Amendment to Fair Credit Reporting Act— New Federal Law Requires Credit Score Disclosure When Credit Grantor Makes Certain Risk-based Pricing Decisions
Beginning July 21, 2011, if a credit grantor makes a risk-based pricing decision adverse to a consumer of the type covered by the risk-based pricing notice provisions of the federal Fair Credit Reporting Act (“FCRA”), and the decision is based in whole or in part on a “credit score” obtained from a consumer reporting agency, then, subject to certain exceptions, that credit grantor must provide the consumer a risk-based pricing notice containing not only the disclosures currently required under the FCRA, but also the credit score itself and certain other information relating to the score, including up to four key adverse factors in the score (plus a fifth if the number of inquiries into the credit file of the consumer is a key adverse factor). Currently (prior to July 21, 2011) the risk-based pricing notice already must include (i) that the terms offered are set based on information in a consumer report, (ii) the identity and contact information of the consumer reporting agency, and (iii) that the consumer can obtain a copy of their consumer report from the consumer reporting agency without charge. Just as prior to the amendment, the credit grantor is required to give the risk-based pricing notice where, based in whole or in part on a credit score obtained from a consumer reporting agency, the credit grantor (i) approves of credit applied for by a credit applicant, but the terms approved are materially less favorable than the most favorable material terms available to a substantial portion of the credit grantor’s applicants for the same product,¹ or (ii) increases the interest rate on a consumer’s existing credit account. The new requirement to disclose the credit score is mandated by Section 1100F of the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), signed into law on July 21, 2010, which (among many other things) amends the FCRA. On March 15, 2011, the Federal Trade Commission published for public comment proposed rules containing, among other things, proposed modifications to model risk-based pricing notice forms previously adopted by the FTC in order to incorporate the credit score disclosure requirements. The comment period expired on April 14, 2011. Assuming the rules will be adopted essentially as proposed, you will be able to refer to the modified model forms for guidance in preparing risk-based pricing notices. Also, certain exceptions to the risk-based pricing notice requirements continue to exist (those are described in the existing FTC regulations pertaining to risk-based pricing notices), including the alternative of the credit grantor providing to its credit applicants generally (not just those otherwise qualifying for receipt of a risk-based pricing notice) what is referred to as a “credit score disclosure exception notice.” Such an alternative notice has some similarities to the risk-based pricing notice, but requires disclosure to the credit grantor’s credit applicants generally of general information regarding credit scoring along with, for each consumer receiving the exception notice, their current or most recently calculated credit score and information concerning the range and distribution of credit scores under the particular scoring model used.2 If your company uses, or is considering using, credit scores in connection with risk-based pricing decisions, you should be prepared to comply with the new credit score disclosure requirements on July 21, 2011. For further information, including with respect to compliance with risk-based pricing notice requirements generally, or with the “credit score disclosure exception notice” alternative, please contact Bruce Richards (678-336-7146), whose areas of practice include consumer reporting, equal credit, e-payments, and consumer data protection. ¹The rules for determining when an applicant qualifies for the notice under this test are somewhat complicated, with various methods prescribed in the rules for making the determination. 2The purpose behind the “credit score disclosure exception notice” is to provide an acceptable method of educating the credit grantor’s credit applicants and customers generally on the use of credit scores without having to apply the sometimes complicated rules for determining which applicants and customers are entitled to the risk-based pricing notice. Bruce Richards is a business lawyer with an extensive corporate, transactional and regulatory background. Having served as general counsel and an executive officer of four publicly traded companies, including Atlanta-based Equifax, he excels at evaluating, managing and advising with respect to the broad spectrum of legal challenges facing his clients’ businesses, and advising boards of directors and board committees with respect to strategic transactions and corporate governance matters.