Risk-Based Pricing Notice Proposed Changes

Written by Steve Van Beek

Back in late March, I blogged briefly about the proposed changes to the risk-based pricing notices.  The ink was barely dry on the risk-based pricing rules before Dodd-Frank required the notices to be updated.  As the March blog post notes, this change impacts institutions using the traditional risk-based pricing notices.  The "credit score disclosure exception notices" are not impacted because they already contain the credit score information.

The changes to the risk-based pricing notices have not been finalized but they will become effective July 21, 2011 (unless the Fed extends the compliance date when it issues the final rule).  When finalized, credit unions will need to include credit score information on all risk-based pricing notices.  This is required by Section 1100F of Dodd-Frank which amended Section 615(h) to the Fair Credit Reporting Act (which is then implemented by Regulation V).

This requirement for the credit score information dovetails with the requirement for the credit score information which will soon be required for FCRA adverse action notices.  Dodd-Frank required these changes to ensure consumers knew their credit score information and that it was a factor in the credit union's decision.  In the past, the adverse action notice and traditional risk-based pricing notice only required a disclosure about the consumer's right to receive and review their credit report.  Going forward, these notices will need to have the credit score as well.  

The proposed rule - which includes proposed model forms - is located here.

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The rationale for the Dodd-Frank change makes some sense.  Congress wanted to give consumers a right to their credit score in addition to their ability to obtain their credit report.  However, sometimes I think Congress does not give enough attention to the burden this places on small institutions.  

Allow me one example (for today).  Here is a section of the current language from Regulation V - 12 C.F.R. 222.75(c):

"(c) Multiple consumers —(1) Risk-based pricing notices. In a transaction involving two or more consumers who are granted, extended, or otherwise provided credit, a person must provide a notice to each consumer to satisfy the requirements of §222.72(a) or (c). If the consumers have the same address, a person may satisfy the requirements by providing a single notice addressed to both consumers. If the consumers do not have the same address, a person must provide a notice to each consumer.

(2) Credit score disclosure notices. In a transaction involving two or more consumers who are granted, extended, or otherwise provided credit, a person must provide a separate notice to each consumer to satisfy the exceptions in §222.74(d), (e), or (f). Whether the consumers have the same address or not, the person must provide a separate notice to each consumer. Each separate notice must contain only the credit score(s) of the consumer to whom the notice is provided, and not the credit score(s) of the other consumer."

There was some flexibility built into the Regulation V risk-based pricing notice.  This allowed institutions who were sending the traditional risk-based pricing notices to send one notice in situations where the consumers both had the same address (this was not allowed for credit unions sending the credit score disclosure exception notices).  

This new change will ultimately remove this flexibility.  All risk-based pricing notices will now need credit score information.  This means credit unions that previously sent one notice to members jointly at the same address will need to send two separate notices - even if the members reside at the same address - because of the credit score information.  

Now, you may be thinking - this is not a huge change.  But - I'd argue this small change (sending two notices rather than one) has a large compliance cost.  Remember, the risk-based pricing rule just became effective on January 1, 2011.  This change from Dodd-Frank will become effective July 21, 2011.  That is just over six months.  The cost of this change is not just the additional cost of mailing out an additional notice each time.  Credit unions will also need to update their current procedures and retrain staff.  And that is just on this small mailing change.  Credit unions will also need to spend time and resources reading and digesting the other changes in the final rule which hasn't arrived yet.

NAFCU Members:  Our Reg Alert on the changes to Regulation V (11-EA-07) can be found here.      

Comments

[Zachary]

Hey Steve,

Assuming nothing happens between now and July 21st on this issue. What does the credit union need to do to be compliant on July 21?

[Steve Van Beek]

Zachary,
The biggest change is the credit union will need to make sure it is disclosing the credit score information on its risk-based pricing notices. Assuming the CU is using the traditional RBPN, this is going to require an updating from following the H-1 model form to the new H-6 model form.

The H-6 model form will be the credit union's best guide for how to include the credit score information. When the rule is finalized, review the final model form and be sure the CU has all the require information. Also, review your procedures to be sure any RBPN that includes credit score information is sent individually to a member. A notice with credit score information cannot be sent to multiple members (even if they are co-applicants).

[Frank]

Steve:

Does the new requiremnt apply to only those accounts which are denied due to credit scores , i.e. D paper denied second mortgages, or does it apply to all risk based if the credit score is used to determine rates?

[Steve Van Beek]

Frank,
The risk-based pricing rules apply when credit is granted on less favorable terms (i.e., higher APR) than other members. If you are denying credit, you'd be triggering an adverse action notice.

One of the exceptions to the risk-based pricing notice requirements is if you send an adverse action notice. 12 C.F.R. 222.74(b).

[Dianna]

I hope I haven't missed the opportunity to receive a reply on this subject since I'm commenting at such a late date . . . ?
If we use the combined (Reg B and FCRA) Adverse Action form, will we have to send to both applicants regardless of whose credit score was deemed the reason for the disapproval of the loan?

[debra]

I am looking for the same answer as Diana - it appears that an adverse action notice should include the score that was used to determine whether the deal was doable (for mortgages). In most cases that is the lower middle score of all applicants. If I have to send the notice out to each co-applicant - someone is receiving information about a credit score that does not pertain to them individually AND is actually the private information of another person. This seems ripe for trouble. I am thinking about having co-applicants sign a waiver at the outset of the loan that allows us to disclose the determinative credit score to co-applicants.

[Linda Factory]

Is there a certain number of days that this notice must be given after the application has been taken?