Adverse Action and Risk-Based Disclosures (Final Rules)

On July 6, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) jointly issued final rules (Rules) to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Our previous notification relating to this rule was on 7/7/11, on 3-2-11, and 1-3-11.

The Rules amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements. 

If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

REGULATION B (ECOA)

Adverse Action Notice

Section 701 of the Equal Credit Opportunity Act (ECOA) requires a creditor to notify a credit applicant when it has taken adverse action against the applicant. The ECOA adverse action requirements are implemented in the FRB's Regulation B.

Section 615(a) of the Fair Credit Reporting Act (FCRA) also requires a person to provide a notice when the person takes an adverse action against a consumer based in whole or in part on information in a consumer report.

Certain model notices in Regulation B include the content required by both the ECOA and the FCRA adverse action provisions, so that creditors can use the model notices to comply with the adverse action requirements of both statutes.

The FRB is amending these model notices in Regulation B to include the disclosure of credit scores and related information if a credit score is used in taking adverse action.

The revised model notices reflect the new content requirements in section 615(a) of the FCRA as amended by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Effective: August 15, 2011

REGULATION V (FCRA)

Fair Credit Reporting Risk-Based Pricing Regulations 

On January 15, 2010, the Board and the Commission published final rules to implement the risk-based pricing provisions in section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the Fair Credit Reporting Act (FCRA).

The final rules generally require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor.

The FRB and the Commission are amending their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting the material terms of credit.

These final rules reflect the new requirements in section 615(h) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Effective: August 15, 2011

LIBRARY

Equal Credit Opportunity
Regulation B
Adverse Action Notice
FRB: 12 CFR Part 202
Final Rule
July 15, 2011

Fair Credit Reporting
Regulation V
Fair Credit Reporting Risk-Based Pricing Regulations
FRB: 12 CFR Part 222
FTC: 16 CFR Parts 640 and 698
Final Rules
July 15, 2011

FRB and FTC: Credit Score Disclosure - Final Rules

On July 6, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) jointly issued final rules (Rules) to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Our previous notifications relating to this rule were on 1-3-11, and 3-2-11.

If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

The Rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements.

The rules under Regulations V and B are effective 30 days after the date of publication in the Federal Register, which is expected soon.

Effective Date: July 21, 2011

 REGULATION V

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

Section 1100F of the Dodd-Frank Act (Dodd-Frank) amends section 615(h) of the FCRA to require that additional content be disclosed to consumers in risk-based pricing notices; specifically, if a credit score is used in making the credit decision, the creditor must disclose that score and certain information relating to the credit score.

Rulemaking authority for the risk-based pricing provisions of the FCRA, including the amendments prescribed by section 1100F of the Dodd-Frank, will not be vested in the Consumer Financial Protection Bureau until the date that the section 1100F amendments become effective.

 REGULATION B

The Rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements.

Section 1100F of the Dodd-Frank Act amends section 615(a) of the FCRA to require creditors to disclose on FCRA adverse action notices a credit score used in taking any adverse action and information relating to that score.

The FRB is issuing revised model adverse action notices substantially as proposed, and revised to the extent necessary for the adverse action model notices in Regulation B to be consistent with the requirements of section 1100F of the Dodd-Frank.

 LIBRARY

 

 FRB: 12 CFR Part 222, Regulation V and
FTC: 16 CFR Parts 640 and 698
Fair Credit Reporting Risk-Based Pricing Regulations
July 6, 2011

 FRB: 12 CFR Part 202, Regulation B
Equal Credit Opportunity
Final Rule
July 6, 2011

Risk-Based Pricing and Adverse Action Disclosures

On March 1, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) proposed regulations regarding the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The statute requires creditors to disclose credit scores and related information to consumers in risk-based pricing and adverse action notices under the Fair Credit Reporting Act (FCRA), if a credit score was used in setting the credit terms or taking adverse action.

We recently notified you about the required implementation of risk-based pricing rules, effective January 1, 2011. Our Newsletter archive contains additional, related information.

Public comments on the proposed rules under Regulations V and B are due 30 days after publication in the Federal Register, which is expected shortly.

Regulation V

The FRB and FTC have proposed amending Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices and to add related model forms to reflect the new credit score disclosure requirements.

Specifically, the FRB and the FTC propose to amend their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting the material terms of credit. (These proposed amendments reflect the new requirements in section 615(h) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.)

Regulation B

The FRB proposed amending certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for both Regulation B and the FCRA. The proposed amendments would revise the model notices to incorporate the new credit score disclosure requirements.

Specifically, certain model notices in Regulation B include the content required by both the ECOA and the FCRA adverse action provisions, so that creditors can use the model notices to comply with the adverse action requirements of both statutes. The FRB proposes to amend these model notices in Regulation B to include the disclosure of credit scores and information relating to credit scores if a credit score is used in taking adverse action. (These proposed amendments reflect the new content requirements in section 615(a) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.)

Visit Library

FRB and FTC: Fair Credit Reporting Risk-Based Pricing Regulations,
Notice of Proposed Rulemaking, March 1, 2011
FRB: Equal Credit Opportunity,
Notice of Proposed Rulemaking, March 1, 2011

NEW Risk-Based Pricing Rules - January 1, 2011

MAGAZINE ARTICLE: by JONATHAN FOXX

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President & Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

I think you will be interested in reading my newest article in the National Mortgage Professional Magazine, the national publication that is considered the premier mortgage industry magazine for residential mortgage originators.

In this month's Regulatory Compliance Outlook, I discuss Risk-Based Pricing, which refers to the practice of using a consumer's credit report, reflecting his or her risk of nonpayment, in setting or adjusting the price and other terms of credit offered or extended to a particular consumer.

I consider the use of credit reports or scores in connection with a credit decision, notice requirements, and the disclosure requirements when a lender grants credit on material terms that are not the most favorable terms offered to a substantial proportion of consumers.

TOPICS

• What are Material Terms?
• Who provides the RBP Disclosures?
• Who receives the RBP Disclosures?
• When are the RBP Disclosures sent?
• What are the model forms?
• Are there exceptions?

EXCERPT

WHO PROVIDES THE RBP DISCLOSURES?

Two-Prong Test

There is a two-prong test to determine the RBP compliance requirement, and both conditions must be met:

(1) determine that a consumer report is being used in connection with an application for, or a grant, extension, or other provision of, credit (for personal, household, and family - not business - purposes) to a consumer; and

(2) based in whole or in part on the consumer report, determine if credit is granted, extended, or otherwise provided to that consumer on "material terms" that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through the credit grantor.

I am pleased to share this article with you. I hope you will share it with your colleagues.

We provide expert guidance in all areas of residential mortgage compliance.

If you are not yet a client, shouldn't you become one?

If you have questions about this matter or would like assistance or guidance, please contact me at any time.

Jonathan Foxx
President & Managing Director
(516) 442-3456 X 100

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.

Visit Library for Issuance

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.

FTC: Seeks Comments on Revised Disclosures

On August 27, 2010, the Federal Trade Commission (FTC) published for public comment revised versions of three documents required by the Fair Credit Reporting Act (FCRA). The FCRA requires the FTC to prescribe the content of notices that consumer reporting agencies must provide to those who furnish information to them and to those who obtain consumer reports from them.

The proposed revisions incorporate changes in rights and obligations created by several new rules issued pursuant to the Fair and Accurate Credit Transactions Act of 2003 (FACTA).

Under the FCRA, consumer reporting agencies (CRAs) are required to include a summary of consumer rights with every consumer report they provide to a consumer, and the FTC is required to provide a model summary of rights to be used for this purpose.

Comments: by September 21, 2010

If you have any questions about this matter, please contact Jonathan Foxx.

Highlights

Revisions and Updates

GENERAL SUMMARY OF CONSUMER RIGHTS

"Your Rights Under the Fair Credit Reporting Act"

• Furnisher Direct Dispute Rule: which took effect on July 1, 2010, allows consumers to dispute the accuracy of information in their consumer report directly with the furnisher of that information as well as the CRA. The proposed revised Summary of Rights reflects this additional dispute right, and also directs consumers to the FTC's website for more information about disputing consumer report errors.

• Federal Agency Contacts: the current Summary of Rights incorporates a list of Federal agencies responsible for enforcing the FCRA. The proposed revised Summary of Rights makes this information available on its website in a separate document that lists the Federal agencies responsible for enforcing the FCRA, along with their addresses, phone numbers, and website addresses, which can be updated more easily.

• Format changes: include revisions to improve the clarity and readability of the document.

NOTICE OF FURNISHER RESPONSIBILITIES

"NOTICE TO FURNISHERS OF INFORMATION TO
CONSUMER REPORTING AGENCIES:
YOUR OBLIGATIONS UNDER THE FAIR CREDIT REPORTING ACT"

• Furnisher Direct Dispute Rule: reflects the new duties of furnishers provided in the Summary of Rights.

• Furnisher Accuracy Rule: new duties contained in the Furnisher Accuracy Rule, which became effective on July 1, 2010, are outlined.

• Format changes: include revisions to improve the clarity and readability of the document.

NOTICE OF USER RESPONSIBILITIES

"NOTICE TO USERS OF CONSUMER REPORTS:
YOUR OBLIGATIONS UNDER THE FAIR CREDIT REPORTING ACT"

• Risk-Base Pricing Rule: effective January 1, 2011, the Risk-Based Pricing Rule requires users of consumer reports to provide risk-based pricing notices in certain circumstances or permits such users to provide consumers who apply for credit with a free credit score and information about their credit score.
• Address Discrepancy Rule: effective on January 1, 2008, requires the user to implement reasonable procedures to verify that the consumer report relates to the correct consumer.
• Medical Information Rule: effective on April 1, 2006, prescribes the circumstances under which creditors may obtain, use, and share medical information.
• Format changes: include revisions to improve the clarity and readability of the document.

Visit Library for Issuance

Summary of Rights and Notices of Duties
Under the Fair Credit Reporting Act
Federal Register, Vol. 75, No. 166, p 52655
August 27, 2010

________________________________

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.

OTS: Updates FCRA Compliance Exam

On August 31, 2010, the OTS updated Section 1300 of the OTS Handbook, which outlines FCRA compliance requirements reviewed in examinations. The OTS, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Trade Commission implemented the FACT Act changes through final rules that were effective July 1, 2009.

Section 623 of the Fair Credit Reporting Act (FCRA) was amended by the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) to improve the way that institutions furnish information to consumer reporting agencies (CRAs) and handle direct disputes from consumers.

Section 1300 of the OTS's Examination Handbook contains procedures used by OTS examiners to assess compliance with the FCRA. The module on financial institutions as being "furnishers of information" (Module 4) has been revised to include the requirements of the new rules.

Furnishing information to CRAs is voluntary. However, under the new rules, institutions that do so must have policies and procedures for furnishing information with accuracy and integrity.

The rules also lay out the duties of institutions that receive disputes directly from consumers. The attached examination procedures address both of these areas.

If you have any questions about this matter, please contact Jonathan Foxx.

Highlights

Summary of Key Regulatory Provisions

Policies and Procedures

In developing the required policies and procedures, furnishers must:

• consider the guidelines that are in Appendix E to the rule

• develop policies and procedures that fit the institution's activities

• provide for reasonable investigations of disputes

• use standard data reporting formats

• maintain records for enough time to respond to direct disputes

• review procedures upon transfers of accounts to prevent re-aging of information

• periodically review and update practices and procedures for investigating and correcting information

• review and update their procedures periodically

Direct Disputes

• When a consumer disputes information reported to a CRA directly with an institution, the institution must conduct a reasonable investigation of a direct dispute if it relates to consumer liability on the account, the terms of the account, the consumer's performance, or other information in a credit report regarding the account with the furnisher that bears on the consumer's creditworthiness and reputation.

• When an institution receives a direct dispute, it must review all relevant information that the consumer provided and report investigation results to the consumer.

• If the institution finds that it provided incorrect information to a CRA, it must provide the correct information to each affected CRA.

• An investigation is not required if the institution determines that the dispute is frivolous or irrelevant and sends the consumer a notice within five days of making that determination.

• The notice may be on a standard form and must include the reasons for the determination and identify information that the institution needs to investigate the dispute.

Visit Library for Issuances

• Furnishing Information to Consumer Reporting Agencies and Direct Disputes Regulation: FCRA Examination Procedures, OTS Letter 363 (8/31/10)

• Regulatory Bulletin, RB 37-60, Handbook: Examination, Subject: Fair Credit Reporting Act, Section 1300 (8/31/10)

• Final Rule/Guidelines on Furnishing Consumer Information to Credit Reporting Agencies and Direct Disputes; and Advance Notice of Proposed Rulemaking (ANPR) Seeking Comment on Additions to Guidelines, OTS Letter 313, (7/17/09) .

• Guidelines for Furnishers of Information to Consumer Reporting Agencies, Proposed rule, Federal Register, Vol. 74, No. 125, pp 31529-31533 (7/1/09)

• Procedures To Enhance the Accuracy and Integrity of Information Furnished to Consumer Reporting Agencies Under Section 312 of the Fair and Accurate Credit Transactions Act, Final rules, Federal Register, Vol. 74, No. 125, pp 31484-31528 (7/1/09)

_________________________________