--
(i) A consumer applies for a credit card either in connection with
an application program, such as a direct-mail offer or a take-one
application, or in response to a solicitation under 12 CFR 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 an annual
percentage rate referenced in Sec. 222.71(n)(1)(ii) that is greater
than the lowest annual percentage rate referenced in Sec.
222.71(n)(1)(ii) available in connection with the application or
solicitation.
(2) No requirement to compare different offers. A credit card
issuer is not subject to the requirements of paragraph (a) of this
section and is not required to provide a risk-based pricing notice to a
consumer if--
(i) The consumer applies for a credit card for which the card
issuer provides a single annual percentage rate referenced in Sec.
222.71(n)(1)(ii), excluding a temporary initial rate that is lower than
the rate that will apply after the temporary rate expires and a penalty
rate that will apply upon the occurrence of one or more specific
events, such as a late payment or an extension of credit that exceeds
the credit limit; or
(ii) The credit card issuer offers the consumer the lowest annual
percentage rate referenced in Sec. 222.71(n)(1)(ii) available under
the credit card offer for which the consumer applied, even if a lower
annual percentage rate referenced in Sec. 222.71(n)(1)(ii) is
available under a different credit card offer issued by the card
issuer.
(3) Examples. (i) A credit card issuer sends a solicitation to the
consumer that discloses several possible purchase annual percentage
rates that may apply, such as 10, 12, or 14 percent, or a range of
purchase annual percentage rates from 10 to 14 percent. The consumer
applies for a credit card in response to the solicitation. The card
issuer provides a credit card to the consumer with a purchase annual
percentage rate of 12 percent based in whole or in part on a consumer
report. Unless an exception applies under Sec. 222.74, the card issuer
may satisfy its obligations under paragraph (a) of this section by
providing a risk-based pricing notice to the consumer because the
consumer received credit at a purchase annual percentage rate greater
than the lowest purchase annual percentage rate available under that
solicitation.
(ii) The same facts as in the example in paragraph (c)(3)(i) of
this section, except that the card issuer provides a credit card to the
consumer at a purchase annual percentage rate of 10 percent. The card
issuer is not required to provide a risk-based pricing notice to the
consumer even if, under a different credit card solicitation, that
consumer or other consumers might qualify for a purchase annual
percentage rate of 8 percent.
(d) Account review--(1) In general. Except as otherwise provided in
this subpart, a person is subject to the requirements of paragraph (a)
of this section and must provide a risk-based pricing notice to a
consumer in the form and manner required by this subpart if the
person--
(i) Uses a consumer report in connection with a review of credit
that has been extended to the consumer; and
(ii) Based in whole or in part on the consumer report, increases
the annual percentage rate (the annual percentage rate referenced in
Sec. 222.71(n)(1)(ii) in the case of a credit card).
(2) Example. A credit card issuer periodically obtains consumer
reports for the purpose of reviewing the terms of credit it has
extended to consumers in connection with credit cards. As a result of
this review, the credit card issuer increases the purchase annual
percentage rate applicable to a consumer's credit card based in whole
or in part on information in a consumer report. The credit card issuer
is subject to the requirements of paragraph (a) of this section and
must provide a risk-based pricing notice to the consumer.
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 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 that the terms offered, such as the annual
percentage rate, have been set based on information from a consumer
report;
(iii) A statement 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 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 the consumer reporting agency
or agencies identified in the notice without charge for 60 days after
receipt of the notice;
(vii) A statement informing the consumer how to obtain a consumer
report from the consumer reporting agency or agencies identified in the
notice and providing contact information (including a toll-free
telephone number, where applicable) specified by the consumer reporting
agency or agencies; 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 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 using information from a consumer report;
(iii) A statement 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 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 the consumer
[[Page 2756]]
reporting agency or agencies identified in the notice without charge
for 60 days after receipt of the notice;
(vii) A statement informing the consumer how to obtain a consumer
report from the consumer reporting agency or agencies identified in the
notice and providing contact information (including a toll-free
telephone number, where applicable) specified by the consumer reporting
agency or agencies; 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 content and form requirements of paragraphs (a)(1) and (b) of this
section. 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 content and form
requirements of paragraphs (a)(2) and (b) of this section. Use of the
model forms is optional.
(c) Timing--(1) General. Except as provided in paragraph (c)(3) of
this section, a risk-based pricing notice must be provided to the
consumer--
(i) 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;
(ii) 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
(iii) 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 (annual percentage rate referenced in Sec.
222.71(n)(1)(ii) 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 (to the extent permitted by
law), no later than five days after the effective date of the change in
the annual percentage rate.
(2) Application to certain automobile lending transactions. When a
person to whom a credit obligation is initially payable grants,
extends, or provides credit to a consumer for the purpose of financing
the purchase of an automobile from an auto dealer or other party that
is not affiliated with the person, any requirement to provide a risk-
based pricing notice pursuant to this subpart is satisfied if the
person:
(i) Provides a notice described in Sec. Sec. 222.72(a), 222.74(e),
or 222.74(f) to the consumer within the time periods set forth in
paragraph (c)(1)(i) of this section, Sec. 222.74(e)(3), or Sec.
222.74(f)(4), as applicable; or
(ii) Arranges to have the auto dealer or other party provide a
notice described in Sec. Sec. 222.72(a), 222.74(e), or 222.74(f) to
the consumer on its behalf within the time periods set forth in
paragraph (c)(1)(i) of this section, Sec. 222.74(e)(3), or Sec.
222.74(f)(4), as applicable, and maintains reasonable policies and
procedures to verify that the auto dealer or other party provides such
notice to the consumer within the applicable time periods. If the
person arranges to have the auto dealer or other party provide a notice
described in Sec. 222.74(e), the person's obligation is satisfied if
the consumer receives a notice containing a credit score obtained by
the dealer or other party, even if a different credit score is obtained
and used by the person on whose behalf the notice is provided.
(3) Timing requirements for contemporaneous purchase credit. When
credit under an open-end credit plan is granted, extended, or provided
to a consumer in person or by telephone for the purpose of financing
the contemporaneous purchase of goods or services, any risk-based
pricing notice required to be provided pursuant to this subpart (or the
disclosures permitted under Sec. 222.74(e) or (f)) may be provided at
the earlier of:
(i) The time of the first mailing by the person to the consumer
after the decision is made to approve the grant, extension, or other
provision of open-end credit, such as in a mailing containing the
account agreement or a credit card; or
(ii) Within 30 days after the decision to approve the grant,
extension, or other provision of credit.
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 a consumer report after the consumer applied for or
requested credit and after the person obtained the consumer report. For
purposes of this section, ``specific material terms'' means a single
material term, or set of material terms, such as an annual percentage
rate of 10 percent, and not a range of alternatives, such as an annual
percentage rate that may be 8, 10, or 12 percent, or between 8 and 12
percent.
(2) Example. A consumer receives a firm offer of credit from a
credit card issuer. The terms of the firm offer are based in whole or
in part on information from a consumer report that the credit card
issuer obtained under the FCRA's firm offer of credit provisions. The
solicitation offers the consumer a credit card with a single purchase
annual percentage rate of 12 percent. The consumer applies for and
receives a credit card with an annual percentage rate of 12 percent.
Other customers with the same credit card have a purchase annual
percentage rate of 10 percent. The exception applies because the
consumer applied for specific material terms and was granted those
terms. Although the credit card issuer specified the annual percentage
rate in the firm offer of credit based in whole or in part on a
consumer report, the credit card issuer specified that material term
before, not after, the consumer applied for or requested credit.
(b) Adverse action notice. A person is not required to provide a
risk-based pricing notice to the consumer under Sec. 222.72(a), (c),
or (d) if the person provides an adverse action notice to the consumer
under section 615(a) of the FCRA.
(c) Prescreened solicitations--(1) In general. A person is not
required to provide a risk-based pricing notice to the consumer under
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.
(2) More favorable material terms. This exception applies to any
firm offer of credit offered by a person to a consumer, even if the
person makes other firm offers of credit to other
[[Page 2757]]
consumers on more favorable material terms.
(3) Example. A credit card issuer obtains two prescreened lists
from a consumer reporting agency. One list includes consumers with high
credit scores. The other list includes consumers with low credit
scores. The issuer mails a firm offer of credit to the high credit
score consumers with a single purchase annual percentage rate of 10
percent. The issuer also mails a firm offer of credit to the low credit
score consumers with a single purchase annual percentage rate of 14
percent. The credit card issuer is not required to provide a risk-based
pricing notice to the low credit score consumers who receive the 14
percent offer because use of a consumer report to make a firm offer of
credit does not trigger the risk-based pricing notice requirement.
(d) Loans secured by residential real property--credit score
disclosure. (1) In general. A person is not required to provide a risk-
based pricing notice to a consumer under Sec. 222.72(a) or (c) if:
(i) The consumer requests from the person an extension of credit
that is or will be secured by one to four units of residential real
property; and
(ii) The person provides to each consumer described in paragraph
(d)(1)(i) of this section a notice that contains the following--
(A) A statement that a consumer report (or credit report) is a
record of the consumer's credit history and includes information about
whether the consumer pays his or her obligations on time and how much
the consumer owes to creditors;
(B) A statement that a credit score is a number that takes into
account information in a consumer report and that a credit score can
change over time to reflect changes in the consumer's credit history;
(C) A statement that the consumer's credit score can affect whether
the consumer can obtain credit and what the cost of that credit will
be;
(D) The information required to be disclosed to the consumer
pursuant to section 609(g) of the FCRA;
(E) The distribution of credit scores among consumers who are
scored under the same scoring model that is used to generate the
consumer's credit score using the same scale as that of the credit
score that is provided to the consumer, presented in the form of a bar
graph containing a minimum of six bars that illustrates the percentage
of consumers with credit scores within the range of scores reflected in
each bar or by other clear and readily understandable graphical means,
or a clear and readily understandable statement informing the consumer
how his or her credit score compares to the scores of other consumers.
Use of a graph or statement obtained from the person providing the
credit score that meets the requirements of this paragraph
(d)(1)(ii)(E) is deemed to comply with this requirement;
(F) A statement that the consumer is encouraged to verify the
accuracy of the information contained in the consumer report and has
the right to dispute any inaccurate information in the report;
(G) A statement that federal law gives the consumer the right to
obtain copies of his or her consumer reports directly from the consumer
reporting agencies, including a free report from each of the nationwide
consumer reporting agencies once during any 12-month period;
(H) Contact information for the centralized source from which
consumers may obtain their free annual consumer reports; and
(I) A statement directing consumers to the Web 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 in the case of closed-end credit
or before the first transaction is made under an open-end credit plan.
(4) Multiple credit scores--(i) In General. When a person obtains
two or more credit scores from consumer reporting agencies and uses one
of those credit scores in setting the material terms of credit granted,
extended, or otherwise provided to a consumer, for example, by using
the low, middle, high, or most recent score, the notice described in
paragraph (d)(1)(ii) of this section must include that credit score and
the other information required by that paragraph. When a person obtains
two or more credit scores from consumer reporting agencies and uses
multiple credit scores in setting the material terms of credit granted,
extended, or otherwise provided to a consumer, for example, by
computing the average of all the credit scores obtained, the notice
described in paragraph (d)(1)(ii) of this section must include one of
those credit scores and the other information required by that
paragraph. The notice may, at the person's option, include more than
one credit score, along with the additional information specified in
paragraph (d)(1)(ii) of this section for each credit score disclosed.
(ii) Examples. (A) A person that uses consumer reports to set the
material terms of mortgage credit granted, extended, or provided to
consumers regularly requests credit scores from several consumer
reporting agencies and uses the low score when determining the material
terms it will offer to the consumer. That person must disclose the low
score in the notice described in paragraph (d)(1)(ii) of this section.
(B) A person that uses consumer reports to set the material terms
of mortgage credit granted, extended, or provided to consumers
regularly requests credit scores from several consumer reporting
agencies, each of which it uses in an underwriting program in order to
determine the material terms it will offer to the consumer. That person
may choose one of these scores to include in the notice described in
paragraph (d)(1)(ii) of this section.
(5) Model form. A model form of the notice described in paragraph
(d)(1)(ii) of this section consolidated with the notice required by
section 609(g) of the FCRA is contained in Appendix H-3 of this part.
Appropriate use of Model Form H-3 is deemed to comply with the
requirements of 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 a consumer under Sec. 222.72(a) or (c) if:
(i) The consumer requests from the person an extension of credit
other than credit that is or will be secured by one to four units of
residential real property; and
(ii) The person provides to each consumer described in paragraph
(e)(1)(i) of this section a notice that contains the following--
(A) A statement that a consumer report (or credit report) is a
record of the consumer's credit history and includes information about
whether the consumer pays his or her obligations on time and how much
the consumer owes to creditors;
(B) A statement that a credit score is a number that takes into
account information in a consumer report and that a credit score can
change over time
[[Page 2758]]
to reflect changes in the consumer's credit history;
(C) A statement that the consumer's credit score can affect whether
the consumer can obtain credit and what the cost of that credit will
be;
(D) The current credit score of the consumer or the most recent
credit score of the consumer that was previously calculated by the
consumer reporting agency for a purpose related to the extension of
credit;
(E) The range of possible credit scores under the model used to
generate the credit score;
(F) The distribution of credit scores among consumers who are
scored under the same scoring model that is used to generate the
consumer's credit score using the same scale as that of the credit
score that is provided to the consumer, presented in the form of a bar
graph containing a minimum of six bars that illustrates the percentage
of consumers with credit scores within the range of scores reflected in
each bar, or by other clear and readily understandable graphical means,
or a clear and readily understandable statement informing the consumer
how his or her credit score compares to the scores of other consumers.
Use of a graph or statement obtained from the person providing the
credit score that meets the requirements of this paragraph
(e)(1)(ii)(F) is deemed to comply with this requirement;
(G) The date on which the credit score was created;
(H) The name of the consumer reporting agency or other person that
provided the credit score;
(I) A statement that the consumer is encouraged to verify the
accuracy of the information contained in the consumer report and has
the right to dispute any inaccurate information in the report;
(J) A statement that federal law gives the consumer the right to
obtain copies of his or her consumer reports directly from the consumer
reporting agencies, including a free report from each of the nationwide
consumer reporting agencies once during any 12-month period;
(K) Contact information for the centralized source from which
consumers may obtain their free annual consumer reports; and
(L) A statement directing consumers to the web 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 in the case of closed-end credit or before
the first transaction is made under an open-end credit plan.
(4) Multiple credit scores--(i) In General. When a person obtains
two or more credit scores from consumer reporting agencies and uses one
of those credit scores in setting the material terms of credit granted,
extended, or otherwise provided to a consumer, for example, by using
the low, middle, high, or most recent score, the notice described in
paragraph (e)(1)(ii) of this section must include that credit score and
the other information required by that paragraph. When a person obtains
two or more credit scores from consumer reporting agencies and uses
multiple credit scores in setting the material terms of credit granted,
extended, or otherwise provided to a consumer, for example, by
computing the average of all the credit scores obtained, the notice
described in paragraph (e)(1)(ii) of this section must include one of
those credit scores and the other information required by that
paragraph. The notice may, at the person's option, include more than
one credit score, along with the additional information specified in
paragraph (e)(1)(ii) of this section for each credit score disclosed.
(ii) Examples. The manner in which multiple credit scores are to be
disclosed under this section are substantially identical to the manner
set forth in the examples contained in paragraph (d)(4)(ii) of this
section.
(5) Model form. A model form of the notice described in paragraph
(e)(1)(ii) of this section is contained in Appendix H-4 of this part.
Appropriate use of Model Form H-4 is deemed to comply with the
requirements of 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 a 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 provides credit;
(ii) Does not obtain a credit score from another consumer reporting
agency in connection with granting, extending, or providing credit to
the consumer; and
(iii) Provides to the consumer a notice that contains the
following--
(A) A statement that a consumer report (or credit report) includes
information about the consumer's credit history and the type of
information included in that history;
(B) A statement that a credit score is a number that takes into
account information in a consumer report and that a credit score can
change over time in response to changes in the consumer's credit
history;
(C) A statement that credit scores are important because consumers
with higher credit scores generally obtain more favorable credit terms;
(D) A statement that not having a credit score can affect whether
the consumer can obtain credit and what the cost of that credit will
be;
(E) A statement that a credit score about the consumer was not
available from a consumer reporting agency, which must be identified by
name, generally due to insufficient information regarding the
consumer's credit history;
(F) A statement that the consumer is encouraged to verify the
accuracy of the information contained in the consumer report and has
the right to dispute any inaccurate information in the consumer report;
(G) A statement that federal law gives the consumer the right to
obtain copies of his or her consumer reports directly from the consumer
reporting agencies, including a free consumer report from each of the
nationwide consumer reporting agencies once during any 12-month period;
(H) The contact information for the centralized source from which
consumers may obtain their free annual consumer reports; and
(I) A statement directing consumers to the web 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 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,
[[Page 2759]]
but does not provide the person with a credit score on that consumer.
If the person does not obtain a credit score from another consumer
reporting agency and, based in whole or in part on information in a
consumer report, grants, extends, or provides credit to the consumer,
the person may provide the notice described in paragraph (f)(1)(iii) of
this section. If, however, the person obtains a credit score from
another consumer reporting agency, the person may not rely upon the
exception in paragraph (f) of this section, but may satisfy the
requirements of paragraph (e) of this section.
(3) Form of the notice. The notice described in paragraph
(f)(1)(iii) of this section must be:
(i) Clear and conspicuous;
(ii) Segregated from other information provided to the consumer;
and
(iii) Provided to the consumer in writing and in a form that the
consumer may keep.
(4) Timing. The notice described in paragraph (f)(1)(iii) of this
section must be provided to the consumer as soon as reasonably
practicable after the person has requested the credit score, but in any
event not later than consummation of a transaction in the case of
closed-end credit or when the first transaction is made under an open-
end credit plan.
(5) Model form. A model form of the notice described in paragraph
(f)(1)(iii) of this section is contained in Appendix H-5 of this part.
Appropriate use of Model Form H-5 is deemed to comply with the
requirements of 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 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. However, the bank or finance
company may comply with this rule if the auto dealer has agreed to
provide notices to consumers before consummation pursuant to an
arrangement with the bank or finance company, as permitted under Sec.
222.73(c).
(c) Multiple consumers--(1) Risk-based pricing notices. In a
transaction involving two or more consumers who are granted, extended,
or otherwise provided credit, a person must provide a notice to each
consumer to satisfy the requirements of Sec. 222.72(a) or (c). If the
consumers have the same address, a person may satisfy the requirements
by providing a single notice addressed to both consumers. If the
consumers do not have the same address, a person must provide a notice
to each consumer.
(2) Credit score disclosure notices. In a transaction involving two
or more consumers who are granted, extended, or otherwise provided
credit, a person must provide a separate notice to each consumer to
satisfy the exceptions in Sec. 222.74(d), (e), or (f). Whether the
consumers have the same address or not, the person must provide a
separate notice to each consumer. Each separate notice must contain
only the credit score(s) of the consumer to whom the notice is
provided, and not the credit score(s) of the other consumer.
(3) Examples. (i) Two consumers jointly apply for credit with a
creditor. The creditor grants credit to the consumers on material terms
that are materially less favorable than the most favorable terms
available to other consumers from the creditor. The two consumers
reside at different addresses. The creditor provides risk-based pricing
notices to satisfy its obligations under this subpart. The creditor
must provide a risk-based pricing notice to each consumer at the
address where each consumer resides.
(ii) Two consumers jointly apply for credit with a creditor. The
two consumers reside at the same address. The creditor obtains credit
scores on each of the two consumer applicants. The creditor grants
credit to the consumers. The creditor provides credit score disclosure
notices to satisfy its obligations under this subpart. Even though the
two consumers reside at the same address, the creditor must provide a
separate credit score disclosure notice to each of the consumers. Each
notice must contain only the credit score of the consumer to whom the
notice is provided.
0
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 person may change the forms by rearranging the format or by
making technical modifications to the language of the forms, in each
case without modifying the substance of
[[Page 2760]]
the disclosures. Any such rearrangement or modification of the
language of the model forms may not be so extensive as to materially
affect the substance, clarity, comprehensibility, or meaningful
sequence of the forms. Persons making revisions with that effect
will lose the benefit of the safe harbor for appropriate use of
Appendix H model forms. A person is not required to conduct consumer
testing when rearranging the format of the model forms.
a. Acceptable changes include, for example:
i. Corrections or updates to telephone numbers, mailing
addresses, or Web site addresses that may change over time.
ii. The addition of graphics or icons, such as the person's
corporate logo.
iii. Alteration of the shading or color contained in the model
forms.
iv. Use of a different form of graphical presentation to depict
the distribution of credit scores.
v. Substitution of the words ``credit'' and ``creditor'' or
``finance'' and ``finance company'' for the terms ``loan'' and
``lender.''
vi. Including pre-printed lists of the sources of consumer
reports or consumer reporting agencies in a ``check-the-box''
format.
vii. Including the name of the consumer, transaction
identification numbers, a date, and other information that will
assist in identifying the transaction to which the form pertains.
viii. Including the name of an agent, such as an auto dealer or
other party, when providing the ``Name of the Entity Providing the
Notice.''
b. Unacceptable changes include, for example:
i. Providing model forms on register receipts or interspersed
with other disclosures.
ii. Eliminating empty lines and extra spaces between sentences
within the same section.
4. If a person uses an appropriate Appendix H model form, or
modifies a form in accordance with the above instructions, that
person shall be deemed to be acting in compliance with the
provisions of 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 comply 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
Authority and Issuance
0
For the reasons discussed in the joint preamble, the Federal Trade
Commission amends chapter I, title 16, Code of Federal Regulations, as
follows:
0
1. Add a 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 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 part 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 (15 U.S.C.
1681m(h)).
(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) Adverse action has the same meaning as in 15 U.S.C.
1681a(k)(1)(A).
(b) 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.
(c) Closed-end credit has the same meaning as in 12 CFR
226.2(a)(10).
(d) Consumer has the same meaning as in 15 U.S.C. 1681a(c).
(e) Consummation has the same meaning as in 12 CFR 226.2(a)(13).
(f) Consumer report has the same meaning as in 15 U.S.C. 1681a(d).
(g) Consumer reporting agency has the same meaning as in 15 U.S.C.
1681a(f).
(h) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(i) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5).
(j) Credit card has the same meaning as in 15 U.S.C. 1681a(r)(2).
(k) Credit card issuer has the same meaning as in 15 U.S.C.
1681a(r)(1)(A).
(l) Credit score has the same meaning as in 15 U.S.C.
1681g(f)(2)(A).
(m) Firm offer of credit has the same meaning as in 15 U.S.C.
1681a(l).
(n) Material terms means--
(1) (i) Except as otherwise provided in paragraphs (n)(1)(ii) and
(n)(3) of this section, 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)(1)(ii) or 12 CFR 226.6(b)(2)(i), excluding any
temporary initial rate that is lower than the rate that will apply
after the temporary rate expires, 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, and any fixed
annual percentage rate option for a home equity line of credit;
(ii) In the case of a credit card (other than a credit card that is
used to access a home equity line of credit or a charge card), the
annual percentage rate required to be disclosed under 12 CFR
226.6(b)(2)(i) that applies to purchases (``purchase annual percentage
rate'') and no other annual percentage rate, or in the case of a credit
card that has no purchase annual percentage rate, the annual percentage
rate that varies based on information in a consumer report and that has
the most significant financial impact on consumers;
(2) In the case of closed-end credit, the annual percentage rate
required to be disclosed 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, the financial term that varies based on information in a consumer
report and that has the most significant financial impact on consumers,
such as a deposit required in connection with credit extended by a
telephone company or utility or an annual membership fee for a charge
card.
(o) Materially less favorable means, when applied to material
terms, that the terms granted, extended, or otherwise provided to a
consumer differ from the terms granted, extended, or otherwise provided
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, extended, or otherwise provided 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, extended,
or otherwise provided to the two consumers.
(p) Open-end credit plan has the same meaning as in 15 U.S.C.
1602(i), as interpreted by the Board in Regulation Z and the Official
Staff Commentary to Regulation Z.
(q) Person has the same meaning as in 15 U.S.C. 1681a(b).
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 which consumers must receive a notice. A person may
determine whether paragraph (a) of this section applies by directly
comparing the material terms offered to each consumer and the material
terms offered to other consumers for a specific type of credit product.
For purposes of this section, a ``specific type of credit product''
means one or more credit products with similar features that are
designed for similar purposes. Examples of a specific type of credit
product include student loans, unsecured credit
[[Page 2770]]
cards, secured credit cards, new automobile loans, used automobile
loans, fixed-rate mortgage loans, and variable-rate mortgage loans. As
an alternative to making this direct comparison, a person may make the
determination by using one of the following methods:
(1) Credit score proxy method--(i) In general. A person that sets
the material terms of credit granted, extended, or otherwise provided
to a consumer, based in whole or in part on a credit score, may comply
with the requirements of paragraph (a) of this section by--
(A) Determining the credit score (hereafter referred to as the
``cutoff score'') that represents the point at which approximately 40
percent of the consumers to whom it grants, extends, or provides credit
have higher credit scores and approximately 60 percent of the consumers
to whom it grants, extends, or provides credit have lower credit
scores; and
(B) Providing a risk-based pricing notice to each consumer to whom
it grants, extends, or provides credit whose credit score is lower than
the cutoff score.
(ii) Alternative to the 40/60 cutoff score determination. In the
case of credit that has been granted, extended, or provided on the most
favorable material terms to more than 40 percent of consumers, a person
may, at its option, set its cutoff score at a point at which the
approximate percentage of consumers who historically have been granted,
extended, or provided credit on material terms other than the most
favorable terms would receive risk-based pricing notices under this
section.
(iii) Determining the cutoff score--(A) Sampling approach. A person
that currently uses risk-based pricing with respect to the credit
products it offers must calculate the cutoff score by considering the
credit scores of all or a representative sample of the consumers to
whom it has granted, extended, or provided credit for a specific type
of credit product.
(B) Secondary source approach in limited circumstances. A person
that is a new entrant into the credit business, introduces new credit
products, or starts to use risk-based pricing with respect to the
credit products it currently offers may initially determine the cutoff
score based on information derived from appropriate market research or
relevant third-party sources for a specific type of credit product,
such as research or data from companies that develop credit scores. A
person that acquires a credit portfolio as a result of a merger or
acquisition may determine the cutoff score based on information from
the party which it acquired, with which it merged, or from which it
acquired the portfolio.
(C) Recalculation of cutoff scores. A person using the credit score
proxy method must recalculate its cutoff score(s) no less than every
two years in the manner described in paragraph (b)(1)(iii)(A) of this
section. A person using the credit score proxy method using market
research, third-party data, or information from a party which it
acquired, with which it merged, or from which it acquired the portfolio
as permitted by paragraph (b)(1)(iii)(B) of this section generally must
calculate a cutoff score(s) based on the scores of its own consumers in
the manner described in paragraph (b)(1)(iii)(A) of this section within
one year after it begins using a cutoff score derived from market
research, third-party data, or information from a party which it
acquired, with which it merged, or from which it acquired the
portfolio. If such a person does not grant, extend, or provide credit
to new consumers during that one-year period such that it lacks
sufficient data with which to recalculate a cutoff score based on the
credit scores of its own consumers, the person may continue to use a
cutoff score derived from market research, third-party data, or
information from a party which it acquired, with which it merged, or
from which it acquired the portfolio as provided in paragraph
(b)(1)(iii)(B) until it obtains sufficient data on which to base the
recalculation. However, the person must recalculate its cutoff score(s)
in the manner described in paragraph (b)(1)(iii)(A) of this section
within two years, if it has granted, extended, or provided credit to
some new consumers during that two-year period.
(D) Use of two or more credit scores. A person that generally uses
two or more credit scores in setting the material terms of credit
granted, extended, or provided to a consumer must determine the cutoff
score using the same method the person uses to evaluate multiple scores
when making credit decisions. These evaluation methods may include, but
are not limited to, selecting the low, median, high, most recent, or
average credit score of each consumer to whom it grants, extends, or
provides credit. If a person that uses two or more credit scores does
not consistently use the same method for evaluating multiple credit
scores (e.g., if the person sometimes chooses the median score and
other times calculates the average score), the person must determine
the cutoff score using a reasonable means. In such cases, use of any
one of the methods that the person regularly uses or the average credit
score of each consumer to whom it grants, extends, or provides credit
is deemed to be a reasonable means of calculating the cutoff score.
(iv) Credit score not available. For purposes of this section, a
person using the credit score proxy method who grants, extends, or
provides credit to a consumer for whom a credit score is not available
must assume that the consumer receives credit on material terms that
are materially less favorable than the most favorable credit terms
offered to a substantial proportion of consumers from or through that
person and must provide a risk-based pricing notice to the consumer.
(v) Examples. (A) A credit card issuer engages in risk-based
pricing and the annual percentage rates it offers to consumers are
based in whole or in part on a credit score. The credit card issuer
takes a representative sample of the credit scores of consumers to whom
it issued credit cards within the preceding three months. The credit
card issuer determines that approximately 40 percent of the sampled
consumers have a credit score at or above 720 (on a scale of 350 to
850) and approximately 60 percent of the sampled consumers have a
credit score below 720. Thus, the card issuer selects 720 as its cutoff
score. A consumer applies to the credit card issuer for a credit card.
The card issuer obtains a credit score for the consumer. The consumer's
credit score is 700. Since the consumer's 700 credit score falls below
the 720 cutoff score, the credit card issuer must provide a risk-based
pricing notice to the consumer.
(B) A credit card issuer engages in risk-based pricing, and the
annual percentage rates it offers to consumers are based in whole or in
part on a credit score. The credit card issuer takes a representative
sample of the consumers to whom it issued credit cards over the
preceding six months. The credit card issuer determines that
approximately 80 percent of the sampled consumers received credit at
its lowest annual percentage rate, and 20 percent received credit at a
higher annual percentage rate. Approximately 80 percent of the sampled
consumers have a credit score at or above 750 (on a scale of 350 to
850), and 20 percent have a credit score below 750. Thus, the card
issuer selects 750 as its cutoff score. A consumer applies to the
credit card issuer for a credit card. The card issuer obtains a credit
score for the consumer. The consumer's credit score is 740. Since the
consumer's 740 credit score falls below the 750 cutoff score, the
credit card
[[Page 2771]]
issuer must provide a risk-based pricing notice to the consumer.
(C) An auto lender engages in risk-based pricing, obtains credit
scores from one of the nationwide consumer reporting agencies, and uses
the credit score proxy method to determine which consumers must receive
a risk-based pricing notice. A consumer applies to the auto lender for
credit to finance the purchase of an automobile. A credit score about
that consumer is not available from the consumer reporting agency from
which the lender obtains credit scores. The lender nevertheless grants,
extends, or provides credit to the consumer. The lender must provide a
risk-based pricing notice to the consumer.
(2) Tiered pricing method--(i) In general. A person that sets the
material terms of credit granted, extended, or provided to a consumer
by placing the consumer within one of a discrete number of pricing
tiers for a specific type of credit product, based in whole or in part
on a consumer report, may comply with the requirements of paragraph (a)
of this section by providing a risk-based pricing notice to each
consumer who is not placed within the top pricing tier or tiers, as
described below.
(ii) Four or fewer pricing tiers. If a person using the tiered
pricing method has four or fewer pricing tiers, the person complies
with the requirements of paragraph (a) of this section by providing a
risk-based pricing notice to each consumer to whom it grants, extends,
or provides credit who does not qualify for the top tier (that is, the
lowest-priced tier). For example, a person that uses a tiered pricing
structure with annual percentage rates of 8, 10, 12, and 14 percent
would provide the risk-based pricing notice to each consumer to whom it
grants, extends, or provides credit at annual percentage rates of 10,
12, and 14 percent.
(iii) Five or more pricing tiers. If a person using the tiered
pricing method has five or more pricing tiers, the person complies with
the requirements of paragraph (a) of this section by providing a risk-
based pricing notice to each consumer to whom it grants, extends, or
provides credit who does not qualify for the top two tiers (that is,
the two lowest-priced tiers) and any other tier that, together with the
top tiers, comprise no less than the top 30 percent but no more than
the top 40 percent of the total number of tiers. Each consumer placed
within the remaining tiers must receive a risk-based pricing notice.
For example, if a person has nine pricing tiers, the top three tiers
(that is, the three lowest-priced tiers) comprise no less than the top
30 percent but no more than the top 40 percent of the tiers. Therefore,
a person using this method would provide a risk-based pricing notice to
each consumer to whom it grants, extends, or provides credit who is
placed within the bottom six tiers.
(c) Application to credit card issuers--(1) In general. A credit
card issuer subject to the requirements of paragraph (a) of this
section may use one of the methods set forth in paragraph (b) of this
section to identify consumers to whom it must provide a risk-based
pricing notice. Alternatively, a credit card issuer may satisfy its
obligations under paragraph (a) of this section by providing a risk-
based pricing notice to a consumer when--
(i) A consumer applies for a credit card either in connection with
an application program, such as a direct-mail offer or a take-one
application, or in response to a solicitation under 12 CFR 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 an annual
percentage rate referenced in Sec. 640.2(n)(1)(ii) that is greater
than the lowest annual percentage rate referenced in Sec.
640.2(n)(1)(ii) available in connection with the application or
solicitation.
(2) No requirement to compare different offers. A credit card
issuer is not subject to the requirements of paragraph (a) of this
section and is not required to provide a risk-based pricing notice to a
consumer if--
(i) The consumer applies for a credit card for which the card
issuer provides a single annual percentage rate referenced in Sec.
640.2(n)(1)(ii), excluding a temporary initial rate that is lower than
the rate that will apply after the temporary rate expires and a penalty
rate that will apply upon the occurrence of one or more specific
events, such as a late payment or an extension of credit that exceeds
the credit limit; or
(ii) The credit card issuer offers the consumer the lowest annual
percentage rate referenced in Sec. 640.2(n)(1)(ii) available under the
credit card offer for which the consumer applied, even if a lower
annual percentage rate referenced in Sec. 640.2(n)(1)(ii) is available
under a different credit card offer issued by the card issuer.
(3) Examples. (i) A credit card issuer sends a solicitation to the
consumer that discloses several possible purchase annual percentage
rates that may apply, such as 10, 12, or 14 percent, or a range of
purchase annual percentage rates from 10 to 14 percent. The consumer
applies for a credit card in response to the solicitation. The card
issuer provides a credit card to the consumer with a purchase annual
percentage rate of 12 percent based in whole or in part on a consumer
report. Unless an exception applies under Sec. 640.5, the card issuer
may satisfy its obligations under paragraph (a) of this section by
providing a risk-based pricing notice to the consumer because the
consumer received credit at a purchase annual percentage rate greater
than the lowest purchase annual percentage rate available under that
solicitation.
(ii) The same facts as in the example in paragraph (c)(3)(i) of
this section, except that the card issuer provides a credit card to the
consumer at a purchase annual percentage rate of 10 percent. The card
issuer is not required to provide a risk-based pricing notice to the
consumer even if, under a different credit card solicitation, that
consumer or other consumers might qualify for a purchase annual
percentage rate of 8 percent.
(d) Account review--(1) In general. Except as otherwise provided in
this 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 annual percentage rate referenced in
Sec. 640.2(n)(1)(ii) in the case of a credit card).
(2) Example. A credit card issuer periodically obtains consumer
reports for the purpose of reviewing the terms of credit it has
extended to consumers in connection with credit cards. As a result of
this review, the credit card issuer increases the purchase annual
percentage rate applicable to a consumer's credit card based in whole
or in part on information in a consumer report. The credit card issuer
is subject to the requirements of paragraph (a) of this section and
must provide a risk-based pricing notice to the consumer.
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 that a consumer report (or credit report) includes
information
[[Page 2772]]
about the consumer's credit history and the type of information
included in that history;
(ii) A statement that the terms offered, such as the annual
percentage rate, have been set based on information from a consumer
report;
(iii) A statement 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 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 the consumer reporting agency
or agencies identified in the notice without charge for 60 days after
receipt of the notice;
(vii) A statement informing the consumer how to obtain a consumer
report from the consumer reporting agency or agencies identified in the
notice and providing contact information (including a toll-free
telephone number, where applicable) specified by the consumer reporting
agency or agencies; and
(viii) A statement directing consumers to the Web sites of the
Board and Federal Trade 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 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 using information from a consumer report;
(iii) A statement 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 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 the consumer reporting agency
or agencies identified in the notice without charge for 60 days after
receipt of the notice;
(vii) A statement informing the consumer how to obtain a consumer
report from the consumer reporting agency or agencies identified in the
notice and providing contact information (including a toll-free
telephone number, where applicable) specified by the consumer reporting
agency or agencies; 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. 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 content and form requirements of paragraphs (a)(1) and (b) of this
section. A model form of the risk-based pricing notice required by
Sec. 640.3(d) is also contained in Appendix B of that part.
Appropriate use of Model Form B-2 is deemed to comply with the content
and form requirements of paragraphs (a)(2) and (b) of this section. Use
of the model forms is optional.
(c) Timing--(1) General. Except as provided in paragraph (c)(3) of
this section, a risk-based pricing notice must be provided to the
consumer--
(i) 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;
(ii) 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
(iii) 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 (annual percentage rate referenced in Sec.
640.2(n)(1)(ii) 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 (to the extent permitted by
law), no later than five days after the effective date of the change in
the annual percentage rate.
(2) Application to certain automobile lending transactions. When a
person to whom a credit obligation is initially payable grants,
extends, or provides credit to a consumer for the purpose of financing
the purchase of an automobile from an auto dealer or other party that
is not affiliated with the person, any requirement to provide a risk-
based pricing notice pursuant to this part is satisfied if the person:
(i) Provides a notice described in Sec. Sec. 640.3(a), 640.5(e),
or 640.5(f) to the consumer within the time periods set forth in
paragraph (c)(1)(i) of this section, Sec. 640.5(e)(3), or Sec.
640.5(f)(4), as applicable; or
(ii) Arranges to have the auto dealer or other party provide a
notice described in Sec. Sec. 640.3(a), 640.5(e), or 640.5(f) to the
consumer on its behalf within the time periods set forth in paragraph
(c)(1)(i) of this section, Sec. 640.5(e)(3), or Sec. 640.5(f)(4), as
applicable, and maintains reasonable policies and procedures to verify
that the auto dealer or other party provides such notice to the
consumer within the applicable time periods. If the person arranges to
have the auto dealer or other party provide a notice described in Sec.
640.5(e), the person's obligation is satisfied if the consumer receives
a notice containing a credit score obtained by the dealer or other
party, even if a different credit score is obtained and used by the
person on whose behalf the notice is provided.
(3) Timing requirements for contemporaneous purchase credit. When
credit under an open-end credit plan is granted, extended, or provided
to a consumer in person or by telephone for the purpose of financing
the contemporaneous purchase of goods or services, any risk-based
pricing notice required to be provided pursuant to this part (or the
disclosures permitted under Sec. 640.5(e) or (f)) may be provided at
the earlier of:
(i) The time of the first mailing by the person to the consumer
after the decision is made to approve the grant, extension, or other
provision of open-end credit, such as in a mailing containing the
account agreement or a credit card; or
(ii) Within 30 days after the decision to approve the grant,
extension, or other provision of credit.
[[Page 2773]]
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 a consumer report after the consumer applied for or
requested credit and after the person obtained the consumer report. For
purposes of this section, ``specific material terms'' means a single
material term, or set of material terms, such as an annual percentage
rate of 10 percent, and not a range of alternatives, such as an annual
percentage rate that may be 8, 10, or 12 percent, or between 8 and 12
percent.
(2) Example. A consumer receives a firm offer of credit from a
credit card issuer. The terms of the firm offer are based in whole or
in part on information from a consumer report that the credit card
issuer obtained under the FCRA's firm offer of credit provisions. The
solicitation offers the consumer a credit card with a single purchase
annual percentage rate of 12 percent. The consumer applies for and
receives a credit card with an annual percentage rate of 12 percent.
Other customers with the same credit card have a purchase annual
percentage rate of 10 percent. The exception applies because the
consumer applied for specific material terms and was granted those
terms. Although the credit card issuer specified the annual percentage
rate in the firm offer of credit based in whole or in part on a
consumer report, the credit card issuer specified that material term
before, not after, the consumer applied for or requested credit.
(b) Adverse action notice. A person is not required to provide a
risk-based pricing notice to the consumer under Sec. 640.3(a), (c), or
(d) if the person provides an adverse action notice to the consumer
under section 615(a) of the FCRA.
(c) Prescreened solicitations--(1) In general. A person is not
required to provide a risk-based pricing notice to the consumer under
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.
(2) More favorable material terms. This exception applies to any
firm offer of credit offered by a person to a consumer, even if the
person makes other firm offers of credit to other consumers on more
favorable material terms.
(3) Example. A credit card issuer obtains two prescreened lists
from a consumer reporting agency. One list includes consumers with high
credit scores. The other list includes consumers with low credit
scores. The issuer mails a firm offer of credit to the high credit
score consumers with a single purchase annual percentage rate of 10
percent. The issuer also mails a firm offer of credit to the low credit
score consumers with a single purchase annual percentage rate of 14
percent. The credit card issuer is not required to provide a risk-based
pricing notice to the low credit score consumers who receive the 14
percent offer because use of a consumer report to make a firm offer of
credit does not trigger the risk-based pricing notice requirement.
(d) Loans secured by residential real property--credit score
disclosure--(1) In general. A person is not required to provide a risk-
based pricing notice to a consumer under Sec. 640.3(a) or (c) if:
(i) The consumer requests from the person an extension of credit
that is or will be secured by one to four units of residential real
property; and
(ii) The person provides to each consumer described in paragraph
(d)(1)(i) of this section a notice that contains the following--
(A) A statement that a consumer report (or credit report) is a
record of the consumer's credit history and includes information about
whether the consumer pays his or her obligations on time and how much
the consumer owes to creditors;
(B) A statement that a credit score is a number that takes into
account information in a consumer report and that a credit score can
change over time to reflect changes in the consumer's credit history;
(C) A statement that the consumer's credit score can affect whether
the consumer can obtain credit and what the cost of that credit will
be;
(D) The information required to be disclosed to the consumer
pursuant to section 609(g) of the FCRA;
(E) The distribution of credit scores among consumers who are
scored under the same scoring model that is used to generate the
consumer's credit score using the same scale as that of the credit
score that is provided to the consumer, presented in the form of a bar
graph containing a minimum of six bars that illustrates the percentage
of consumers with credit scores within the range of scores reflected in
each bar or by other clear and readily understandable graphical means,
or a clear and readily understandable statement informing the consumer
how his or her credit score compares to the scores of other consumers.
Use of a graph or statement obtained from the person providing the
credit score that meets the requirements of this paragraph
(d)(1)(ii)(E) is deemed to comply with this requirement;
(F) A statement that the consumer is encouraged to verify the
accuracy of the information contained in the consumer report and has
the right to dispute any inaccurate information in the report;
(G) A statement that federal law gives the consumer the right to
obtain copies of his or her consumer reports directly from the consumer
reporting agencies, including a free report from each of the nationwide
consumer reporting agencies once during any 12-month period;
(H) Contact information for the centralized source from which
consumers may obtain their free annual consumer reports; and
(I) A statement directing consumers to the web sites of the 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 in the case of closed-end credit
or before the first transaction is made under an open-end credit plan.
(4) Multiple credit scores--(i) In general. When a person obtains
two or more credit scores from consumer reporting agencies and uses one
of those credit scores in setting the material terms of credit granted,
extended, or otherwise provided to a consumer, for example, by using
the low, middle, high, or most recent score, the notice described in
paragraph (d)(1)(ii) of this section must include that credit score and
the other information required by that paragraph. When a person obtains
two or more credit scores from consumer reporting agencies and uses
multiple credit scores in setting the material terms of credit granted,
extended, or otherwise provided to a consumer, for example, by
computing the average of all the credit scores
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obtained, the notice described in paragraph (d)(1)(ii) of this section
must include one of those credit scores and the other information
required by that paragraph. The notice may, at the person's option,
include more than one credit score, along with the additional
information specified in paragraph (d)(1)(ii) of this section for each
credit score disclosed.
(ii) Examples. (A) A person that uses consumer reports to set the
material terms of mortgage credit granted, extended, or provided to
consumers regularly requests credit scores from several consumer
reporting agencies and uses the low score when determining the material
terms it will offer to the consumer. That person must disclose the low
score in the notice described in paragraph (d)(1)(ii) of this section.
(B) A person that uses consumer reports to set the material terms
of mortgage credit granted, extended, or provided to consumers
regularly requests credit scores from several consumer reporting
agencies, each of which it uses in an underwriting program in order to
determine the material terms it will offer to the consumer. That person
may choose one of these scores to include in the notice described in
paragraph (d)(1)(ii) of this section.
(5) Model form. A model form of the notice described in paragraph
(d)(1)(ii) of this section consolidated with the notice required by
section 609(g) of the FCRA is contained in 16 CFR Part 698, Appendix B.
Appropriate use of Model Form B-3 is deemed to comply with the
requirements of Sec. 640.5(d). Use of the model form is optional.
(e) Other extensions of credit--credit score disclosure--(1) In
general. A person is not required to provide a risk-based pricing
notice to a consumer under Sec. 640.3(a) or (c) if:
(i) The consumer requests from the person an extension of credit
other than credit that is or will be secured by one to four units of
residential real property; and
(ii) The person provides to each consumer described in paragraph
(e)(1)(i) of this section a notice that contains the following--
(A) A statement that a consumer report (or credit report) is a
record of the consumer's credit history and includes information about
whether the consumer pays his or her obligations on time and how much
the consumer owes to creditors;
(B) A statement that a credit score is a number that takes into
account information in a consumer report and that a credit score can
change over time to reflect changes in the consumer's credit history;
(C) A statement that the consumer's credit score can affect whether
the consumer can obtain credit and what the cost of that credit will
be;
(D) The current credit score of the consumer or the most recent
credit score of the consumer that was previously calculated by the
consumer reporting agency for a purpose related to the extension of
credit;
(E) The range of possible credit scores under the model used to
generate the credit score;
(F) The distribution of credit scores among consumers who are
scored under the same scoring model that is used to generate the
consumer's credit score using the same scale as that of the credit
score that is provided to the consumer, presented in the form of a bar
graph containing a minimum of six bars that illustrates the percentage
of consumers with credit scores within the range of scores reflected in
each bar, or by other clear and readily understandable graphical means,
or a clear and readily understandable statement informing the consumer
how his or her credit score compares to the scores of other consumers.
Use of a graph or statement obtained from the person providing the
credit score that meets the requirements of this paragraph
(e)(1)(ii)(F) is deemed to comply with this requirement;
(G) The date on which the credit score was created;
(H) The name of the consumer reporting agency or other person that
provided the credit score;
(I) A statement that the consumer is encouraged to verify the
accuracy of the information contained in the consumer report and has
the right to dispute any inaccurate information in the report;
(J) A statement that federal law gives the consumer the right to
obtain copies of his or her consumer reports directly from the consumer
reporting agencies, including a free report from each of the nationwide
consumer reporting agencies once during any 12-month period;
(K) Contact information for the centralized source from which
consumers may obtain their free annual consumer reports; and
(L) A statement directing consumers to the web 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 in the case of closed-end credit or before
the first transaction is made under an open-end credit plan.
(4) Multiple credit scores--(i) In General. When a person obtains
two or more credit scores from consumer reporting agencies and uses one
of those credit scores in setting the material terms of credit granted,
extended, or otherwise provided to a consumer, for example, by using
the low, middle, high, or most recent score, the notice described in
paragraph (e)(1)(ii) of this section must include that credit score and
the other information required by that paragraph. When a person obtains
two or more credit scores from consumer reporting agencies and uses
multiple credit scores in setting the material terms of credit granted,
extended, or otherwise provided to a consumer, for example, by
computing the average of all the credit scores obtained, the notice
described in paragraph (e)(1)(ii) of this section must include one of
those credit scores and the other information required by that
paragraph. The notice may, at the person's option, include more than
one credit score, along with the additional information specified in
paragraph (e)(1)(ii) of this section for each credit score disclosed.
(ii) Examples. The manner in which multiple credit scores are to be
disclosed under this section are substantially identical to the manner
set forth in the examples contained in paragraph (d)(4)(ii) of this
section.
(5) Model form. A model form of the notice described in paragraph
(e)(1)(ii) of this section is contained in 16 CFR Part B, Appendix B.
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 a 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
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person grants, extends, or provides credit;
(ii) Does not obtain a credit score from another consumer reporting
agency in connection with granting, extending, or providing credit to
the consumer; and
(iii) Provides to the consumer a notice that contains the
following--
(A) A statement that a consumer report (or credit report) includes
information about the consumer's credit history and the type of
information included in that history;
(B) A statement that a credit score is a number that takes into
account information in a consumer report and that a credit score can
change over time in response to changes in the consumer's credit
history;
(C) A statement that credit scores are important because consumers
with higher credit scores generally obtain more favorable credit terms;
(D) A statement that not having a credit score can affect whether
the consumer can obtain credit and what the cost of that credit will
be;
(E) A statement that a credit score about the consumer was not
available from a consumer reporting agency, which must be identified by
name, generally due to insufficient information regarding the
consumer's credit history;
(F) A statement that the consumer is encouraged to verify the
accuracy of the information contained in the consumer report and has
the right to dispute any inaccurate information in the consumer report;
(G) A statement that federal law gives the consumer the right to
obtain copies of his or her consumer reports directly from the consumer
reporting agencies, including a free consumer report from each of the
nationwide consumer reporting agencies once during any 12-month period;
(H) The contact information for the centralized source from which
consumers may obtain their free annual consumer reports; and
(I) A statement directing consumers to the web sites of the 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 provided to
consumers regularly requests credit scores from a particular consumer
reporting agency and provides those credit scores and additional
information to consumers to satisfy the requirements of paragraph (e)
of this section. That consumer reporting agency provides to the person
a consumer report on a particular consumer that contains one trade
line, but does not provide the person with a credit score on that
consumer. If the person does not obtain a credit score from another
consumer reporting agency and, based in whole or in part on information
in a consumer report, grants, extends, or provides credit to the
consumer, the person may provide the notice described in paragraph
(f)(1)(iii) of this section. If, however, the person obtains a credit
score from another consumer reporting agency, the person may not rely
upon the exception in paragraph (f) of this section, but may satisfy
the requirements of paragraph (e) of this section.
(3) Form of the notice. The notice described in paragraph
(f)(1)(iii) of this section must be:
(i) Clear and conspicuous;
(ii) Segregated from other information provided to the consumer;
and
(iii) Provided to the consumer in writing and in a form that the
consumer may keep.
(4) Timing. The notice described in paragraph (f)(1)(iii) of this
section must be provided to the consumer as soon as reasonably
practicable after the person has requested the credit score, but in any
event not later than consummation of a transaction in the case of
closed-end credit or when the first transaction is made under an open-
end credit plan.
(5) Model form. A model form of the notice described in paragraph
(f)(1)(iii) of this section is contained in 16 CFR Part 698, Appendix
B. 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. 640.3(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. 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), 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. However, the bank or finance
company may comply with this rule if the auto dealer has agreed to
provide notices to consumers before consummation pursuant to an
arrangement with the bank or finance company, as permitted under Sec.
640.4(c).
(c) Multiple consumers--(1) Risk-based pricing notices. In a
transaction involving two or more consumers who are granted, extended,
or otherwise provided credit, a person must provide a notice to each
consumer to satisfy the requirements of Sec. 640.3(a) or (c). If the
consumers have the same address, a person may satisfy the requirements
by providing a single notice addressed to both consumers. If the
consumers do not have the same address, a person must provide a notice
to each consumer.
(2) Credit score disclosure notices. In a transaction involving two
or more consumers who are granted, extended, or otherwise provided
credit, a person must provide a separate notice to each consumer to
satisfy the exceptions in Sec. 640.5(d), (e), or (f). Whether the
consumers have the same address or
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not, the person must provide a separate notice to each consumer. Each
separate notice must contain only the credit score(s) of the consumer
to whom the notice is provided, and not the credit score(s) of the
other consumer.
(3) Examples. (i) Two consumers jointly apply for credit with a
creditor. The creditor grants credit to the consumers on material terms
that are materially less favorable than the most favorable terms
available to other consumers from the creditor. The two consumers
reside at different addresses. The creditor provides risk-based pricing
notices to satisfy its obligations under this part. The creditor must
provide a risk-based pricing notice to each consumer at the address
where each consumer resides.
(ii) Two consumers jointly apply for credit with a creditor. The
two consumers reside at the same address. The creditor obtains credit
scores on each of the two consumer applicants. The creditor grants
credit to the consumers. The creditor provides credit score disclosure
notices to satisfy its obligations under this part. Even though the two
consumers reside at the same address, the creditor must provide a
separate credit score disclosure notice to each of the consumers. Each
notice must contain only the credit score of the consumer to whom the
notice is provided.
PART 698--MODEL FORMS AND DISCLOSURES
0
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; Public Law 108-159, sections 211(d), 214(b), and 311; 117
Stat. 1952.
0
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.
0
4. In Part 698, add a new Appendix B 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. 640.3. 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 person may change the forms by rearranging the format or by
making technical modifications to the language of the forms, in each
case without modifying the substance of the disclosures. Any such
rearrangement or modification of the language of the model forms may
not be so extensive as to materially affect the substance, clarity,
comprehensibility, or meaningful sequence of the forms. Persons
making revisions with that effect will lose the benefit of the safe
harbor for appropriate use of Appendix B model forms. A person is
not required to conduct consumer testing when rearranging the format
of the model forms.
a. Acceptable changes include, for example:
i. Corrections or updates to telephone numbers, mailing
addresses, or web site addresses that may change over time.
ii. The addition of graphics or icons, such as the person's
corporate logo.
iii. Alteration of the shading or color contained in the model
forms.
iv. Use of a different form of graphical presentation to depict
the distribution of credit scores.
v. Substitution of the words ``credit'' and ``creditor'' or
``finance'' and ``finance company'' for the terms ``loan'' and
``lender.''
vi. Including pre-printed lists of the sources of consumer
reports or consumer reporting agencies in a ``check-the-box''
format.
vii. Including the name of the consumer, transaction
identification numbers, a date, and other information that will
assist in identifying the transaction to which the form pertains.
viii. Including the name of an agent, such as an auto dealer or
other party, when providing the ``Name of the Entity Providing the
Notice.''
b. Unacceptable changes include, for example:
i. Providing model forms on register receipts or interspersed
with other disclosures.
ii. Eliminating empty lines and extra spaces between sentences
within the same section.
4. If a person uses an appropriate Appendix B model form, or
modifies a form in accordance with the above instructions, that
person shall be deemed to be acting in compliance with the
provisions of Sec. 640.4 or Sec. 640.5, as applicable, of this
regulation. It is intended that appropriate use of Model Form B-3
also will comply 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, December 18, 2009.
Jennifer J. Johnson,
Secretary.
The Federal Trade Commission.
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. E9-30678 Filed 1-14-10; 8:45 am]
BILLING CODE C