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FRB
and FTC Propose Risk-Based Pricing Notices
Section
311 of the Fair and Accurate
Credit Transactions Act of 2003 (
FACT
Act) requires that
risk-based pricing provisions be implemented by the Federal
Reserve Board (FRB) and Federal
Trade Commission (FTC). Section 311 is part of Title III and is
entitled “Enhancing the Accuracy of Consumer Report
Information.” The risk-based pricing requirement is designed
primarily to improve the accuracy of consumer reports by alerting
consumers to the existence of negative information on their consumer
reports so that consumers can, if they choose, check their reports
for accuracy and correct any inaccurate information.
Definitions
In
understanding any rule, definitions are critical. In this NPR, the
following should be noted:
·
Risk-based
pricing – the practice of setting or adjusting the price and other
terms of credit offered or extended to a particular consumer to
reflect the risk of nonpayment by that consumer.
·
Material
terms – the annual percentage rate (APR) for credit that has an
APR. In the case of credits with no APR, it refers to any monetary
terms such as the down payment amount or deposit, that varies based
on the consumer report. For credit cards, which may have multiple
APRs applicable to different features, it is the APR applicable to
purchases.
·
Materially
less favorable – means the terms granted or extended to consumers
differ, making the cost significantly greater to the consumer
receiving less favorable terms.
SCOPE
The
proposed rules apply to any person that:
·
Uses a
consumer report in connection with an application for, or a grant,
extension, or other provision of credit to a consumer that is
primarily for personal, family, or household purposes, and
·
Based on the
credit report in whole or in part grants, extends, or otherwise
provides the credit on material terms that are materially less
favorable than the most favorable material terms available to a
substantial portion of consumers.
Creditors
can determine which consumers must receive the notice by:
·
Directly
comparing the material terms offered to each consumer with the
material terms offered to other consumers in similar types of
transactions; or
·
By the credit
score proxy method which means determining a “cutoff score.”
For
credit card applicants, creditors provide the risk-based pricing
notice if:
·
The consumer
applies as a result of a direct-mail or take-one application or
other covered solicitation, and more than a single possible purchase
APR may apply; and
·
Based in
whole or in part on the credit report, the card issuer provides a
card to the consumer with a purchase APR greater than the lowest
purchase APR available under that application or solicitation.
For
account reviews, the creditor must provide a notice if:
·
A credit
report is used in connection with a review of an existing credit
account; and
·
Based in
whole or in part on the report, increases the APR (the purchase APR
in the case of a credit card).
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