Risk-Based Pricing Notices
Users must provide consumers with a risk-based pricing notice. Consumers now have a right to a new notice relating to risk-based pricing. Whenever a creditor extends credit on terms “materially less favorable than the most favorable terms available to a substantial proportion of consumers,” the creditor must provide to consumers a notice that explains that the terms are based on information in a credit report and that the consumers can request a free copy of the report. This notice requirement will address a current flaw in the Act where creditors fail to provide notice to consumers when they charge higher interest fees, or other charges based on a credit report. This flaw was specifically highlighted in testimony by FTC Chairman, Timothy Muris.
The “risk-based pricing” notice must be given at the time of application or at the time of communication of the approval. This notice may be given orally, in writing or electronically.
The credit industry may take the position that this new subsection should affect how to interpret the current definition of “adverse action” found in the Act under §603(k)(1)(B)(iv). This current definition includes an action taken on an application that “is adverse to the interest of the consumer” and because it also involves account reviews, it must necessarily refer to credit transactions. This definition also kicks in current requirements for a notice under §615(a) of the Act for actions adverse to the interests of a consumer on the basis of information in consumer reports. The industry may incorrectly argue that the new risk-based pricing notice required under §615(h) makes clear that the definition of adverse action in §603(k)(1)(B)(iv) does not apply to credit applications because otherwise this new risk-based pricing notice required under (h) would not be necessary. This argument is untenable for several reasons.
First, a plain reading of §603(k)(1)(B)(iv) requires a court to apply the term “adverse to the interests of the consumer” to any action made in connection with a consumer’s application. If a court finds conduct that meets this definition, regarding an application made by the consumer, then the §615(a) notice is required. The court must construe the definition consistently with §603(k)(1)(A) that first includes anything that qualifies as an adverse action under the Equal Credit Opportunity Act (ECOA), and thus, the phrase “adverse to the interests of the consumer” should include something more than or other than an ECOA adverse action. No basis exists in the language to conclude that §603(k)(1)(B)(iv) does not apply to credit applications.
Second, the new risk-based pricing notice requirement regulates a broader area than that of §603(k)(1)(B)(iv). Consider, a person who has never been given credit or has really bad credit and is then approved for credit by a bank (which does not seem adverse to their interests). Although the industry may argue that the approval was not adverse to the consumer and thus not notice is required, the consumer still did not get the most favorable terms generally available. The new notice required under FACTA then comes into play and must be provided to the consumer. Similarly, a person applying for credit at a car dealership might have the finance and insurance manager only plan to sell the credit contract to sub-prime assignees, and discuss with the consumer only a high interest loan. The consumer may be happy with getting credit to buy the car, even though the car dealer finances a substantial proportion of customers at 0%. Again, the industry may argue that no decision was made adverse to the consumer’s interests because the consumer was given credit at the expected terms and thus no adverse action notice pursuant to §615(a) is required. The new notice requirement under FACTA (§615(h)) simply plugs the gap by requiring the creditor to notify the consumer in such circumstances that the offered terms are not as good as those offered to other consumers. Consequently, given the type of decisions that are made and the potential for a court to accept the argument that getting credit at less than the most favorable terms is not “adverse to the interests” of many sub-prime consumers, the new FACTA notice supplements the application of existing notice requirements in §603(k)(1)(B)(iv) of the Act.
Third, Congress made clear that the new risk-based pricing notice overlapped with the adverse action notice required under §615(a). If the user provides a notice under §615(a), then they do not have to give the risk-based pricing notice; the notice provided under §615(a) will suffice. This contemplates that in some situations both would be required. The point that both can be required in the same transaction is further covered by the provision that the new notice (which is shorter) cannot be used in place of a notice under §615(a). Thus, no basis exists to claim that if a situation is covered by the risk-based pricing notice, it cannot be an adverse action under §615(a). The use of the phrase “materially less favorable than the most favorable terms” cannot be read to be necessarily mutually exclusive of §603(k)(1)’s phrase “adverse to the interests of the consumer.”
The most important aspect of the risk-based pricing notice is the fact that it must be provided at the time of application or the time the decision is communicated to the consumer, while the consumer still has an opportunity to use the notice to check the validity of the information being used to make the determination. The timing requirement is significant because other notice under the FCRA (§615(a) and (b)) are not given any timing requirement in the statute. Without a statutory basis for their decision, the industry seems to have decided that these notices follow the ECOA notice timing requirement. They are normally given too late to be of any use when they are given at all.
Assuming the new FACTA risk-based pricing notice requirements are enforced, this notice will have tremendous effects throughout the retail credit sale industry. Right now, many in the credit industry ignore the proper definition of adverse action and FCRA notices are not given unless it is also an ECOA adverse action situation. This practice is based on the false assumption that §603(k)(1)(b)(iv) does not apply to credit transactions. The new requirements in FACTA makes clear that risk-based pricing notices must be provided even if the consumer is given and accepts credit, and clearly require a FCRA notice even when no ECOA notice is required. There is great potential for these notices to have beneficial effects. For instance, wherever a lender has discretion over a yield spread premium that is of a sufficiently significant amount to render a loan with that premium “materially less favorable” than one without a premium (or with a lower premium) than the consumer who is offered the credit with the higher premium is entitled to the notice. Thus, a car dealer who takes a 3% yield spread would have to provide the risk-based pricing notice. Prior to FACTA the notice did not have to tell the consumer what happened, and the statute did not require the creditor to even tell the consumer that more favorable terms are given to some people, but not them.
The FTC and the FRB are jointly to promulgate regulations, and those regulations will further define “materially less favorable” and the required content of the notice. The true meaning of this provision will not be apparent until these regulations are seen. These regulations will be extremely important for determining when this notice is required. A problem may arise if the agencies define “materially less favorable” to require a huge difference from the most favorable terms; courts might use that definition to interpret “adverse to the interests of the consumer” for the §615(a) notice. Thus, if the new risk-based pricing notice under §615(h) is administratively regulated to apply to only a narrow range of credit decisions, that provision may effectively lead courts to correspondingly interpret the breadth of §615(a)’s adverse action notices more narrowly.
A major drawback to the new risk-based pricing notice requirement is that it can only be enforced through Federal agencies and officials under §621 of the Act and states are preempted from regulating the subject matter of the provision.
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