Must risk-based pricing notices be provided to denied applicants?
Section 1022.72(a) of Regulation V (12 C.F.R. Part 1022 ) specifies when a creditor must provide a risk-based pricing notice to a consumer applying for credit, subject to the exceptions in §1022.74. If an application is denied and an adverse action notice is provided, a risk-based pricing or exception notice is not required. See §1022.74(b).
What are the specific timing requirements for provision of the disclosures?
The timing requirements for the risk-based pricing notices vary with the type of credit product and notice:
Risk-Based Pricing Notices
- Closed-end credit: before consummation, but not before credit approval is communicated to the consumer. See §1022.73(c)(1)(i).
- Open-end credit: before the first transaction is made under the plan, but not before credit approval is communicated to the consumer. See §1022.73(c)(1)(ii).
- Account review: when the decision to increase the annual percentage rate (APR) is communicated to the consumer, if advance notice of an APR increase is required to be given to the consumer. If advance notice of the increase in the APR is not required,1 no later than five days after the effective date of the change in the APR. See §1022.73(c)(1)(iii).
- Automobile lending: before consummation, but not before credit approval is communicated to the consumer. If the creditor relies on the dealer to deliver the notice, the creditor must maintain reasonable policies and procedures to verify that the dealer or other party provides the notice within the required time frame. See §1022.73(c)(2).
- Contemporaneously granted open-end credit plans: If credit is granted contemporaneously with a purchase of goods or services, the risk-based pricing notice may be provided at the time of the first mailing by the creditor to the consumer after credit is granted or within 30 days after the decision to approve credit, whichever is earlier. For example, a consumer may apply for and be approved for a credit card when making a purchase at a department store. If a notice is required to be given to the consumer, the creditor may provide the notice in a mailing containing the account agreement or the credit card or within 30 days after the decision to approve credit, whichever is earlier. See §1022.73(c)(3).
Credit Score Exception Notices
- If the creditor chooses to provide an exception notice under §1022.74(d) or (e) in lieu of a risk-based pricing notice, the exception notice must be provided to the consumer as soon as reasonably practicable after requesting the consumer's credit score but not later than consummation for closed-end credit or when the first transaction is made for open-end credit. See §§1022.74(d)(3) (residential mortgage consumer credit) and 1022.74(e)(3) (nonresidential mortgage consumer credit).
No Credit Score Notice
- When a consumer does not have a credit score (for example, because of insufficient credit history), the “no credit score” notice required by §1022.74(f)(1)(i) must be provided as soon as reasonably practicable after the person has requested the credit score, but not later than consummation for closed-end credit or when the first transaction is made for an open-end credit plan. See §1022.74(f)(4).
If the same rates are charged to all approved applicants for a particular product, do notices need to be provided?
As discussed in §1022.74(a)(1), if a lender offers one rate for a product and the applicant either receives that rate or is denied, no risk-based pricing or exception notice is required for approved applicants but an adverse action notice is still required for denied applicants.
If all mortgage applicants receive the notice of credit score disclosure required by §609(g), do risk-based pricing notices need to be provided if a consumer receives less favorable terms based on information in a credit report?
Yes. Lenders are required to comply with the risk-based pricing rules by providing either a risk-based pricing notice (§1022.72(a)), a credit score exception notice (§1022.74(d)(1)(ii) or (e)(1)(ii)), a no credit score notice (§1022.74(f)), or an adverse action notice (§1022.74(b)), as appropriate. For loans secured by one to four units of residential real property, simply providing a §609(g) disclosure is insufficient because it does not contain all of the disclosures required by the risk-based pricing or credit score exception notices. To facilitate compliance, mortgage lenders have the option under §1022.74(d) of providing a credit score exception notice to all mortgage applicants (model form H-3) in lieu of both the §609(g) notice and the risk-based pricing notice. The model form exception notice contains all of the information required by §609(g) plus required additional disclosures, including a bar graph showing how the consumer's score compares to other consumers using the same scale, a statement that federal law gives consumers the right to obtain a copy of their credit report from the consumer reporting agency, and a statement directing consumers to the websites of the Board of Governors of the Federal Reserve System (Board) and Federal Trade Commission (FTC) to obtain more information about consumer reports.
Readers should also be aware that §1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the risk-based pricing disclosure requirements effective July 21, 2011, to require creditors to disclose credit scores in their risk-based pricing notice if the score was used in setting the material terms or in an adverse action notice if the score was used in taking adverse action. The Board and the FTC jointly issued a final rule to implement §1100F's requirements. See 76 Fed.Reg. 41,602 (July 15, 2011). Outlook discussed these requirements in the Third Quarter 2011 issue (“An Overview of the Credit Score Disclosure Requirements for Risk-Based Pricing Notices”) Under the final rule, providing a credit score exception notice to all mortgage applicants satisfies the new credit score disclosure requirements with respect to applicants qualifying for a risk-based pricing notice. However, if the creditor takes adverse action (for example, denying the credit application) and relied on a credit score in making this decision, the creditor must still disclose the credit score in the adverse action notice, even though the creditor already provided a credit score exception notice or a §609(g) notice. See 76 Fed. Reg. at 41,596.
If a consumer reporting agency finds no credit file for an applicant, is the creditor required to provide any type of disclosure?
Under §1022.74(f), if a creditor regularly obtains credit scores from a consumer reporting agency but a credit score is not available from that agency for an applicant, the creditor is not required to provide a risk-based pricing notice. Instead, the creditor must provide the applicant with a notice indicating that no credit score was available. Section 222.74(f)(1)(iii) lists the information that must be included in the notice or creditors may instead use model form H-5 (loans where credit score is not available).
The consumer reporting agency generates the credit score disclosure and includes three scores. Is the lender required to indicate which score was used to price the loan?
As discussed in the Outlook article in the Third Quarter 2011 issue, 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. See 76 Fed. Reg. 41,602, 41,608-09 (July 15, 2011).
If an automobile lender does not pull a credit report but ultimately prices a loan based on an indirect lender's buy rate, which was determined using information from a credit report, who must provide the notice?
The risk-based pricing notice requirements apply to a person who “uses” a consumer report in connection with a credit application. See 15 U.S.C. §1681m(h)(1). When an automobile dealer is the original creditor (i.e., three-party financing), the automobile dealer must provide the required notice (risk-based pricing, adverse action, or credit score exception, as appropriate), even if the dealer immediately assigns the credit agreement to a third-party funding lender, because the automobile dealer has “used” a consumer report by initiating the request to the funding lender that caused the consumer report to be used in setting the terms of the credit. See 76 Fed. Reg. at 41,606-07.
Can model form H-3 be used for both real-estate secured and non-real-estate secured loans?
No. Appendix H of Regulation V instructs that “each of the model forms is designated for use in a particular set of circumstances as indicated by the title of that model form.” Model form H-3 is for real-estate-secured loans, and model form H-4 is for non-real-estate-secured loans.
If a lender routinely pulls credit reports but not credit scores and uses the reports to set terms materially less favorable, are risk-based pricing notices required?
Although credit scores are not being used, the lender is using information in a consumer report to set terms that are materially less favorable. In this circumstance, creditors are required to provide risk-based pricing notices. See §1022.72(a). Since the creditor is not using credit scores, the methods available to determine whether a consumer receives materially less favorable terms are the direct comparison or tiered pricing methods. See §1022.72(b) (direct comparison) and (b)(2) (tiered pricing). The lender can use either model form H-1 when credit is extended or H-2 after an account review. With respect to the credit score disclosure requirements imposed by the Dodd-Frank Act, because the lender did not rely on the credit score in setting the material terms of the credit, the creditor is not required to include a credit score in the risk-based pricing notice. See 76 Fed. Reg. at 41,606.
What range of credit scores should be disclosed in the credit score exception notices?
In the credit score exception notices, creditors are required to disclose the distribution of credit scores among consumers who are scored under the same scoring model that is used to generate the consumer's credit score using the same scale as that of the credit score provided to the consumer. This information must be presented as either:
- a bar graph containing a minimum of six bars that illustrates the percentage of consumers with credit scores within the range of scores reflected in each bar; or
- a clear and readily understandable statement informing the consumer how his or her credit score compares with the scores of other consumers.
See §1022.74(d)(1)(ii)(E) (requirements for residential mortgage consumer credit) and §1022.74(e)(1)(ii)(F) (requirements for nonresidential mortgage consumer credit). As discussed in the preamble to the final rule, “If a credit score has a range of 1 to 100, the distribution must be disclosed using that same 1 to 100 scale. For a creditor using the bar graph, each bar would have to illustrate the percentage of consumers with credit scores within the range of scores reflected by that bar. A creditor would not be required to prepare its own bar graph; use of a bar graph obtained from the person providing the credit score that meets the requirements of this paragraph would be deemed compliant.” See 75 Fed. Reg. 2,724, 2,741 (Jan. 15, 2010).