New Risk Based-Pricing Rules

Risk-based pricing refers to the practice of using a consumer's credit report, which reflects his or her risk of nonpayment, in setting or adjusting the price and other terms of credit offered or extended to a particular consumer.

The risk-based pricing rules implement section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACTA), which amends the Fair Credit Reporting Act (FCRA).

The Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) proposed regulations in May 2008 that generally would require a creditor to provide a consumer with a risk-based pricing notice when, based in whole or in part on the consumer's credit report, the creditor offers or provides credit to the consumer on terms less favorable than the terms it offers or provides to other consumers.

On December 28, 2009, the FRB and FTC announced the final risk-based pricing rules, with the effective compliance date of January 1, 2011. Publication in the Federal Register of the final rules took place on January 15, 2010.

The new rules apply to all mortgage brokers, correspondents and lenders and impacts all consumers that have credit data and/or scores accessed for a risk-based pricing decision, regardless of loan approval status.

Indeed, risk-based pricing rules apply, with certain exceptions, to all creditors that engage in risk-based pricing. A risk-based pricing notice would generally be provided to the consumer after the terms of credit have been set, but before the consumer becomes contractually obligated on the credit transaction.

The rules provide a number of different approaches that creditors may use to identify the consumers to whom they must provide risk-based pricing notices.

In addition, the rules include certain exceptions to the notice requirement, the most significant being an exception that permits creditors, in lieu of providing a risk-based pricing notice to those consumers who receive less favorable terms, to provide all of their consumers with their credit scores and explanatory information.

As an alternative to providing risk-based pricing notices, the final rules permit creditors to provide consumers who apply for credit with a free credit score and information about their score. Today, most consumers must pay a fee to obtain their credit score.

Companies that use a credit report or score in connection with a credit decision must send notice, containing specified information, to a consumer when, based on a credit report or score, the company grants credit on material terms that are not the most favorable terms offered to a substantial proportion of consumers. For instance, in most cases, the rule defines "material terms" as the loan's Annual Percentage Rate.

Effective: January 1, 2011

Highlights

The new rule differs from the current FACTA required Notice to Home Loan Applicant and Consumer Score Disclosure requirements in several important ways:

1) Each risk based pricing disclosure must include the decisioning credit score and a comparative study showing how each consumer's credit score relates to others using that specific scoring model.

2) Whereas the previous FACTA notices allowed for combining of joint applicants, the new disclosures are required to be sent individually and separately. (These disclosures cannot be combined with any other non-FACTA documents and/or required disclosures.)

3) A unique disclosure is required in instances where a credit score is not available.

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Fair Credit Reporting Risk-Based Pricing

Fair Credit Reporting Risk-Based Pricing Regulations, Final Rule, FR 75/10, January 15, 2010
Fair Credit Reporting Risk-Based Pricing Regulations - Agency Notice, December 28, 2009
Model Forms - Risk-Based Pricing, Agency Notice, December 28, 2009
Fair Credit Reporting Risk-Based Pricing Regulations: Correction, FR 73/104, May 29, 2008
Fair Credit Reporting Risk-Based Pricing Regulations, Proposed Rule, FR 73/97, May 19, 2008

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Fannie Mae: Credit Reports Prior To Closing

OVERVIEW

Under Fannie Mae’s new Loan Quality Initiative guidelines, there is an affirmation that the lender is responsible for implementing "practices to identify undisclosed liabilities in a transaction."

Thus, it is the lender's responsibility to develop and implement its own business processes to support compliance with Fannie Mae's requirements  through the closing of a transaction.

Fannie Mae has not changed the policy as it relates to credit reports. Credit documents, including the credit report, are valid for 90 days from the date of the report and may not be older than 90 days at time of closing (i.e., the date that the Note is signed by the borrowers).

However, the lender is responsible for confirming and factoring in the undisclosed liabilities that were not present in the loan processing reviews conducted prior to and through to the date of closing.

Therefore, if the lender pulls a new credit report the day before closing and no differences are found compared with the original credit report, the lender is not relieved of representations and warranties for undisclosed liabilities.

Although pulling a new credit report may reduce the lender's risk exposure related to its representations and warranties on undisclosed liabilities, lenders remain responsible for any and all borrower debt up to and concurrent with closing.

HIGHLIGHTS

Actions

●Retrieving a refreshed credit report just prior to the closing date and reviewing it for additional credit lines.

●New vendor services are becoming available to provide borrower credit report monitoring services between the time of loan application and closing - Equifax's Undisclosed Debt Monitoring™ is one example.

●Direct verification with a creditor that is listed on the credit report under recent inquiries to determine whether a prospective borrower did in fact enter into a financial arrangement with the creditor, which may not be listed on the loan application.

●Running a Mortgage Electronic Registration System (MERS®) report to determine if the borrower has undisclosed liens or another mortgage is being established simultaneously.

New P-T-C Credit Report Finds Undisclosed Liabilities

If additional liabilities are discovered prior to closing, the lender must consider any such additional debts of the borrower in the qualification:

●If the lender is using Desktop Underwriter® (DU®) and identifies differences between the new and/or refreshed credit report and the credit report used when underwriting the loan case file through DU, the lender must take appropriate action when information that was not considered by DU might result in a recommendation other than that returned by DU.

Examples of situations in which loan case files should be resubmitted to DU:

     o If additional debt has been incurred and the inclusion of the additional debt would increase the total expense ratio to a level outside the tolerance specified in section B3-2-10, Accuracy of DU Data, DU Tolerances, and Errors in the Credit Report, of the Fannie Mae Selling Guide.

     o If new derogatory information is detected and/or the credit score has materially changed.

Example of a situation in which the lender should not have to resubmit the loan case file to DU would be if credit balances have changed slightly but the change in the total expense ratio remains within the DU Tolerances policy.

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Fannie Mae: Loan Quality Initiative (LQI) Program
FAQs - Update

5/28/10