[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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

[[Page 2774]]

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

[[Page 2775]]

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

[[Page 2776]]

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