Changes to Risk-Based Pricing Rules – Compliance Deadline Looming

November 30, 2010 at 4:38 pm Leave a comment

(Original E-Alert dated November 12, 2010)

On January 1, 2011, the new risk-based pricing rules amending Regulation V issued by the Federal Reserve Board (Fed) and the Federal Trade Commission (FTC) on December 22, 2009, will become effective (Final Rules). The Final Rules are available by clicking here.

The Final Rules require any person (lender) who uses a consumer report in connection with the extension of credit to a consumer primarily for personal, family or household purposes and, based on that report, extends credit to the consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that lender, to provide a risk-based pricing notice to that consumer. The Final Rules apply to both extensions of new credit and reviews of existing accounts.

To assist lenders in determining which consumers must receive a risk-based pricing notice, the Final Rules provide two alternative methods: the “credit score proxy method” and the “tiered pricing method.” The Final Rules also have a special test for credit card issuers with multiple-rate offers.

The Final Rules specify the content of the risk-based pricing notice and include several model forms that can be used as a safe harbor. Generally, the notice must be given after the terms of credit have been determined, but prior to the consumer becoming contractually obligated; however, the Final Rules specify specific timing depending on the type of credit extended by the lender. The duty to provide the notice is imposed on the original lender, even where the credit is extended as part of a three-party financing arrangement. The Final Rules contain a special provision for indirect automobile lending, providing that the lender can either provide the notice itself within the required time period or arrange to have the automobile dealer provide the notice on its behalf if the lender maintains policies and procedures to verify the automobile dealer provides the notice within the required time period.

The Final Rules also contain numerous exceptions to the requirement to provide a risk-based pricing notice, including:

  • Consumer applies for and receives specific material terms
  • Consumer is provided an adverse action notice
  • Lender obtains a consumer report that is a prescreened list and uses that consumer report to make a firm offer of credit to consumers
  • Extension of credit will be secured by 1-4 units of residential real property and the consumer is provided a notice consisting of the consumer’s credit score and certain additional information
  • Consumer is provided a credit score disclosure with certain additional information that provides context for the credit score disclosure
  • Credit score is not available from the agency where the lender regularly obtains a credit score and the lender does not obtain a credit score from another consumer reporting agency and provides the consumer a notice containing specified information

Entry filed under: Client Alerts.

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