FACT Act: FTC Issues Final Rule on Prescreening Notices

A provision in the FACT Act requires notices to recipients of offers of credit that were prescreened using the consumer's credit report. The Act assigns rule writing responsibility to the FTC but requires the FTC to consult with the bank regulatory agencies in developing the final rule. All of that has happened and the rule is final.

Coverage
The final rule applies to "any person" which includes all creditors. The rule is triggered when any person uses a consumer report, in compliance with the FCRA prescreening rules, in connection with any credit or insurance transaction that is not initiated by the consumer.
The key here is that the creditor or other person initiates the use of the credit report. When a creditor obtains the consumer's credit report in order to process an application for credit filed by the consumer, the transaction is initiated by the consumer and would not trigger coverage of this particular notice.

Simple and Easy to Understand
Unlike other consumer protection laws such as Truth in Lending, the FACT Act requires that the notices be simple and easy to understand. In short, technical language and boiler plate must be worked out of any notice text or format. The rule establishes the basic requirements for the notice but does allow some room for creativity - as long as the creativity is simple and easy to understand.

Defining simple and easy to understand should be easy, but then again, this is a regulation. The concept means plain language that is clearly understood by regular people - ordinary consumers. The notices should not be written for bankers or for regulators.

The final definition contains two concepts: specific requirements - specific format requirements, and suggestions or examples. The specific format requirements include using a layered notice, with a short, clear notice at the beginning of the materials, using plain language, and using clear concise sentences.

The examples provide more detailed guidance including the use of short sentences, active voice, non-complex sentences, and avoidance of confusing or misleading language.

Layered Notices
The rule requires not one notice, but two. The first notice is very brief and designed to convey core information to the consumer. It must contain four elements and must not contain any other information. In short, no distractors.

The short notice must tell consumers that they have the right to opt out of receiving prescreened solicitations, provide the toll-free number to call to exercise the right, direct the consumer to the existence and location of the long notice, and state the heading for the long notice.

In addition to content, the short notice has presentation requirements. The type size must be larger than the type size of the principal text on the same page and must also be at least 12-point type in size.

Presentation requirements do not end with type size. The short notice must also be placed and positioned so that it is prominent and distinct from other text. This can be done with colors, type face, borders or other methods as long as the result is clear.

The long notice must contain the information required by Section 615(d) of the FCRA. A limited amount of other information may be included but it must not detract from or contradict the notice. The type size must be at least 8-point type and must also be the same type size (at least as large) as the principal text on the same page.

The rule provides some allowances for electronic notices. Generally, all of the principals for printed notices apply but may be translated into an electronic screen environment. Anything that must be "written" must appear on the screen and be presented in a way that the consumer can print out. The rule recognizes that the creditor providing the notices does not have control over the screen presentation of the user so the size and prominence requirements become converted to screen techniques.

Where?
The long notice may be placed in a variety of positions, including last. However, the short initial notice must be positioned prominently on the principal promotional document. The short notice must be placed so that the consumer sees it with the first piece of the promotion. This may be the cover letter or some other document. It does not need to be placed with any other disclosures such as the terms and costs of credit. Clearly, with this requirement, the method of stuffing promotional envelopes becomes a compliance issue as well as a marketing issue.

Effective Date
The FTC listened to concerns expressed by the industry about compliance and has set an effective date of August 1, 2005. The proposal had contemplated an implementation period of 2 months. The final rule provides for six months to implement the rule.

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