Insights

Among the many changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) are a new adverse action notice disclosure under the Fair Credit Reporting Act (FCRA) and a change to the risked-based pricing notice requirements.

Section 1100F (Title 10, Subtitle H, which amends Sections 615(a) and 615(h) of the FCRA), imposes new requirements on users of consumer reports. These requirements will affect users of credit scores who take adverse action or make a risk-based pricing decision based on the score.

Adverse Action

If a creditor uses a numerical credit score in taking adverse action based in whole or in part on any information in a consumer report, the creditor will be required to provide the consumer with a written or electronic disclosure of the credit score. The creditor’s notice will need to disclose not only the credit score, but also the following information:

• the range of possible credit scores under the model used;
• all of the key factors that adversely affected the credit score of the consumer in the model used, the total number of which shall cannot exceed 4;
• the date on which the credit score was created; and
• the name of the person or entity that provided the credit score or credit file upon which the credit score was created.

The creditor needs to disclose the numerical credit score only if it is a “credit score,” as defined in the FCRA. (That is, a “numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default.”)

Unlike the other components of the FCRA adverse action notice, which may be given orally, in writing or electronically, the credit score and related disclosures must be given to the consumer in written or electronic form. As a practical matter, the requirement to give the notice in writing or electronically may have little effect on users who are creditors because under the Equal Credit Opportunity Act, creditors are already required to give a written notice of adverse action, and most creditors give the combined ECOA/FCRA notice in writing.

When this change will take place is not clear. Although other provisions of Dodd-Frank require the new Bureau of Consumer Financial Protection (Bureau) to promulgate rules, the Bureau is not required to write rules implementing the new component of the FCRA adverse action disclosure. Because there is no rulemaking required, and there is no effective date specified in Section 1100F, users will need to be ready to implement the change by the default effective date for Subtitle H, which is the “effective on the designated transfer date.” That is the date that the new Bureau will spring into life. The Secretary of the Treasury must designate that date before September 19, 2010, but we don’t know what that date will be, and the date could change even after it is designated.

At first blush, the new requirement does not seem particularly difficult. However, there are significant issues to resolve when implementing the new disclosure. First, a creditor will need to decide what score to give – for creditors using a proprietary scoring system, this will present significant disclosure challenges. Second, for creditors that have decided to take advantage of the credit score disclosure exception to the Risk Based Pricing Rule notice requirement that goes into effect on January 1, 2011 (which might be all auto dealers and mortgage lenders) there may be confusion if the scores in the notices differ for the same transaction.

For example, what if the score purchased to satisfy the risk-based pricing notice exception requirement differs from the score the creditor uses in the decision to take adverse action? What if the primary reasons for the credit score obtained from a consumer reporting agency are not the primary reason for taking adverse action? What if a contract is shopped to multiple creditors – does each creditor need to give the adverse action notice, potentially obviating the option under ECOA for one creditor to give the notice on behalf of another? These questions present potential operation challenges and training obstacles that will need to be addressed.

It remains to be seen whether the Bureau will promulgate rules on the form of adverse action notice.

Risk-Based Pricing Notices

The Section 1100F amendment to the FCRA’s risk-based pricing rule provision is even more uncertain and confusing than the new adverse action notice requirement. Here’s the problem: The 2003 FACTA amendments to the FCRA created a new section 615(h), which required the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) to prescribe a risk-based pricing rule, and that subsection also set forth the content of the notice to be required under the rule. After much deliberation, the two agencies published the rule in January of this year, with an effective date of January 2011. Creditors are in the process of preparing their notices in order to comply with the new rule by this effective date.

Section 1100F in the Dodd-Frank Act adds a new disclosure to be included in the content of the risk-based pricing notice if the creditor used a numerical credit score in making the credit decision based in whole or in part on any information in a consumer report. However, it is unknown when this new credit score requirement will need to be included in any risk-based pricing notice. First, as in the case of the new adverse action disclosures, the amendment to the FCRA section 615(h) risk-based pricing provisions do not take effect until the “designated transfer date.” Then, the credit score disclosure will need to be included in the risk-based pricing notice only after the risk-based pricing rule is amended to add this new requirement to the notice. However, after the “designated transfer date,” the FRB and the FTC will no longer have any rulemaking authority under the risk-based pricing provisions of FCRA section 615(h). Only the Bureau will be able to write rules under that section or any other FCRA provision. Creditors may need to wait and see how this one works out.

As with the adverse action notice requirement, if the agencies do not act, then creditors may need to determine when to include this new credit score disclosure in the risk-based pricing notices, and whether any changes to the creditor score exception notices are needed.

Without question, Section 1100F is certain to create confusion for consumers if creditors end up giving consumers two credit scores in the notices in connection with the same transaction.

While the primary intent behind this particular change may have seemed simple – give the consumer his or her credit score – for many creditors, implementing the change will be anything but simple. All users, and creditors in particular, will need to examine their own practices and procedures and understand the implications of the changes, including the confusion for both their own employees and consumers.

Lisa C. DeLessio is a partner in the Maryland office of Hudson Cook, LLP. Lisa can be reached at 410-865-5437 or by email at ldelessio@hudco.com.

Anne P. Fortney is a partner in the Washington, D.C., office of Hudson Cook, LLP. Anne can be reached at 202-327-9709 or by email at afortney@hudco.com.