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Many times, in this Back to Basics series, I have written about the Fair Credit Reporting Act and its impact on the consumer finance industry. I have also written about the role of The Federal Trade Commission (FTC) in the world of credit extension. However, I don’t think that I have written specifically about the role of the FTC in credit reporting—including its role in Risk-Based Pricing (RBP). An RPB Rule was adopted by the FTC in 2011, and since then, it has been enforced by the CFPB.  

The purpose of the RBP Rule is to require lenders to provide consumers with a notice when credit is granted on “material terms that are materially less favorable than the most favorable terms available to a substantial proportion of the consumers.”

We have often debated the impact of what happens when a customer is granted credit, but not in the amount requested; that is, some lesser amount of credit is offered, and it is at a higher APR. Has such a customer suffered risk-based pricing? That seems to be the case.

So, what is a creditor to do?

If the creditor is engaged in risk-based pricing, then the following decision tree analysis should be done:

• First consider whether there is any exception to giving an RBP disclosure notice entirely. For example, if the creditor does not use credit reports, then no RBP disclosure need be given, even though an ECOA/FCRA turndown notice is required.  
• Next, if RBP occurs, decide whether to give a Credit Score Disclosure or a Risk-Based Pricing Notice (with accompanying information) in connection with the RBP.
  • If giving a Credit Score Disclosure, that must be given to all consumers—not merely the affected consumer.
  • If giving a Risk-Based Pricing Notice, that should be given only to the consumer suffering RBP.
    • And, in the case of the giving of that RBP Notice to the specific consumer, the RBP Notice must be accompanied by some detailed information concerning risk-based pricing by selection of either the “direct comparison” method, the “credit score proxy” method or the “tiered pricing” method.
    • These accompanying methodologies require some serious attention. The devil is always in the detail.

Practice Pointer: If you haven’t reviewed your Risk-Based Pricing process and procedure recently, you may want to do so.