Historically, the Fair Credit Reporting Act has required lenders to provide "adverse action" notices to consumers when their credit applications are declined or when a consumer rejects a lender's less favorable counteroffer.
These notices must be sent whenever either action is based in whole or in part on credit report information. They identify the agency that furnished the report, inform consumers of their right to a free credit report from that agency and how to obtain it, and state consumers' right to dispute the accuracy of data in the report.
Recognizing that the move to risk-based credit pricing means fewer credit denials and correspondingly fewer adverse-action notices, Congress has mandated a new pricing notice in an effort to fill the resulting data gap. Specifically, the FACT Act establishes a new notice requirement for lenders that use credit report data in their risk-based underwriting programs for new credit customers.
A lender that establishes pricing terms for new loans or credit accounts based on credit report information must send a risk-based-pricing notice when using that information results in "materially less favorable" terms than those offered to a "substantial proportion" of its new credit customers.
Given the wide variety of terms, it could be difficult for lenders to determine which terms are materially less favorable and what constitutes a substantial proportion of new customers, even though the Federal Reserve Board and Federal Trade Commission are directed to help lenders make that determination. Lenders can eliminate uncertainty about who should receive risk-based-pricing notices by providing them to all their new credit customers - for example, by including them in loan approval letters or with new account packages.
The FACT Act provides lenders with additional flexibility in the timing of risk-based-pricing notices. Specifically, they may choose to provide notices when credit is applied for or approved. But the Fed and the FTC can specify circumstances in which lenders must provide the notice after loan terms have been set.
The law also identifies situations in which notices are not required, even though the lender uses risk-based underwriting formulas. For example, notices are not required in connection with prescreened credit offers - even though such offers are based on credit scores - unless the terms are changed after a consumer responds. They are also not required if a traditional FCRA adverse-action notice is sent because an application is declined or a counteroffer rejected.
Unlike the traditional adverse-action notice, the risk-based-pricing notice is intended to be more concise and provide only limited information. It tells consumers that credit report information will be or has been used to set loan terms and identifies the reporting agency used. It also tells consumers that they may obtain a free credit report from the agency and provides the contact information. But a lender does not have to tell consumers that it has taken or may take unfavorable action in granting the credit requested.
The Federal Reserve Board and the Federal Trade Commission are directed to jointly prescribe rules to implement this new section. The rules are to address the form, content, time, and manner of delivery of the notice, as well as the meaning of the terms used in the section. The agencies must also develop a model notice, though lenders are not required to use it. And the agencies may create additional exceptions to the notice requirement where they determine that such a notice would not significantly benefit customers.
Though the obligation to send risk-based-pricing notices will result in new procedures with attendant costs, it should not be a source of frivolous litigation. Lenders are not liable for the failure to provide the notice if they maintain reasonable policies and procedures to comply with the requirement. Moreover, the existing FCRA civil liability provisions do not apply to the new notice requirement, which is subject only to administrative enforcement by appropriate federal agencies.
In addition, a new federal preemption provision applies to the risk-based-pricing notice, similar to the existing federal preemption applicable to traditional adverse-action notices. As a result, states are precluded from imposing any requirement or prohibition relating to the duties of lenders to provide notices when they use credit reports in connection with their credit underwriting and pricing activities.
In short, when consumers experience substantially less favorable new loan terms because of their credit histories, the FACT Act mandates a simpler, more flexible notice from lenders that use credit report information to set those loan terms. But lenders have the option of providing the notice to all new loan customers, and they may do so at the time of application or with the approval letter unless agency rules provide otherwise. Lender procedures are also governed by a single federal standard applicable nationwide.
