One of the most frequently asked consultation questions we receive on the Compliance Advisory Team is regarding the Fair Credit Reporting Act. Many aspects of the FCRA must be considered, including the requirement for furnishers of information to have procedures in place to ensure that information reported by a consumer to a credit reporting agency (CRA) is accurate. Also, the furnishers of information have the duty to notify a CRA in the event it has determined that previously furnished information is inaccurate. Sometimes, this determination comes with a direct dispute from a consumer claiming information on their consumer report is inaccurate. There is also the requirement to have a policy and procedures in place to respond to notifications from CRAs relating to information resulting from identity theft. We will cover each of those topics imposed by the Fair Credit Reporting Act and Regulation V in detail in the coming weeks, but the biggest challenge with FCRA comes from its notification requirements.
If you use a consumer’s report in connection with a credit decision, there are certain disclosures you must provide known as the Risk Based Pricing Notice or Exception Notice. If you deny a consumer’s application for credit based on information in their consumer report, then you must include certain credit score disclosures along with their adverse action notice to satisfy the notice of action take requirements under both Regulation B (ECOA) as well as Regulation V (FCRA). Also, remember that Regulation V defines a “consumer” as an “individual.” Often, FCRA gets categorized as a regulation that is specific to consumer-purpose loans, but that is not exactly the case. Certain disclosures apply to consumer-purpose mortgage transactions only, such as the Notice to Home Loan Applicant. However, your general risk based pricing or exception notices will apply in the event you have an application for a business loan and you pull the consumer report of the individual business owner(s).
With that said, let’s take a look at the specifics of the Risk Based Pricing Rule –
If you extend credit but on terms that are less favorable than the most favorable terms available, and those terms (e.g., pricing/rate) are based on information in the consumer’s report, then you are practicing risk based pricing, which requires notice to the applicant.
The content of the risk based pricing notice must include the following –
- A statement that a credit score is a number that takes into account information in a consumer report, that the consumer’s credit score was used to set the terms of credit offered, and that a credit score can change over time to reflect changes in the consumer’s credit history;
- The credit score used by the creditor in making the credit decision;
- The range of possible credit scores under the model used to generate the credit score;
- The key factors that adversely affected the credit score (discussed below);
- The date on which the credit score was created; and
- The name of the consumer reporting agency or other person that provided the credit score.
You also have the option to provide what is known as the credit score exception notice to all credit applicants instead of providing the risk-based pricing notice to certain applicants. This is the approach taken by most creditors because it ensures compliance with the notification requirements if you provide it to every applicant whose consumer report was obtained in connection with the application for credit. There are also model forms that you may rely on when providing either the risk-based pricing or exception notice in Appendix H to Part 1022 of FCRA. We recommend you rely on the model forms. For example, you would rely on Model Form H-3 in connection with an application for a loan to be secured by residential real property as it also includes the model form for the Notice to Home Loan Applicants. Again, that one is only specific to a residential mortgage application for a consumer (personal, family, household) purpose.
The timing requirements for the risk-based pricing/exception notices vary with the type of credit product and notice:
- Closed-end credit: before consummation, but not before credit approval is communicated to the consumer.
- Open-end credit: before the first transaction is made under the plan, but not before credit approval is communicated to the consumer.
- Automobile lending: before consummation, but not before credit approval is communicated to the consumer. If the creditor relies on the dealer to deliver the notice, the creditor must maintain reasonable policies and procedures to verify that the dealer or other party provides the notice within the required time frame.
Keep in mind the notification requirements in this case apply even if the application is withdrawn or denied. If the application for credit is denied, however, then you do not need to provide the risk-based pricing or exception notice because the credit score disclosures must be included with the adverse action notice if you relied on the information in the consumer’s report to make the decision to decline. As provided under Regulation B, you may provide notice of your decision to deny the application orally, in writing, or electronically (don’t forget ESIGN if you provide it electronically), but the notice must contain the following information –
- the name, address, and phone number of the CRA (including a toll-free number for nationwide CRAs) that supplied the report;
- a statement that the CRA didn’t make the adverse decision and can’t explain why the decision was made;
- notice of the consumer’s right to a free copy of their report from the CRA if they ask for it within 60 days;
- notice of the consumer’s right to dispute the accuracy or completeness of any information provided by the CRA; and
- the consumer’s credit score if a score was used.
We hope you found this refresher on the Fair Credit Reporting Act notification requirements helpful. As always, don’t hesitate to reach out to the Temenos Compliance Advisory team with your consultation requests to receive expert assistance with your compliance issues or challenges. It is our pleasure to help relieve the burden of compliance from you and your institution.