Consumer Compliance Outlook
An Overview of the Credit Score Disclosure Requirements for Risk-Based Pricing Notices
On January 15, 2010, the Board of Governors of the Federal Reserve System (Board) and the Federal Trade Commission (FTC) jointly issued final rules implementing the risk-based pricing requirements under the Fair Credit Reporting Act (FCRA) (January 2010 Final Rules). These rules generally require a creditor to provide a consumer applying for credit with a notice when, based on the consumer's credit report, the creditor provides credit to the consumer on less favorable terms than it provides to other consumers.1 The final rule was effective January 1, 2011. Outlook reviewed these requirements in detail in An Overview of the Risk-Based Pricing Implementing Regulations, published in the fourth quarter 2010 issue,2 and in a webinar titled Risk-Based Pricing Notices on February 16, 2011.3
On July 21, 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 1100F of the Dodd-Frank Act amended the FCRA to require disclosure of credit scores and information relating to credit scores for both risk-based pricing and FCRA adverse action notices. On July 15, 2011, the Board and the FTC jointly issued final rules to implement section 1100F for risk-based pricing notices (July 2011 Final Rules). This article reviews the credit score disclosure requirements for risk-based pricing notices that were added under the Dodd-Frank Act.4
CREDIT SCORE DISCLOSURE REQUIREMENTS FOR RISK-BASED PRICING NOTICES
When Must a Credit Score and Information Relating to a Credit Score Be Disclosed on a Risk-Based Pricing Notice?
A creditor must disclose a consumer's credit score and information relating to a credit score on a risk-based pricing notice when the score of the consumer to whom the creditor extends credit or whose extension of credit is under review is used in setting the material terms of credit.5 The use of the credit score does not have to be the sole or primary factor in setting the terms of credit to be subject to the disclosure requirement — it need only be a factor. If the creditor did not use a credit score at all in setting the material credit terms, the creditor is not required to disclose the consumer's credit score or information relating to a credit score.6
What Information Must Be Disclosed?
In addition to the information required by the January 2010 Final Rules, the following information generally must be disclosed on risk-based pricing notices if a credit score is used in setting the material terms of credit:
- A statement that a credit score is a number that takes into account information in a consumer report, that the consumer's credit score was used to set the terms of credit offered, and that a credit score can change over time to reflect changes in the consumer's credit history;
- The credit score used by the creditor in making the credit decision;
- The range of possible credit scores under the model used to generate the credit score;
- The key factors that adversely affected the credit score (discussed below);
- The date on which the credit score was created; and
- The name of the consumer reporting agency or other person that provided the credit score.7
Creditors generally must disclose no more than four key factors. However, if one key factor is the number of inquiries made with respect to the consumer report, this factor must be disclosed and may constitute a fifth factor. If a creditor is using a credit score purchased from a consumer reporting agency, the consumer reporting agency is in the best position to identify the key factors that affected the score. Thus, the creditor could rely on the information from the consumer reporting agency in its disclosure to consumers.
How Many Credit Scores Must Be Disclosed?
When a creditor uses multiple credit scores in setting the terms of credit, the creditor must disclose any one of those scores. Alternatively, the creditor, at its option, may disclose multiple scores used in setting the material terms of credit. If a creditor obtained multiple credit scores, but used only one score, only that score must be disclosed. For example, if the creditor regularly requests scores from several consumer reporting agencies and uses only the lowest score, then the lowest score must be disclosed.
What Types of Credit Scores Must Be Disclosed?
A creditor must disclose “the credit score used by the person in making the credit decision” on a risk-based pricing notice.8 “Credit score” has the same meaning used in §609(f)(2)(a) of the FCRA.
Most credit scores that meet the FCRA definition are scores that creditors obtain from consumer reporting agencies. The FCRA credit score definition specifically excludes some — but not all — proprietary scores. The definition of credit score does not include any mortgage score or rating of an automated underwriting system that considers one or more factors in addition to credit information, including the loan-to-value ratio, the amount of down payment, or the financial assets of a consumer. Thus, if a creditor uses a proprietary score that is based on one or more of these factors in addition to information obtained from a consumer reporting agency, this proprietary score is not a credit score and thus does not need to be disclosed to the consumer. In contrast, if a creditor uses a proprietary score that only includes information acquired from a consumer reporting agency in setting the material terms of credit or reviewing the account, the proprietary score would be a credit score for purposes of the FCRA and would be required to be disclosed to the consumer.
If a creditor uses both a proprietary score that does not meet the definition of a credit score and a credit score from a consumer reporting agency in setting the material terms of credit or reviewing the account, the creditor would disclose the credit score from the consumer reporting agency. Similarly, if a creditor uses a credit score from a consumer reporting agency as an input to a proprietary score, but that proprietary score itself is not a credit score, the creditor would disclose the credit score from the consumer reporting agency.9
No Credit Score. In some cases, a creditor that provides risk-based pricing notices to consumers may try to obtain a credit score for an applicant, but the applicant may have insufficient credit history for the consumer reporting agency to generate a credit score. In these instances, the creditor cannot and is not required to disclose credit score information if an applicant has no credit score.10
Multiple Consumers. In some cases, a creditor may use the credit score of a guarantor or co-signer, but not the credit score of the consumer to whom it extends credit or whose extension of credit is under review. A creditor may be required to provide a risk-based pricing notice to the consumer to whom it extends credit or whose application is under review but is not required to provide a risk-based pricing notice to the guarantor or cosigner. When a creditor uses the credit score only of a guarantor or cosigner to set the terms of credit for the consumer to whom it extends credit or whose extension of credit is under review, a person shall not include a credit score in the general risk-based pricing notice or account review notice provided to the consumer.11
In a transaction involving two or more borrowers, a creditor must provide a general risk-based pricing notice or an account review notice to all of the coborrowers and not only to the borrower whose credit score was used in setting the material terms of credit.12 Whether the consumers have the same address or not, a creditor must provide a separate notice to each consumer if a notice includes a credit score(s). Each separate notice that includes a credit score(s) 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. If the consumers have the same address and the notice does not include a credit score(s), a creditor may provide a single notice addressed to both consumers.13
Risk-Based Pricing Model Forms
The Board and the FTC's joint rulemaking under the FCRA includes model forms for risk-based pricing notices that require credit score disclosures.14 Model Form H-6 of the Board's rules and Model Form B-6 of the FTC's rules may be used when a creditor used a credit score in deciding upon an initial extension of credit. Model Form H-7 of the Board's rules and Model Form B-7 of the FTC's rules may be used when a creditor used a credit score during an account review.
Credit Score Disclosure Exception to Risk-Based Pricing Notice
The January 2010 Final Rules included a compliance option in which a creditor may choose to send a credit score exception notice to all credit applicants instead of providing a risk-based pricing notice to certain consumers. The agencies clarified in the July 2011 Final Rules that creditors may continue to provide credit score exception notices to all credit applicants in lieu of providing risk-based pricing notices to some consumers.15
The requirements for disclosing credit scores and related information under section 1100F of the Dodd- Frank Act became effective on July 21, 2011. The effective date for the regulations issued by the Board and the FTC was August 15, 2011.16
Creditors should ensure that their risk-based pricing notices comply with these new requirements. Specific issues and questions about consumer compliance matters should be raised with your primary regulator.