QUESTION
We have a question about the risk-based pricing method. Our procedures already cover the required format of the pricing notice and the types of credit covered. What we want to know is when we are required to provide the risk-based pricing notice for closed-end credit transactions. Also, a question that concerns us is if we need to provide it if we are not going to do the loan.
When are we required to provide the risk-based pricing notice for closed-end credit?
Do we have to provide the risk-based notice if we don’t do the loan?
COMPLIANCE SOLUTION
ANSWER
FACTA (Fair and Accurate Credit Transactions Act), which amended the FCRA (Fair Credit Reporting Act), added a requirement that mandates that if you use a consumer report in connection with an application for, or a grant, extension, of other provision of, credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through your financial institution, based in whole or in part on a consumer report, then you must provide a notice to the consumer containing specific information.
The purpose of the requirement is to alert the consumer as to how information in their consumer report and their credit score can affect the terms of credit they receive. It is meant to enable the consumer to assess if there are any errors in their consumer report and, further, allows them to understand better how certain factors may influence their credit standing.
Timing is a central feature of the risk-based pricing notice (“Notice”). The timing of the Notice depends on the particular situation. However, I can summarize the general timing rules for a closed-end credit transaction.
Suppose you are granting, extending, or offering some other provision of closed-end credit. In that case, the Notice must be provided to the consumer before consummation of the transaction – but not earlier than the time the decision to approve an application for, or a grant, extension, or other provision of, credit is communicated to the consumer by the financial institution required to provide the Notice.
In the case of a review of credit that has been extended to a consumer, the Notice must be provided to the consumer at the time the decision to increase the APR (Annual Percentage Rate) based on a consumer report is communicated to the consumer by the financial institution required to provide the Notice.
If no Notice of the increase in the APR is provided to the consumer before the effective date of the change in the APR, the Notice must be provided no later than five days after the effective date of the change in the APR.[i]
Now, your other question is often asked because the answer does not seem intuitive. You asked if a Notice must be provided if a financial institution does not grant, extend, or otherwise provide credit.
The short answer is No!
The requirement to provide a Notice applies only when, based in whole or in part on a consumer report, a financial institution grants, extends or otherwise provides credit to a 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 financial institution. That leads to a brief discussion of adverse action.
There is an express exception to the Notice requirement when a consumer is provided with an adverse action notice.[ii] Potentially, a financial institution may need to provide a Notice if it grants, extends, or otherwise provides credit and the consumer does not accept the credit, because the deadline by which a Notice must be provided may be reached before the financial institution learns that the consumer will not accept the credit.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] 75
FR 2724, 12 CFR § 222.73(c); 16 CFR § 640.4(c)
[ii]
75 FR 2724, 2731
