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Published: April 2011

Old exceptions to risk-based pricing rule must be removed before Dodd-Frank can work

Coalition: Credit

Consumer Action signed onto comments that point out problems with provisions proposed by the Federal Reserve and the FTC that would fail to remove currently-existing exceptions to the risk-based pricing rule (if the creditor makes a credit scoring disclosure) in the Dodd-Frank bill.

Below is an excerpt from the letter:

We appreciate the Board and FTC’s efforts to have in place provisions that implement the Dodd-Frank credit score disclosure requirement prior to the effective date of July 21, 2011. However, we have grave concerns about the proposed rule and object to a glaring omission. The proposal is entirely deficient because it fails to remove currently-existing exceptions to the risk-based pricing rule if the creditor makes a credit scoring disclosure. These exceptions, when combined with the new Dodd-Frank credit score disclosure requirement, will effectively nullify the whole risk-based pricing notice. At the same time, this combination of exceptions and the new credit-score disclosure will create a huge loophole allowing creditors to disclose only generic credit scores, contrary to Section 1100F.

We also highlight another issue with the Dodd-Frank credit disclosure requirement, i.e., its impact on adverse action notices. The issue is whether the Dodd- Frank disclosure must be provided by users of credit scores who use the score to for purposes other than the extension of credit, such as insurers. While we recognize that the Board and FTC have no authority to promulgate rules on this matter, we wanted to bring the issue to their attention.

A. The Board and FTC Must Remove the Pre-existing Credit Score Disclosure Exceptions Provisions

1. Background and History
Under the Fair Credit Reporting Act, creditors must send a risk-based pricing notice whenever they use a consumer report (including a credit score) in connection with an application for consumer credit, and based on that report, provides credit on terms that are “materially less favorable” than “the most favorable material terms available to a substantial proportion of consumers” through that creditor.9 The FTC and Board implemented this risk-based pricing notice requirement at 12 C.F.R. Part 222 and 16 C.F.R. Part 640.
Among other things, the FTC/Board’s rule creates exceptions in which a creditor is not required to provide a risk-based pricing notice if either: (1) the loan is secured by residential real property and the creditor provides a mortgage score disclosure to the consumer;10 or (2) the creditor provides every consumer with a copy of her credit score.11 We will refer to these exceptions as credit score disclosure exceptions.

If the creditor provides a credit score to consumers pursuant to the credit score disclosure exceptions, the creditor is not required to provide a risk-based pricing notice at all. The credit score disclosure exceptions were adopted as part of the risk-based pricing notice rule issued by the Board and FTC on January 15, 2010. At the time, the FTC and Board stated that their believe that these exceptions would benefit consumers, because they would “provide[] a consumer with specific information about his or her own credit history that will likely be more effective than the more generic information about consumer reports that will be included in a risk-based pricing notice.”12
Subsequently, in July 2010, Congress passed the Dodd-Frank Act. Section 1110F of that Act amended the risk-based pricing notice requirement by requiring that, if the credit decision is based on a credit score, the creditor must provide the credit score that it actually used in the risk-based pricing notice. In addition, the creditor must provide the range of possible scores under the model used, no more than four of the key factors that adversely affected the score13, the date on which the score was created, and the name of the entity that created the credit score or file on which the score was created.

2. After Dodd-Frank, the Pre-existing Credit Score Disclosure Exceptions Will Become the Exceptions that Swallow the Rule.

The proposed rule has a fundamental deficiency in what it does not do. The FTC and Board have deliberately chosen to keep the pre-existing credit score disclosure exceptions to the risk-based pricing notice, despite the fact they could create the proverbial exception that swallows the rule.

The logic is very simple: the new Dodd-Frank disclosure requires all creditors that issue risk-based pricing notices to disclose the credit score used by the creditor. Since all creditors must provide a credit score in the risk-based pricing notice, their incentive will be to provide credit scores for all consumers and avoid the complex task of determining which consumers must be provided the risk-based pricing notice. The failure to remove the pre-existing credit score disclosure exceptions will strongly motivate creditors to provide credit scores for all applicants. This means that many consumers who would benefit from a risk-based pricing notice – informing them that they are being offered or paying a higher price for credit based on their credit report and score – will not receive the notice, contrary to as Congress’s intent in enacting that requirement. The result will likely be that no creditors will ever provide the risk-based pricing notice (unless in the very rare case that the creditor does not use a credit score).

Indeed, even prior to the passage of Dodd-Frank, there were indications that creditors were being advised to opt for the credit score disclosure exceptions instead of taking the effort to engage in the analysis required by the risk-based pricing notice rule. For example, the Ohio Automobile Dealers Association advised its members: “The credit score exception notice is much simpler than the risk based pricing notice. We believe the vast majority of dealers will provide the credit score exception notice in lieu of the risk based pricing notice.”14
Prior to the Dodd-Frank Act, the fact that creditors were being advised to choose the credit score disclosure exceptions was justifiable in that consumers would be receiving a benefit – a free credit score – in lieu of the risk-based pricing notice. Indeed, the FTC and Board specifically cited this benefit as the reason for allowing the exception, stating:
For the reasons discussed below, the Agencies believe that a separate risk-based pricing notice will not provide a significant benefit to consumers who receive a credit score disclosure that satisfies this exception. The notice required to qualify for the exception provides consumers with their credit scores without charge along with contextual information to help consumers understand how their credit scores may affect the terms of the offer and how their credit scores compare to the credit scores of other consumers. The credit score disclosure provides tangible value to consumers because free credit scores typically are not available to consumers in connection with non-mortgage transactions. Consumer reporting agencies and other sellers of credit scores typically charge consumers between $6 and $10 for a credit score.

Lead Organization

National Consumer Law Center

Other Organizations

Center for Economic Justice | Center for Responsible Lending | Consumer Federation of America | NAACP | National Fair Housing Alliance | U.S. PIRG

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