Effective Date: January 1, 2011

SUMMARY

Final rules:

• Provide creditors with several methods to determine which consumers must receive RBP notices.
• Permit creditors, as an alternative, to provide a Credit Score Disclosure.

REQUIREMENTS TO PROVIDE RBP NOTICES

A Risk-Based Pricing (“RBP”) Notice is required when a creditor:

·         Uses a consumer report in connection with an application for, or a grant, extension, or other provision of, consumer credit; and

·         Provides credit to that consumer on terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers, from that creditor.

The obligation to provide a Notice is distinct for each “specific credit product.” 

Determining Recipients

Institutions have several options:

1.     Credit Score Proxy General Method

a.     Determine the Cutoff Score at which approximately 40% of the consumers to whom credit is provided have higher credit scores, and

b.    Provide RBP Notices to each consumer whose score is lower than the cutoff.

Additional requirements may apply, and Cutoff Score must be re-calculated no less than every two (2) years.

2.     Credit Score Proxy Alternative Method

This method is available to lenders that grant, extend, or provide the most favorable material terms to more than 40 percent of consumers.  Cutoff Score is calculated differently. 

3.     Tiered Pricing Method

There are separate guidelines for 4 or fewer tiers -and- 5 or more.  Re-evaluate consumers receiving a notice each time the total number of pricing tiers changes. Summary table follows:

*For seven (7) pricing tiers, the more conservative regulatory approach would be to provide the notice to more (i.e., 5 tiers with 2 excluded) vs. less (i.e., 4 tiers with 3 excluded) consumers

4.     Credit Card Issuers

An issuer can satisfy RBP Notice requirements via method “1.,” “2.,” or “3.” above; alternatives are available.

5.     Lenders Engaging in Periodic Account Review Pricing

A lender must also provide an RBP Notice if it uses a consumer report in connection with a review of existing consumer credit; and subsequently increases the loan or credit card APR.

Format and Content: For Model Form RBP Notices, see Reg. V, Appendix H.

EXCEPTIONS

Exceptions apply for:

·         Business credit

·         Instances in which Consumer Reporting Agency (“CRA”) information is not used

·         All customers offered the same terms for a credit product type 

·         If a consumer’s application is for a single material term, or set of material terms, such as an annual percentage rate of 10%,

·         Declined applicants

·         Creditors obtaining consumer information related to a prescreened list

·         Lender providing a Credit Score Disclosure (“CSD”) to all applicants.  See Reg. V, App. H for Model Forms.  Additional rules apply if multiple scores are used.

·         Consumer score is not available

ADDITIONAL PROVISIONS

·         Timing of Notices          ●    Multi-Party Transactions

·         Number of Notices        ●    Multiple Consumers

For more details on Risk-Based Pricing, please visit:  http://www.ICScompliance.com/whitepaperdownload.aspx

By Gene Collett, CRCM

Assistant Director