TopMortgage Compliance Update (1)
           January 3, 2011
                                            New Risk Based-Pricing Rules

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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

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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

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