Learning from the Preamble - Risk-Based Pricing Notice Edition

Written by Steve Van Beek

I continue to be amazed at the amount of information that regulators decide to stuff into the preamble and staff commentary rather than the actual regulation.  Of course, in a lot of situations the decision makes sense as the language is clarifying the regulation's requirements.  However, in some situations  - such as the one below - I'm starting to wonder if it wouldn't make more sense to include the information directly in the rule to prevent unnecessary confusion.  

Many credit unions are struggling with the determination of when to send risk-based pricing notices and making decisions on whether they will use the traditional risk-based pricing notice or the alternative credit score disclosures.  One question that often gets asked is: Can we just give the notice to all credit applicants?  

Traditional Risk-Based Pricing Notice

The traditional risk-based pricing notice (model form B/H-1) has language telling the member that other consumers may have received better terms than they received.  Giving that notice to all applicants could potentially be misleading for members who received your lowest APRs.  Additionally, the traditional risk-based pricing notice (B/H-1) includes this language: "Under federal law, you have the right to obtain a copy of your credit report[s] without charge for 60 days after you receive this notice."  That language is similar to the Fair Credit Reporting Act adverse action notice.  And, it doesn't work well in the situations where members have received the best terms the CU offers.  Regulation V indicates which members need to receive the notice, but I wished they would have gone a step farther and clearly stated that the traditional risk-based pricing notice is inappropriate for members who receive the CU's best terms.

Credit Score Disclosure Exception

What about if the credit union decides to use the credit score disclosure exception rather than send the traditional risk-based pricing notice?  The model forms for the credit score disclosures, B/H-3; B/H-4; and B/H-5 (scroll down to bottom), has language that seems applicable to all applicants as it discusses credit scores generally rather than indicating members received less favorable terms that other applicants.

In fact, tucked in the preamble to the rule is this language from the Federal Reserve:

"Some commenters requested that the Agencies clarify in the final rules that a credit score disclosure exception should only be given to those consumers who would otherwise receive a risk-based pricing notice. The credit score disclosure exceptions were created to provide an alternative to the risk-based pricing notices that was potentially simpler for compliance purposes, but that also would provide consumers with information of equal or greater value than the information a consumer would receive in a risk-based pricing notice. Requiring creditors to provide credit score disclosure exception notices only to those who would otherwise receive the risk-based pricing notices would not be consistent with the Agencies’ intent to provide a simpler alternative that could reduce the cost and burden associated with determining which consumers must receive notices. Thus, the final rules retain the requirement that in order to use these exceptions to the risk-based pricing disclosure requirements, a person must provide an exception notice to every consumer requesting an extension of credit for a product for which the person uses risk-based pricing, even those who would not otherwise receive a risk-based pricing notice. To clarify this, paragraph (d)(1)(ii) in the final rules is revised to replace the phrase ‘‘the consumer’’ with the phrase ‘‘each consumer described in paragraph (d)(1)(i) of this section.’’ Similarly, paragraph (e)(1)(ii) in the final rules is revised to replace the phrase ‘‘the consumer’’ with the phrase ‘‘each consumer described in paragraph (e)(1)(i) of this section,’’ where ‘‘each consumer’’ is each one who requests an extension of credit."  Emphasis Added.

Woah.  The Fed comes right out and tells you what they expect (albeit, in the preamble rather than the rule).  If the credit union uses the credit score disclosure exception - it must send the credit score disclosure to each applicant.  Thus, if you send the credit score disclosures, you will be sending more disclosures but the process is simplified as you are required to send to all applicants rather than using one of the tests that are required for the traditional risk-based pricing notice.  Notice the language the Fed uses to "clarify" this:

"To clarify this, paragraph (d)(1)(ii) in the final rules is revised to replace the phrase ‘‘the consumer’’ with the phrase ‘‘each consumer described in paragraph (d)(1)(i) of this section.’’ Similarly, paragraph (e)(1)(ii) in the final rules is revised to replace the phrase ‘‘the consumer’’ with the phrase ‘‘each consumer described in paragraph (e)(1)(i) of this section,’’ where ‘‘each consumer’’ is each one who requests an extension of credit."   

What?  Let us take a look at the section on the credit score disclosure exception for non-home secured loans and see if the Fed has made it clear that credit unions need to send the notice to each applicant (if they choose the credit score disclosure rather than traditional risk-based pricing notice) - from 12 CFR 222.74(e):

"(e)Other extensions of credit—credit score disclosure—(1)In general. A person is not required to provide a risk-based pricing notice to a consumer under §222.72(a) or (c) if:

(i) The consumer requests from the person an extension of credit other than credit that is or will be secured by one to four units of residential real property; and

(ii) The person provides to each consumer described in paragraph (e)(1)(i) of this section a notice that contains the following—"

What?!?!  I know what the Fed is saying here (after five reads of the text and reading the preamble), but why do they need to make it so convoluted and complicated in the actual regulation?  If they wrote this section in plain English, financial institutions would be more likely to provide the correct notices to consumers at the correct time which would provide consumers with required information when they need it most.  By writing this in such an awkward manner, the Fed (and the FTC as this was a joint rulemaking and perhaps part of the reason it is so convoluted) has made compliance harder.

There has been a lot of speculation about the new Consumer Financial Protection Bureau - and specifically about which areas the Bureau will get involved with first to help consumers.  Here is my plea to the CFPB - look at the existing regulations and remove passages such as "the person provides to each consumer described in paragraph (e)(1)(i) of this section" with clear requirements to help financial institutions who are trying to help consumers.  

Where are the demands for plain vanilla regulations?  Currently, I see a rainbow of regulations that don't taste good at all.  

Comments

[Language course Malta]

Thanks for sharing this really informative Article.

[robert joyner]

The CFPB does not have to look far for inspiration and guidance on writing technical financial language in plain english. Mr Investment, Warren Buffett, helped the SEC develop an alternative to the mind blowing prospectus ,which is created every time a company is doing an equity offering.

http://www.sec.gov/pdf/handbook.pdf