Posts Tagged ‘Risk-Based Pricing Guidance in Plain English’

Risk-Based Pricing Guidance in Plain English

Posted by Joel pate in Auto Loans, Banks, Business, Credit Cards, Credit Repair, Leads, Management, Mortgage Loans, Sales, Uncategorized. Tagged: , , , , , , , , ,

bigstock_Law_School_2856177Information. It’s the key to knowledge and to success. I recently received this valuable information from a top law firm and top DC based political consulting firm. After receiving permission, I wanted to share it with you.

Understanding these changes will make you stand out as the expert in your field. Send me a note to let me know how you enjoy it. To your success…

RISK BASED PRICING NOTICES TO CONSUMERS PER DODD-FRANK

FACTS

If a consumer’s credit score is used in setting the material terms of credit, the risk-based pricing notice must provide the credit score and certain related information. These new content requirements also apply if a credit score of the consumer whose extension of credit is under review was used to increase the APR.

The final rule requires the following five (5) additional information to be included in risk-based pricing notices if a credit score of the consumer was used in setting the material terms of credit or in increasing the APR:

(1) the credit score used in making the credit decision;

(2) the range of possible credit scores under the model used to generate the credit score;

(3) all of the key factors that adversely affected the credit score. Note that the risk-based pricing notice generally may not list more than four key factors. However, if one of the key factors is the number of inquiries made with respect to the consumer report, up to five key factors may be used.

(4) the date on which the credit score was created; and

(5) the name of the consumer reporting agency or other person that provided the credit score.

The risk-based pricing notice also must include a statement that a credit score is a number that takes into account information in a consumer report and that a credit score can change over time to reflect changes in the consumer’s credit history. In addition, although the final rule is largely unchanged from the proposed rule, the final rule also requires the risk-based pricing notice to include a statement that the consumer’s credit score was used to set the terms of credit offered.

Credit score” is generally defined under FCRA to mean a numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default. However, the definition of “credit score” expressly excludes any mortgage score or rating of an automated underwriting system that considers one or more factors in addition to credit information, including the LTV ratio, the amount of down payment, or the financial assets of a consumer. Therefore, the final rule notes that some, but not all, proprietary scores would be excluded from the definition of a “credit score” and would not need to be disclosed to the consumer.

The final rule also provides model forms for situations where a credit score and information relating to the credit score must be disclosed. The FIRST NEW MODEL form provides a general risk-based pricing notice when a credit score is used in setting the material terms of credit. The SECOND MODEL FORM provides a risk-based pricing notice in connection with account review if a credit score is used in increasing the APR. The use of the model forms is optional. However, appropriate use of the model forms provides a safe harbor for compliance with the risk-based pricing notice requirements.

If the transaction involves two or more consumers, the lender must provide a separate notice to each consumer. However, if the consumers have the same address, and the notice does not include a credit score, lenders may provide a single notice addressed to both consumers. The final rule also addresses situations when multiple credit scores were obtained by the lender. If a lender obtains multiple credit scores but uses only one of the credit scores in setting the material terms of credit, such credit score that was used must be included in the disclosure. If a lender obtains and uses multiple credit scores (e.g., by computing the average of the credit scores), the final rule requires the lender to disclose any one of such credit scores. However, the lender has the option to include more than one credit score in the disclosure.

The final rule does not change the existing exception under Regulation V from the requirement to provide a risk-based pricing notice to a consumer whose credit score was used in setting the material terms of credit. Such exception continues to be available to lenders who provide a credit score disclosure exception notice to all consumers who apply for credit. (Dodd-Frank Section 1100Fand 15 U.S.C. 1681m)

 

ADVERSE ACTION NOTICE UNDER DODD-FRANK

The second final rule amends the model adverse action notices in Regulation B to satisfy the adverse action notice requirements under FCRA, as amended by the Dodd-Frank Act. Certain model notices in Regulation B include the content required by the adverse action provisions of both ECOA and FCRA so that creditors can use the model notices to comply with both statutes. The Board amended these model notices to include the disclosure of credit scores and related information if a credit score is used in taking adverse action.

FCRA requires a person to provide, in an adverse action notice, information regarding the consumer reporting agency that furnished the consumer report used in taking the adverse action. It also requires a person to disclose that a consumer has a right to a free consumer report and a right to dispute the accuracy or completeness of any information in a consumer report. The final rule applies to any person that (1) is required to provide an adverse action notice to a consumer; and (2) uses a credit score in making the credit decision requiring an adverse action notice.

Creditors also disclose additional information on certain adverse action notices. If a credit score is used in taking an adverse action, a FCRA adverse action notice must include the same information that was added by the Dodd-Frank Act with respect to risk-based pricing notices:

(1) a numerical credit score used in making the credit decision;

(2) the range of possible scores under the model used;

(3) up to four key factors that adversely affected the consumer’s credit score (or up to five factors if the number of inquiries made with respect to that consumer report is a key factor);

(4) the date on which the credit score was created; and

(5) the name of the person or entity that provided the credit score.

The second final rule is largely unchanged from the proposed rule, but the Board made the following clarification changes:

The final rule added optional language in Forms C-1 through C-5 that may be used to direct the consumer to the entity that provided the credit score for any questions about the credit score, along with the entity’s contact information. Creditors may use or not use this additional language without losing the safe harbor, since the language is optional.

On Forms C-1 through C-5, references to “credit report” have been changed to “consumer report”.

Official Staff Comment # 9 to paragraph 9(b)(2) was revised to clarify that FCRA requires a creditor to disclose, in addition to the credit score used in taking adverse action, up to four key factors that adversely affected the consumer’s credit score (or up to five factors if the number of inquiries made with respect to that consumer report is a key factor).

Thank you Weiner, Brodsky and Herman Thordsen for the updates.

To your succes,

Joel

Joel S. Pate

Founder & Chairman

Joel Pate is an entrepreneur and founder of multiple successful companies in the mortgage, real estate, and marketing space. For more information on Joel, contact him at joel@oxpublishing.com