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The time has come to implement the risk-based pricing notice requirements under the Fair and Accurate Credit Transactions (FACT) Act. We hope you’re ready because these rules are effective January 1, 2011.
The objective of this final rule is to provide consumers with a notification (the risk-based pricing notice) alerting them to the existence of negative information on their consumer reports. The expectation is then for the consumers to check their reports for inaccuracies.
Well, that sounds easy enough. But now comes the true test of understanding what this really means. You will need to determine and comply with the who, what, and when of the rule.
If a credit report is used in whole or in part to determine creditworthiness, then a risk-based pricing notice will be given to consumers who are provided considerably less favorable terms.
What does that mean? Well, there are three methods available to determine whether a consumer received less-favorable terms:
- Direct consumer-to-consumer comparison;
- Credit score proxy method; and
- Tiered pricing method.
In reviewing these available methods, we've found that the tiered pricing method seems to be the easiest to implement. But you’ll need to determine which method is most appropriate based on your operations and available resources.
Check the Federal Register (pdf) for the specifics of each method, starting on page 2,769.
The Fed has developed model risk-based pricing forms. Don’t make more work for yourself—take advantage of the model forms.
On pages 2,777 and 2,778 of the Federal Register are the model risk-based pricing notices (Model Forms B-1 and B-2). If you give the exception notice, then model forms B-3, B-4, and B-5 would be used. But that’s a conversation for a later date.
The risk-based pricing notice must be provided before the consummation of the transaction, or the first transaction for credit cards or other open-end credit, but no earlier than the time that approval of the credit is communicated to the consumer.
In addition, if you use a credit report for account reviews and you increase the annual percentage rate so that the terms are materially less favorable, a notice must be provided.
Remember, this rule is only applicable to creditors that use risk-based pricing for extending consumer credit for personal, family, or household purposes.
And like any rule, be aware of the exceptions because they make up an entirely separate blog post. Stay tuned.
PolicyWorks provides regulatory compliance solutions for credit unions and government and public affairs consulting. This article originally appeared as a blog entry on The Works. Visit our compliance page for regular updates to The Works.