AGENCIES PROPOSE FACTA RULES ON RISK-BASED PRICING NOTICES
The Federal Reserve Board and the Federal Trade Commission have issued proposed rules implementing Section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACTA), which generally requires a creditor to provide 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 apply to creditors that engage in “risk-based pricing” (i.e., 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). The notice requirement is designed to improve the accuracy of consumer reports by alerting consumers to the existence of negative information on their consumer reports so that they can check their reports and correct any inaccurate information.
The proposed rules define “material terms” as (i) the annual percentage rate (APR), (ii) any monetary terms (e.g., down payment amount or deposit) that may vary based on a consumer report for credit that does not have an APR or (iii) the APR applicable to purchases for credit cards. “Materially less favorable,” as it applies to material terms, means 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.
Comparison of Material Terms
A person subject to the rules (generally the person to whom the obligation is initially payable) may determine whether a consumer has received material terms that are materially less favorable using one of several methods. First, a creditor could compare the material terms offered to the consumer to the material terms offered to other consumers in similar transactions. Second, a creditor that uses credit scores could use the “credit score proxy method,” whereby the creditor would (i) determine (and periodically update) a cutoff score representing the point at which approximately 60% of its consumers have lower credit scores and (ii) provide notice to consumers whose scores are below the cutoff. Third, a creditor that assigns consumers to one of a discrete number of pricing tiers based on consumer reports could use the “tiered pricing method” and provide notice to consumers who are not assigned to the top pricing tier(s).
Credit card issuers would be required to provide notice to any applicant who responds to a multiple-rate offer and, based on a consumer report, is granted credit at a purchase APR that is higher than the lowest purchase APR available under that offer.
The proposed rules also would require creditors that use consumer reports in connection with periodic account reviews to provide notice to a consumer if the creditor increases the consumer’s APR because of information in the consumer’s consumer report.
Content and Timing
In addition to the content prescribed by the FACTA (which provides that the notice must, at a minimum, (i) inform the consumer that the terms offered are set based on consumer report information, (ii) identify the consumer reporting agency (CRA) furnishing the report, (iii) inform the consumer that the consumer may obtain a copy of a consumer report from that CRA without charge and (iv) include the contact information specified by that CRA for obtaining such consumer reports), the proposed rules would require the notice to include a statement that the terms offered may be less favorable than the terms offered to consumers with better credit histories. The proposed rules also include special content requirements for the notice in the context of account reviews. The agencies have proposed model forms.
The proposed rules generally would require notice to be provided after the terms of credit have been set, but before the consumer becomes contractually obligated on the credit transaction. For account reviews, notice would need to be provided at the time the decision to increase the APR is communicated or, if no notice of the increase is provided prior to the effective date of the change, no later than five days after the effective date of the change.
The proposed rules contain a number of exceptions, including the statutory exceptions that apply when a consumer (i) applies for and receives specific material terms and (ii) receives an adverse action notice in connection with the transaction. The agencies also are proposing exceptions for creditors that provide applicants with certain information, including their credit scores, in lieu of the risk-based pricing notice. In addition, the agencies are proposing an exception for prescreened solicitations. Under this exception, a creditor would not be required to provide a risk-based pricing notice if that creditor obtains a prescreened list and makes firm offers of credit to consumers on the list, regardless of how the material terms of that offer compare to the terms that the creditor includes in other firm offers of credit.
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.
The agencies request comment on the proposed rules within 90 days of publication in the Federal Register.