[Federal Register Volume 76, Number 136 (Friday, July 15, 2011)]
[Rules and Regulations]
[Pages 41602-41626]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17649]
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FEDERAL RESERVE SYSTEM
12 CFR Part 222
[Regulation V; Docket No. R-1407]
RIN 7100-AD66
FEDERAL TRADE COMMISSION
16 CFR Parts 640 and 698
RIN R411009
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: On January 15, 2010, the Board and the Commission published
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 amended 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 Board and
the Commission are amending their respective risk-based pricing rules
to require disclosure of credit scores and information relating to
credit scores in risk-based pricing notices if a credit score of the
consumer is used in setting the material terms of credit. These final
rules reflect the new requirements in section 615(h) of the FCRA that
were added by section 1100F of the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
DATES: These rules are effective August 15, 2011.
FOR FURTHER INFORMATION CONTACT: Board: Krista P. Ayoub, Counsel;
Mandie K. Aubrey or Nikita M. Pastor, Senior Attorney; or Catherine
Henderson, Attorney, Division of Consumer and Community Affairs, (202)
[[Page 41603]]
452-3667 or (202) 452-2412, 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 \1\:
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\1\ The Board is placing the final rules in the part of its
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 rules and model forms 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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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. Section 311 of the FACT Act added section 615(h), 15 U.S.C.
1681m(h), to the Fair Credit Reporting Act (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 person generally must provide a
risk-based pricing notice to a consumer when the person uses a consumer
report in connection with an extension of credit and, based in whole or
in part on the consumer report, extends credit to the consumer on terms
that are materially less favorable than the most favorable terms
available to a substantial proportion of consumers. The risk-based
pricing notice is designed primarily to improve the accuracy of
consumer reports by alerting consumers to the existence of negative
information in their consumer reports, so that consumers can, if they
choose, check their consumer reports for accuracy and correct any
inaccurate information. The Board and the Commission (the Agencies)
jointly published regulations implementing these risk-based pricing
provisions on January 15, 2010, which had a mandatory compliance date
of January 1, 2011. 75 FR 2724 (January 2010 Final Rule).
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) was signed into law. Pub. L. 111-203,
124 Stat. 1376. Section 1100F of the Dodd-Frank Act amends section
615(h) of the FCRA to require that additional content be disclosed to
consumers in risk-based pricing notices; specifically, if a credit
score is used in making the credit decision, the creditor must disclose
that score and certain information relating to the credit score. The
effective date of these amendments is July 21, 2011.\2\
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\2\ Section 1100H of the Dodd-Frank Act provides that the
amendments in Subtitle H of Title X, which includes Section 1100F,
become effective on a ``designated transfer date.'' The Secretary of
the Treasury set the designated transfer date as July 21, 2011. 75
FR 57252 (Sept. 20, 2010).
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The Agencies published proposed regulations and model forms to
reflect these requirements on March 15, 2011. 76 FR 13902. The comment
period closed on April 14, 2011, and comments on the Paperwork
Reduction Act analysis closed on May 16, 2011. The Agencies received
more than 35 comment letters regarding the proposal from banks and
other creditors, industry trade associations, consumer groups,
individual consumers, and others.
Title X of the Dodd-Frank Act also establishes a Bureau of Consumer
Financial Protection (the Bureau), to which rulewriting authority for
certain consumer protection laws will transfer. Section 1088(a)(9) of
the Dodd-Frank Act amends section 615(h)(6) to provide that rulewriting
authority for section 615(h) will transfer to the Bureau. Pursuant to
section 1100H of the Dodd-Frank Act, however, this rulewriting
authority does not transfer to the Bureau until July 21, 2011.\3\ Thus,
rulewriting authority for the risk-based pricing provisions of the
FCRA, including the amendments prescribed by section 1100F of the Dodd-
Frank Act, will not be vested in the Bureau until the date that the
section 1100F amendments become effective.
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\3\ Section 1100H of the Dodd-Frank Act provides that the
amendments in Subtitle H of Title X, which includes Section 1088,
become effective on a ``designated transfer date.'' The Secretary of
the Treasury set the designated transfer date as July 21, 2011. 75
FR 57252 (Sept. 20, 2010).
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The Agencies believe it is important to have implementing
regulations and revised model forms in place as close as possible to
July 21, 2011. This will help ensure that consumers receive consistent
disclosures of credit scores and information relating to credit scores,
and will help facilitate uniform compliance when section 1100F of the
Dodd-Frank Act becomes effective.
Accordingly, the Agencies are finalizing amendments to the risk-
based pricing rules and notices to incorporate the additional content
required by section 1100F of the Dodd-Frank Act, pursuant to their
existing authority under section 615(h) of the FCRA. Section 615(h)
gives the Agencies the authority to issue rules implementing the risk-
based pricing provisions, and requires the Agencies to address in those
rules the form, content, timing, and manner of delivery of risk-based
pricing notices.
In particular, section 615(h)(5) prescribes certain content
requirements for the risk-based pricing notices, but provides that the
required content elements are the minimum that must be disclosed.
Moreover, section 615(h)(6)(B)(iv) provides that the Agencies must
provide a model notice that can be used to comply with section 615(h).
Therefore, the Agencies have the authority to add content to the risk-
based pricing notices that they deem appropriate. The Agencies believe
that adding to the requirements for the risk-based pricing notice the
content required by section 1100F of the Dodd-Frank Act, and providing
revised model notices is appropriate to avoid consumer confusion, and
to ensure timely and consistent compliance with the new content
provisions.
As discussed more fully below, the Agencies received some comments
from industry and consumer advocates that did not relate to the changes
to the model notices to incorporate the section 1100F requirements,
such as a new request to exempt certain entities from the risk-based
pricing rules entirely. Given the impending transfer of rulemaking
authority to the Bureau, however, the Agencies are not making changes
to the risk-based pricing rules and notices beyond those required by
section 1100F of the Dodd-Frank Act. Such changes are beyond the scope
of this rulemaking.
II. Section-by-Section Analysis
Section ----.73 Content, Form, and Timing of Risk-Based Pricing
Notices.
Section ----.73(a) Content of the Notice
Content
Section 615(h) of the FCRA requires a person to include certain
information in a risk-based pricing notice. The January 2010 Final Rule
implements the general
[[Page 41604]]
content requirements for risk-based pricing notices in Sec.
222.72(a)(1) and Sec. 640.3(a)(1) (hereafter ``general risk-based
pricing notice''). The January 2010 Final Rule also sets forth the
content requirements for any risk-based pricing notice required to be
given as a result of the use of a consumer report in an account review
in Sec. 222.72(a)(2) and Sec. 640.3(a)(2) (hereafter ``account review
notice'').
Section 1100F of the Dodd-Frank Act amends section 615(h) of the
FCRA to require that creditors disclose additional information in risk-
based pricing notices. Consistent with section 1100F of the Dodd-Frank
Act, proposed ----.73(a)(1) and (a)(2) amended the content requirements
of the general risk-based pricing notice and the account review notice,
pursuant to section 615(h) of the FCRA. Proposed ----.73(a)(1)(ix)
required a person to provide the additional content in a general risk-
based pricing notice if a credit score of the consumer to whom a person
grants, extends, or otherwise provides credit is used in setting the
material terms of credit. Similarly, proposed ----.73(a)(2)(ix)
required a person to provide the additional content in an account
review notice if a credit score of the consumer whose extension of
credit is under review is used in increasing the annual percentage
rate.
Specifically, Sec. ----.73(a)(1)(ix)(B)-(F) and Sec. ----
--.73(a)(2)(ix)(B)-(F) of the proposed rules required the following
disclosures: (1) the credit score \4\ used by the person in making the
credit decision; (2) the range of possible credit scores under the
model used to generate the credit score; (3) all of the key factors
that adversely affected the credit score, which shall not exceed four
key factors, except that if one of the key factors is the number of
enquiries made with respect to the consumer report, the number of key
factors shall not exceed five; (4) the date on which the credit score
was created; and (5) the name of the consumer reporting agency or other
person that provided the credit score. In addition, to provide context
for the additional content requirements, proposed Sec. --
--.73(a)(1)(ix)(A) and Sec. ----.73(a)(2)(ix)(A) required 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.
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\4\ ``Credit score'' is defined in the January 2010 Final Rule
in ------.71(l) to have the same meaning as in section 609(f)(2)(A)
of the FCRA, 15 U.S.C. 1681g(f)(2)(A). This is consistent with the
definition of ``numerical credit score'' in section 1100F of the
Dodd-Frank Act.
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Industry commenters generally supported the additional content.
Some industry commenters, however, requested additional flexibility in
disclosing the factors that adversely affect the credit score, as
discussed below. Consumer advocates suggested that the Agencies add
additional information related to credit scores to the risk-based
pricing notices, as discussed below. For the reasons discussed below,
the final rules adopt the changes to Sec. ----.73(a)(1)(ix)(A)-(F) and
Sec. ------.73(a)(2)(ix)(A)-(F), as proposed, with an addition to
clarify that the credit score was used in setting the terms of credit.
Key factors. Several industry commenters and a consumer advocate
argued that creditors should have flexibility to disclose only factors
that substantially affected the credit score. They asserted that
requiring creditors to disclose the top four key factors (or five
factors if the number of enquiries made with respect to that consumer
report is one of the key factors) was burdensome and expensive for
creditors, and confusing and of limited value to consumers. In
contrast, one commenter stated that creditors should be required to
disclose all factors that affected the credit score, not just the top
four key factors (or five factors if the number of enquiries made with
respect to that consumer report is a key factor).
Section 1100F of the Dodd-Frank Act requires a person engaging in
risk-based pricing to provide the consumer the information set forth in
subparagraphs (B) through (E) of section 609(f)(1) of the FCRA. Section
609(f)(1)(C) of the FCRA requires disclosure of all of the key factors
that adversely affected the credit score of the consumer in the model
used, up to four, subject to section 609(f)(9) of the FCRA. This
section requires that if the key factors that adversely affected the
credit score include the number of enquiries made with respect to the
consumer report, the number of enquiries must also be disclosed as a
key factor. Because the statutes thus require disclosure of the top
four (or five) key factors that adversely affected the credit score,
the Agencies adopt Sec. ----.73(a)(1)(ix)(B)-(F) and Sec. --
--.73(a)(2)(ix)(B)-(F) as proposed.
An industry commenter requested clarification that a creditor is
permitted to rely on and disclose the key factors provided with the
scores purchased from consumer reporting agencies, without
verification. The commenter further asked for guidance in the event
that a consumer reporting agency does not provide the key factors with
the score.
Under section 1100F of the Dodd-Frank Act, the person setting the
material terms of credit is responsible for providing the credit score
disclosure, including the key factors adversely affecting the credit
score. If a creditor is using a credit score purchased from a consumer
reporting agency, the consumer reporting agency is in the best position
to identify the key factors that affected the score. Thus, the creditor
would need to and could rely on that information in its disclosure to
consumers. With respect to the manner in which this information may be
obtained from the consumer reporting agencies, the Agencies acknowledge
that the contractual arrangements between creditors and consumer
reporting agencies may vary as to how creditors will receive the credit
score information necessary to comply with section 1100F, but do not
believe that imposing specific disclosure requirements on consumer
reporting agencies is within the scope of this rulemaking. In any
event, creditors have two options: (1) they can write their contracts
with consumer reporting agencies to require the consumer reporting
agencies to provide them the key factors adversely affecting the credit
score, or (2) they can choose to send credit score disclosure exception
notices to all consumers applying for non-mortgage credit. See
Exception Notices, below.
Number of enquiries. Several industry commenters suggested that
creditors not be required to disclose the number of enquiries as a key
factor that adversely affected the credit score if the number of
enquiries is not one of the top four key factors. In these cases, the
commenters said that the effect of the number of enquiries on the
credit score is marginal, so that disclosing the number of enquiries as
a key factor may be confusing to consumers.
As discussed above, section 609(f)(9) of the FCRA states that if
the number of enquiries is a key factor that adversely affected the
consumer's credit score, that factor must be disclosed pursuant to
section 609(f)(1)(C) of the FCRA, without regard to the numerical
limitation. The FCRA accordingly requires disclosure of the number of
enquiries as a key factor, regardless of whether it is one of the top
four key factors. Thus, the Agencies adopt the proposed provision
without change.
Additional information regarding credit scores. Consumer advocates
suggested that the Agencies add additional information related to
credit scores to the risk-based pricing notices. Specifically, consumer
advocates suggested that the risk-based pricing notice include an
explanation that the
[[Page 41605]]
consumer does not have a single credit score, and that the credit score
may vary with the consumer reporting agency, scoring model provider, or
particular credit product for which the consumer applied. These
commenters indicated that consumers need this information to help them
understand why they are receiving a particular score that may not be
the same as a generic score, such as a FICO or Vantage score.
The Agencies believe that requiring these additional disclosures
might create ``information overload'' for consumers, and detract from
the primary purpose of the credit score information, which is to inform
consumers of the credit score that has been used to set the material
terms of credit, or used in the review of the account. The Agencies
agree, however, that a disclosure that informs the consumer that the
disclosed score was used in setting the credit terms, or in review of
the credit terms, would further consumer understanding. The Agencies
are thus adding a requirement that the notice include this information.
In addition, the Agencies are revising the model forms H-6 and H-7 in
the Board's rule and B-6 and B-7 in the Commission's rule to add the
statement: ``We used your credit score to set the terms of credit we
are offering you,'' in the ``What you should know about your credit
score'' box on the model forms. This statement mirrors a sentence on
the current risk-based pricing notice, informing consumers that their
credit report was used to set the terms of credit being offered.
Other comments on content. The January 2010 Final Rule requires
that the risk-based pricing notice include a statement that the terms
offered, such as the annual percentage rate, have been set based on
information from a consumer report. Model Form H-1 adopted as part of
the January 2010 Final Rule, and proposed Model Form H-6 state ``We
used information from your credit report(s) to set the terms of the
credit we are offering you, such as [Annual Percentage Rate/down
payment].''
Some industry commenters objected to language in the final rules
and model forms adopted as part of the January 2010 Final Rule that
indicated that the terms of credit were ``set'' or ``based on''
information from a consumer report. These commenters instead
recommended language stating that the terms of credit were ``based in
whole or in part on information from a consumer report.'' The final
rules retain the current language in the regulation and model forms, as
described above. The Agencies believe that the current language in the
regulation and model forms is more concise and understandable to
consumers than the language suggested by the commenters.
Proprietary Scores
As discussed above, proposed ----.73(a)(1)(ix) required a person to
provide the additional content (i.e., the credit score and related
information) in a general risk-based pricing notice if a credit score
of the consumer to whom a person grants, extends, or otherwise provides
credit is used in setting the material terms of credit. Similarly,
proposed ----.73(a)(2)(ix) required a person to provide the additional
content in an account review notice if a credit score of the consumer
whose extension of credit is under review is used in increasing the
annual percentage rate.
Some industry commenters specifically asked when a proprietary
score would be deemed a credit score for purposes of Sec. ----.73.
Proprietary scores are those developed by creditors themselves or for
specific creditors, as opposed to those developed by consumer reporting
agencies or large scoring companies such as FICO or Vantage Score for
use by individual creditors. Commenters also asked for clarification
regarding the information a creditor should disclose under Sec. --
--.73 and the model form a creditor should use when a creditor uses a
proprietary score in setting the material terms of credit. Some
industry commenters indicated that a proprietary score should not be
required to be disclosed under section 1100F of the Dodd-Frank Act
because Congress intended for this provision to apply only to credit
scores that are obtained from consumer reporting agencies, and
disclosing proprietary scores would be confusing to consumers. Consumer
advocates suggested that all proprietary scores, in particular credit-
based insurance scores, be subject to disclosure under Sec. ----.73.
``Credit score'' for purposes of section 1100F of the Dodd-Frank
Act and Sec. ----.71(1) of the January 2010 Final Rule is defined to
have the same meaning as section 609(f)(2)(A) of the FCRA, 15 U.S.C.
1681g(f)(2)(A). Specifically, section 609(f)(2)(A) of the FCRA defines
a credit score to mean ``a numerical value or a categorization derived
from a statistical tool or modeling system used by a person who makes
or arranges a loan to predict the likelihood of certain credit
behaviors, including default[.]'' Accordingly, scores not used to
predict the likelihood of certain credit behaviors, such as insurance
scores or scores used to predict the likelihood of false identity, are
not credit scores by definition, and thus are not required to be
disclosed.
Most credit scores that meet the FCRA definition are scores that
creditors obtain from consumer reporting agencies. Section 609(f)(2)(A)
of the FCRA specifically excludes some--but notall--proprietary scores.
The definition of credit score does not include any mortgage score or
rating of an automated underwriting system that considers one or more
factors in addition to credit information, including the loan-to-value
ratio, the amount of down payment, or the financial assets of a
consumer.
Thus, if a creditor uses a proprietary score that is based on one
or more of these factors in addition to information obtained from a
consumer reporting agency, this proprietary score is not a credit score
for purposes of Sec. ----.71(1) and ----.73 and thus does not need to
be disclosed to the consumer. If, however, the creditor uses both a
proprietary score that does not meet the definition of a credit score
and a credit score from a consumer reporting agency in setting the
material terms of credit or reviewing the account, the creditor would
disclose the credit score from the consumer reporting agency under
Sec. ----.73(a)(1)(ix) and ----.73(a)(2)(ix), as applicable.
Similarly, if a creditor uses a credit score from a consumer reporting
agency as an input to a proprietary score, but that proprietary score
itself is not a credit score, the creditor would disclose the credit
score from the consumer reporting agency under Sec. ----.73. The
creditor may use the ``Your Credit Score and Understanding Your Credit
Score'' section of Forms H-6 and H-7 of the Board's rules and Forms B-6
and B-7 of the Commission's rules for these disclosures.
In contrast, if a creditor uses a proprietary score that only
includes information acquired from a consumer reporting agency in
setting the material terms of credit or reviewing the account, the
proprietary score would be a credit score under section 609(f)(2)(A) of
the FCRA. Commenters asked for guidance on how to disclose information
required under Sec. ----.73(a)(1)(ix) and ----.73(a)(2)(ix) when a
creditor uses only a proprietary score deemed a credit score under
609(f)(2)(A) of the FCRA.
These commenters also suggested that the rules should permit
creditors to purchase a credit score from a consumer reporting agency
and disclose that credit score, instead of disclosing the proprietary
score that is used in setting the material terms of credit or reviewing
the account. Section 1100F of the Dodd-Frank Act requires disclosure of
the
[[Page 41606]]
credit score used in setting the material terms of credit or reviewing
the account. The Agencies do not believe that a creditor would comply
with the statute by disclosing a different credit score purchased after
setting the material terms of credit based on a proprietary score.
In these situations, the creditor should modify the ``Your Credit
Score and Understanding Your Credit Score'' section of Forms H-6 and H-
7 of the Board's rules and Forms B-6 and B-7 of the Commission's rules
to reflect that the creditor did not obtain a credit score from a
consumer reporting agency, but rather used a proprietary score that met
the definition of a credit score under 609(f)(2)(A) of the FCRA in
setting the material terms of credit or reviewing the account. The
creditor should disclose the value of the proprietary score, the date,
the range of proprietary scores, and the key factors adversely
affecting the consumer's proprietary score. The creditor should
indicate that it is the source of the proprietary score. Alternatively,
the creditor has the option of providing all consumers requesting an
extension of credit with a credit score disclosure exception notice
pursuant to the January 2010 Final Rule discussed below.
Commenters also asked for guidance on what information to disclose
under Sec. ----.73(a)(1)(ix) and ----.73(a)(2)(ix) when a creditor
uses both a proprietary score that meets the definition of a credit
score, and a credit score from a consumer reporting agency in setting
the material terms of credit or reviewing the account. Both scores
would be deemed credit scores under section 609(f)(2)(A) of the FCRA.
In such cases where both credit scores are used, a creditor has the
option to choose which credit score to disclose, as detailed in Sec.
----.73(d) discussed below. The creditor may use Forms H-6 and H-7 of
the Board's rules and Forms B-6 and B-7 of the Commission's rules to
comply with the requirements of Sec. ----.73(a)(1)(ix) and --
--.73(a)(2)(ix). If the creditor chooses to disclose the proprietary
score, it would amend the model forms as discussed above. If the
creditor chooses to disclose the credit score from a consumer reporting
agency, the creditor would disclose the value of that credit score, the
date, the range of credit scores, and the key factors adversely
affecting the consumer's credit score. The creditor would indicate the
consumer reporting agency that is the source of the credit score.
Use of a Credit Score
Section 1100F of the Dodd-Frank Act requires a risk-based pricing
notice to include disclosure of a credit score used by a person in
making the credit decision. A person who is required to provide a
general risk-based pricing notice or account review notice may use a
consumer report to set the credit terms offered or extended to
consumers without using a credit score. In a case where a person does
not use a credit score in making the credit decision requiring a risk-
based pricing notice or account review notice, the person is not
required to disclose a credit score and information relating to a
credit score.
Several industry commenters agreed that creditors should not
disclose a credit score when they do not use a credit score in making
the credit decision. These commenters also asked that a creditor not be
required to disclose credit score information when a creditor obtains
but does not use a credit score, or when the credit score was not the
cause of the risk-based pricing.
Section 1100F of the Dodd-Frank Act requires disclosure if a credit
score was used in setting the material terms of credit. A creditor that
obtains a credit score and engages in risk-based pricing would need to
disclose that score, unless the credit score played no role in setting
the material terms of credit. Moreover, even if the credit score was
not a significant factor in setting the material terms of credit but
was a factor in setting those terms, the creditor will have used the
credit score for purposes of section 1100F of the Dodd-Frank Act.
With respect to the scope of the term ``use,'' the Agencies
received one comment suggesting that the original creditor in certain
three-party financing transactions should be considered outside the
scope of the risk-based pricing rules altogether and, therefore, would
not be required to provide a risk-based pricing notice. The risk-based
pricing rules apply to the original creditor if that person ``uses a
consumer report in connection with'' an application for credit. 15
U.S.C. 1681m(h)(1). The commenter contended that the original creditor
does not obtain and thus does not ``use'' a consumer report; rather the
consumer report is ``used'' by an underlying finance source. The
Commission believes that this view of ``use'' is too narrow.
The specific financing situation raised in the comment involves an
automobile financing transaction where an automobile dealer is the
original creditor. In this three-party financing transaction, a
consumer visits the automobile dealer and applies for financing by
completing a loan application with the dealer. The dealer submits the
loan application to one or more unrelated finance sources, which
finance source(s) then conducts underwriting on the consumer's credit
application. Based in whole or in part on the consumer report, the
finance source(s) provides the dealer with an approval of the
consumer's application and the wholesale buy rate at which the finance
source(s) will purchase the resulting credit contract from the dealer.
The dealer then selects the finance source to which it intends to
assign the contract and determines which credit terms, including a
retail finance rate (``APR''), it will offer the consumer. The
commenter asserts that because the original creditor (the automobile
dealer) does not directly obtain the consumer report and/or credit
score from a consumer reporting agency, and instead relies upon the buy
rates from the underlying financing sources, the original creditor does
not ``use'' the consumer report and is outside the scope of the risk-
based pricing rules. The Commission disagrees. The automobile dealer
must provide the consumer with a risk-based pricing notice.\5\
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\5\ If the finance source used a credit score in its
underwriting, that automobile dealer must include that score in the
risk-based pricing notice.
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The original creditor has ``used'' a consumer report in connection
with an application for credit because the original creditor initiated
the request that caused the financing source to obtain the consumer
report and used the resulting information from the financing source to
set the rate offered to consumers. Applying a causal, transaction-based
analysis to the term ``use'' is consistent with the clear intent of
Congress to provide consumers with information about the role that
their credit history plays in setting the terms for credit.\6\ In the
scenario set forth above, the consumer report was used in connection
with the application for credit made by the consumer to the automobile
dealer because the consumer report was obtained by the financing source
in order to fulfill a request made to it by the automobile dealer. The
finance source has not obtained and used the consumer report and/or
credit score independently of the automobile dealer. The finance
source, at the behest of the automobile dealer, has obtained the
reports and performed underwriting and has told the automobile dealer
the wholesale buy rate at which it will
[[Page 41607]]
purchase the contract.\7\ The original creditor incorporated the
wholesale buy rate in the rate offered to the consumer, establishing a
causal connection between the consumer report and the ultimate rate
offered to the consumer.\8\ The original creditor has therefore
``used'' the consumer report.\9\
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\6\ This interpretation of ``use'' is also consistent with the
January 2010 Final Rule, where the Agencies noted that the
``automobile dealer's use of a consumer report to determine which
third-party financing source is likely to purchase the retail
installment sales contract and at what `buy rate' is conduct that
fits squarely within the description of risk-based pricing in [the
final rules].'' 75 FR 2730.
\7\ Indeed, it is unity of interest in the same credit
transaction between the original creditor/automobile dealer and the
underlying finance source that provides the permissible purpose
pursuant to which the finance sources may obtain the consumer's
report.
\8\ The Commission notes that the statute employs the word
``obtain'' when addressing physical possession, lending further
support that ``use'' must be a broader concept. See section 604(f)
(providing that ``[a] person shall not use or obtain a consumer
report for any purpose unless * * * the consumer report is obtained
for a purpose for which the consumer report is authorized to be
furnished [under the FCRA]''); section 604(b)(1)(a) (a consumer
reporting agency cannot provide a consumer report for employment
purposes unless the person who ``obtains'' the report provides a
certification to the consumer reporting agency that, among other
things, it will not be ``used'' in violation of state or federal
law).
\9\ The risk-based pricing rules require the ``original
creditor'' to provide consumers with the necessary notices. If the
automobile dealer, the original creditor in the situation described
above, was not required to provide the risk-based pricing notice,
consumers purchasing automobiles in three-party financing
transactions would never receive a risk-based pricing notice or, in
the alternative, a credit score disclosure exception notice.
Further, if the responsibility for providing the risk-based pricing
notice was to be shifted to the underlying finance sources in these
types of transactions, consumers could receive multiple risk-based
pricing notices per transaction from unfamiliar entities, a result
which would not be beneficial to consumers. See 75 FR at 2730 (``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'').
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Guarantors and Co-Signers
In some cases, a creditor may use the credit score of a guarantor,
co-signer, surety, or endorser, but not a credit score of the consumer
to whom it extends credit or whose extension of credit is under review.
Proposed Sec. Sec. ----.73(a)(1)(ix) and ----.73(a)(2)(ix) required a
person to disclose a credit score and information relating to a credit
score only when using the credit score of the consumer to whom it
grants, extends, or otherwise provides credit or whose extension of
credit is under review. As discussed in the January 2010 Final Rule, a
person is not required to provide a risk-based pricing notice to a
guarantor, co-signer, surety, or endorser.\10\ A person may be
required, however, to provide a risk-based pricing notice to the
consumer to whom it grants, extends, or otherwise provides credit, even
if the person only uses the consumer report or credit score of the
guarantor, co-signer, surety, or endorser.
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\10\ See 75 FR at 2731 (Jan. 15, 2010).
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Some industry commenters and consumer advocates supported the
proposed rules governing guarantors and co-signers. The Agencies
continue to believe that the credit score of one consumer, such as a
guarantor, co-signer, surety, or endorser, should not be disclosed to a
different consumer entitled to receive a risk-based pricing notice.
Therefore, when a person uses a credit score only of a guarantor, co-
signer, surety, or endorser to set the terms of credit for the consumer
to whom it extends credit or whose extension of credit is under review,
a person shall not include a credit score in the general risk-based
pricing notice or account review notice provided to the consumer.
Exception Notices
The Agencies note that the January 2010 Final Rule provides
exceptions to the requirements to provide general risk-based pricing
notices for persons that provide credit score disclosure exception
notices to consumers who request credit. See Sec. Sec. 222.74(d), (e),
and (f); Sec. Sec. 640.5(d), (e), and (f).
Many industry commenters argued that section 1100F of the Dodd-
Frank Act does not affect creditors' option to provide credit score
disclosure exception notices to all consumers instead of risk-based
pricing notices. Consumer advocates, however, urged the Agencies to
eliminate the credit score disclosure exceptions. Consumer advocates
argued that giving creditors the option to provide exception notices
would result in creditors rarely providing risk-based pricing notices.
They stated that a key benefit of the exception notices in comparison
to the risk-based pricing notices was that consumers received a free
credit score. They asserted that section 1100F of the Dodd-Frank Act
eliminated this comparative benefit of the exception notices by
requiring that risk-based pricing notices also disclose credit scores.
Consumer advocates argued that Congress did not eliminate the exception
notices in the Dodd-Frank Act because the notices were created by
regulation, and were not the product of Congress. Finally, consumer
advocates stated that section 1100F of the Dodd-Frank Act required
disclosure of the actual credit score used by the creditor, while
exception notices could contain a generic credit score.
After the Dodd-Frank Act, there remain strong arguments for
retaining the credit score disclosure exceptions. The January 2010
Final Rule, which includes the credit score disclosure exceptions, was
published in January 2010 and became effective on January 1, 2011.
Because the rules were published more than six months before the Dodd-
Frank Act was enacted, Congress could have eliminated the credit score
disclosure exceptions but did not do so. Moreover, the Agencies believe
that the credit score disclosure exception notices continue to be
consistent with the goals of, and underlying reasons for, the risk-
based pricing rule, which are to provide consumers with education about
their credit profiles and alert them to potentially inaccurate
information in their consumer reports that could have a negative effect
on the credit terms being offered to them. Eliminating the exception
notices would result in fewer consumers receiving their credit score
for free. To use the exception notice provision, a creditor must
provide exception notices to all consumers who apply for credit. By
contrast, a creditor must provide risk-based pricing notices only to
consumers receiving less favorable terms from that particular creditor.
Thus, whether a consumer with a particular credit profile would receive
a risk based pricing notice may depend upon the creditor to which the
consumer applies. As a result, some consumers of a given creditor may
not get risk-based pricing notices because they do not receive
materially less favorable terms from that creditor, even though they
would generally receive materially less favorable terms from other
creditors based on their credit profiles. The credit score disclosure
exceptions arguably achieve a better result--by requiring creditors
using the exception to provide notices to all consumers who apply for
credit--consumers that would not have gotten any notice would instead
receive a free credit score.\11\ In addition, consumers are given
exception notices earlier in the credit decision process, thus giving
consumers an earlier opportunity to identify any potential inaccuracies
in their consumer report.\12\ Consumers benefit from knowing their
credit score earlier, even if they do not yet know
[[Page 41608]]
what terms of credit they will be offered. This earlier notice gives
consumers more time to consider, given their current credit profile,
whether they want to continue with a credit transaction at that time.
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\11\ In addition, some consumers may not receive a risk-based
pricing notice even if they did not receive the most favorable terms
from that creditor because creditors may not be able to precisely
distinguish those consumers who received the most favorable terms
from those who did not (or may have used a proxy method). See 75 FR
2736. By virtue of the fact that exception notices are provided to
all consumers who apply for credit, the credit score disclosure
exceptions avoid this problem.
\12\ Credit score disclosure exceptions must be given as soon as
is reasonably practicable and, in any event, no later than before
consummation of the transaction, whereas risk-based pricing notices
are required to be provided after the terms of credit are set.
---------------------------------------------------------------------------
On the other hand, by requiring that risk-based pricing notices
disclose credit scores when the credit scores were used to set the
terms of credit, section 1100F of the Dodd-Frank Act has eliminated one
of the key comparative benefits of the credit score disclosure
exception notices over the risk-based pricing notices.\13\ Moreover,
while the exception notices contain valuable information about how a
consumer's credit score compares with the credit scores of others, it
does not inform consumers that they may be receiving less favorable
credit terms or an increase in their interest rate based on their
consumer report and/or their credit score.
---------------------------------------------------------------------------
\13\ See 75 FR at 2742 (highlighting benefit to consumers of
providing credit scores to consumers in exception notices).
---------------------------------------------------------------------------
The Agencies note that eliminating the credit score disclosure
exception notice would fundamentally change the structure of the risk-
based pricing rules and may substantially affect compliance costs.
Given that rulemaking authority will be transferred to the Bureau on
July 21, 2011, the Agencies do not believe that it is appropriate to
make a substantial and fundamental change to the rules at this time.
The final rules are limited to implementing the requirements of section
1100F of the Dodd-Frank Act. Thus, the final rules retain the credit
score disclosure exception notices.
Section ----.73(b) Form of the Notice
The Agencies provided model forms that may be used for compliance
with the risk-based pricing requirements in Appendices H and B of the
January 2010 Final Rule. Paragraph (b)(2) of section ----.73 of the
January 2010 Final Rule clarifies how each of the model forms of the
risk-based pricing notices required by Sec. Sec. ----.72(a) and (c),
and by Sec. ----.72(d) may be used. Paragraph (b)(2) provides that
appropriate use of the model forms contained in Appendices H-1 and H-2
of the Board's rules and Appendices B-1 and B-2 of the Commission's
rules is deemed to comply with Sec. Sec. ----.72(a) and (c), and Sec.
----.72(d), respectively. Use of these model forms is optional.
Under the proposal, the Agencies amended Appendices H and B of the
January 2010 Final Rule to add two new model forms in Appendices H-6
and H-7 of the Board's proposed rules and Appendices B-6 and B-7 of the
Commission's proposed rules, for situations where a credit score and
information relating to such credit score must be disclosed. See Model
Forms, below. Proposed paragraph (b)(2) clarified that appropriate use
of Model Form H-1 or H-6, or B-1 or B-6, is deemed to comply with the
requirements of Sec. Sec. ----.72(a) and (c). It also clarified that
appropriate use of Model Form H-2 or H-7, or B-2 or B-7, is deemed to
comply with the requirements of Sec. ----.72(d).
The final rules adopt Sec. ----.73(b) as proposed. The comments
received on the proposed model forms are discussed below. See Model
Forms, below.
Section ----.73(d) Multiple Credit Scores
Some creditors may obtain multiple credit scores from consumer
reporting agencies in connection with their underwriting processes. A
creditor may use one or more of those scores in setting the material
terms of credit. Section 1100F of the Dodd-Frank Act only requires a
person to disclose a single credit score that is used by the person in
making the credit decision. The Agencies proposed Sec. ----.73(d) to
address situations where a creditor obtains multiple credit scores from
consumer reporting agencies, or obtains a credit score from a consumer
reporting agency in addition to using a proprietary score deemed a
credit score under the FCRA, and must provide either a general risk-
based pricing notice or an account review notice to a consumer.
Proposed Sec. ----.73(d)(1) provided that when a person uses one
of those credit scores in setting the material terms of credit, for
example, by using the low, middle, high, or most recent score, the
general risk-based pricing and account review notices are required to
include that credit score and information relating to that credit score
as required by proposed Sec. Sec. ----.73(a)(1)(ix) and (a)(2)(ix).
When a person uses two or more credit scores in setting the material
terms of credit, for example, by computing the average of all the
credit scores obtained, the notices are required to include any one of
those credit scores and information relating to the credit score as
required by proposed Sec. Sec. ----.73(a)(1)(ix) and (a)(2)(ix). The
notice may, at the person's option, include more than one credit score,
along with the information specified in proposed Sec. Sec. --
--.73(a)(1)(ix) and (a)(2)(ix) for each credit score disclosed.
Proposed Sec. ----.73(d)(2) provided examples to illustrate the
notice requirements for creditors that obtain multiple credit scores
from consumer reporting agencies. The first example described in
proposed Sec. ----.73(d)(2)(i) applied when a person that uses
consumer reports to set the material terms of credit cards 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. Under the
proposed rules, that person must disclose the low score in its notices.
The example described in proposed Sec. ----.73(d)(2)(ii) applied when
a person that uses consumer reports to set the material terms of
automobile loans 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. Under the proposal, that
person could choose any one of these scores to include in its notices.
A consumer advocate and several industry commenters supported the
Agencies' proposal. Other consumer advocates recommended that creditors
disclose all the credit scores used. For the reasons described below,
the final rules adopt Sec. ----73(d) as proposed with revisions to
make clear that these rules apply to use of proprietary scores that
meet the definition of ``credit score'' in Sec. ----.71(l) as well as
credit scores obtained from consumer reporting agencies.
The final rules do not require creditors to disclose all the credit
scores used if a creditor uses multiple credit scores in setting the
material terms of credit. The final rules permit creditors at their
option to disclose all the credit scores used. As noted above, although
a creditor may use multiple credit scores in setting the material terms
of credit, section 1100F of the Dodd-Frank Act only requires a person
to disclose a single credit score that is used by the person in making
the credit decision. Further credit scoring models may differ
considerably in nature and range. The Agencies believe that disclosing
multiple credit scores may confuse consumers and provide them little
value. Consumers may not understand the extent to which credit scoring
models differ, and may try to compare the different credit scores. Such
comparisons may confuse consumers and lessen the value of the credit
score disclosures.
Moreover, the Agencies do not believe that requiring disclosure of
a particular credit score, for example, the lowest score, would be in
the best interest of
[[Page 41609]]
consumers when multiple scores are used. The lowest score may not truly
be the ``worst'' score, since credit scoring models differ, and
requiring businesses to identify the ``worst'' score would add a layer
of complexity without a clear benefit to consumers. The Agencies also
note that the Dodd-Frank Act requires the Bureau to ``conduct a study
on the nature, range, and size variations'' of different credit scoring
systems, and on whether these variations disadvantage consumers.
Section 1078(a). The Bureau must submit a report to Congress with the
results of this study within one year after the Dodd-Frank Act
enactment date. Section 1078(b). That study may shed light on the
extent to which disclosure of multiple credit scores would benefit
consumers, and the Bureau could revisit the Agencies' judgment in view
of the results of its study.
For the reasons discussed above, the final rules do not require
that creditors always disclose the lowest credit score if a creditor
uses two or more credit scores in setting the material terms of credit.
The Agencies believe that section 1100F of the Dodd-Frank Act does not
mandate that a person disclose the lowest credit score that is used by
the person in making the credit decision, if the person uses multiple
credit scores in setting the material terms of credit. The person must
simply disclose a credit score used.
Section ----.75 Rules of construction
Section ----.75(c) Multiple Consumers
The proposed rules amended Sec. ----.75(c) to address
circumstances where a person must provide multiple consumers, such as
co-borrowers, with a risk-based pricing notice in a transaction. The
proposed rules retained the rule of construction that clarifies 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. The proposed rules, however,
amended the rules addressing the provision of a risk-based pricing
notice when the consumers have the same address and when the consumers
have different addresses, to account for situations where a risk-based
pricing notice contains a consumer's credit score.
Proposed Sec. ----.75(c)(1) provided that whether the consumers
have the same address or not, the person must provide a separate notice
to each consumer if a notice includes a credit score(s). Each separate
notice that includes a credit score(s) 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. If the consumers have the same
address, and the notice does not include a credit score(s), a person
may satisfy the requirements by providing a single notice addressed to
both consumers.
The proposed rules also amended Sec. ----.75(c)(3)(i) to provide
an example illustrating the notice requirements when a person must
provide a risk-based pricing notice that includes credit score
information to multiple consumers. Proposed Sec. ----.75(c)(3)(i)
clarified that, in a situation where two consumers jointly apply for
credit with a creditor and the credit decision is based in part on the
consumers' credit scores, a separate risk-based pricing notice must be
provided to each consumer whether the consumers have the same address
or not. Each separate risk-based pricing notice must contain the credit
score(s) of the consumer to whom the notice is provided.
Consumer advocates supported the proposed rules governing multiple
consumers. Several industry commenters asked that creditors have the
option to provide risk-based pricing notices to all the applicants or
only to the applicant whose credit score was used in setting the
material terms of credit. Some industry commenters also argued that co-
applicants elect to share information with one another, and that
creditors cannot prevent co-applicants from accessing each other's
risk-based pricing notices.
Under section 615(h) of the FCRA, a person generally must provide a
risk-based pricing notice to a consumer when the person uses a consumer
report in connection with an extension of credit and, based in whole or
in part on a consumer report, extends credit to the consumer on
material terms that are materially less favorable than the most
favorable terms available to a substantial proportion of consumers. A
creditor therefore must provide a risk-based pricing notice to all co-
applicants, and not only to the applicant whose credit score was used
in setting the material terms of credit.\14\ Further, the Agencies do
not believe co-applicants necessarily choose, merely by applying for
credit together, to share sensitive information with one another, in
particular, credit scores. The Agencies understand that creditors may
not be able to prevent co-applicants from accessing each other's risk-
based pricing notices. Yet the Agencies believe that creditors must
provide each risk-based pricing notice to the corresponding applicant,
in keeping with privacy concerns.
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\14\ As noted above, a creditor that obtains a credit score and
engages in risk-based pricing would need to disclose that score,
unless the credit score played no role in setting the material terms
of credit. If the credit score obtained for an applicant played no
role in setting the material terms of credit, then the creditor does
not need to include a credit score in the risk-based pricing notice
provided to that applicant.
---------------------------------------------------------------------------
Appendix H of the Board's Rules and Appendix B of the Commission's
Rules
Model Forms
Appendix H of the Board's rules and Appendix B of the Commission's
rules contain five model forms that the Agencies prepared to facilitate
compliance with the rules. Two of the model forms are for risk-based
pricing notices and three of the model forms are credit score
disclosure exception notices. Each of the model forms is designated for
use in a particular set of circumstances as indicated by the title of
that model form. Model forms H-1 and B-1 are for use in complying with
the general risk-based pricing notice requirements in Sec. ----.72.
Model forms H-2 and B-2 are for use in complying with the risk-based
pricing notices given in connection with account review in Sec. --
--.72.
The proposed rules added two new forms that could be used when a
person must disclose credit score information to a consumer. Model
forms H-6 and B-6 set forth a risk-based pricing notice with credit
score information that could be used to comply with the general risk-
based pricing requirements if the additional content requirements of
Sec. ----.73(a)(1)(ix) apply. Model forms H-7 and B-7 set forth an
account review risk-based pricing notice with credit score information
that could be used to comply with the account review notice
requirements if the additional content requirements of Sec. --
--.73(a)(2)(ix) apply.
Model forms H-1 and H-2, and B-1 and B-2, are retained. The general
risk-based pricing and account review notices could continue to be used
to comply with Sec. ----.72 when the additional content requirements
discussed in Sec. Sec. ----.73(a)(1)(ix) and (a)(2)(ix) do not apply.
As with the other model forms, use of the model forms H-6 or H-7, or B-
6 or B-7, by creditors is optional. If a creditor appropriately uses
Model Form H-6 or H-7, or B-6 or B-7, or modifies a form in accordance
with the rules or the instructions to the appendix, that creditor will
be within the rules' safe harbor and is deemed to be acting in
compliance with the general risk-based pricing notice or account review
notice requirement when the content provisions of Sec. Sec. --
--.73(a)(1)(ix) or (a)(2)(ix) apply.
[[Page 41610]]
Finally, the proposal amended instructions 1. and 2. to Appendices
H and B to reflect the addition of H-6 and H-7, and B-6 and B-7. The
Agencies did not receive comments on the proposed changes to
instructions 1. and 2. to Appendices H and B. The Agencies are adopting
the changes to instructions 1. and 2. to Appendices H and B as proposed
in the final rules.
In addition, as discussed in more detail above, model forms H-6 and
H-7 of the Board's rules and B-6 and B-7 of the Commission's rule are
also revised to add the statement: ``We used your credit score to set
the terms of credit we are offering you,'' in the ``What you should
know about your credit score'' box on the model forms. See Additional
Information Regarding Credit Scores, above.
The Agencies received several comments on the proposed model forms,
as discussed in more detail below. The final rules adopt model forms H-
6 and H-7 of the Board's rule and B-6 and B-7 of the Commission's rule
as proposed with one revision pertaining to the disclosure of contact
information for the entity that provided the credit score.
Contact information for the entity that provided the credit score.
An industry commenter asked that the Agencies add language to the model
forms directing the consumer to the consumer reporting agency for more
information about the credit score. The commenter believed that
consumers may otherwise contact creditors with questions about their
credit score, but that creditors are not in a position to answer those
questions.
The Agencies are adding optional language to model forms H-6 and H-
7 of the Board's rule and B-6 and B-7 of the Commission's rule
directing the consumer to the entity (which may be a consumer reporting
agency or, in the case of a proprietary score that meets the definition
of a credit score, the creditor itself) that provided the credit score
for any questions about the credit score, along with the entity's
contact information. Creditors may use or not use the additional
language without losing the safe harbor, since the language is
optional. The final rules add new instruction 4. to Appendices H and B
to make clear that this disclosure of the entity's contact information
is optional.
Co-applicants, guarantors, and co-signers. An industry commenter
recommended providing creditors with the flexibility to add language to
the model forms to indicate that for co-applicants, the terms of credit
may be based on either or both of the applicants' credit information. A
consumer advocate similarly suggested adding language to the model
forms indicating that for applications with a guarantor or co-signer,
the terms of credit may be based on either or both of the applicant's,
guarantor's, or co-signer's credit information. The commenters
explained that such language would decrease consumer confusion, since
an applicant with an excellent credit profile who receives a risk-based
pricing notice may not realize that the risk-based pricing decision may
have been made because of the co-applicant's, guarantor's, or co-
signer's credit profile.
The Agencies believe the additional language may simply complicate
the disclosures without providing a substantial benefit to consumers.
An applicant with strong credit who receives a risk-based pricing
notice will likely understand that the adverse decision was based on
the co-applicant, guarantor, or co-signer's credit information or will
contact the creditor to inquire.
Disclosure that no credit score is available. In some cases, a
creditor may try to obtain a credit score for an applicant, but the
applicant may have insufficient credit history for the consumer
reporting agency to generate a credit score. One commenter asked that
the creditor have the option to amend the model forms to provide the
applicant notice that no credit score was available from a consumer
reporting agency in the space available on the model forms for the
credit information disclosure.
Section 1100F only applies when a creditor uses a credit score in
setting the material terms of credit. The creditor cannot and is not
required to disclose credit score information if an applicant has no
credit score. Nothing in section 1100F of the Dodd-Frank Act prevents a
creditor from providing the applicant notice that no credit score was
available from a consumer reporting agency, although section 1100F does
not require such notice.
Order of content. The Agencies specifically solicited comment on
the ordering of the content in Model Forms H-6 and H-7, and B-6 and B-
7, and whether the credit score and information relating to a credit
score should be presented prior to the information on consumer reports.
Some commenters indicated that the Agencies should not change the
order of the content in the model forms to present the credit score and
information relating to the credit score prior to information on
consumer reports. One commenter indicated that changing the order of
content would impose additional compliance burdens on creditors without
providing significant additional benefits for consumers.
Another commenter proposed that the credit score information should
be moved up and incorporated into the information on consumer reports,
instead of disclosed separately at the bottom of the notice. The final
rules retain the order of the content in the model forms as proposed.
The Agencies believe that it is appropriate to disclose the information
related to credit reports first because the primary purpose of the
risk-based pricing notices is to alert consumers that risk-based
pricing occurred as a result of their consumer reports. Further, in
retaining the proposed order of the content, the model forms more
logically progress from more general consumer report information to
more specific credit score information. In addition, given that a
creditor may still provide a consumer Forms H-1 and H-2 of the Board's
rules and Forms B-1 and B-2 of the Commission's rules when the creditor
does not use the consumer's credit score in setting the material terms
of credit, providing the credit score information after the consumer
report information will promote ease of use for creditors who use Forms
H-1 and H-2 of the Board's rules and Forms B-1 and B-2 of the
Commission's rules for some consumers and the amended model forms for
other consumers.
Order of credit report information. One commenter suggested that
the credit report information in the model form should be reordered.
Proposed Model Forms H-6 and H-7 of the Board's rules and Forms B-6 and
B-7 of the Commission's rules disclose the credit score in the first
row of the section ``Your Credit Score and Understanding Your Credit
Score.'' An explanation of what credit scores are is disclosed in the
second row of this section. The commenter suggested that the
information would be more understandable to consumer if the explanation
of what credit scores are was disclosed in the first row of this
section.
The final rules retain the proposed order of the credit report
information in model forms H-6 and H-7 of the Board's rules and Forms
B-6 and B-7 of the Commission's rules. The Agencies believe that
disclosing the credit score that is used in setting the material credit
terms or reviewing the account is the primary purpose of the provisions
of section 1100F of the Dodd-Frank Act. By placing the credit score
that is applicable to the consumer in the first row of the section
``Your Credit Score and Understanding Your Credit Score,''
[[Page 41611]]
the Agencies believe that consumers are more likely to continue reading
the notice to find out additional information about the credit score.
Attaching the credit score information to the current model form.
One industry commenter asked the Agencies to clarify that a creditor
may staple or append the credit score information using a supplemental
document to a current model form on general risk-based pricing (H-1 and
B-1) or an account review notice (H-2 and B-2). The Agencies note that
information contained on the first page of H-1 and B-1 is the same as
the information contained on the first page of H-6 and B-6. Likewise,
the information contained on the first page of H-2 and B-2 is the same
as the information contained on the first page of H-7 and B-7. The
difference between H-1 (or B-1) and H-6 (or B-6) is the inclusion of
the credit score information contained in the section ``Your Credit
Score and Understanding Your Credit Score'' that is contained on the
second page of H-6 and B-6. Likewise, the difference between H-2 (or B-
2) and H-7 (or B-7) is the inclusion of the credit score information
contained in the section ``Your Credit Score and Understanding Your
Credit Score'' that is contained on the second page of H-7 and B-7.
Thus, the Agencies believe that a creditor will be deemed to have used
H-6 or B-6 if it staples or appends to H-1 or B-1 the credit score
information contained in the section ``Your Credit Score and
Understanding Your Credit Score'' that is contained on the second page
of H-6 and B-6. Instruction 3. to Appendices H and B sets out the
modifications that may be made to the model forms without losing the
benefit of safe harbor. The combined H-1 or B-1 and attachment must
comply with Instruction 3. to Appendices H and B for the creditor to
retain the safe harbor for using H-6 or B-6. Likewise, a creditor will
be deemed to have used H-7 or B-7 if it staples or appends to H-2 or B-
2 the credit score information contained in the section ``Your Credit
Score and Understanding Your Credit Score'' that is contained on the
second page of H-7 and B-7, in a format substantially similar to H-7
and B-7. The combined H-2 or B-2 and attachment must comply with
Instruction 3. to Appendices H and B for the creditor to retain the
safe harbor for using H-7 or B-7.
Use of graphs or table format. An industry commenter requested that
the Agencies clarify that creditors may use a graph or table format to
provide the information in the model forms without losing the safe
harbor. The commenter stressed that graphs, tables, and other visual
devices may be clearer and more useful to consumers.
Although the Agencies certainly encourage simplicity, one of the
key benefits of a safe harbor is uniformity. Thus, it is difficult to
make a blanket statement that creditors may substitute graphs or tables
without losing the safe harbor.
The Agencies reiterate the interpretation in the proposed rule. A
creditor may rearrange the format of the model forms or make technical
modifications to the language of the model forms, so long as the
creditor does not change the substance of the disclosures. See
Instruction 3. to Appendices H and B. The creator may not, however,
make such an extensive rearrangement or modification of the language of
the model forms as to materially affect the substance, clarity,
comprehensibility, or meaningful sequence of the model forms. See
Instruction 3. to Appendices H and B. Such extensive rearrangements or
modification of the language of the model forms would result in loss of
the safe harbor. See Instruction 3. to Appendices H and B. Whether a
graph or table could be used without losing the safe harbor would have
to be determined on a case by case basis using this standard.
Implementation Date
The Agencies noted in the proposal that the amendments in section
1100F of the Dodd-Frank Act are effective on July 21, 2011. Several
industry commenters asked that the Agencies delay the implementation
date by 6 months to at least 12 months. One commenter suggested that
the Agencies stay the rulemaking, and let the Bureau finalize the
rules. Another commenter requested that creditors receive the benefit
of the safe harbor for using the proposed model forms until creditors
can implement the requirements in the final rule.
Several industry commenters argued that the risk-based pricing
requirements in section 1100F do not become effective until
incorporated by rules, because section 1100F amends section 615(h) of
the FCRA, and that section 615(h)(6) of the FCRA states that
regulations are required to implement risk-based pricing requirements.
Further, one industry commenter asserted that section 1088(a)(9) of the
Dodd-Frank Act amends the FCRA to require the Bureau to issue
regulations implementing section 1100F. This commenter argued that
Congress could not have intended section 1100F of the Dodd-Frank Act to
take effect on July 21, 2011 since the Bureau would not yet be
operational. The commenter concluded that section 1100F of the Dodd-
Frank Act is an exception to the July 21, 2011 effective date.
Section 1100F of the Dodd-Frank Act provides that the amendments in
Subtitle H of Title X, which includes Section 1100F, become effective
on a ``designated transfer date.'' The Secretary of the Treasury set
the designated transfer date as July 21, 2011. 75 FR 57252 (Sept. 20,
2010). Thus, effective July 21, 2011, section 1100F of the Dodd-Frank
Act amends section 615(h)(5) of the FCRA, which sets forth the minimum
content required for risk-based pricing notices. Even if the Agencies
did not modify the model forms to incorporate this additional minimum
content, creditors would be required to disclose this information
pursuant to the statute.
Rather than have creditors create their own notices in order to
comply with section 1100F of the Dodd-Frank Act, the Agencies are
exercising their existing authority to amend the model notices to
reflect these changes to avoid consumer confusion, and to ensure
timely, consistent, and uniform compliance with the new content
provisions. Section 615(h) gives the Agencies the authority to issue
rules implementing the risk-based pricing provisions, including
authority to address ``the form, content, timing, and manner of
delivery'' of risk-based pricing notices. The Agencies believe that
adding to the requirements for the risk-based pricing notice the
content required by section 1100F of the Dodd-Frank Act, and providing
revised model notices is appropriate. These final rules are thus
effective and compliance is mandatory beginning 30 days after the date
of publication in the Federal Register.
III. Regulatory Analysis
A. Paperwork Reduction Act
The Agencies have reviewed the final rules and determined that they
contain ``collections of information'' subject to the Paperwork
Reduction Act of 1995, 44 U.S.C. 3501-3521 (PRA). 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 Office of
Management and Budget (OMB) control number.
The Board has reviewed and approved the final rulemaking under the
authority delegated by OMB. 5 CFR part 1320, Appendix A.1. The
collections of information required by this final
[[Page 41612]]
rulemaking are found in 12 CFR 222.73(a)(1) and (a)(2).\15\
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\15\ The information collections (ICs) in this rule will be
incorporated with the Board's Recordkeeping and 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 final rulemaking. The current OMB inventory for
Regulation V is available at: http://www.reginfo.gov/public/do/PRAMain.
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The Commission submitted the information collection requirements
contained in the proposed rulemaking to OMB for review and approval
under the PRA; OMB withheld formal action on the rulemaking pending its
further review of the joint final rules. The collections of information
required by this final rulemaking are found in 16 CFR 640.4(a)(1) and
(a)(2).
As discussed above, on March 15, 2011, the Agencies published in
the Federal Register a joint notice of proposed rulemaking that is
consistent with new content requirements in section 615(h) of the FCRA
that were added by section 1100F of the Dodd-Frank Act. 76 FR 13902.
The final rules require creditors to disclose credit score information
to consumers when a credit score is used to set or adjust the terms of
credit. Specifically, the final rules would require the following
disclosures: (1) The credit score used by the person in making the
credit decision; (2) the range of possible credit scores under the
model used to generate the credit score; (3) all of the key factors
that adversely affected the credit score, which shall not exceed four
key factors, except that if one of the key factors is the number of
enquiries made with respect to the consumer report, the number of key
factors shall not exceed five; (4) the date on which the credit score
was created; and (5) the name of the consumer reporting agency or other
person that provided the score. In addition, the final rules require a
statement that a credit score is a number that takes into account
information in a consumer report, that the consumer's credit score was
used to set the terms of credit offered, and that a credit score can
change over time to reflect changes in the consumer's credit history.
In the proposal, the Agencies collectively estimated that
respondents potentially affected by the additional notice would take,
on average, 16 hours (2 business days) to update their systems and
modify model notices to comply with the proposed requirements. 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 this average figure was a reasonable estimate.
Comments Received
The Agencies received 13 comments--two from banks, three from
utilities, two from credit union trade association, two from banking
trade associations, two from credit and financial services companies,
one from a consumer credit trade association, and one from a law firm
on behalf of an unspecified client--in response to the PRA section of
the proposal. The commenters asserted that the time needed to update
their systems to incorporate these requirements and coordinate with
consumer reporting agencies as necessary would exceed the 16 hours
estimated by the Agencies.
Burden Statement
Based on these comments, the Agencies agree that some additional
time beyond 16 hours may be needed. The Agencies, therefore, have
revised upward their prior burden estimate. The Agencies believe that
32 hours (4 business days) is a reasonable estimate of the average
amount of time to modify existing database systems to incorporate these
new requirements. Entities affected by these final rules are already
familiar with the existing provisions of section 615(h) of the FCRA,
which require risk-based pricing disclosures when a person uses a
consumer report in setting the material terms of credit. The new
requirement to require creditors to disclose credit score information
to consumers when a credit score is used to set or adjust the terms of
credit should not be burdensome. In addition, the Agencies have
provided model notices that should significantly reduce the cost of
compliance with the final rules. Moreover, the Agencies have provided
exceptions to the final rules, whereby creditors may fulfill their
compliance obligation by providing credit score disclosure exception
notices.
Frequency of Response: On occasion.
Affected Public: Any person that is required to provide a risk-
based pricing notice and uses a credit score in making the credit
decision requiring a risk-based pricing notice.
Board:
For purposes of the PRA, the Board is estimating the burden for
entities regulated by the Board, Office of the Comptroller of the
Currency, Federal Deposit Insurance Corporation, Office of Thrift
Supervision, National Credit Union Administration, and the U.S.
Department of Housing and Urban Development (collectively, the
``Federal financial regulatory agencies''). Such entities 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: 32 hours (four business days) to
update systems and modify model notices to comply with final
requirements.
Total Estimated Annual Burden: 581,536 hours.
Commission:
For purposes of the PRA, the Commission is estimating the burden
for entities that extend credit to consumers for personal, household,
or family purposes, and are subject to administrative enforcement by
the FTC pursuant to section 621(a)(1) of the FCRA (15 U.S.C.
1681s(a)(1)). These businesses include, among others, non-bank mortgage
lenders, consumer lenders, utilities, state-chartered credit unions,
and automobile dealers and retailers that directly extend credit to
consumers for personal, non-business uses.
Number of Respondents: 199,500.\16\
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\16\ 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 purposed of
estimating the burden, Commission staff made the conservative
assumption that all of the included entities engage in risk-based
pricing and use a credit score in making the credit decision
requiring a risk-based pricing notice.
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Estimated Time per Response: 32 hours (4 business days) to update
systems and modify model notices.
Total Estimated Annual Burden: Based on an estimated 199,500
respondents, the one-time burden, annualized for a 3 year PRA
clearance, would be 2,128,000 hours [(32 x 199,500) / 3]. The
Commission believes that, on a continuing basis, the revision to the
final rules would have a negligible effect on the annual burden. The
estimated one-time labor cost for all categories of FTC covered
entities under the final rule, annualized for a 3 year PRA clearance,
is $91,397,600.
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
[[Page 41613]]
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 update systems
for providing risk-based pricing notices and adapt the written notices
as necessary at an hourly rate of $42.95.\17\ Based on the above
estimates, the estimated one-time labor cost for all categories of FTC
covered entities under the final rule, annualized for a 3 year PRA
clearance, is $91,397,600 [((32 hours x $42.95) x 199,500) / 3].
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\17\ 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.
---------------------------------------------------------------------------
Commission staff does not anticipate that compliance with the final
rules will require any new capital or other non-labor expenditures. The
final rules provide a simple and concise model notice that creditors
may use to comply, and, as creditors already are providing risk-based
pricing notices to consumers under the FCRA, they already have the
necessary resources to generate and distribute these notices. Thus, any
capital or non-labor costs associated with compliance would be
negligible.
B. Regulatory Flexibility Act
Board:
The Board prepared an initial regulatory flexibility analysis under
the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) in
connection with the proposed rules. The final 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.\18\ The size standard to be
considered a small business is: $175 million or less in assets for
banks and other depository institutions; and $7 million or less in
annual revenues for the majority of non-bank entities that are likely
to be subject to the final rules. 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 rules will not have a significant economic
impact on a substantial number of small entities. The Board hereby
certifies that the final rules will not have a significant economic
impact on a substantial number of small business entities. The Board
recognizes that the final rules will affect some small business
entities; however the Board does not expect that a substantial number
of small businesses will be affected or that the final rules will have
a significant economic impact on them. Nonetheless, the Board has
decided to publish a final regulatory flexibility analysis with the
final rules and has prepared the following analysis:
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\18\ 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 Rules
Section 1100F of the Dodd-Frank Act amends section 615(h) of the
FCRA to require persons to disclose a credit score and information
relating to that credit score in risk-based pricing notices when the
person uses a credit score in setting the material terms of credit.
Specifically, a person must disclose, in addition to the information
currently required by the January 2010 Final Rule: (1) A numerical
credit score used in making the credit decision; (2) the range of
possible scores under the model used; (3) the key factors that
adversely affected the credit score of the consumer in the model used;
(4) the date on which the credit score was created; and (5) the name of
the person or entity that provided the credit score. The effective date
of these amendments is July 21, 2011.
The Agencies are issuing final rules to amend the risk-based
pricing rules pursuant to their existing authority under section 615(h)
of the FCRA, to facilitate compliance with the new requirements under
section 1100F of the Dodd-Frank Act.
2. Statement of Objectives and Legal Basis
The SUPPLEMENTARY INFORMATION above contains information on the
objectives and legal basis of the final rules. The legal basis for the
final rules is section 615(h) of the FCRA. The final rules are
consistent with section 1100F of the Dodd-Frank Act.
3. Summary of Issues Raised by Commenters
Some industry commenters stated that the proposed rules would
create substantial compliance burdens, particularly for small entities.
They asked that small entities be exempt from the requirements, or that
the Board delay the implementation date for small entities.
The compliance burdens identified by these commenters are not
substantially different from the burdens imposed by the January 2010
Final Rule. In addition, the exemption requested by the commenters
would also affect the underlying January 2010 Final Rule. Further,
changes to the risk-based pricing rules and notices beyond those
required by section 1100F of the Dodd-Frank Act are outside the scope
of this rulemaking. Finally, the Agencies do not believe such changes
to the January 2010 Final Rule are appropriate in light of the
impending transfer of rulemaking authority to the Bureau.
4. Description of Small Entities to Which the Regulation Applies
The final rules apply to any person that (1) is required to provide
a risk-based pricing notice to a consumer; and (2) uses a credit score
in making the credit decision requiring a risk-based pricing notice.
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 credit scores for risk-based pricing in
connection with consumer credit. The risk-based pricing provisions of
section 1100F of the Dodd-Frank Act have broad applicability to persons
who use credit scores for risk-based pricing in connection with the
provision of consumer credit.
Based on estimates compiled by the Board, the Federal Deposit
Insurance Corporation, and the Office of Thrift Supervision, there are
approximately 9,458 depository institutions that could be considered
small entities and that are potentially subject to the final rules.\19\
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, automobile finance companies, automobile dealers, other non-
bank finance companies, telephone companies, and utility companies.
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\19\ The estimate includes 1,459 institutions regulated by the
Board, 659 national banks, and 4,099 federally-chartered credit
unions, as determined by the Board. The estimate also includes 2,872
institutions regulated by the FDIC and 369 thrifts regulated by the
OTS. See 75 FR 36016, 36020 (Jun. 24, 2010).
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It also is unknown how many of these small entities that meet the
SBA's size standards and that are potentially subject to the final
rules use credit scores for risk-based pricing in connection with the
provision of consumer credit. The final rules do not impose any
requirements on small entities that do not use credit scores for
[[Page 41614]]
risk-based pricing in connection with consumer credit.
5. Projected Reporting, Recordkeeping and Other Compliance Requirements
The compliance requirements of the final rules are described in
detail in the SUPPLEMENTARY INFORMATION above.
The final rules generally require a person that is required to
provide a risk-based pricing notice to a consumer and uses a credit
score in making the credit decision to provide a credit score and
information relating to that credit score in the notice, in addition to
the information currently required by the January 2010 Final Rule.
Pursuant to the January 2010 Final Rule, a person is required to
determine if it engages in risk-based pricing, based in whole or in
part on consumer reports, in connection with the provision of consumer
credit. If the person does engage in risk-based pricing based on
consumer reports, the person generally is currently required to
establish procedures for identifying those consumers to whom it must
provide risk-based pricing notices.
A person that is required to provide risk-based pricing notices to
certain consumers would need to analyze the regulations. The person
would need to determine whether it used credit scores for risk-based
pricing of the consumers to whom it must provide risk-based pricing
notices. Pursuant to the final rules, a person that uses credit scores
for risk-based pricing would need to provide a credit score and
information relating to that credit score to those consumers to whom it
must provide an risk-based pricing notice, in addition to the
information currently required by the January 2010 Final Rule. The
person would need to design, generate, and provide notices, including a
credit score and information relating to that credit score, to the
consumers to whom it must provide a risk-based pricing notice.
The Board does not expect that the costs associated with the final
rules will place a significant burden on small entities.
6. Identification of Duplicative, Overlapping, or Conflicting Federal
Regulations
The Board has not identified any federal statutes or regulations
that would duplicate, overlap, or conflict with the final rules. As
discussed in Part II above, the amendments to the risk-based pricing
rules are consistent with section 1100F of the Dodd-Frank Act. The
Agencies are issuing the final rules pursuant to their existing
authority under section 615(h) of the FCRA. The amendments to the risk-
based pricing rules have been designed to work in conjunction with the
requirements of section 1100F of the Dodd-Frank Act, to help facilitate
uniform compliance when this section becomes effective.
7. Steps Taken To Minimize the Economic Impact on Small Entities
The Board solicited comments on any significant alternatives
consistent with section 615(h) of the FCRA, including the provisions of
section 1100F of the Dodd-Frank Act, that would minimize the impact of
the final rules on small entities. As noted above, several industry
commenters suggested that small entities be exempt from the proposed
rules, or that the Board delay the effective date for 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, and providing model notices to ease creditors' burden.
As explained above, given the impending transfer of rulemaking
authority to the Bureau, the Agencies do not believe it is appropriate
to make changes to the January 2010 risk-based pricing rules and
notices beyond those required by section 1100F of the Dodd-Frank Act.
Such changes are beyond the scope of this rulemaking. In addition,
Congress set the effective date for section 1100F of the Dodd-Frank Act
for July 21, 2011. To facilitate compliance, the final rules are
effective and compliance is mandatory beginning 30 days after the date
of publication in the Federal Register.
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 rules and a Final Regulatory
Flexibility Analysis (FRFA) with the final rules, unless the Commission
certifies that the rules will not have a significant economic impact on
a substantial number of small entities. See 5 U.S.C. 603-605.
The Commission hereby certifies that the final rules will not have
a significant economic impact on a substantial number of small business
entities. The Commission recognizes that the final rules 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 rules 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 rules is not
feasible. The Commission did not receive any comments relating to the
total number of small entities that would be affected by the final
rules. We did receive some comments from industry suggesting that the
compliance with the final rules would be burdensome. One comment stated
that publicly owned utilities, many of which qualify as small entities,
will incur ``significant'' costs to comply with the final rules and
requested that the Commission conduct the full FRFA analysis. The
Commission considered these comments, and 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 rules 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 rules and has prepared the following
analysis:
1. Need for and Objectives of the Rules
Section 1100F of the Dodd-Frank Act amends section 615(h) of the
FCRA to require persons to disclose a credit score and information
relating to that credit score in risk-based pricing notices when the
person uses a credit score in setting the material terms of credit.
Specifically, a person must disclose, in addition to the information
currently required by the January 2010 Final Rule: (1) The numerical
credit score used in making the credit decision; (2) the range of
possible scores under the model used; (3) the key factors that
adversely affected the credit score of the consumer in the model used;
(4) the date on which the credit score was created; and (5) the name of
the person or entity that provided the credit score. The effective date
of these amendments is July 21, 2011.
The Agencies are issuing final rules to amend the risk-based
pricing rules pursuant to their existing authority under section 615(h)
of the FCRA, to facilitate compliance with the new requirements under
section 1100F of the Dodd-Frank Act.
2. Significant Issues Received by Public Comment
The Commission received a number of comments in response to the
proposed rules. Some of the industry comments stated that the proposed
rules would create substantial compliance burdens, particularly for
small entities. They asked that certain small entities be exempt from
the requirements, or that the Commission delay the implementation date
for small entities.
[[Page 41615]]
The compliance burdens identified by these comments are not
substantially different or distinct from the burdens imposed by the
original Final Rule, which became effective January 1, 2011. Therefore
the exemption requested by the comments--to be excluded from the
requirement to provide risk-based pricing notices--would affect the
underlying Rule. Given the impending transfer of rulemaking authority
to the Bureau, however, the Agencies do not believe it is appropriate
to make changes to the risk-based pricing rules and notices beyond
those required by section 1100F of the Dodd-Frank Act. Such changes are
beyond the scope of this rulemaking.
3. Small Entities to Which the Final Rules Will Apply
The final rules apply to any person that (1) Is required to provide
a risk-based pricing notice to a consumer; and (2) uses a credit score
in making the credit decision requiring a risk-based pricing notice.
The total number of small entities likely to be affected by the final
rules is unknown, because the Commission does not have data on the
number of small entities that use credit scores 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 entities. Generally,
the entities under the Commission's jurisdiction that also are covered
by section 311 include state-chartered credit unions, non-bank mortgage
lenders, automobile dealers, and utility companies. The available data,
however, are not sufficient for the Commission to realistically
estimate the number of small entities, as defined by the SBA, that the
Commission regulates and that would be subject to the proposed
rules.\20\ The Commission received one comment stating that a majority
of publicly owned utilities qualified as small entities and would,
therefore, be affected by these final rules. The final rules do not,
however, impose any requirements on small entities that do not use
credit scores for risk-based pricing in connection with the provision
of consumer credit.
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\20\ 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. Automobile dealers have a higher size
standard of $26.5 million in average annual receipts for new car
dealers and $21 million in average annual receipts for used car
dealers. A list of the SBA's size standards for all industries can
be found in the SBA's Table of Small Business Size Standards Matched
to North American Industry Classification Codes, which is available
at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
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4. Projected Reporting, Recordkeeping and Other Compliance Requirements
The compliance requirements of the final rules are described in
detail in the SUPPLEMENTARY INFORMATION above.
The final rules generally require a creditor that is required to
provide a risk-based pricing notice to a consumer, and uses a credit
score in making the credit decision to provide a credit score and
information relating to that credit score in the notice, in addition to
the information that is currently required by the January 2010 Final
Rule. Pursuant to the January 2010 Final Rule, a person is required to
determine if it engages in risk-based pricing, based in whole or in
part on consumer reports, in connection with the provision of consumer
credit. If the person does engage in risk-based pricing based on
consumer reports, the person generally is required to establish
procedures for identifying those consumers to whom it must provide
risk-based pricing notices.
A person that is required to provide risk-based pricing notices
would need to analyze the rules. The person would need to determine
whether it used credit scores for risk-based pricing of the consumers
to whom it must provide risk-based pricing notices. Pursuant to the
final rules, a person that uses credit scores for risk-based pricing
would need to provide credit score information relating to that credit
score to those consumers to whom it must provide a risk-based pricing
notice, in addition to the information currently required by the
January 2010 Final Rule. The person would need to design, generate, and
provide notices, including a credit score and information relating to
that credit score, to the consumers to whom it must provide a risk-
based pricing notice.
Compliance with the final rules will involve some expenditure of
time and resources, although Commission staff anticipates that the
costs per entity will not be significant. Most of the costs will be
incurred initially as entities update their systems for determining
which of their consumers should receive risk-based pricing notices, and
update notices to include a credit score and information relating to
that score, as necessary, and as they train staff to comply with the
rules. In calculating these costs, Commission staff assumes that for
all entities managerial or professional technical personnel will handle
the initial aspects of compliance with the rule, and that sales
associates or administrative personnel will handle any ongoing
responsibilities. To further minimize the costs associated with the
final rules, the Agencies have provided a model notice to facilitate
compliance. Cost estimates for compliance with the final rules are
described in detail in the PRA section of this Notice.
Commission staff does not expect that the costs associated with the
final rules will place a significant burden on small entities.
5. Steps Taken To Minimize Significant Economic Impact of the Rules on
Small Entities
The Commission considered whether any significant alternatives,
consistent with section 615(h) of the FCRA, including the provisions of
section 1100F of the Dodd-Frank Act, could further minimize the final
rules' impact on small entities. As noted above, some industry
commenters suggested that small entities be exempt from the rules, or
that the Commission delay the effective date for small entities.
As explained above, given the impending transfer of rulemaking
authority to the Bureau, however, the Agencies do not believe it is
appropriate to make changes to the risk-based pricing rules and notices
beyond those required by section 1100F of the Dodd-Frank Act. Such
changes are beyond the scope of this rulemaking. In addition, Congress
set the effective date for section 1100F of the Dodd-Frank Act for July
21, 2011. The final rules are effective and compliance is mandatory
beginning 30 days after the date of publication in the Federal
Register.
The Commission has sought to minimize the economic impact on small
entities by providing a model notice to ease creditor's burden and
facilitate compliance. By using the model notice, creditors qualify for
the safe harbor. Creditors are not required to use the model notice,
however. If they provide a notice that clearly and conspicuously
conveys the required information, these creditors would comply with the
requirements of the rules, though they would not receive the benefit of
the safe harbor. In addition, compliance with this notice requirement
is format-neutral. Finally, a creditor may comply with the January 2010
Final Rule by providing consumers with a credit score disclosure
notice. By providing a range of options, the Agencies have sought to
help businesses of all sizes reduce the burden of complying with the
final rules.
[[Page 41616]]
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
Credit, Trade practices.
16 CFR Part 698
Credit, Trade practices.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the joint preamble, the Board is
amending chapter II of title 12 of the Code of Federal Regulations by
amending 12 CFR part 222, as follows:
PART 222--FAIR CONSUMER REPORTING (REGULATION V)
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1. The authority citation for part 222 continues 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.
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2. Section 222.73 is amended as follows:
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A. Paragraphs (a)(1)(vii) and (viii) are revised.
0
B. Paragraph (a)(1)(ix) is added.
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C. Paragraphs (a)(2)(vii) and (viii) are revised.
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D. Paragraph (a)(2)(ix) is added.
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E. Paragraph (b)(2) is revised.
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F. Paragraph (d) is added.
Sec. 222.73 Content, form, and timing of risk-based pricing notices.
(a) * * *
(1) * * *
(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;
(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; and
(ix) If a credit score of the consumer to whom a person grants,
extends, or otherwise provides credit is used in setting the material
terms of credit:
(A) A statement that a credit score is a number that takes into
account information in a consumer report, that the consumer's credit
score was used to set the terms of credit offered, and that a credit
score can change over time to reflect changes in the consumer's credit
history;
(B) The credit score used by the person in making the credit
decision;
(C) The range of possible credit scores under the model used to
generate the credit score;
(D) All of the key factors that adversely affected the credit
score, which shall not exceed four key factors, except that if one of
the key factors is the number of enquiries made with respect to the
consumer report, the number of key factors shall not exceed five;
(E) The date on which the credit score was created; and
(F) The name of the consumer reporting agency or other person that
provided the credit score.
(2) * * *
(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;
(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; and
(ix) If a credit score of the consumer whose extension of credit is
under review is used in increasing the annual percentage rate:
(A) A statement that a credit score is a number that takes into
account information in a consumer report, that the consumer's credit
score was used to set the terms of credit offered, and that a credit
score can change over time to reflect changes in the consumer's credit
history;
(B) The credit score used by the person in making the credit
decision;
(C) The range of possible credit scores under the model used to
generate the credit score;
(D) All of the key factors that adversely affected the credit
score, which shall not exceed four key factors, except that if one of
the key factors is the number of enquires made with respect to the
consumer report, the number of key factors shall not exceed five;
(E) The date on which the credit score was created; and
(F) The name of the consumer reporting agency or other person that
provided the credit score.
(b) * * *
(2) Model forms. Model forms of the risk-based pricing notice
required by Sec. 222.72(a) and (c) are contained in Appendices H-1 and
H-6 of this part. Appropriate use of Model Form H-1 or H-6 is deemed to
comply with the requirements of Sec. 222.72(a) and (c). Model forms of
the risk-based pricing notice required by Sec. 222.72(d) are contained
in Appendices H-2 and H-7 of this part. Appropriate use of Model Form
H-2 or H-7 is deemed to comply with the requirements of Sec.
222.72(d). Use of the model forms is optional.
* * * * *
(d) Multiple credit scores--(1) In general. When a person obtains
or creates two or more credit scores and uses one of those credit
scores in setting the material terms of credit, for example, by using
the low, middle, high, or most recent score, the notices described in
paragraphs (a)(1) and (2) of this section must include that credit
score and information relating to that credit score required by
paragraphs (a)(1)(ix) and (a)(2)(ix). When a person obtains or creates
two or more credit scores and uses multiple credit scores in setting
the material terms of credit by, for example, computing the average of
all the credit scores obtained or created, the notices described in
paragraphs (a)(1) and (2) of this section must include one of those
credit scores and information relating to credit scores required by
paragraphs (a)(1)(ix) and (a)(2)(ix). The notice may, at the person's
option, include more than one credit score, along with the additional
information specified in paragraphs (a)(1)(ix) and (a)(2)(ix) of this
section for each credit score disclosed.
(2) Examples. (i) A person that uses consumer reports to set the
material terms of credit cards 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 notices described in paragraphs (a)(1) and (2) of this
section.
(ii) A person that uses consumer reports to set the material terms
of automobile loans 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 notices described in
paragraph (a)(1) and (2) of this section.
[[Page 41617]]
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3. Section 222.75 is amended by revising paragraphs (c)(1) and
(c)(3)(i) to read as follows:
Sec. 222.75 Rules of construction.
* * * * *
(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). Whether
the consumers have the same address or not, the person must provide a
separate notice to each consumer if a notice includes a credit
score(s). Each separate notice that includes a credit score(s) 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. If the
consumers have the same address, and the notice does not include a
credit score(s), a person may satisfy the requirements by providing a
single notice addressed to both consumers.
* * * * *
(3) Examples. (i) Two consumers jointly apply for credit with a
creditor. The creditor obtains credit scores on both consumers. Based
in part on the credit scores, 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 creditor provides risk-based pricing notices to satisfy its
obligations under this subpart. The creditor must provide a separate
risk-based pricing notice to each consumer whether the consumers have
the same address or not. Each risk-based pricing notice must contain
only the credit score(s) of the consumer to whom the notice is
provided.
* * * * *
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4. Appendix H is amended by revising paragraphs 1.,2., and 4. and
adding Model Forms H-6 and H-7 to read as follows:
Appendix H to Part 222--Appendix H--Model Forms for Risk-Based Pricing
and Credit Score Disclosure Exception Notices
1. This appendix contains four 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 if a credit score
is not used in setting the material terms of credit. Model form H-2
is for risk-based pricing notices given in connection with account
review if a credit score is not used in increasing the annual
percentage rate. 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. Model form H-6 is for use in complying
with the general risk-based pricing notice requirements in Sec.
222.72 if a credit score is used in setting the material terms of
credit. Model form H-7 is for risk-based pricing notices given in
connection with account review if a credit score is used in
increasing the annual percentage rate. All forms contained in this
appendix are models; their use is optional.
* * * * *
4. Optional language in model forms H-6 and H-7 may be used to
direct the consumer to the entity (which may be a consumer reporting
agency or the creditor itself, for a proprietary score that meets
the definition of a credit score) that provided the credit score for
any questions about the credit score, along with the entity's
contact information. Creditors may use or not use the additional
language without losing the safe harbor, since the language is
optional.
* * * * *
H-6 Model form for risk-based pricing notice with credit score
information
H-7 Model form for account review risk-based pricing notice with
credit score information
* * * * *
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BILLING CODE 6750-01-P
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BILLING CODE 6210-01-C
BILLING CODE 6750-01-C
Federal Trade Commission
16 CFR Chapter I
Authority and Issuance
For the reasons discussed in the joint preamble, the Federal Trade
Commission is amending chapter I, title 16, Code of Federal
Regulations, as follows:
PART 640--DUTIES OF CREDITORS REGARDING RISK-BASED PRICING
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5. The authority citation for part 640 continues to read as follows:
Authority: Pub. L. 108-159, sec. 311; 15 U.S.C. 1681m(h).
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6. Section 640.4 is amended as follows:
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A. Paragraphs (a)(1)(vii) and (viii) are revised.
0
B. Paragraph (a)(1)(ix) is added.
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C. Paragraphs (a)(2)(vii) and (viii) are revised.
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D. Paragraph (a)(2)(ix) is added.
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E. Paragraph (b)(2) is revised.
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F. Paragraph (d) is added.
Sec. 640.4 Content, form, and timing of risk-based pricing notices.
(a) * * *
(1) * * *
(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;
(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; and
(ix) If a credit score of the consumer to whom a person grants,
extends, or otherwise provides credit is used in setting the material
terms of credit:
(A) A statement that a credit score is a number that takes into
account information in a consumer report, that the consumer's credit
score was used to set the terms of credit offered, and that a credit
score can change over time to reflect changes in the consumer's credit
history;
(B) The credit score used by the person in making the credit
decision;
(C) The range of possible credit scores under the model used to
generate the credit score;
(D) All of the key factors that adversely affected the credit
score, which shall not exceed four key factors, except that if one of
the key factors is the number of enquiries made with respect to the
consumer report, the number of key factors shall not exceed five;
(E) The date on which the credit score was created; and
(F) The name of the consumer reporting agency or other person that
provided the credit score.
(2) * * *
(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)
[[Page 41622]]
specified by the consumer reporting agency or agencies;
(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; and
(ix) If a credit score of the consumer whose extension of credit is
under review is used in increasing the annual percentage rate:
(A) A statement that a credit score is a number that takes into
account information in a consumer report, that the consumer's credit
score was used to set the terms of credit offered, and that a credit
score can change over time to reflect changes in the consumer's credit
history;
(B) The credit score used by the person in making the credit
decision;
(C) The range of possible credit scores under the model used to
generate the credit score;
(D) All of the key factors that adversely affected the credit
score, which shall not exceed four key factors, except that if one of
the key factors is the number of enquiries made with respect to the
consumer report, the number of key factors shall not exceed five;
(E) The date on which the credit score was created; and
(F) The name of the consumer reporting agency or other person that
provided the credit score.
(b) * * *
(2) Model forms. Model forms of the risk-based pricing notice
required by Sec. 640.3(a) and (c) are contained in Appendices B-1 and
B-6 of this part. Appropriate use of Model form B-1 or B-6 is deemed to
comply with the requirements of Sec. 640.3(a) and (c). Model forms of
the risk-based pricing notice required by Sec. 640.3(d) are contained
in Appendices B-2 and B-7 of this part. Appropriate use of Model form
B-2 or B-7 is deemed to comply with the requirements of Sec. 640.3(d).
Use of the model forms is optional.
* * * * *
(d) Multiple credit scores--(1) In general. When a person obtains
or creates two or more credit scores and uses one of those credit
scores in setting the material terms of credit, for example, by using
the low, middle, high, or most recent score, the notices described in
paragraphs (a)(1) and (2) of this section must include that credit
score and information relating to that credit score required by
paragraphs (a)(1)(ix) and (a)(2)(ix). When a person obtains or creates
two or more credit scores and uses multiple credit scores in setting
the material terms of credit by, for example, computing the average of
all the credit scores obtained or created, the notices described in
paragraphs (a)(1) and (2) of this section must include one of those
credit scores and information relating to credit scores required by
paragraphs (a)(1)(ix) and (a)(2)(ix). The notice may, at the person's
option, include more than one credit score, along with the additional
information specified in paragraphs (a)(1)(ix) and (a)(2)(ix) of this
section for each credit score disclosed.
(2) Examples. (i) A person that uses consumer reports to set the
material terms of credit cards 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 notices described in paragraphs (a)(1) and (2) of this
section.
(ii) A person that uses consumer reports to set the material terms
of automobile loans 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 notices described in
paragraph (a)(1) and (2) of this section.
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7. Section 640.6 is amended by revising paragraphs (c)(1) and (c)(3)(i)
to read as follows:
Sec. 640.6 Rules of construction.
* * * * *
(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). Whether
the consumers have the same address or not, the person must provide a
separate notice to each consumer if a notice includes a credit
score(s). Each separate notice that includes a credit score(s) 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. If the
consumers have the same address, and the notice does not include a
credit score(s), a person may satisfy the requirements by providing a
single notice addressed to both consumers.
* * * * *
(3) Examples. (i) Two consumers jointly apply for credit with a
creditor. The creditor obtains credit scores on both consumers. Based
in part on the credit scores, 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 creditor provides risk-based pricing notices to satisfy its
obligations under this subpart. The creditor must provide a separate
risk-based pricing notice to each consumer whether the consumers have
the same address or not. Each risk-based pricing notice must contain
only the credit score(s) of the consumer to whom the notice is
provided.
* * * * *
PART 698--MODEL FORMS AND DISCLOSURES
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8. The authority citation for part 698 continues to read as follows:
Authority: 15 U.S.C. 1681e, 1681g, 1681j, 1681m, 1681s, and
1681s-3; Pub. L. 108-159, sections 211(d), 214(b), and 311; 117
Stat. 1952.
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9. Appendix B to Part 698 is amended by revising paragraphs 1., 2., and
4, and adding Model Forms B-6 and B-7 to read as follows:
Appendix B to Part 698--Model Forms for Risk-Based Pricing and Credit
Score Disclosure Exception Notices
1. This appendix contains four 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 if a credit score
is not used in setting the material terms of credit. Model form B-2
is for risk-based pricing notices given in connection with account
review if a credit score is not used in increasing the annual
percentage rate. 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. Model form B-6 is for use in complying
with the general risk-based pricing notice requirements in Sec.
640.3 if a credit score is used in setting the material terms of
credit. Model form B-7 is for risk-based pricing notices given in
connection with account review if a credit score is used in
increasing the annual percentage rate. All forms contained in this
appendix are models; their use is optional.
* * * * *
4. Optional language in model forms B-6 and B-7 may be used to
direct the consumer
[[Page 41623]]
to the entity (which may be a consumer reporting agency or the
creditor itself, for a proprietary score that meets the definition
of a credit score) that provided the credit score for any questions
about the credit score, along with the entity's contact information.
Creditors may use or not use the additional language without losing
the safe harbor, since the language is optional.
* * * * *
B-6 Model form for risk-based pricing notice with credit score
information
B-7 Model form for account review risk-based pricing notice with
credit score information
* * * * *
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BILLING CODE 6210-01-C; 6750-01-C
By order of the Board of Governors of the Federal Reserve
System, July 5, 2011.
Jennifer J. Johnson,
Secretary of the Board.
By the direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 2011-17649 Filed 7-14-11; 8:45 am]
BILLING CODE 6210-01-P; 6750-01-P