Credit Score Info on Risk-Based Pricing Notices

Written by Steve Van Beek

This morning's blog post discussed the minimal implementation time given by the Federal Reserve.  This post will get into some of the weeds of the risk-based pricing notice final rule.  We will pick up on other issues tomorrow and the changes to Reg B's model forms next week.  

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Risk-Based Pricing Notices

Credit Score Exception Notices.  The recent changes will not impact your credit union if you use the credit score disclosure exception notices.  I blogged about this back in late March.  However, consumer groups made a strong push to remove these exception notices completely.  The Fed did not follow - but remember the new Consumer Financial Protection Bureau (CFPB) takes over the consumer laws, including Reg V, and will be a new ear for consumer groups.  The two pages of discussion are here if you want to review the discussion - which provides a good reminder for the role of comment letters.    

Key Factors.  The Fed clarified that credit unions who purchase a credit score from a consumer reporting agency (CRA) can rely on the "key factors" provided by the CRA to disclose the key factors that adversely affected the credit score.

Use of Credit Score.  This new requirement - from Section 1100F of Dodd-Frank - applies when the credit unions uses a credit score in setting or reviewing the APR on the account.  If the credit union uses a credit score in the credit decision, it must include these new disclosures.  

What if you obtain a credit score but do not use it?  The Fed discusses this situation and concludes:

"A creditor that obtains a credit score and engages in risk-based pricing would need to disclose that score, unless the credit score played no role in setting the material terms of credit.  Moreovers, even if the credit score was not a significant factor in setting the material terms of credit but was a factor in setting those terms, the creditor will have used the credit score for purposes of Section 1100F of the Dodd-Frank Act." (emphasis added).  Page 9.

Here is the problem with that:  how do you prove to an examiner that you did not use a credit score that you have in your possession?  That might be a very tough hurdle and strong procedures and documentation might not be able to satisfy an examiner.  A separate question might be:  why is the CU obtaining a credit score when it is not using it in the decision process?    

Guarantors & Co-Signers.  Regulation V does not require the credit union to send a risk-based pricing notice to a guarantor or co-signer on an account because the CU is not granting credit to that person (see 75 Fed. Reg. 2731 for more discussion).  However, the credit union may need to send a risk-based pricing notice to the actual applicant.

So what happens if a CU uses a guarantor's credit score to grant credit to the applicant?  Does it send the credit score information of the guarantor to the applicant?  The Fed answered this on page 11 of the final rule.  The Fed concluded:

"The Agencies continue to believe that the credit score of one consumer, such as a guarantor, co-signer, surety, or endorser, should not be disclosed to a different consumer entitled to receive a risk-based pricing notice."    

Multiple Consumers.  Last month, I blogged on the proposed change for sending risk-based pricing notices when there are multiple applicants.  This change was finalized and will require the credit union to send separate risk-based pricing notices to co-applicants - even if they reside in the same household - if the notice contains credit score information.  In other words, the credit score information is private information and cannot be shared with other co-applicants.  Update (7/7/11):  For the regulatory text, see section 222.75(c)(1) and the example in 222.75(c)(3).  

In regulator-land, the fact that two applicants applied jointly for credit does not mean the "co-applicants necessarily choose, merely by applying for credit together, to share sensitive information with one another, in particular, credit scores."  Taking this to the logical conclusion, it is strange that the Fed does not require financial institutions to send separate credit card statements to joint accounts based on which card was used. [Note: I realize I should not give regulators ideas like this!]  After all, even if I had a joint account with my fiancé that doesn't mean I want her to know where I ate lunch yesterday, right?  Or, that I went golfing when I was supposed to be cat sitting....... 

Note:  All applicants must receive a risk-based pricing notice even if the CU only used one applicant's credit score.  In that situation, the CU would need to send a RBPN with credit score information to the applicant whose credit score was used and a normal risk-based pricing notice to the other co-applicant.  From the Fed:

"A creditor therefore must provide a risk-based pricing notice to all co-applicants, and not only to the applicant whose credit score was used in setting the material terms of credit."  Pages 15-17.    

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There was also an interesting statement by the Fed in their final rule to Reg V.  The Fed was asked to considering changing the language on the model form so that the form did not state the terms (i.e., the APR) were "set" or "based on" information in the credit report.  The commenters asked that the language be changed to broader language - such as "based in whole or in part on information from a consumer report."  

The Fed said no.  Why?  "The Agencies believe that the current language in the regulation and model forms is more concise and understandable to consumers than the language suggested by the commenters."

Ok, understandable.  It is hard to determine what is meant by "in whole or in part."  Then why in the world is this the test that the Federal Reserve uses in Section 222.72(a) of Regulation V??:

"§ 222.72   General requirements for risk-based pricing notices.

(a) In general. Except as otherwise provided in this subpart, a person must provide to a consumer a notice (“risk-based pricing notice”) in the form and manner required by this subpart if the person both—

(1) Uses a consumer report in connection with an application for, or a grant, extension, or other provision of, credit to that consumer that is primarily for personal, family, or household purposes; and

(2) Based in whole or in part on the consumer report, grants, extends, or otherwise provides credit to that 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 person." 

Why do credit unions have to use concise language and regulators do not?  This looks like a perfect area for Ms. Warren and the CFPB to step in and make sure credit unions do not need "an army of lawyers" to understand the legal requirements.  

Comments

[Dianna]

Can you please clarify "normal risk based pricing notice" from this statement:
Note: All applicants must receive a risk-based pricing notice even if the CU only used one applicant's credit score. In that situation, the CU would need to send a RBPN with credit score information to the applicant whose credit score was used and a normal risk-based pricing notice to the other co-applicant.
Thank you!

[Steve Van Beek]

Dianna,
Sure - in this situation I was referring to a "normal RBPN" as one that did not have the credit score information. Because the CU would not have the credit score for that applicant, it would send the H-1 form.

[Rachel]

Do you think it would be permissible to provide the RBPN with the credit score information to both co-appliants, even though the credit score of only one of the applicants was used to price the terms of the loan?

[Steve Van Beek]

Rachel,
Unfortunately not. I've added a link to the "Multiple Consumers" section above which includes the regulatory text and an example. If the RBPN has a credit score, it can only be sent to that applicant. The other co-applicant would need to receive their own RBPN - with their credit score if one was used.

[Rachel]

Steve,

I should of clarified my question better. I realize both need a separate notice. My question is can I provide both with their own RBPN with their own credit score information, even though one of their credit scores wasn't used in pricing the loan terms. You mentioned in the blog that the one whose credit score was not used in pricing the terms would receive a normal risk notice, and I was wondering if we could just provide them the notice with their own credit score. Does that make sense?

[Steve Van Beek]

Rachel,
If you have received both credit scores, you'd need to give each member a risk-based pricing notice that included their own credit score. The only exception is if the credit score played no role in the decision, but that is awfully hard to show an examiner.

The example I used with sending the co-applicant a "normal" RBPN was assuming the CU did not obtain that co-applicant's credit score.

[DJ]

Any updates to this discussion?
We pull credit reports on both the applicant and the joint applicant but we only use the applicant's credit score in determining the APR. The model forms don't really provide accurate information to the joint applicant when it says "We used information from your credit report to set the terms . . . "
Have you heard any further discussion on these Notices? There are many examples where the Notice received by the joint applicant provides only confusing information (consider the situation where the joint applicant has an 800 score!).
Hope it's not too late to revive this older blog discussion!

[Mike Coleman]

Hi Dianna,

No, there have not been any updates to the requirements for risk based pricing notices. If you have obtained a consumer report for the co-applicant, including a credit score, but the credit score played no part in the credit decision, you would still be required to send a RBPN, however, you could use model for H-1 which does not include the credit score information disclosures.