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
Background: On January 15, 2010, the Board of Governors of the Federal Reserve (the Commission) and the FTC published final rules to implement the risk-based pricing provisions in section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) which amended the Fair Credit Reporting Act (FCRA). The final rules require a creditor to provide risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit on material terms that are less favorable than the most favorable terms available to consumers from or through that creditor.
Section 1100f of the Dodd-Frank Wall Street Reform and Consumer Protection Act amends the FCRA to require additional content to be disclosed to consumers in risk-based pricing notices. However, if an entity does not use risk-based pricing to make a credit decision, than the entity is not required to disclose the credit score and information related to the score.
Content Disclosure Requirements to Consumers
The following are the content disclosure requirements for creditors to include in notices to consumers when utilizing risk-based credit pricing.
- The credit score used by the person in making the credit decision;
- The range of possible credit scores under the model used to generate the credit score;
- all of the key factors that adversely affected the credit score, which shall not exceed four key factors, except that if one of the key factors is the number of enquiries made with respect to the consumer report, the number of key factors shall not exceed five;
- The date on which the credit score was created; and
- The name of the consumer reporting agency or other person that provided the credit score. In addition, to provide context for the additional content requirements, creditors are required to provide a statement that a credit score is a number that takes into account information in a consumer report, and that a credit score can changed over time to reflect changes in the consumer's credit history.
A key question raised by a commenter on the Final Rule was, what happens in the event that the consumer reporting agency does not provide the key factors that adversely affected the score with the score itself?
Answer: The Commission acknowledges that contracts between creditors and consumer reporting agencies may not contain the key factors information. Forcing consumer reporting agencies to do so is beyond the scope of this rule-making leaving creditors with two options:
- Creditors write their contracts with consumer reporting agencies to provide them the key-factors that adversely affected the credit score or;
- They can send credit score disclosure exception notices to all consumers.
Credit Score:``a numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default[.]''
Proprietary Scores: Are those developed by creditors themselves or for specific creditors, as opposed to those developed by consumer reporting agencies or large scoring companies such as
FICO or Vantage Score for use by individual creditors.
The key issue with Proprietary Scores is when their use has to be disclosed to the consumer.
- Scores not used to predict the likelihood of certain credit behaviors, such as insurance scores or scores used to predict the likelihood of false identity are not credit scores by definition and are not required to be disclosed.
- In addition, the definition of a credit score does not include mortgage scores or an automated underwriting system that considers one or more factors in addition to credit information, including the loan-to-value ratio, the amount of down payment, or the financial assets of a consumer. Therefore, a proprietary score which includes the use of these enumerated scores and information from a consumer reporting agency does not need to be disclosed to the consumer
- If a creditor uses a proprietary score that does not meet the definition of a credit score and a credit score from a consumer reporting agency in setting the material terms of credit or reviewing the account, than the creditor would disclose the credit score from the consumer reporting agency.
- If a creditor uses a credit score from a consumer reporting agency as an input to a proprietary score that is not itself a credit score, the creditor shall report the credit score from the consumer reporting agency.
- If a creditor only uses a proprietary score that only includes information acquired from a consumer reporting agency in setting the material terms of credit or reviewing the account, the proprietary score would be a credit score and must be disclosed.
- If a creditor uses both a proprietary score that is a credit score and a credit score from a consumer reporting agency in setting the material terms of credit, both are credit scores. In the case where both credit scores are used, the creditor has the option to choose which one to disclose.
Use of a Credit Score
Commenters raised several issues with regards to the “use” of a credit score:
- Creditors argued that they should not have to disclose a credit score if the score was not used in making the credit decision.
- Creditors argued that they should not have to disclose a credit score even if it obtains the score but doesn’t use it, or when the credit score was not the cause of the risk-based pricing.
The Federal Reserve and the FTC determined that a creditor that obtains a credit score and engages in risk-based pricing would need to disclose that score, unless it played no role in setting the terms of credit. Moreover, disclosure of the score would be required, even if it was not a significant factor in setting the terms of credit.
Three-Party Financing Transactions: In the case where a creditor goes to a financing source for a transaction (e.g. car purchase) which obtains the consumer’s credit score to set the terms of the transaction (APR), the creditor will still have “used” a credit score and will have to follow risk-based pricing rules.
Guarantors and Co-Signers
In cases where a creditor uses the credit score of a guarantor, co-signer, surety, or endorser, but not a credit score of the consumer to which it extends credit, the risk-based pricing notice must still be sent to the consumer and not to the guarantor or co-signer, etc.
Credit Score Disclosure Exception Notices for risk-based pricing are still valid after the changes made to the FCRA by the Dodd-Frank Act. The rationale for maintaining these exceptions is that the Exception Notices provide a free credit score to the consumer. Elimination of these notices would reduce consumer knowledge about credit and potential inaccuracies in their credit score.
Form of the Notice
The FTC and Federal Reserve have provided model forms that may be used for compliance with the risk-based pricing rules and their use is optional.
Multiple Credit Scores
Some creditors obtain multiple credit scores from consumer reporting agencies when setting the terms of the agreement. The Dodd-Frank act only requires a creditor to disclose a single credit score but does have the option to disclose all credit scores.
In the case of multiple consumers (e.g. co-borrowers, co-applicants), a creditor must provide a risk-based pricing notice to all co-applicants, and not only to the applicant whose credit score was used in setting the terms of credit.
The changes to the FCRA by Dodd-Frank are effective 30 days after the final role is posted in the Federal Register. The final rule was included in the Federal Register on July 15th, and therefore become effective on August 14, 2011.
Applicability to Public Gas Systems
After consulting with Bud Miller and APPA on this issue, it appears that the risk-based pricing regulations will apply to all public gas systems, regardless of size, that uses a credit score in making credit decisions.
The Commission estimates that the time required/cost burden for implementation of these rules will be minimal for entities of all sizes. More specifically, the Commission estimates that itwould take on average each entity four days to update systems and the model forms.
The Commission estimates that the labor cost per entity would be the average wage of the manager/technical personnel implementing the changes would be $42.95/hour x 32 hours= $1,374.40 per entity to implement the changes.
The Commission does not anticipate that compliance with the final rules will require any new capital or other non-labor expenditures. The Commission believes that final rules provide a simple and concise model notice that creditors may use to comply, and, as creditors already are providing risk-based pricing notices to consumers under the FCRA, they already have the necessary resources to generate and distribute these notices. Thus, any capital or non-labor costs associated with compliance would be negligible.