[Federal Register: May 19, 2008 (Volume 73, Number 97)]
[Proposed Rules]
[Page 28965-29021]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19my08-22]
[[Page 28965]]
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Part IV
Federal Reserve System
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12 CFR Part 222
Federal Trade Commission
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16 CFR Parts 640 and 698
Fair Credit Reporting Risk-Based Pricing Regulations; Proposed Rule
[[Page 28966]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 222
[Regulation V; Docket No. R-1316]
FEDERAL TRADE COMMISSION
16 CFR Parts 640 and 698
RIN 3084-AA94
Fair Credit Reporting Risk-Based Pricing Regulations
AGENCIES: Board of Governors of the Federal Reserve System (Board) and
Federal Trade Commission (Commission).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Board and the Commission are publishing for comment
proposed rules to implement the risk-based pricing provisions in
section 311 of the Fair and Accurate Credit Transactions Act of 2003
(FACT Act), which amends the Fair Credit Reporting Act (FCRA). The
proposed rules generally require a creditor to provide a risk-based
pricing notice to a consumer when the creditor uses a consumer report
to grant or extend credit to the consumer on material terms that are
materially less favorable than the most favorable terms available to a
substantial proportion of consumers from or through that creditor. The
proposed rules also provide for two alternative means by which
creditors can determine when they are offering credit on material terms
that are materially less favorable. The proposed rules also include
certain exceptions to the general rule, including exceptions for
creditors that provide a consumer with a disclosure of the consumer's
credit score in conjunction with additional information that provides
context for the credit score disclosure.
DATES: Comments must be received on or before August 18, 2008.
ADDRESSES: The Board and the Commission will jointly review all of the
comments submitted. Therefore, you may comment to either the Board or
the Commission and you need not send comments (or copies) to both
agencies. Because paper mail in the Washington area and at the Board
and the Commission is subject to delay, please submit your comments by
electronic means whenever possible. Commenters are encouraged to use
the title ``FACT Act Risk-Based Pricing Rule'' in addition to the
docket or RIN number in their submission. Interested parties are
invited to submit comments in accordance with the following
instructions:
Board: You may submit comments, identified by Docket No. R-1316, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
Commission: Comments should refer to ``FACT Act Risk-Based Pricing
Rule, Project No. R411009,'' and may be submitted by any of the
following methods. If, however, the comment contains any material for
which confidential treatment is requested, it must be filed in paper
form, and the first page of the document must be clearly labeled
``Confidential.'' \1\
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\1\ Commission Rule 4.2(d), 16 CFR 4.2(d). The comment must be
accompanied by an explicit request for confidential treatment,
including the factual and legal basis for the request, and must
identify the specific portions of the comment to be withheld from
the public record. The request will be granted or denied by the
Commission's General Counsel, consistent with applicable law and the
public interest. See Commission Rule 4.9(c), 16 CFR 4.9(c).
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Web Site: Comments filed in electronic form should be
submitted by clicking on the following Web link: https://
secure.commentworks.com/ftc-RiskBasedPricing and following the
instructions on the Web-based form. To ensure that the Commission
considers an electronic comment, you must file it on the Web-based form
at https://secure.commentworks.com/ftc-RiskBasedPricing.
Federal eRulemaking Portal: If this notice appears at
http://www.regulations.gov, you may also file an electronic comment
through that Web site. The Agencies will consider all comments that
regulations.gov forwards to the Commission.
Mail or Hand Delivery: A comment filed in paper form
should include ``FACT Act Risk-Based Pricing Rule, Project No.
R411009,'' both in the text and on the envelope and should be mailed or
delivered, with two complete copies, to the following address: Federal
Trade Commission/Office of the Secretary, Room H-135 (Annex M), 600
Pennsylvania Avenue, NW., Washington, DC 20580. The Commission is
requesting that any comment filed in paper form be sent by courier or
overnight service, if possible.
Comments on any proposed filing, recordkeeping, or disclosure
requirements that are subject to paperwork burden review under the
Paperwork Reduction Act should additionally be submitted to: Office of
Management and Budget, Attention: Desk Officer for the Federal Trade
Commission. Comments should be submitted via facsimile to (202) 395-
6974 because U.S. Postal Mail is subject to lengthy delays due to
heightened security precautions.
The FTC Act and other laws the Commission administers permit the
collection of public comments to consider and use in this proceeding as
appropriate. All timely and responsive public comments, whether filed
in paper or electronic form, will be considered by the Commission, and
will be available to the public on the Commission's Web site, to the
extent practicable, at http://www.ftc.gov/os/publiccomments.htm. As a
matter of discretion, the Commission makes every effort to remove home
contact information for individuals from the public comments it
receives before placing those comments on the Commission's Web site.
More information, including routine uses permitted by the Privacy Act,
may be found in the Commission's privacy policy, at http://www.ftc.gov/
ftc/privacy.htm.
FOR FURTHER INFORMATION CONTACT:
Board: David A. Stein, Managing Counsel, or Amy E. Burke, Senior
Attorney, Division of Consumer and Community Affairs, (202) 452-3667 or
(202) 452-2412; or Andrea K. Mitchell, Senior Attorney, Legal Division,
(202) 452-2458, Board of Governors of the Federal Reserve System, 20th
and C Streets, NW., Washington, DC 20551. For users of a
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
Commission: Kellie Cosgrove Riley, Senior Attorney, or Stacey
Brandenburg,
[[Page 28967]]
Attorney, Division of Privacy and Identity Protection, Bureau of
Consumer Protection, (202) 326-2252, Federal Trade Commission, 600
Pennsylvania Avenue, NW., Washington DC 20580.
SUPPLEMENTARY INFORMATION:
I. Background
The Fair and Accurate Credit Transactions Act of 2003 (FACT Act)
was signed into law on December 4, 2003. Public Law 108-159, 117 Stat.
1952. In general, the FACT Act amended the Fair Credit Reporting Act
(FCRA) to enhance the ability of consumers to combat identity theft,
increase the accuracy of consumer reports, and allow consumers to
exercise greater control regarding the type and amount of solicitations
they receive.
Section 311 of the FACT Act added a new section 615(h) to the FCRA
to address risk-based pricing. Risk-based pricing refers to the
practice of setting or adjusting the price and other terms of credit
offered or extended to a particular consumer to reflect the risk of
nonpayment by that consumer. Information from a consumer report is
often used in evaluating the risk posed by the consumer. Creditors that
engage in risk-based pricing generally offer more favorable terms to
consumers with good credit histories and less favorable terms to
consumers with poor credit histories.
Under the new section 615(h) of the FCRA, a risk-based pricing
notice must be provided to consumers in certain circumstances.
Generally, a person must provide a risk-based pricing notice to a
consumer when the person uses a consumer report in connection with an
application, grant, extension, or other provision of credit and, based
in whole or in part on the consumer report, grants, extends, or
provides credit to the consumer on material terms that are materially
less favorable than the most favorable terms available to a substantial
proportion of consumers from or through that person.
Section 311 is part of Title III of the FACT Act, which is entitled
``Enhancing the Accuracy of Consumer Report Information.'' The risk-
based pricing notice requirement is designed primarily to improve the
accuracy of consumer reports by alerting consumers to the existence of
negative information on their consumer reports so that consumers can,
if they choose, check their consumer reports for accuracy and correct
any inaccurate information. \2\
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\2\ See S. Rep. No. 108-166, at 20 (Oct. 17, 2003).
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Section 615(h) requires the Board and the Commission (Agencies)
jointly to issue rules implementing the risk-based pricing provisions.
The statute requires the Agencies to address in the implementing rules
the form, content, timing, and manner of delivery of any notices
pursuant to section 615(h). The rules also must clarify the meaning of
certain terms used in this section, including what are ``material''
credit terms and when credit terms are ``materially less favorable.''
Section 615(h) gives the Agencies the authority to provide exceptions
to the notice requirement for classes of persons or transactions for
which the Agencies determine that risk-based pricing notices would not
significantly benefit consumers. Finally, the Agencies must provide a
model notice that can be used to comply with section 615(h).
II. Developing the Proposed Rules
In developing these proposed risk-based pricing rules, the Agencies
sought to implement the statutory provisions in a manner that would be
operationally feasible for the wide variety of entities that will be
subject to the rules. At the outset of developing the proposed rules,
the Agencies conducted outreach to various interested parties,
including consumer groups, financial institutions, mortgage bankers,
and consumer reporting agencies. The goals of this initial outreach
were to get a broad sense of how risk-based pricing is used in
practice, how information from consumer reports factors into risk-based
pricing, and how interested parties believe the Agencies should
implement these provisions.
Based on this initial outreach, the Agencies determined that it may
not be operationally feasible in many cases for creditors to compare
the terms offered to each consumer with the terms offered to other
consumers to whom the creditor has extended credit. After considering
several approaches, the Agencies concluded that the most effective way
to implement the statute was to develop certain tests that could serve
as proxies for comparing the terms offered to different consumers.
These tests could be used by creditors for which making direct
comparisons among consumers would be difficult or infeasible.
The Agencies then conducted additional, more in-depth outreach
meetings with interested parties, including consumer groups, consumer
reporting agencies, and a variety of different types of creditors,
including large banks, small community banks, credit card issuers,
mortgage bankers, auto finance companies, automobile dealers, private
student loan creditors, manufactured housing lenders, and industry
trade associations. This outreach provided the Agencies with valuable
information about how risk-based pricing is conducted in various
sectors of the consumer credit market. In addition, the Agencies sought
feedback from outreach participants on a number of possible tests that
could be used to implement the requirements of the statute. The
Agencies' goal was to determine which tests would both identify those
consumers who likely received materially less favorable terms than the
terms obtained by other consumers and be operationally feasible for
creditors to implement.
The proposed rules reflect the Agencies' judgments as to the best
approaches identified through these outreach efforts. As discussed more
fully below, the Agencies recognize that no single test or approach is
likely to be feasible for all of the various types of creditors to
which the rules apply or for the many different credit products for
which risk-based pricing is used. Therefore, the proposed rules provide
a menu of approaches that creditors may use to comply with the
statute's legal requirements. The next section provides a brief
explanation of the proposed rules.
III. Summary of the Proposed Rules
Risk-Based Pricing Notice
The proposed rules implement the risk-based pricing notice
requirement of section 615(h). The proposed rules apply to any person
that both: (i) Uses a consumer report in connection with an application
for, or a grant, extension, or other provision of, credit to a
consumer; and (ii) based in whole or in part on the consumer report,
grants, extends, or otherwise provides credit to that consumer on
material terms that are materially less favorable than the most
favorable terms available to a substantial proportion of consumers from
or through that person. The proposed rules clarify that the risk-based
pricing notice requirements apply only in connection with credit that
is primarily for personal, household, or family purposes, but not in
connection with business credit. For more information about the scope
of the proposed rules, see the discussion of Sec. ----.70 in the
Section-by-Section Analysis.
Definitions
The proposed rules define certain key terms. Specifically, the
proposed rules define ``material terms'' as the annual percentage rate
for credit that has an annual percentage rate,\3\ or, in the case
[[Page 28968]]
of credit that does not have an annual percentage rate, as any monetary
terms, such as the down payment amount or deposit, that the person
varies based on the consumer report. For credit cards, which may have
multiple annual percentage rates applicable to different features,
``material terms'' is defined as the annual percentage rate applicable
to purchases. In addition, the proposed rules define ``materially less
favorable,'' as it applies to material terms, to mean that the terms
granted or extended to a consumer differ from the terms granted or
extended to another consumer from or through the same person such that
the cost of credit to the first consumer would be significantly greater
than the cost of credit to the other consumer. For more information
about the definitions of these and other terms used in the proposed
rules, see the discussion of Sec. ----.71 in the Section-by-Section
Analysis.
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\3\ Under Regulation Z, which implements the Truth in Lending
Act, 15 U.S.C. 1601, et seq., the annual percentage rate is a
measure of the cost of credit, expressed as a yearly or annualized
rate. See 12 CFR 226.14, 226.22. Regulation Z requires creditors to
disclose accurately the cost of credit, including the annual
percentage rate. See 12 CFR 226.5a(b)(1), 226.5b(d)(6) and (12), and
226.18(e).
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General Rule and Methods for Identifying Consumers Who Must Receive
Notice
The proposed rules generally restate the statutory requirement that
a person must provide the consumer with a notice if that person both:
(i) Uses a consumer report in connection with an application for, or a
grant, extension, or other provision of, credit to that consumer; and
(ii) based in whole or in part on the consumer report, grants, extends,
or otherwise provides credit to that consumer on material terms that
are materially less favorable than the most favorable terms available
to a substantial proportion of consumers from or through that person.
The proposed rules apply to a person to whom the obligation is
initially payable (also referred to as ``the original creditor'').
A person subject to the rule may determine, on a case-by-case
basis, whether a consumer has received material terms that are
materially less favorable terms than other consumers have received from
or through that person by comparing the material terms offered to the
consumer to the material terms offered to other consumers in similar
transactions. It may not be operationally feasible for many persons
subject to the rule to make such direct comparisons between consumers,
however.
For those persons who prefer not to compare directly the material
terms offered to their consumers, the proposed rules provide two
alternative methods for determining which consumers must receive risk-
based pricing notices. Using either method, a person may determine when
credit offered from or through that person is on material terms that
are materially less favorable than the most favorable terms available
to a substantial proportion of consumers from or through that person.
The first method is the credit score proxy method. A credit score
is a numerical representation of a consumer's credit risk based on
information in the consumer's credit file. The proposed rules permit a
creditor that uses credit scores to set the material terms of credit to
determine a cutoff score, representing the point at which approximately
60 percent of its consumers have lower credit scores, and provide a
risk-based pricing notice to each consumer who has a credit score lower
than the cutoff score. The proposed rules require periodic updating of
the cutoff score.
The second method is the tiered pricing method. The proposed rules
permit a creditor that sets the material terms of credit by assigning
each consumer to one of a discrete number of pricing tiers, based in
whole or in part on a consumer report, to use this method to provide a
risk-based pricing notice to each consumer who is not assigned to the
top pricing tier or tiers. The number of tiers of consumers to whom the
notice is required to be given depends upon the total number of tiers.
For more information about the general rule and the methods for
determining which consumers must receive notices, see the discussion of
Sec. ----.72 in the Section-by-Section Analysis.
Application of Rule to Credit Card Issuers
The proposed rules set forth a special test to identify
circumstances in which a credit card issuer must provide a notice to
consumers. A credit card issuer is required to provide a risk-based
pricing notice to a consumer if the consumer applies for a credit card
in connection with a multiple-rate offer and, based in whole or in part
on a consumer report, is granted credit at a purchase annual percentage
rate that is higher than the lowest purchase annual percentage rate
available under that offer. The proposed rules assume that a consumer
who applies for credit in response to a multiple-rate offer is applying
for the best rate available. For more information about the application
of the rule to credit card issuers, see the discussion of Sec. ----.72
in the Section-by-Section Analysis.
Account Review
Some creditors conduct periodic reviews of a consumer report in
connection with credit that has been extended to a consumer. If the
consumer's credit history has deteriorated, the creditor may, pursuant
to applicable account terms, increase the annual percentage rate
applicable to that consumer's account. The proposed rules require the
creditor to provide a risk-based pricing notice to the consumer if the
creditor increases the consumer's annual percentage rate in an account
review based in whole or in part on a consumer report. For more
information about the application of the general rule to account
reviews, see the discussion of Sec. ----.72 in the Section-by-Section
Analysis.
Content of the Notice
In addition to the minimum content prescribed by section 615(h)(5)
of the FCRA, the proposed rules require the risk-based pricing notice
to include a statement that the terms offered may be less favorable
than the terms offered to consumers with better credit histories. The
Agencies believe that including such a statement in the notice could
encourage consumers to check their consumer reports for inaccuracies.
The proposed rules also include special content requirements for the
notice in the context of account reviews. For more information about
the content of the risk-based pricing notices, see the discussion of
Sec. ----.73 in the Section-by-Section Analysis.
Timing of the Notice
Section 615(h)(2) of the FCRA states that the risk-based pricing
notice may be provided at the time of an application for, or a grant,
extension, or other provision of, credit or at the time of
communication of an approval of an application for, or grant,
extension, or other provision of, credit. Section 615(h)(6)(B)(v) of
the FCRA, however, gives the Agencies broad discretion to set the
timing requirements for the notice by rule.
The proposed rules generally require a risk-based pricing notice to
be provided to the consumer after the terms of credit have been set,
but before the consumer becomes contractually obligated on the credit
transaction. In the case of closed-end credit, the notice must be
provided to the consumer before consummation of the transaction, but
not earlier than the time the approval decision is communicated to the
consumer. In the case of open-end credit, the notice must be provided
to the consumer before the first transaction
[[Page 28969]]
is made under the plan, but not earlier than the time the approval
decision is communicated to the consumer. For account reviews, the
notice must be provided at the time that the decision to increase the
annual percentage rate is communicated to the consumer or, if no notice
of the increase in the annual percentage rate is provided to the
consumer prior to the effective date of the change in the annual
percentage rate, no later than five days after the effective date of
the change in the annual percentage rate. For more information about
the timing requirements, see the discussion of Sec. ----.73 in the
Section-by-Section Analysis.
Exceptions to the Risk-Based Pricing Notice Requirement
The proposed rules contain a number of exceptions to the risk-based
pricing notice requirement. First, the proposed rules implement the
statutory exceptions that apply: (i) When a consumer applies for, and
receives, specific material terms; and (ii) when a consumer is
receiving an adverse action notice under section 615(a) of the FCRA in
connection with the transaction.
The Agencies also have used the exception authority set forth in
section 615(h)(6)(iii) of the FCRA to propose additional exceptions for
classes of persons or transactions regarding which the Agencies believe
that the notice would not significantly benefit consumers. The Agencies
are proposing exceptions for creditors that provide consumer applicants
with certain information, including their credit score, in lieu of the
risk-based pricing notice.\4\ For credit secured by one to four units
of residential real property, an exception applies when a creditor
provides the consumer with a notice containing the credit score
disclosure required by section 609(g) of the FCRA along with certain
additional information that provides context for the credit score
disclosure, describes the creditor's use of credit scores to set the
terms of credit, and explains how a consumer can obtain his or her free
annual consumer reports. Another proposed exception applies to credit
that is not secured by one to four units of residential real property,
and is thus not subject to the credit score disclosure requirements of
section 609(g). This exception is similar to the credit score
disclosure exception for residential real property secured credit.
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\4\ These exceptions are distinct from the credit score proxy
method discussed above. The credit score proxy method is one way in
which creditors can comply with the proposed rules' requirement to
identify those consumers who should receive a risk-based pricing
notice. The credit score disclosure exceptions, on the other hand,
provide consumers with a credit score and related information in
lieu of a risk-based pricing notice. A creditor, therefore, can
comply with the proposed rules either by using the credit score
proxy method (or one of the other enumerated methods) to determine
for a given class of products which consumers should receive a risk-
based pricing notice, or by providing the credit score disclosure to
its consumers for that class of products.
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In some cases, a consumer's credit file may not contain sufficient
information to permit a consumer reporting agency or other person to
calculate a score for that individual. A creditor using either of the
credit score disclosure exceptions described above is permitted to
comply with the regulation by providing an alternate narrative notice
that does not include a credit score to those consumers for whom a
score is not available.
Finally, the Agencies have proposed an exception for prescreened
solicitations. Under this exception, a creditor will not be required to
provide a risk-based pricing notice if that creditor obtains a consumer
report that is a prescreened list and uses that consumer report to make
a firm offer of credit to the consumers, regardless of how the material
terms of that offer compare to the terms that the creditor includes in
other firm offers of credit. For more information about the exceptions,
see the discussion of Sec. ----.74 in the Section-by-Section Analysis.
Free Consumer Report
Section 615(h)(5)(C) of the FCRA states that the risk-based pricing
notice must contain a statement informing the consumer that he or she
may obtain a copy of a consumer report, without charge, from the
consumer reporting agency identified in the notice. Some industry
representatives have interpreted this section as a reference to the
free annual consumer report described in section 612(a) of the FCRA.\5\
These industry representatives do not believe that section 615(h) of
the FCRA gives rise to a right to a separate free consumer report.
Consumer groups, on the other hand, interpret this section as giving a
consumer a right to a separate free consumer report.\6\ The proposed
rule is based on the Agencies' reading of section 615(h) as giving
consumers a right to a separate free consumer report upon receipt of a
risk-based pricing notice.
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\5\ See letter from Mortgage Bankers Association to the Federal
Trade Commission (Aug. 16, 2004), available at http://www.ftc.gov/
os/comments/FACTA-summaries/511461-0007.pdf and letter from American
Bankers Association & America's Community Bankers et al., to Alan
Greenspan and Deborah Platt Majoras (Sept. 9, 2004), available at
http://www.mortgagebankers.org/files/ResourceCenter/FACTA/FACTARisk-
BasedPricingComments9-9-04.pdf.
\6\ See letter from National Consumer Law Center and Consumers
Union et al., to Alan Greenspan and Deborah Platt Majoras (Feb. 2,
2005), available at http://www.consumerlaw.org/issues/credit_
reporting/ content/facta_riskbased.pdf.
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Section 612(b) of the FCRA provides for free consumer reports to
consumers who have received a notification pursuant to ``section 615''
of the FCRA. Section 615 of the FCRA includes both the adverse action
notice requirement (section 615(a)), the risk-based pricing notice
provision (section 615(h)), and certain other requirements.
Accordingly, the Agencies read the reference to the free consumer
report in section 612(b) to apply equally when notices are given under
section 615(a) and section 615(h)(5)(C), i.e., to require in both those
cases a free report that is separate from the free annual report.
The notices provided under the credit score disclosure exceptions
are not risk-based pricing notices, and therefore do not give rise to
the right to a free consumer report. Instead, a consumer who receives a
credit score disclosure notice that identifies a consumer reporting
agency or other third party as the source of the credit score could
request the free annual consumer report that is available from each of
the three nationwide consumer reporting agencies. For more information
about the credit score disclosure exceptions, see the discussion of
Sec. ----.74 in the Section-by-Section Analysis.
One Notice Per Credit Extension
The proposed rules contain a rule of construction to clarify that,
in general, only one risk-based pricing notice will need to be provided
per credit extension, except in the case of a notice provided in
connection with an account review. The person to whom the obligation is
initially payable must provide the risk-based pricing notice, or
satisfy one of the exceptions, even if the loan is assigned to a third
party or if that person is not the funding source for the loan.
Although legal responsibility for providing the notice rests with the
person to whom the obligation is initially payable, the various parties
involved in a credit extension could determine by contract which party
will send the notice. Purchasers or assignees of credit contracts will
not be subject to the risk-based pricing notice requirements. For more
information about the rules of construction, see the discussion of
Sec. ----.75 in the Section-by-Section Analysis.
[[Page 28970]]
Model Forms
Section 615(h)(6)(B)(iv) requires the Agencies to provide a model
notice that may be used to comply with the risk-based pricing rules.
For each of the risk-based pricing notices and alternative credit score
disclosures, the Agencies have proposed model forms that are appended
to the proposed rules as Appendices H-1 through H-5 of the Board's rule
and Appendices B-1 through B-5 of the Commission's rule. For more
information, see the discussion of the model forms in the Section-by-
Section Analysis.
IV. Section-by-Section Analysis
Section ----.70 Scope
Proposed Sec. ----.70 sets forth the scope of the Agencies' rules.
Proposed paragraph (a)(1) generally tracks the statutory language from
section 615(h)(1) of the FCRA, except that it limits coverage of the
proposed rules to credit to a consumer that is primarily for a
consumer's personal, family, or household purposes.
Proposed paragraph (a)(2) provides that the risk-based pricing
rules do not apply to persons who use consumer reports in connection
with an application for, grant, extension, or other provision of,
credit for business purposes. Section 615(h) of the FCRA does not
explicitly state that it applies only to a person using a consumer
report in connection with consumer purpose credit. Section 615(h) does,
however, require a person using a consumer report to compare the terms
of credit offered in a particular transaction to the most favorable
terms available to a substantial proportion of ``consumers'' and to
provide a notice to the ``consumer'' if the person offers or extends
credit on materially less favorable terms. In addition, several of the
statutory exceptions reference the ``consumer'' or ``consumers,''
including those in section 615(h)(3)(A) (``the consumer applied for
specific material terms * * *'') and section 615(h)(6)(B)(iii) (``* * *
regarding which the agencies determine that notice would not
significantly benefit consumers''). The statute's repeated use of the
term ``consumer,'' which section 603(c) of the FCRA defines to mean
``an individual,'' suggests that Congress intended for the risk-based
pricing provisions to apply only to credit that is primarily for
personal, family, or household purposes.
Business-purpose loans generally are made to partnerships or
corporations, as well as to individual consumers in the case of sole
proprietorships. The Agencies understand that business borrowers
generally are more sophisticated than individual consumers. For
business loans made to partnerships or corporations, a creditor may
obtain consumer reports on the principals of the business who may serve
as guarantors for the loan.\7\ The credit is granted or extended to the
business entity, however, based primarily on that entity's
creditworthiness, and that entity is primarily responsible for the
loan. Also, when a consumer report is used in connection with a small
business loan, the report may factor into the underwriting process
quite differently than a consumer report utilized in connection with a
consumer purpose loan. It may not be operationally feasible to compare
the terms of credit granted for different business purposes because
some types of business ventures pose a greater degree of risk than
other types of business ventures. In addition, the Agencies believe
that a comparison of the terms of business purpose credit to the terms
of consumer purpose credit would not be meaningful. For example, the
underwriting process used to set the terms for a business loan made to
purchase a fleet of vehicles may differ substantially from the
underwriting process used to set the terms of a single auto loan made
to an individual consumer. The Agencies solicit comment regarding
whether there are any circumstances under which creditors should be
required to provide risk-based pricing notices in connection with
credit primarily for business purposes.
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\7\ See FTC Staff Opinion Letter from Joel Winston to Julie L.
Williams, J. Virgil Mattingly, William F. Kroener, III, and Carolyn
Buck (June 22, 2001) (available at http://www.ftc.gov/os/statutes/
fcra/tatelbaumw.shtm).
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Proposed paragraph (b) provides that compliance with either the
Board's or the Commission's substantively identical risk-based pricing
rules would be deemed to satisfy the requirements of the statute. Both
the Board's and the Commission's rules would apply to the persons
covered by paragraph (a). The Board proposes to codify its risk-based
pricing rules at 12 CFR 222.70 et seq., and the Commission proposes to
codify its risk-based pricing rules at 16 CFR 640. There is, however,
no substantive difference between the two sets of rules.
Proposed paragraph (c), consistent with the statutory language in
section 615(h)(8), provides that the risk-based pricing rules will be
enforced in accordance with sections 621(a) and (b) by the relevant
federal agencies and officials identified in those sections, including
state officials. The risk-based pricing provisions do not provide for a
private right of action.
Section ----.71 Definitions
Proposed Sec. ----.71 contains definitions for the following
terms: ``annual percentage rate'' (and the related terms ``closed-end
credit'' and ``open-end credit plan''), ``credit,'' ``creditor,''
``credit card,'' ``credit card issuer,'' ``credit score,'' ``material
terms'' (and the related term ``consummation''), and ``materially less
favorable.''
Annual Percentage Rate
Proposed paragraph (a) defines ``annual percentage rate'' by
incorporating the definitions of ``annual percentage rate'' for open-
end credit plans and closed-end credit set forth in sections 226.14(b)
and 226.22 of Regulation Z, respectively. (12 CFR 226.14(b), 12 CFR
226.22). The concept of an annual percentage rate, as discussed later
in this Section-by-Section analysis, is relevant to the Agencies'
proposed definition of ``material terms.'' The Agencies believe that
use of the Regulation Z definitions of annual percentage rate promotes
consistency among the rules pertaining to consumer credit, including
the rules that implement the FCRA and the Truth-in-Lending Act.
Regulation Z prescribes two separate methods for calculating the annual
percentage rate for credit, depending on whether that credit is open-
end or closed-end. To ensure that the correct calculation methods for
the annual percentage rate are applied to the appropriate products, the
proposal also incorporates the Truth-in-Lending Act's definition of
``open-end credit plan,'' as interpreted by the Board,\8\ and the
Regulation Z definition of ``closed-end credit.'' Paragraph (b) of the
proposal defines ``closed-end credit'' to have the same meaning as in
Regulation Z (12 CFR 226.2(a)(10)). Paragraph (k) of the proposal
defines ``open-end credit plan'' to have the same meaning as set forth
in the Truth-in-Lending Act, as implemented by the Board in Regulation
Z and the Official Staff Commentary to Regulation Z (15 U.S.C. 1602(i),
12 CFR 226.2(a)(20)).
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\8\ The Board defines the term ``open-end credit'' in Regulation
Z, rather than ``open-end credit plan.'' 12 CFR 226.2(a)(20).
---------------------------------------------------------------------------
Credit, Creditor, Credit Card, Credit Card Issuer, and Credit Score
Proposed paragraphs (d), (e), (f), (g), and (h) incorporate the
FCRA's statutory definitions of ``credit,'' ``creditor,'' ``credit
card,'' ``credit card issuer,'' and
[[Page 28971]]
``credit score.'' Each of these terms is used in the proposed rules.
Material Terms
Proposed paragraph (i) contains three separate definitions of
``material terms,'' depending on whether the credit is extended under
an open-end credit plan for which there is an annual percentage rate,
is closed-end credit for which there is an annual percentage rate, or
is credit for which there is no annual percentage rate.
Proposed paragraph (i)(1) defines ``material terms'' for credit
extended under an open-end credit plan as the annual percentage rate
required to be disclosed in the account-opening disclosures required by
Regulation Z (12 CFR 226.6(a)(2)). The definition excludes both any
temporary initial rate that is lower than the rate that would apply
after the temporary rate expires and any penalty rate that would apply
upon the occurrence of one or more specific events, such as a late
payment or extension of credit that exceeds the credit limit. The
annual percentage rate has historically been one of the most
significant pricing terms for open-end credit, and it is probably the
term that creditors most often adjust as a result of risk-based
pricing.
Credit cards, unlike other open-end credit products, have multiple
annual percentage rates, including annual percentage rates for cash
advances, balance transfers, and purchases. The Agencies believe that
purchases are the most common type of open-end credit card transaction,
and thus the annual percentage rate for purchases is the most commonly
applied rate in credit card transactions. Moreover, it is one of the
most common terms that consumers compare when shopping for credit
cards. Therefore, for credit cards (other than those used to access a
home equity line of credit), the proposal defines ``material terms'' as
the annual percentage rate applicable to purchases (``purchase annual
percentage rate''), and no other annual percentage rate.
Similarly, proposed paragraph (i)(2) defines ``material terms'' for
closed-end credit as the annual percentage rate required to be
disclosed prior to consummation under the provisions of Regulation Z
regarding closed-end credit (12 CFR 226.17(c) and 226.18(e)). This
definition does not address temporary initial rates or penalty rates,
because any such rates are not annual percentage rates for the purposes
of the closed-end provisions of Regulation Z.
The related term ``consummation'' is defined in proposed paragraph
(c) to mean the time that a consumer becomes contractually obligated on
a credit transaction. The proposed definition is identical to the
definition of ``consummation'' in Regulation Z. 12 CFR 226.2(a)(13).
Consummation is defined in the proposed rules for clarity and
completeness.
Most consumer credit products have an annual percentage rate, and
it has historically been a significant factor, and often the most
significant factor, in the pricing of credit. As discussed below, the
Agencies have proposed a definition of ``material terms'' that
generally focuses on a single term in order to ensure that there is a
feasible way for creditors to identify those consumers who must receive
risk-based pricing notices. The Agencies believe that focusing on the
annual percentage rate is appropriate because the Agencies understand
that when risk-based pricing occurs, it typically affects the annual
percentage rate.
The Agencies acknowledge that the pricing of credit products is
complex and that the annual percentage rate is only one of the costs of
consumer credit. In addition to the annual percentage rate(s)
applicable to a given credit product, there may be other terms that
affect the cost of credit, such as the amount of any down payment,
prepayment penalties, or late fees. In addition, a single credit
product may have a number of different rate structures, such as a
credit card that has different annual percentage rates for purchases,
cash advances, and balance transfers. The Agencies understand that the
annual percentage rate is the primary term that varies as a result of
risk-based pricing and that, for credit cards, the purchase annual
percentage rate is the primary term that varies as a result of risk-
based pricing. Thus, the Agencies believe that, in most cases, defining
``material terms'' with reference to the annual percentage rate will
effectively target those consumers who are likely to have received
credit on terms that are materially less favorable than the terms
offered to other consumers. If creditor practices were to change in the
future such that other terms of credit begin to vary as a result of
risk-based pricing, the Agencies could revise the meaning of ``material
terms.''
To satisfy the risk-based pricing notice requirements, creditors
must have some feasible means of comparing different credit granted to
different consumers. The Agencies believe that it would not be
operationally feasible for creditors to compare credit terms on the
basis of multiple variables. For example, it is unclear how a creditor
would compare one mortgage loan with a certain combination of annual
percentage rate, down payment, and points and fees to another such loan
where all three variables differ, even for the same product, such as a
30-year fixed-rate loan. The Agencies welcome comment on whether there
are other monetary or non-monetary terms that should be included in the
definition of ``material terms,'' and how the comparison between terms
granted to consumers could be conducted if multiple variables were
taken into account.
The Agencies solicit comment as to whether creditors vary temporary
initial rates, penalty rates, balance transfer rates, or cash advance
rates, on either closed-end or open-end credit, as a result of risk-
based pricing. If those rates do vary as a result of risk-based
pricing, the Agencies request comment on whether those rates also
should be treated as ``material terms,'' and whether it would be
possible to apply to those rates the existing tests described in
proposed Sec. ----.72(b). If new tests would be required under such a
broader definition of ``material terms,'' the Agencies solicit comment
on what those tests might be.
The Agencies understand that some home-secured closed-end and home-
secured open-end credit plans may charge prepayment penalties. The
Agencies invite comment on whether creditors vary prepayment penalties
based on information in consumer reports, and whether prepayment
penalties should be treated as ``material terms.'' The Agencies also
request comment on how the tests in proposed Sec. ----.72(b) could be
modified to account for risk-based pricing of prepayment penalties or
whether entirely new tests would be required and, if so, what those new
tests might be.
Proposed paragraph (i)(3) defines ``material terms'' for credit
with no annual percentage rate as any monetary terms that the person
varies based on information in a consumer report, such as the down
payment or deposit. This provision applies to creditors such as
telephone companies or utilities that use consumer reports in extending
credit (for example, in determining the amount of a deposit or
prepayment requirement) but do not extend credit subject to annual
percentage rates. This provision also applies to charge cards for which
the annual membership fee varies based on information from a consumer
report. The Agencies solicit comment as to whether the definition's
reference to ``any monetary terms'' that the person varies based on
information from a consumer report is sufficiently specific or too
broad.
[[Page 28972]]
Materially Less Favorable Material Terms
Proposed paragraph (j) defines ``materially less favorable,'' as it
applies to material terms, to mean that the terms granted or extended
to a consumer differ from the terms granted or extended to another
consumer from or through the same person such that the cost of credit
to the first consumer would be significantly greater than the cost of
credit granted or extended to the other consumer. This definition
clarifies that a comparison between one set of material terms and
another set of material terms is generally required to satisfy the
general rule and to identify which consumers must receive the notice.
The statute focuses on whether the material terms granted or
extended to a consumer are ``materially less favorable than the most
favorable terms available to a substantial proportion of consumers''
from or through a particular person. Therefore, for purposes of making
this comparison, creditors must: (1) Select the ``most favorable
terms'' available to a group of consumers that represents a substantial
proportion of consumers to whom the creditor extends credit; and (2)
compare the material terms granted or extended to the individual
consumer to the most favorable material terms granted or extended to
the comparison group. It would not be acceptable, for example, to
compare a consumer's material terms to an arbitrarily selected
benchmark, such as the creditor's median or average material terms or
to the material terms generally available to the creditor's less
creditworthy consumers. On the other hand, a creditor should not use in
its comparison material terms that are available to only a tiny
percentage of its most exceptionally creditworthy consumers, such as
very high net worth individuals.
The proposed rules do not define what constitutes ``a substantial
proportion'' of consumers, even though that concept is integrally
linked to the concept of ``materially less favorable'' terms under the
statute. The Agencies have not identified a definition of ``a
substantial proportion'' that could reflect the widely varying pricing
practices of creditors generally. For example, one creditor may offer
its most favorable material terms to ninety percent of its consumers
and materially less favorable material terms to ten percent of its
consumers. Another creditor may offer its most favorable material terms
to ten percent of its consumers and materially less favorable material
terms to ninety percent of its consumers. A third creditor may offer
its most favorable material terms to one percent of its consumers,
slightly less favorable material terms to twenty percent of its
consumers, and materially less favorable material terms to its
remaining consumers. For these reasons, the Agencies do not believe it
is appropriate to define ``a substantial proportion.'' Nonetheless, the
Agencies expect that creditors would consider ``a substantial
proportion'' as constituting more than a de minimis percentage, but
that may or may not represent a majority.
Within these limitations, however, the proposed definition provides
guidance regarding how to determine whether a particular set of terms
is materially less favorable. Under the proposed definition, factors
relevant to determining the significance of a difference in the cost of
credit include the type of credit product, the term of the credit
extension, if any, and the extent of the difference between the
material terms granted or extended to the individual consumer and the
material terms granted or extended to the comparison group.
Consideration of these factors by different creditors may result in two
creditors reaching opposite conclusions about the materiality of the
same difference in annual percentage rates. For example, a credit card
issuer considering these factors may conclude that a one-quarter
percentage point difference in the annual percentage rate is not
material, whereas a mortgage lender may conclude that a one-quarter
percentage point difference in the annual percentage rate is material.
In assessing the extent of the difference between two sets of material
terms, a creditor should consider how much the consumer's cost of
credit would increase as a result of receiving the less favorable
material terms and whether that difference is likely to be important to
a reasonable consumer.
The Agencies solicit comment on the proposed definition of
``materially less favorable.'' In particular, the Agencies seek comment
on whether the proposed definition is helpful, and whether the
interrelated terms ``most favorable terms'' and ``a substantial
proportion of consumers'' also should be defined and, if so, how they
should be defined.
Section ----.72 General Requirements for Risk-Based Pricing Notices
General Rule
Proposed Sec. ----.72 establishes the basic rules implementing the
risk-based pricing notice requirement of section 615(h). Paragraph (a)
states the general requirement that a person must provide the consumer
with a notice if that person both: (i) Uses a consumer report in
connection with an application for, or a grant, extension, or other
provision of, credit to that consumer that is primarily for personal,
family, or household purposes; and (ii) based in whole or in part on
the consumer report, grants, extends, or otherwise provides credit to
that consumer on material terms that are materially less favorable than
the most favorable terms available to a substantial proportion of
consumers from or through that person. This paragraph mirrors the
language in proposed Sec. ----.70(a) and generally tracks the
statutory language.
Although the statute would permit various interpretations of ``from
or through that person,'' the Agencies interpret the phrase to refer to
the person to whom the obligation is initially payable, i.e., the
original creditor. Under this interpretation, the original creditor is
responsible for determining whether consumers received materially less
favorable material terms and providing risk-based pricing notices to
consumers, whether or not that person is the source of funding for the
loan. When the original creditor is the source of funding for the loan,
the consumer obtains credit from the original creditor. This occurs,
for example, where the consumer obtains credit directly from a bank or
finance company. When the original creditor is not the source of
funding for the loan, however, the consumer obtains credit through the
original creditor. This occurs, for example, where the consumer enters
into a credit contract with an auto dealer, but the dealer does not
fund the loan. Instead, the dealer has an agreement with a bank or
finance company to purchase the contract. The bank or finance company
provides the funding for the loan. The dealer immediately assigns the
credit contract to a bank or finance company upon consummation of the
transaction. In that case, the consumer has obtained credit through the
auto dealer, rather than from the auto dealer.
The Agencies recognize that this interpretation excludes from the
scope of the proposed rules brokers and other intermediaries who do not
themselves grant, extend, or provide credit, but who, based in whole or
in part on a consumer report, shop credit applications to creditors
that offer less favorable rates than other creditors. Instead the
proposed rules require an intermediary, such as a broker, to provide
risk-based pricing notices to consumers only when the intermediary is
the person to whom the obligation is initially payable. The Agencies
believe this is the most appropriate
[[Page 28973]]
interpretation of the statute, given its language and purpose.
With respect to the statutory language, section 615(h) applies to
the ``material terms'' granted, extended, or provided to the consumer
based on a consumer report. An intermediary's decision regarding where
to shop a consumer's credit application generally occurs before the
material terms are set. Thus, at the time the application is shopped to
various creditors, it is too early in the process to perform the direct
comparison of material terms required by the statute, even if a
consumer report influenced the intermediary's decision regarding where
to shop the consumer's credit application.
The Agencies also believe that their interpretation of the statute
with respect to intermediaries is consistent with its purposes. For the
reasons described below, requiring intermediaries to provide notices
based on the creditors to which they shop a consumer's credit
application would not provide a significant benefit to consumers; would
likely be confusing to consumers; and would be operationally difficult,
burdensome, and costly.
First, a rule requiring intermediaries to provide notices when they
shop applications to certain creditors would frequently result in the
consumer receiving multiple risk-based pricing notices in connection
with a single extension of credit. Under such a rule, consumers who
work through intermediaries would in many cases receive two notices:
The first from the intermediary when it shops the application, and the
second from the creditor itself if the creditor grants credit to the
consumer on materially less favorable material terms than it grants to
a substantial proportion of its other consumers. In some cases, the
intermediary is also the original creditor and could be required to
provide two notices to the consumer. This scenario could arise, for
example, in the context of an automobile loan. Under a rule requiring a
shopping-triggered notice, if a dealer shops the consumer's application
to finance companies that offer materially less favorable material
terms than do other sources of financing, the dealer would be required
to provide a notice to the consumer. In addition, an auto dealer that
is the original creditor on the loan must provide a notice to a
consumer who receives materially less favorable material terms than
those received by a substantial proportion of the dealer's other
consumers.
The Agencies generally do not believe that a consumer would benefit
from receiving more than one risk-based pricing notice in connection
with a single extension of credit. The purpose of the statute is to
notify consumers that information in their consumer reports caused them
to receive materially less favorable material terms, and to encourage
those consumers to check their consumer reports for possible errors.
The Agencies do not believe that providing a consumer with a second
notice in connection with the same extension of credit is necessary or
beneficial to educate or motivate the consumer to obtain a copy of his
or her credit report. For that reason, the rules of construction in
proposed Sec. ----.75, discussed below, codify the principle that
generally one notice for each extension of credit is sufficient.
Second, requiring multiple notices in connection with a single
extension of credit would introduce significant compliance burdens and
costs. As an operational matter, it would be difficult to establish by
regulation appropriate criteria for determining when shopping a
consumer's credit application to certain lenders would trigger the
requirement to provide a risk-based pricing notice. There is no single,
uniform method for distinguishing a prime lender from a subprime
lender, for example, and some lenders may make both prime and subprime
loans. In addition, requiring multiple notices in connection with a
single extension of credit could impose significant costs on the credit
reporting system (which costs would be passed on to consumers) in view
of the Agencies' reading of the statute as providing consumers with a
right to request a free consumer report upon receipt of each risk-based
pricing notice.
The Agencies recognize that, under the proposed rules, some
consumers who use an intermediary will not receive a risk-based pricing
notice, even though their consumer reports, in whole or in part,
influenced the intermediary's decision to shop their credit
applications only to creditors that generally offer less favorable
material terms than other creditors. This would occur if the creditor
to whom the application was shopped granted its most favorable material
terms to the consumer. Under the statute, however, the same issue
exists when a consumer applies directly to subprime lenders because the
statute does not require a creditor to compare the material terms it
offers to consumers to the material terms offered by other creditors.
The Agencies solicit comment on whether intermediaries who are not
original creditors, such as brokers, should be required to provide
risk-based pricing notices to consumers based upon the intermediaries'
decisions regarding the shopping of consumer credit applications to
certain creditors and, if so, how such a requirement could be
structured.
Direct Comparisons and Materially Less Favorable Material Terms
Creditors may follow the general rule in determining, on a case-by-
case basis, whether a consumer has received materially less favorable
terms than the terms a substantial proportion of consumers have
received from or through that creditor. The general rule is flexible
and permits the creditor to determine, consistent with its particular
circumstances, when material terms are ``materially less favorable than
the most favorable terms available to a substantial proportion'' of its
consumers.
When a creditor undertakes direct, consumer-to-consumer
comparisons, such comparisons necessarily must account for the unique
aspects of that creditor's business. For example, many creditors make
pricing decisions based on a number of variables that are not based on
information in a consumer report (e.g., debt-to-income ratio or type of
collateral) in addition to variables that are based on information in a
consumer report. The role each of these variables plays in the pricing
decision may vary from creditor to creditor and product to product.
Similarly, creditors must compare the transaction at issue with past
transactions of a similar type, and must control for changes in
interest rates and other market conditions over time. A particular
method of comparison that is sensible and feasible for one creditor may
not be sensible and feasible for another creditor. No precise
regulatory benchmark could account for such creditor-specific and
product-specific variations.
Although the proposed rules do not impose a quantitative standard
or specific methodology for determining whether a consumer is receiving
materially less favorable terms, the determination should be made in a
reasonable manner. The Agencies expect that creditors would provide
risk-based pricing notices to some, but fewer than all, of the
consumers to whom they extend credit. Under the general rule, the
creditor would first need to identify the appropriate subset of its
current or past consumers to compare to any given consumer. Each
consumer would need to be compared to an adequate sample of consumers
who have engaged in similar transactions, such as those who have
applied for or received the particular credit product for which the
consumer has applied. The terms offered to a
[[Page 28974]]
consumer in a 30-year fixed-rate purchase money mortgage, for example,
cannot be compared to the terms offered to consumers who obtain auto
loans, credit cards, student loans, or adjustable-rate mortgages. The
creditor also would need to tailor its comparison to disregard any
underwriting criteria that do not depend upon consumer report
information. Such a comparison also would have to account for changes
in the creditor's customer base, product offerings, or underwriting
criteria over time. Similarly, adjustments would have to be made if the
terms offered to consumers in the past are not presently offered to
consumers.
The Agencies recognize that, even with the flexibility provided in
the proposed rules, it may not be feasible or practical for many
creditors to make the direct comparisons required by the general rule.
Many creditors are likely to encounter operational difficulties in
determining whether a consumer report played a role in a particular
pricing decision that was based on multiple variables, and in
identifying an appropriate benchmark with which to compare a given
consumer's material terms. Small creditors in particular may have
difficulty identifying a sufficient number of comparable benchmark
credit transactions, since those creditors may make relatively few
loans of any given type.
For these reasons, proposed paragraph (b) sets forth two other
methods, the ``credit score proxy method'' and the ``tiered pricing
method,'' that creditors can use to identify which consumers must
receive notices for a given class of products. These two methods
provide alternatives to the direct consumer-to-consumer comparison
described in section 615(h) of the FCRA. Consumers identified by either
of these two methods will be deemed to have been granted, extended, or
otherwise provided credit on materially less favorable material terms.
The Agencies have crafted these two methods in order to enable a
creditor to provide the risk-based pricing notice to fewer than all
consumers without having to make a direct comparison between the
material terms granted to each consumer and the material terms granted
to its other consumers. The Agencies recognize that these methods may
not result in a precise differentiation in every case between consumers
who received the most favorable terms and those who received materially
less favorable terms. The Agencies believe, however, that each of these
methods is a reasonable proxy or substitute for identifying those
consumers who received materially less favorable terms. Permitting the
use of proxy methods also recognizes that, at least in some cases,
there is no reliable way to determine which consumers received
materially less favorable terms. Moreover, through the two alternative
methods, the Agencies can provide clear guidance regarding the meaning
of materially less favorable material terms.
The Agencies believe that the credit score proxy method and the
tiered-pricing method generally will identify those consumers who
receive materially less favorable material terms from or through a
particular person. In applying either of these methods, however, there
may be some instances where a consumer receives a notice, but does not
receive material terms that are materially less favorable than the most
favorable terms generally available to a substantial proportion of
consumers. For example, using the credit score proxy method, a consumer
with a credit score below the cutoff score would receive a notice even
if he or she received the creditor's most favorable terms. It would not
violate the rules to provide risk-based pricing notices to some
consumers who receive the most favorable terms so long as the selection
of those consumers results from the proper application of either of
these two methods. Neither of these methods, however, would permit a
creditor to provide the notice to all consumers.
Although the proposed rules set forth two alternate methods that a
person may use, for purposes of consistency a person must use the same
method to evaluate all consumers who are granted, extended, or
otherwise provided substantially similar products from or through that
person. For example, if a creditor uses the credit score proxy method
to evaluate consumers who obtain credit to finance the purchase of a
new automobile, the creditor must use that method for all such
consumers for new vehicle loans. On the other hand, the Agencies
recognize that the feasibility of these methods may vary among
different product lines. Thus, a person may use one method to evaluate
consumers who obtain mortgages and the other method to evaluate
consumers who obtain auto loans.
The Agencies recognize that there may be other methods that would
serve as effective proxies for identifying the appropriate consumers to
receive the risk-based pricing notice. Based on the information
available to the Agencies, the two methods in the proposed rules appear
to represent the approaches that best balance effective targeting of
the notice to those consumers who are likely to have received
materially less favorable terms with operational feasibility. The
Agencies solicit comment on whether there are other methods, in
addition to those included in this proposal, that would satisfy the
Agencies' criteria and provide other operationally feasible options for
identifying those consumers who must receive risk-based pricing
notices.
Credit Score Proxy Method
Proposed paragraph (b)(1) sets forth the credit score proxy method.
Under this method, a person that sets the material terms of credit
granted, extended, or otherwise provided to a consumer, based in whole
or in part on a credit score, may comply with the section 615(h)
requirements by (i) determining the credit score that represents the
point at which approximately 40 percent of its consumers have higher
credit scores and approximately 60 percent of its consumers have lower
credit scores, and (ii) providing a risk-based pricing notice to each
consumer with a credit score below that cutoff score.\9\ A creditor
that sets its material terms based in whole or in part on a credit
score may use the credit score proxy method, and is not required to
consider the actual credit terms offered to each consumer. Rather, that
creditor is required only to compare the credit score of a given
consumer with the pre-calculated cutoff score, which determines whether
a notice is required. The Agencies believe that, all other things being
equal, consumers with lower credit scores are likely to receive
materially less favorable terms than consumers with higher credit
scores when the terms are set based in whole or in part on their
consumer reports. As a result, the Agencies believe that this method
will target the risk-based pricing notice to those consumers who are
likely to have received materially less favorable terms due to risk-
based pricing.
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\9\ The proposed rules do not require a precise cutoff point at
the 40 percent/60 percent mark. Depending on the available data set
and the practices of the creditor, the cutoff point may be
approximate.
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The credit score proxy method focuses on only one variable, the
consumer's credit score. A credit score obtained from an entity
regularly engaged in the business of selling credit scores is based on
information in a consumer report. For a creditor that obtains such a
credit score, the credit score proxy method generally eliminates the
influence of variables that are not derived from information in a
consumer report, such as the consumer's income, the term of the loan,
or the amount of any down payment. In effect, this method substitutes a
comparison of the
[[Page 28975]]
credit scores of different consumers as a proxy for a comparison of the
material terms offered to different consumers.
The Agencies believe that setting the standard for the cutoff score
at a point that requires notices to be provided to the approximately 60
percent of a creditor's consumers with the lowest credit scores is
appropriate and reasonable. The point at which consumers typically
begin to receive materially less favorable material terms from a
creditor will vary from creditor to creditor and product to product.
The Agencies believe, however, that setting a numerical standard for
calculating the cutoff score represents a reasonable balancing of the
goal of providing notices to consumers most likely to benefit from them
with the need for a clear, bright-line standard that provides certainty
and predictability for creditors. If the Agencies did not establish a
numerical standard for calculating the cutoff score, each creditor
would have to determine how to calculate its own cutoff score based on
its own consumer base, which would involve a complex analysis that may
be difficult to implement. In addition, setting a numerical standard
for determining the cutoff score should enhance the ability of
regulators to enforce compliance against creditors using this method.
The Agencies solicit comment on whether the credit score proxy
method generally will result in risk-based pricing notices being
provided to consumers who are likely to have received materially less
favorable terms due to risk-based pricing. The Agencies also request
comment on whether setting the cutoff score at approximately the point
at which 40 percent of a creditor's consumers have higher scores and 60
percent have lower scores is appropriate and workable, or whether a
different point, such as the point at which 50 percent of a creditor's
consumers have higher scores and 50 percent have lower scores, would be
more appropriate. The Agencies also solicit comment regarding any
empirical data regarding the point at which consumers typically begin
to receive materially less favorable material terms and that may
suggest the most appropriate point at which to set the cutoff score.
Proposed paragraph (b)(1)(ii) describes two methods for determining
the cutoff score. In general, creditors will be required to use the
sampling approach set forth in paragraph (b)(1)(ii)(A). The sampling
approach provides that a person that currently uses risk-based pricing
with respect to the credit products it offers must calculate the cutoff
score by considering the credit scores of all or a representative
sample of the consumers to whom it has granted, extended, or otherwise
provided credit for a given class of products. When a creditor's
customer base or underwriting standards vary significantly among
different classes of products, it may be necessary to calculate
separate cutoff scores for each class of products based on
representative samples of consumers offered that type of credit. For
example, a creditor with a varied portfolio of credit products may have
to calculate separate cutoff scores for mortgages, credit cards,
automobile loans, and student loans.
The Agencies recognize that the sampling approach will not be
feasible for some creditors, such as new entrants to the credit
business, entities that introduce new credit products, or entities that
have just started to use risk-based pricing and have not yet developed
a representative sample of consumers. Proposed paragraph (b)(1)(ii)(B)
permits such creditors initially to determine the appropriate cutoff
score based on information from appropriate market research or relevant
third-party sources for similar products, such as information from
companies that develop credit scores. For example, one major provider
of credit scores publishes a chart on its web site showing the
distribution of credit scores across the U.S. population. In addition,
proposed paragraph (b)(1)(ii)(B) permits a creditor that acquires a
credit portfolio as a result of a merger or acquisition to determine
the cutoff score based on information it received from the merged or
acquired party.
Proposed paragraph (b)(1)(ii)(C) addresses the recalculation of
cutoff scores. In general, persons using the sampling approach will
need to recalculate their cutoff scores at least every two years. A
person whose cutoff score was determined using the secondary source
approach in paragraph (b)(1)(ii)(B), however, will be required to
recalculate its cutoff score based on a representative sample of its
own consumers within one year after it begins using a cutoff score
derived from third-party source data. If, however, a person using the
secondary source approach does not grant, extend, or otherwise provide
credit to a sufficient number of new consumers during that one-year
period, and therefore lacks sufficient data with which to recalculate
its cutoff score after one year, the person will be permitted to
continue to use a cutoff score derived from third-party source data
until it grants, extends, or otherwise provides credit to a sufficient
number of new consumers and is able to collect sufficient data on which
to base the recalculation.
The distribution of credit scores for a creditor's customer base
may shift over time, so it is important to recalculate the cutoff score
from time to time. The time period between recalculations, however,
should be long enough to avoid requiring continual sampling and to
minimize the risk of introducing distortions, such as seasonal
variations, into the data used to calculate the cutoff score as a
result of having abbreviated sampling periods. The Agencies solicit
comment on the recalculation requirements, specifically regarding
whether two years, as opposed to a shorter or longer period, is the
appropriate interval at which the recalculation generally should be
conducted under the sampling approach. The Agencies also solicit
comment on whether one year is the appropriate period of time within
which a person using the secondary source approach must recalculate its
cutoff score using the sampling approach.
Proposed paragraph (b)(1)(ii)(D) addresses the situation where a
creditor uses two or more credit scores in setting the material terms
of credit. Some creditors may request credit scores from multiple
sources and may use more than one of those scores in connection with
the underwriting process. Proposed paragraph (b)(1)(ii)(D) states that
if a person using the credit score proxy method generally uses two or
more scores in setting the material terms of credit granted, extended,
or otherwise provided to a consumer, the person must determine the
appropriate cutoff score based on how the person evaluates the multiple
credit scores when making credit decisions. For example, if a creditor
generally purchases two scores for each consumer and uses the average
of those two scores when setting the material terms of credit, it must
use the average of its consumers' scores when calculating its cutoff
score.
Some creditors that use multiple scores, however, may not
consistently use the same method for evaluating those scores. For
example, a creditor may sometimes use the average score and other times
use the high score in its credit evaluation. In these circumstances,
the proposed rules require that the creditor use reasonable means to
determine the appropriate cutoff score and provide a safe harbor to a
creditor that uses either a method that the creditor regularly uses or
the average credit score for each consumer as the means of calculating
the cutoff score.
Some consumers, particularly those with limited credit histories,
may not
[[Page 28976]]
have credit scores. There is no way to compare those consumers to the
cutoff score. A person using the credit score proxy method may
sometimes grant, extend, or otherwise provide credit to such a consumer
for whom a credit score is not available. Under those circumstances,
proposed paragraph (b)(1)(iii) provides that the person using the
credit score proxy method must assume that a consumer for whom a credit
score is not available receives credit on material terms that are
materially less favorable than the most favorable credit terms offered
to a substantial proportion of consumers, and provide a risk-based
pricing notice to that consumer. The Agencies believe this assumption
is appropriate because consumers for whom a credit score is not
available are likely to receive less favorable terms than those offered
to other consumers. The Agencies solicit comment on whether this
assumption is appropriate. The Agencies also solicit comment on
whether, if no credit score is available, there are other reasonable
means by which a person may determine whether the consumer received
materially less favorable credit terms.
Proposed paragraph (b)(1)(iv) provides an example of how a credit
card issuer could apply the credit score proxy method. The credit card
issuer in this hypothetical example calculates a cutoff score of 720.
The Agencies expect that cutoff scores will vary for different
creditors, depending on the type of credit score used and the score
distributions of each creditor's customer base. For example, among
creditors using the same scoring model, a subprime-only creditor would
likely have a lower cutoff score than a creditor that makes both prime
and subprime loans, or a creditor that makes only prime loans.
Tiered Pricing Method
Proposed paragraph (b)(2) sets forth the tiered pricing method for
determining which consumers should receive a risk-based pricing notice.
The general rule in proposed paragraph (b)(2)(i) provides that a person
that sets the material terms of credit granted, extended, or otherwise
provided to a consumer by placing the consumer within one of a discrete
number of pricing tiers, based in whole or in part on a consumer
report, may use the tiered pricing method. Pricing tiers may be
reflected, for example, in a rate sheet that lists different rates
available to the consumer depending upon information in a consumer
report, such as the consumer's credit score, among other factors. The
only factor that a person using this method must consider is tiers with
different annual percentage rates, or, in the case of credit for which
there is no annual percentage rate, other monetary terms that the
person varies based on consumer report information such as the down
payment or deposit. For example, if a lender offers automobile loans
for which the annual percentage rate will be set at seven, nine, or
eleven percent based in whole or in part on information from a consumer
report, the lender would only need to consider which annual percentage
rate pricing tier applies to a consumer in order to determine whether
the consumer should receive a risk-based pricing notice, even if
factors other than the consumer report influence the annual percentage
rate received by the consumer.
Proposed paragraph (b)(2)(i) describes the application of the
tiered pricing method when a person using this method has four or fewer
pricing tiers. In order to comply with the tiered pricing method in
those circumstances, the person must provide a risk-based pricing
notice to each consumer who does not qualify for the top, or lowest-
priced, tier.
Proposed paragraph (b)(2)(ii) describes the application of the
tiered pricing method when a person using this method has five or more
tiers. In this circumstance, a person using the tiered pricing method
may comply with the rule by sending a risk-based pricing notice to each
consumer who does not qualify for the top two (lowest-priced) tiers,
plus any other tier that represents at least the top 30 percent but no
more than the top 40 percent of the total number of tiers. The example
provided in this paragraph explains that in the case of a person with
nine pricing tiers, a notice would need to be provided to all consumers
who are not priced in the top three tiers.
The Agencies recognize that creditors may use different pricing
tiers for different types of products, such as automobile loans and
boat loans. If a creditor uses different pricing tiers for different
products, a separate analysis will be required for each product for
which different tiers apply. If the same tiers apply regardless of the
product, then a creditor need not distinguish between those products.
The tiered pricing method focuses only on the number and percentage
of tiers, not on the number or percentage of consumers who are assigned
to each tier. A test that took into consideration the number of
consumers within each tier could be extremely complicated and difficult
to administer. The Agencies solicit comment on whether the tiered
pricing method should take into account the percentage of consumers
placed in each tier and how that could be accomplished without creating
undue burdens or introducing excessive complexity to the tiered pricing
method.
The Agencies have considered the possibility that creditors may
attempt to circumvent the tiered pricing method by establishing an
additional tier or tiers for which no consumers will likely qualify. A
creditor using the tiered pricing method is not permitted to consider
tiers for which no consumers have qualified nor are reasonably expected
to qualify. For example, if a creditor's underwriting standards
prohibit lending to consumers with credit scores below 640, the
creditor would not be able to use any pricing tiers that correlate with
scores below 640. Similarly, a creditor should not consider a top tier
that is available only to consumers with perfect or near-perfect credit
and which the creditor rarely, if ever, uses. The Agencies solicit
comment on whether and how the tiered pricing method could be subject
to such circumvention by creditors and whether the proposed rules
should be modified to prevent circumvention.
Credit Cards
Proposed paragraph (c) sets forth the special requirements
applicable to credit card issuers. Proposed paragraph (c)(1) generally
requires a credit card issuer to provide a risk-based pricing notice to
a consumer if: (i) The consumer applies for a credit card in connection
with an application program, such as a direct-mail or take-one offer,
or a pre-screened solicitation, for which more than a single possible
purchase annual percentage rate may apply; and (ii) based in whole or
in part on that consumer's consumer report, the card issuer provides a
credit card to the consumer with a purchase annual percentage rate that
is higher than the lowest purchase annual percentage rate available
under that application or solicitation. The Agencies are basing the
proposed rule on the assumption that when a credit card issuer offers a
range of rates within a single solicitation or offer, the consumer
applies for the best rate available under that offer.
Proposed paragraph (c)(2) describes those circumstances in which a
credit card issuer is not required to provide a risk-based pricing
notice. Under this provision, a credit card issuer is not required to
provide a risk-based pricing notice to a consumer if the consumer
applies for a credit card for which the creditor provides a single
purchase annual percentage rate (excluding temporary and penalty
rates). In
[[Page 28977]]
addition, a credit card issuer is not required to provide a risk-based
pricing notice to a consumer if the consumer is offered the lowest
purchase annual percentage rate available under the credit card offer
for which the consumer applied, even if a lower rate is available from
that issuer under a different credit card offer. These interpretations
are consistent with the statutory exception in section 615(h)(3)(A) of
the FCRA, which provides that a risk-based pricing notice is not
required if a consumer applies for, and receives, specific material
terms, unless those terms were initially specified by the person after
the transaction was initiated by the consumer and after the person
obtained a consumer report. In each of the cases described in the
proposed rules, the consumer applies for specific material terms and
receives them, regardless of what other offers may be available to
consumers from or through that credit card issuer. Proposed paragraph
(c)(3) sets forth an example of the application of the risk-based
pricing rules to a credit card solicitation containing multiple
possible purchase annual percentage rates.
Account Review
Proposed paragraph (d) describes how the risk-based pricing rules
apply to the account review process. Proposed paragraph (d)(1) provides
that a person must provide a risk-based pricing notice to a consumer if
it: (i) Uses a consumer report in connection with a review of credit
that has been extended to the consumer; and (ii) based in whole on in
part on that consumer report, increases the annual percentage rate.
Proposed paragraph (d)(2) illustrates this provision's applicability to
credit card accounts. If a credit card issuer periodically obtains
consumer reports in order to review the terms of the credit it has
extended to consumers, and based on such a review increases the
purchase annual percentage rate applicable to a consumer's card, then
it must provide that consumer with a risk-based pricing notice.
Section ----.73 Content, Form, and Timing of Risk-Based Pricing Notices
Proposed Sec. ----.73 establishes the content, form, and timing
for risk-based notices required to be given. These proposed rules apply
whether the creditor makes the direct, consumer-to-consumer comparisons
described in the general rule, or uses one of the proxy methods.
Proposed paragraph (a)(1) states the general content requirements.
Paragraphs (a)(1)(ii), (a)(1)(v), (a)(1)(vi), and (a)(1)(vii) generally
implement the statutory minimum content requirements in section
615(h)(5) of the FCRA, to which the Agencies have added certain
supplemental information as described below to provide additional
context to consumers.
Terms based on consumer report. Proposed paragraph (a)(1)(ii)
requires the notice to contain a statement informing the consumer that
the terms offered, such as the annual percentage rate, have been set
based on information from a consumer report. This statement generally
tracks the statutory requirement in section 615(h)(5)(A) of the FCRA,
except that the Agencies also propose to require that the notice
include the annual percentage rate as an example of the terms offered.
The Agencies believe that this example will help consumers to
understand how the terms of credit offered to them may be affected by
information in a consumer report.
Identity of consumer reporting agency. Proposed paragraph (a)(1)(v)
implements the statutory requirement in paragraph 615(h)(5)(B) of the
FCRA. This paragraph requires the risk-based pricing notice to state
the identity of each consumer reporting agency that furnished a
consumer report used in the credit decision. The statutory language
refers to ``the consumer reporting agency'' furnishing the report. The
Agencies have expanded this statutory minimum content by requiring that
the name of each consumer reporting agency that furnished a consumer
report that was used in the credit decision, not just one consumer
reporting agency, be disclosed on the notice. The Agencies believe that
it is important to inform a consumer that multiple consumer reports
were used in the credit decision, because the consumer may wish to
check each of those reports for errors.
Copy of consumer report. Proposed paragraph (a)(1)(vi) implements
the statutory requirement in paragraph 615(h)(5)(C) of the FCRA that
the notice include a statement informing the consumer that the consumer
may obtain a copy of a consumer report without charge from the consumer
reporting agency identified in the risk-based pricing notice. Proposed
paragraph (a)(1)(vi) requires the notice to include a statement that
federal law gives the consumer the right to obtain a consumer report
from the consumer reporting agency or agencies identified in the notice
without charge for 60 days after receipt of the notice.
Although section 615(h) does not set forth a 60-day time period,
the proposed 60-day time period is consistent with the time limit
contained in the adverse action notice provisions in section 612(b) of
the FCRA. Any right to a free consumer report arising under section
612(b) is valid for 60 days after the consumer receives the notice that
gives rise to that right. Incorporation of this 60-day rule is
consistent with the Agencies' reading of the statute as giving
consumers who receive a risk-based pricing notice the right to a free
consumer report separate from the free annual report. The Agencies
believe that it is important that the risk-based pricing notice let
consumers know that their right to a free report expires after 60 days
so that consumers will be encouraged to request any free reports to
which they may be entitled in a timely manner. The Agencies solicit
comment on whether it is appropriate to require disclosure of the 60-
day period in the notice.
Consumer reporting agency contact information. Proposed paragraph
(a)(1)(vii) implements the statutory requirement in paragraph
615(h)(5)(D) of the FCRA that the risk-based pricing notice include the
contact information specified by the consumer reporting agency
identified in the notice for obtaining the free consumer report
referenced in the notice. The notice must include a statement informing
the consumer how to obtain the free consumer report from the consumer
reporting agency or agencies identified in the notice and providing
contact information specified by each consumer reporting agency. The
Agencies also have clarified that the notice should include a toll-free
number, if applicable, for each consumer reporting agency.
Consumer report explanation. In addition to the minimum content
requirements imposed by the statute and in some cases supplemented by
the Agencies, the proposal also requires that the risk-based pricing
notice contain additional background information regarding consumer
reports. Proposed paragraph (a)(1)(i) requires a statement explaining
that a consumer report includes information about a consumer's credit
history and the type of information included in that history. This
general background information describing consumer reports will provide
additional context that may be helpful to consumers who lack
familiarity with consumer reports and what they contain.
Less favorable terms. Proposed paragraph (a)(1)(iii) requires the
notice to state that the terms offered to the consumer may be less
favorable than the terms offered to consumers with better credit
histories. This statement relates the general information about credit
history and credit pricing to the specific consumer. Absent this
statement, some consumers may assume that the general
[[Page 28978]]
information has no relevance to them. This statement is designed to
carry out the statutory purpose of prompting consumers to check their
consumer reports for any errors.
The proposed rules do not require the notice to state that the
terms offered to the consumer ``are'' or ``will be'' less favorable
than the terms offered to other consumers. Such a statement would not
be accurate in certain cases because the creditor may not be able to
precisely distinguish consumers who received the most favorable terms
from those who did not. For example, if a creditor applies the credit
score proxy method, some consumers may receive a risk-based pricing
notice even if they receive the most favorable terms available from
that creditor. This may occur, for instance, because factors other than
the consumer report, such as income or down payment amount, also
influenced the pricing decision.
The Agencies solicit comment on whether the notice should state
that the terms ``may be'' less favorable, as proposed, or should use a
different phrase, such as that the terms ``are likely to be'' less
favorable. The Agencies request comment on what language would best
serve the dual goals of most accurately describing the probability that
the consumer received materially less favorable material terms and most
effectively prompting consumers to obtain and review their consumer
reports.
Errors, disputes, and information sources. Proposed paragraph
(a)(1)(iv) requires that the notice contain a statement that the
consumer is encouraged to verify the accuracy of the information
contained in the consumer report and has the right to dispute any
inaccurate information in the consumer report. The Agencies believe
that this additional information may prompt consumers to check their
consumer reports for any errors and may be helpful to consumers who
lack familiarity with their ability to correct mistakes on their
consumer reports. Proposed paragraph (a)(1)(viii) requires the notice
to include a statement directing the consumer to the web sites of the
Board and the Commission to obtain more information about consumer
reports.
Account review notices. Proposed paragraph (a)(2) sets forth the
content requirements for any risk-based pricing notice required to be
given as a result of the use of a consumer report in account review.
The proposal requires this notice to include a statement that the
person sending the notice has conducted a review of the account based
in whole or in part on information from a consumer report and a
statement informing the consumer that as a result of that review the
annual percentage rate on the account has been increased. Consistent
with the general risk-based pricing notice and with section 615(h)(5),
the remaining content of the notice must: (i) State that a consumer
report includes information about a consumer's credit history and the
type of information included in that credit history; (ii) state that
the consumer is encouraged to verify the accuracy of the information
contained in the consumer report and has the right to dispute any
inaccurate information in the consumer report; (iii) state the identity
of each consumer reporting agency that furnished a consumer report used
in the account review; (iv) state that federal law gives the consumer a
right to obtain a free copy of his or her consumer report from that
consumer reporting agency for 60 days after receipt of the notice; (v)
inform the consumer how to obtain such a consumer report; and (vi)
direct the consumer to the web sites of the Board and the Commission to
obtain more information about consumer reports.
Format. Proposed paragraph (b) sets forth the format requirements
for risk-based pricing notices. Proposed paragraph (b)(1)(i) requires
that risk-based pricing notices be clear and conspicuous. Proposed
paragraph (b)(1)(ii) specifies that persons subject to the rule are
permitted to make the disclosures in writing, orally, or
electronically. This is consistent with section 615(h)(1) of the FCRA,
which permits the risk-based pricing notice to be provided to the
consumer in writing, orally, or electronically.
Proposed paragraph (b)(2) references the model forms of the risk-
based pricing notices required by Sec. ----.72(a) and (c), and by
Sec. ----.72(d), which are contained in Appendices H-1 and H-2 of the
Board's rule and Appendices B-1 and B-2 of the Commission's rule.
Appropriate use of these model forms will be deemed to be a safe harbor
for compliance with the risk-based pricing notice requirements. Use of
these model forms is optional.
Timing. Proposed paragraph (c) sets forth the timing requirements
for providing risk-based pricing notices in connection with extensions
of closed-end and open-end credit, as well as credit account reviews.
For closed-end transactions, proposed paragraph (c)(1) requires the
notice to be provided to the consumer before consummation of the
transaction, but not earlier than the time the decision to approve an
application for, or a grant, extension, or other provision of, credit
is communicated to the consumer by the person required to give the
notice. For open-end credit, proposed paragraph (c)(2) requires the
notice to be provided to the consumer before the first transaction is
made under the plan, but not earlier than the time the decision to
approve an application for, or a grant, extension, or other provision
of credit is communicated to the consumer. Finally, for account
reviews, proposed paragraph (c)(3) requires that the notice be provided
to the consumer at the time the decision to increase the annual
percentage rate based on a consumer report is communicated to the
consumer by the person required to give the notice, or if no notice of
the increase in the annual percentage rate is provided to the consumer
prior to the effective date of the change in the annual percentage
rate, no later than five days after the effective date of the change in
the annual percentage rate.
Section 615(h)(2) of the FCRA states that the risk-based pricing
notice may be provided at the time of application or at the time that
the approval of an application for credit is communicated to the
consumer. The Agencies considered whether to allow the risk-based
pricing notice to be provided at the time of application, but rejected
that approach. Instead, the Agencies have concluded that the notice
generally should be provided no earlier than the time when approval is
communicated to the consumer. The Agencies have proposed this approach
for several reasons.
First, an application notice generally would have to be provided to
all consumer applicants before a consumer report is reviewed and would
have to be completely generic. The general rule, however, requires
persons engaged in risk-based pricing to differentiate between
consumers and to provide notice to those consumers who receive
materially less favorable material terms than other consumers. The
Agencies believe that requiring the notice to be provided later than
the time of application gives effect to the general rule and ensures
that risk-based pricing notices are provided only to those consumers
who may receive materially less favorable material terms.
Second, the Agencies believe that a completely generic and
depersonalized notice provided at the time of application may not be
effective in communicating to consumers the importance of the consumer
report in potentially establishing the terms of credit. The Agencies
believe that such a notice is less likely to be noticed, read, and
acted upon by consumers than a more targeted, personalized notice.
[[Page 28979]]
Third, permitting the notice to be provided at the time of
application would likely increase significantly the number of risk-
based pricing notices provided to consumers compared to the number of
notices that would be provided later in the credit process. If,
consistent with the Agencies' reading of the statute, receipt of a
risk-based pricing notice entitles the consumer to a free copy of his
or her consumer report, then permitting application notices could
greatly expand the number of free reports to which consumers may be
entitled in ways that could be costly for all parties, including
consumers, and offer little or no benefit to consumers. Accordingly,
the proposed rules specify that the earliest that the risk-based
pricing notice may be provided would be at the time that approval of
the extension of credit is communicated to the consumer.
Finally, the Agencies also believe that the notice is likely to
have the most utility if it is provided early enough in a transaction
that it encourages a consumer to check his or her consumer report for
inaccuracies. For this reason, the proposal requires that the notice be
given prior to consummation of any closed-end transaction or prior to
the first transaction under any open-end plan. The Agencies understand
that for some transactions there may be very little time between
approval of an application and either consummation or the first
transaction under the plan. For example, a credit card account may be
opened quickly. For other types of credit, there may be more time
between approval of the application and either consummation or the
first transaction under the plan. In those cases, a consumer may be
more likely to check his or her consumer report for errors and, after
reviewing the consumer report, may decide not to go forward with the
transaction until any errors in the consumer report are corrected. The
Agencies solicit comment on whether there are any circumstances in
which the notice should be permitted to be provided after consummation
or after the first transaction under the plan, and whether a notice
provided after consummation or after the first transaction under the
plan would be effective for consumers.
Section ----.74 Exceptions
Proposed Sec. ----.74 sets forth a number of exceptions to the
general requirements regarding risk-based pricing notices. Each
exception is discussed below.
Statutory Exceptions
Proposed paragraph (a) provides that notice is not required if the
consumer applied for specific material terms and was granted those
terms, unless those terms were initially specified by the person after
the transaction was initiated by the consumer and after that person
obtained a consumer report. This exception implements the statutory
exception in FCRA section 615(h)(3)(A). This proposed exception
clarifies that ``specific material terms'' means a single material term
or set of material terms, such as a single annual percentage rate, and
not a range of alternatives, such as an offer that gives multiple
annual percentage rates or a range of annual percentage rates. The
example in proposed paragraph (a)(ii) explains that if a consumer
receives a firm offer of credit from a credit card issuer with a single
rate, based in whole or in part on a consumer report, a risk-based
pricing notice is not required to be provided if the consumer applies
for and receives a credit card with that advertised rate. This is the
result because the creditor set the material terms of the offer before,
not after, the consumer applied for or requested the credit.
Proposed paragraph (b) provides that a risk-based pricing notice is
not required if a creditor has provided or will provide an adverse
action notice to the consumer under FCRA section 615(a) in connection
with the transaction. This exception implements the statutory exception
in FCRA section 615(h)(3)(B). The proposed exception applies to any
risk-based pricing notices otherwise required under the general rule,
the rule applicable to credit card issuers, or the rule applicable upon
account review, so long as an adverse action notice has been or will be
provided to the consumer pursuant to section 615(a) of the FCRA.
Prescreened Solicitations Exception
Proposed paragraph (c) provides an exception to the general risk-
based pricing rule when consumer reports are used to set the terms in a
prescreened solicitation (firm offer of credit). Proposed paragraph
(c)(1) states that a person is not required to provide a risk-based
pricing notice if that person (i) obtains a consumer report that is a
prescreened list as described in section 604(c)(2) of the FCRA, and
(ii) uses that consumer report for the purpose of making a firm offer
of credit to the consumer, as described in section 603(l) of the FCRA.
This exception applies regardless of the terms the creditor may offer
to other consumers in other firm offers of credit. In other words, a
creditor is not required to provide a risk-based pricing notice to a
consumer to whom it sends a particular prescreened solicitation just
because the creditor sends prescreened solicitations that offer
materially more favorable material terms to another group of consumers.
The Agencies note that this exception applies only when a consumer
report is used to set the terms offered in a prescreened solicitation
to a consumer at the pre-application stage, and does not eliminate the
requirement to provide a risk-based pricing notice later in connection
with the credit extension, pursuant to proposed Sec. ----.72. For
example, a firm offer of credit may contain several possible rates and,
if a consumer applies in response to the offer and does not receive the
lowest rate, the creditor generally is required to provide a risk-based
pricing notice to that consumer.
The Agencies believe that requiring a notice in connection with
prescreened solicitations will not significantly benefit consumers, but
will impose substantial burdens on creditors and the credit reporting
system. The Agencies understand that only about one half of one percent
of consumers who receive prescreened solicitations respond to them.
Therefore, for the vast majority of consumers who are not interested in
obtaining credit via the prescreened solicitation, a risk-based pricing
notice would have no relevance.\10\ Moreover, a requirement for
creditors to provide notices to all consumers who receive certain
prescreened solicitations and the corresponding availability of free
consumer reports for each of those consumers would impose a significant
burden on creditors and the credit reporting system.
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\10\ Whether a prescreened solicitation is made ``in connection
with an application for, or a grant, extension, or other provision
of credit''--and, thus, whether it is covered by section 615(h)--
could depend on the circumstances of a particular solicitation,
including whether a specific consumer actually applies for credit in
response to the solicitation. Because the Agencies have created an
exception for prescreened solicitations based on their finding,
pursuant to section 615(h)(6)(B)(iii), that there is no significant
benefit to consumers, the Agencies do not need to reach the issue of
whether such solicitations are ``in connection with'' an application
for credit.
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This exception also is consistent with the Agencies' determination
that the appropriate time for providing a notice is no earlier than the
time the decision to approve the credit application, or to grant,
extend, or provide credit, is communicated to the consumer. At the time
a creditor sends a prescreened solicitation, however, the consumer has
[[Page 28980]]
not made an application or otherwise indicated any interest in the
credit.
Finally, the exception also is consistent with the rule of
construction that consumers should receive only one risk-based pricing
notice per credit transaction. See detailed discussion of proposed
Sec. ----.75 below. Absent this exception, some consumers who respond
to prescreened solicitations would receive multiple notices in
connection with the transaction: The first at the time they receive the
solicitation, and the second when they respond to the solicitation but
do not receive the most favorable terms offered in that solicitation
(e.g., when the solicitation offers more than one possible annual
percentage rate). The Agencies find that there is no significant
benefit to consumers from receiving more than one notice, and more than
one opportunity to obtain free consumer reports, in connection with a
single extension of credit.
Credit Score Disclosure Exceptions
The Agencies are proposing three exceptions to the risk-based
pricing notice requirement for creditors that provide a credit score
disclosure to consumers. Each exception is described more fully below.
The credit score disclosure generally will include the consumer's
credit score, along with explanatory information regarding the score
and information regarding the use of consumer reports and scores in the
underwriting process. Under this exception, a creditor will provide
this disclosure to all consumers and will not need to apply a test to
determine which consumers likely were offered or received materially
less favorable material terms. The Agencies also have proposed an
alternate form of the notice to be provided to consumers for whom
credit scores are unavailable. As discussed below, the Agencies are
proposing these exceptions under section 615(h)(6)(iii) of the FCRA,
which gives the Agencies the authority to create exceptions to the
risk-based pricing notice requirement for classes of persons or
transactions regarding which the Agencies determine that the notice
would not significantly benefit consumers.
Credit Score Disclosure Exception for Credit Secured by Residential
Real Property
Proposed paragraph (d) provides an exception to the risk-based
pricing notice requirement for creditors offering loans secured by one
to four units of residential real property. This exception permits
creditors offering loans to consumers that are secured by residential
real property (purchase money mortgages, mortgage refinancings, home-
equity lines of credit, and home-equity plans) to comply with the
regulations by adding certain supplemental disclosures regarding the
use of consumer reports to the credit score disclosure they already are
required to provide to consumers pursuant to section 609(g) of the
FCRA. These creditors could provide this integrated notice to all
consumers in connection with loans secured by real property, and would
not be required to do a comparison of terms offered to different
consumers, as is required by the general rule.
Proposed paragraph (d)(1) sets forth the requirements that a
creditor must meet to avail itself of the exception and states that a
creditor is not required to provide a risk-based pricing notice if it
complies with this subsection. Paragraph (d)(1)(i) provides that in
order to qualify for the exception, the credit requested by the
consumer must involve an extension of credit secured by one to four
units of residential real property.
Proposed paragraph (d)(1)(ii) sets forth the contents of the notice
that must be provided to the consumer in order for a creditor to
qualify for the exception. Proposed paragraphs (d)(1)(ii)(A)-
(d)(1)(ii)(C) require disclosure of certain background information
regarding consumer reports and credit scores, including: (i) A
statement that a consumer report is a record of the consumer's credit
history and includes information about whether the consumer pays his or
her obligations on time and how much the consumer owes to creditors;
(ii) a statement that a credit score is a number that takes into
account information in a consumer report and that a credit score can
change over time to reflect changes in the consumer's credit history;
and (iii) a statement that the consumer's credit score can affect
whether the consumer can obtain credit and what the cost of that credit
will be. The Agencies believe that this background information will
provide helpful context for consumers who may otherwise lack
familiarity with consumer reports and credit scores and how they are
used.
Proposed paragraph (d)(1)(ii)(D) requires the notice to include all
of the information required to be disclosed to the consumer pursuant to
section 609(g) of the FCRA. Section 609(g) requires disclosure of: (i)
The current credit score of the consumer or the most recent credit
score of the consumer that was previously calculated for a purpose
related to the extension of credit; (ii) the date on which that score
was created; (iii) the name of the person or entity that provided the
credit score or credit file on which the credit score was created; (iv)
the range of possible credit scores under the model used; and (v) up to
four key factors that adversely affected the consumer's credit score
(or up to five factors if the number of enquiries made with respect to
that consumer report is one of the factors).
A person relying upon the exception set forth in proposed paragraph
(d) generally is required to provide to the consumer a credit score
that was used in connection with the credit decision. If, however, a
person uses a credit score that was not created by a consumer reporting
agency, such as a proprietary score, that person is permitted to
satisfy the exception either by providing the proprietary score to the
consumer or by providing to the consumer a credit score and associated
information it obtains from an entity regularly engaged in the business
of selling credit scores. In addition, a person that does not use a
credit score in its credit evaluation process is permitted to rely on
this exception by purchasing and providing to the consumer a credit
score and associated information it obtains from an entity regularly
engaged in the business of selling credit scores. This approach is
consistent with the approach taken in section 609(g) of the FCRA and
provides consumers with relevant summary information from their
consumer reports. The Agencies request comment on the types of entities
from which a creditor should be permitted to purchase credit scores for
use under this exception in circumstances where the creditor does not
otherwise use credit scores in the credit evaluation process.
For many consumers, a disclosure of the credit score number alone
will provide no indication of whether that credit score is favorable,
unfavorable, or about average when compared to the credit scores of
other consumers. Therefore, proposed paragraph (d)(1)(ii)(E) contains
the additional requirement that the notice disclose by clear and
readily understandable means either a distribution of credit scores
(i.e., the proportion of consumers who have scores within the specified
ranges) or a statement about how the consumer's credit score compares
to the scores of other consumers. This additional information will
provide important context to help consumers understand their credit
scores. Any distribution or comparison of scores should reflect the
population of consumers who have been scored under the model used by
the person providing the score. If that information is not available
from the person providing the score, or if the
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creditor is disclosing a proprietary score, then the creditor may base
the distribution or comparison on its own consumers who have been
scored using the model.
If a creditor chooses to disclose the credit score distribution,
this information can be presented in the form of a bar graph containing
a minimum of six bars, or by a different form of graphical presentation
that is clear and readily understandable. If a credit score has a range
of 1 to 100, the distribution must be disclosed using that same 1 to
100 scale. For a creditor using the bar graph, each bar must illustrate
the percentage of consumers with credit scores within the range of
scores reflected by that bar. A creditor is not required to prepare its
own bar graph; use of a bar graph obtained from the person providing
the credit score that meets the requirements of this paragraph will be
deemed compliant. The Agencies understand that some credit score
vendors make such graphs available to interested persons, such as at a
Web site. The Agencies believe that providing a graphical depiction of
how the consumer's credit score compares to those of other consumers is
an effective way of communicating this important contextual information
to consumers that they can use to evaluate their individual
circumstances.
Alternatively, the notice can inform the consumer by clear and
readily understandable means how his or her credit score compares to
the scores of other consumers. As discussed more fully in the Model
Forms section below, a concise narrative statement informing the
consumer that his or her credit score ranks higher than a specified
percentage of consumers is a clear and readily understandable means of
providing this information.
The Agencies request comment on whether requiring disclosure of
either the distribution of credit scores or how a consumer's credit
score compares to the scores of other consumers will be helpful to
consumers, and whether such a requirement will be unduly burdensome to
industry or costly to implement. The Agencies also solicit comment as
to whether the bar graph form of the disclosure contained in this
proposal is the simplest and most useful form of the disclosure for
consumers, or whether there are different graphical or other means that
would provide greater consumer benefit. The Agencies also solicit
comment on whether the rule should set forth other examples of specific
methods of presenting the score distribution or score comparison, such
as a narrative, a statement of the midpoint of scores, or different
forms of graphical presentation.
Proposed paragraph (d)(1)(ii)(F) requires the notice to include a
statement that the consumer is encouraged to verify the accuracy of the
information contained in the consumer report and has the right to
dispute any inaccurate information in the consumer report. The Agencies
believe that this statement may encourage consumers who otherwise will
not be aware of their right to dispute errors to do so.
Proposed paragraphs (d)(1)(ii)(G) and (d)(1)(ii)(H) require the
credit score disclosure to provide the consumer with information about
how to obtain his or her consumer report. The notice must state that
federal law gives the consumer the right to obtain copies of his or her
consumer reports directly from the consumer reporting agencies,
including a free consumer report from each of the nationwide consumer
reporting agencies once during any 12-month period, and provide contact
information for the centralized source from which consumers can obtain
their free annual reports. Finally, proposed paragraph (d)(1)(ii)(I)
requires the notice to include a statement directing the consumer to
the Web sites of the Board and the Commission to obtain more
information about consumer reports.
Unlike a risk-based pricing notice given under proposed Sec. --
--.72, the notice provided with the credit score disclosure under this
exception does not give rise to an independent right to a free consumer
report for several reasons. First, the exception notice is not a risk-
based pricing notice under section 615(h) of the FCRA. Therefore, the
Agencies' reading that receipt of a risk-based pricing notice will
trigger a free consumer report under section 612(b) of the FCRA does
not apply. Second, under this exception, consumers will receive, in
addition to the free credit scores they currently receive, specific
information to enable consumers to compare their credit scores to the
credit scores of other consumers. Finally, consumers who receive free
credit scores will have other opportunities to obtain free consumer
reports, such as the free annual reports available from the centralized
source, if they have not already done so in anticipation of entering
into a residential real property transaction.
The Agencies propose to create this exception under FCRA section
615(h)(6)(iii), which gives the Agencies authority to create exceptions
to the risk-based pricing notice requirement for classes of persons or
transactions regarding which the Agencies determine that the risk-based
pricing notice will not significantly benefit consumers. For the
reasons discussed below, the Agencies believe that a separate risk-
based pricing notice will not provide a significant benefit to
consumers who receive a credit score disclosure that satisfies the
exception.
The credit score disclosure required by section 609(g) of the FCRA
provides to the consumer free of charge his or her credit score, which
is an important piece of individualized information about the
consumer's credit history. The notice required to qualify for the
exception will augment the section 609(g) notice by integrating the
score disclosure with the additional information that will provide
consumers with context for understanding how their credit scores may
affect the terms of the offer and how their credit scores compare with
the credit scores of other consumers. The Agencies believe it is better
for consumers to receive all of this information at the same time in a
single disclosure, rather than piecemeal in different notices.
In addition, a consumer who discovers that his or her credit score
ranks less favorably than the credit scores of other consumers may have
a greater motivation to check his or her consumer report for errors
than a consumer who receives the more generic information about
consumer reports that will be included in a risk-based pricing notice.
The credit score disclosure and notice will encourage consumers to
check their consumer reports and will contain the contact information
that the consumer needs in order to obtain his or her free annual
consumer reports. By providing a consumer with such specific
information about his or her own credit history and how it compares to
the credit histories of other consumers, the credit score disclosure
and notice likely will provide consumers with equal or greater value
than the more generic information a consumer will receive in a risk-
based pricing notice. Furthermore, this specific information can be
provided to consumers without the need for creditors to determine
whether the terms of some offers are materially less favorable than the
terms of other offers. Finally, a consumer will obtain this valuable
information without having to take action to request a consumer report
from a consumer reporting agency, something many consumers may fail to
do. Thus, the Agencies believe that consumers who receive this
information integrated with the section 609(g) notice will not
significantly benefit from also receiving a separate risk-based pricing
notice.
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Proposed paragraph (d)(2) sets forth the form that the credit score
disclosure must take in order to satisfy the exception. The notice must
be clear and conspicuous, provided on or with the notice required by
section 609(g) of the FCRA, and segregated from other information
provided to the consumer. The notice also must be provided to the
consumer in writing in a form retainable by the consumer. The
requirement that the notice be in writing is satisfied if it is
provided in electronic form in accordance with the consumer consent and
other applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
Proposed paragraph (d)(3) describes the timing requirements for the
notice that will satisfy the exception. The notice is required to be
provided to the consumer concurrently with the notice required by
section 609(g) of the FCRA, but in any event at or before consummation
of a transaction in the case of closed-end credit or before the first
transaction is made under an open-end credit plan. Section 609(g) of
the FCRA states that the notice required by that subsection must be
provided to the consumer ``as soon as reasonably practicable.'' The
Agencies understand that industry practice is generally to provide the
credit score disclosure within three business days of obtaining a
credit score and will expect the integrated disclosure generally to be