Written by Steve Van Beek
With the creation of the new Consumer Financial Protection Bureau (CFPB), there has been an extra focus on clarity of information. The CFPB has consistently stated that one of its main missions will be to remove the "tricks and traps" currently used in the financial marketplace. It is with that background in mind that I want to walk through an example of where regulators have placed complicated and unnecessary roadblocks on the road to compliance.
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The recent risk-based pricing rule in Regulation V contains a requirement for institutions to send a risk-based pricing notice when the credit union has conducted an "account review" and increased the APR on an existing loan. Note: This post is not going to discuss the Regulation Z issues involved (i.e., change-in-terms process and APR review process if a credit card account).
Here is from Regulation V - 12 C.F.R. 222.72(d):
"(d) Account review —(1) In general. Except as otherwise provided in this subpart, a person is subject to the requirements of paragraph (a) of this section and must provide a risk-based pricing notice to a consumer in the form and manner required by this subpart if the person—
(i) Uses a consumer report in connection with a review of credit that has been extended to the consumer; and
(ii) Based in whole or in part on the consumer report, increases the annual percentage rate (the annual percentage rate referenced in §222.71(n)(1)(ii) in the case of a credit card).
(2) Example. A credit card issuer periodically obtains consumer reports for the purpose of reviewing the terms of credit it has extended to consumers in connection with credit cards. As a result of this review, the credit card issuer increases the purchase annual percentage rate applicable to a consumer's credit card based in whole or in part on information in a consumer report. The credit card issuer is subject to the requirements of paragraph (a) of this section and must provide a risk-based pricing notice to the consumer."
Regulation V includes a model form for this notice; the H-2 notice.
But, wouldn't this be a situation where an adverse action notice would be required under Reg B and the FCRA? Here is a discussion of that issue in the preamble to the final rule:
"Industry commenters objected to this requirement, stating that account review is not covered by the statute. They also argued that the provision was not needed because adverse action notices were already provided when annual percentage rates are increased during account review.
Paragraph (d) of the final rules is adopted as proposed. The legislative history indicates that the statute was meant to apply to account reviews, as well as to new accounts. Moreover, the Agencies acknowledge that there are circumstances where an adverse action notice is provided to the consumer in connection with an account review that results in a rate increase. In these circumstances, the exception for adverse action notices, discussed below, would apply and the creditor would not be required to provide the consumer with a risk-based pricing account review notice. However, if an adverse action notice is not provided to a consumer, a risk-based pricing account review notice must be provided to the consumer." 75 Fed. Reg. 2736.
So, the Fed (and the FTC) are telling institutions they need to send a risk-based pricing notice to members where their APR has been increased. But, the notice is not required if an adverse action notice has been sent (the exception is located in 12 C.F.R. 222.74(b)).
So, let's go back to the example the Fed (and the FTC) used in 12 C.F.R. 222.72(d)(2) to explain this situation:
"(2) Example. A credit card issuer periodically obtains consumer reports for the purpose of reviewing the terms of credit it has extended to consumers in connection with credit cards. As a result of this review, the credit card issuer increases the purchase annual percentage rate applicable to a consumer's credit card based in whole or in part on information in a consumer report. The credit card issuer is subject to the requirements of paragraph (a) of this section and must provide a risk-based pricing notice to the consumer." (emphasis added).
To me, this is a "trick and trap" conducted by the regulators. Industry commenters specifically mentioned that an adverse action notice is sent in a majority of these "account review" situations and that a risk-based pricing notice would be redundant. The Fed (and the FTC) acknowledged this in the preamble but did not change the language of the regulation.
Thus, now we have a situation where a reading of the regulation implies an "account review" risk-based pricing notice would need to be sent. But, the adverse action notice exception, in 12 C.F.R. 222.74(b), still applies. How do we know the adverse action exception applies? The Fed (and the FTC) acknowledged this in the preamble.
Have you seen any discussion about important account terms being "tucked away in the fine print"? To me, this regulation does the exact same thing. Would it have been so hard to include a reference to the adverse action exception in the example used in 12 C.F.R. 222.74(d)(2)?
Here is what this section could have looked like if the Fed (and the FTC) incorporated the comments received during the rulemaking process:
"(2) Example. A credit card issuer periodically obtains consumer reports for the purpose of reviewing the terms of credit it has extended to consumers in connection with credit cards. As a result of this review, the credit card issuer increases the purchase annual percentage rate applicable to a consumer's credit card based in whole or in part on information in a consumer report. The credit card issuer is subject to the requirements of paragraph (a) of this section and must provide a risk-based pricing notice to the consumer.
If a credit card issuer has sent an adverse action notice to the consumer, the credit card issuer would not be required to also send a risk-based pricing notice to the consumer. Refer to 12 C.F.R. 222.74(b) for more details on this exception."
Please Note - the above is a hypothetical regulatory section for informational purposes and is not real.
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Another common refrain from the CFPB is that they understand how an increasing regulatory burden disproportionately hurts small financial institutions - including credit unions. To help ease this burden, regulators need to reduce the situations where key issues are "buried in the preamble" rather than reflected in the regulation or in the staff commentary.
If the goal is increased clarity of information, regulators need to join the party as well.
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