In what is expected to have a big impact on the special-finance marketplace, the Federal Trade Commission (FTC) and the Federal Reserve Board (FRB) issued in late December finalized rules that will require creditors, including dealers, to alert consumers when derogatory credit data causes them to receive less than optimal terms. The rule is expected to take effect Jan. 1, 2011.
The finalized rules implement Section 311 of the Fair and Accurate Credit Transactions Act of 2003. Among other reforms, the act introduced the concept of providing consumers with one free credit report per year to ensure their accuracy and directed the FTC and FRB to develop a Risk-Based Pricing Notice (RBPN) for credit applicants whenever their credit scores triggered higher interest rates or other adverse terms.
According to the FTC’s Manas Mohapatra, the rule also fills a gap created by the advent of risk-based pricing, a practice of setting or adjusting the price and other terms of credit provided to a consumer based on his or her credit worthiness. “With the adverse action requirement, people are told that things in their credit report probably caused their denial of credit,” Mohapatra told F&I. “However, what had been occurring was that people were not getting denied credit, but were getting much worse material terms and weren’t being informed of that fact. This rule is supposed to fill that gap.”
The two agencies had published proposed regulations that would implement these risk-based pricing provisions in May 2008, which was followed by a three-month public comment period. The agencies received more than 80 responses to the proposed rules from banks and other creditors, industry associations such as the National Automobile Dealers Association (NADA), consumer groups, and more.
The rule lays out several scenarios in which the rules may apply. However, because of the difficulty in determining which consumers fit in this category, the NADA recommended — and the agencies adopted — an exception notice that dealers and other creditors may issue in lieu of the RBPN.
Called the credit score disclosure notice, which is based on an existing requirement that applies to dealers in California, the notice must be provided to all customers who apply for credit. It must contain, among other things, the consumer’s credit score, the date the score was created and the source of the score. The notice must also provide consumers with a range of scores and information on how lenders use their scores. The notice must also include a written description or graphic representation of how the applicant ranks against other consumers. An example of the form can be found on page 198 of the rules (www.ftc.gov/os/2009/12/R411009riskbasedpricingfrn.pdf).
Officials with the NADA responded to the news in a prepared statement.
“Due to the difficulty in determining which subset of credit customers must receive risk-based pricing notices, NADA strongly urged the agencies to create an optional compliance mechanism that would allow dealers to provide all of their credit customers with a simple notice that satisfies the requirements of section 311,” the statement reads. “The agencies adopted this recommendation by permitting an exception notice to be issued in lieu of a risk-based pricing notice provided it contains the consumer's credit score, certain information to put the score in context, and additional boilerplate language concerning credit scores, credit reports, and how consumers may access their credit report. We were involved in shaping this result since our first meeting with the agencies in February 2004.”