Credit unions that use risk-based pricing on their credit cards are going to have to do a better job of explaining it to members.
NCUA is cautioning credit unions they have just six months left to provide more information to their members about risk-based pricing, as new disclosures will be required in December under the Fair and Accurate Credit Transactions Act.
For many members that may mean learning for the first time that they are paying more than other members, as FACT requires credit unions to notify members when the have been offered terms that are "materially less favorable" than those available to "a substantial proportion" of other members.
"An FCU may establish a different rate structure for its members based upon their credit scores," NCUA noted. "While current law does not require that an FCU disclose the basis for its rate determinations, FCUs using risk-based pricing will have additional disclosure obligations that become effective in December 2004."
NCUA acknowledged that risk-based pricing has allowed credit unions to offer credit to members they may not have been able to help otherwise, but suggested credit unions take the extra step to explain the situation to members.
"We also note that risk-based pricing means that members will not know the rate for which they qualify until after the FCU has approved an application and established a card account in the member's name. Potentially, this can have an adverse impact on the applicant's credit score, since an applicant may need to submit numerous applications for credit to find a lender offering an affordable rate," the regulator suggested. "Consumer reporting agencies may consider a substantial number of credit applications to be a negative factor in their calculation of a credit score. We recommend that the FCU take some affirmative steps to assure that its members understand this."
Other disclosures require explaining that the lender is basing its terms on information in a credit report; providing contact information for the credit reporting agency providing the report; and including a statement that the consumer can request a free copy of the report.
NCUA issued the opinion in response to a letter from an attorney representing a federal credit union.
