Insights

Maybe you missed it last year… Buried away in the “Conforming Amendments” of Title 10 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is a provision that is anything but conforming. Section 1100F amends Sections 615(a) and 615(h) of the Fair Credit Reporting Act (FCRA) to require a creditor to disclose a credit score and information about that score if the creditor uses the score in making an adverse action or a risk-based pricing decision. Now, the Federal Reserve Board (FRB) has proposed model language to help creditors implement the disclosure that needs to be included in an adverse action notice, and the FRB and Federal Trade Commission (FTC) have jointly proposed to amend the Risk-Based Pricing (RBP) Rule by adding a second RBP notice.

The effective date for the adverse action credit score disclosure is (and always has been) July 21, 2011. Although the Dodd-Frank Act effective date for the credit score disclosure in the RBP notice is also July 21, the FCRA requires rules to implement the RBP notice requirement, and thus we believe, authorizes the Agencies to provide for a different (and later) effective date. However, the Agencies’ proposed rule sets a July 21 effective date. This is an earlier date than expected, but it is possible that creditors may need to be ready for that disclosure (or some alternative) by July 21 as well.

The two proposals answer some questions, but also raise new issues.

Adverse Action

Under the Dodd-Frank amendment, 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 need to provide the consumer with a written or electronic (not oral) 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. This definition is important because there are two things creditors need to consider: (1) do proprietary scores need to be disclosed, and (2) are there scores– other than FICO, Beacon or Vantage scores – that are credit scores that would need to be disclosed?

The FCRA defines a credit score as “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 (and the numerical value or the categorization derived from such analysis may also be referred to as a “risk predictor” or “risk score”); and does not include (I) any mortgage score or rating of an automated underwriting system that considers one or more factors in addition to credit information, including the loan to value ratio, the amount of down payment, or the financial assets of a consumer; or (II) any other elements of the underwriting process or underwriting decision.”

Initially, it was not clear if creditors could rely on this definition to exclude non-mortgage proprietary scores. The language the FRB included in the proposed amended model adverse action notices (found in Appendix C to Regulation B) suggests that the FRB does not intend for information about a proprietary score meeting this definition (i.e. the exception) to be disclosed. In fact, the FRB did not even propose any language about how to disclose a proprietary score.

The proposed introductory language to the score disclosure provides that “We also obtained your credit score from this consumer reporting agency and used it in making our credit decision. Your credit score is a number that reflects the information in your credit report. Your credit score can change, depending on how the information in your credit report changes.” The reference to a consumer reporting agency, not the creditor, means that this language would only be used if a third party provided the score.

The FRB also proposes to amend the notice that may be used when a proprietary score system is used to make the credit decision. That model does not provide alternative language for disclosure of information about a proprietary score. It is hard to imagine that the FRB would not have proposed alternative language for a proprietary score if it intended such scores to be disclosed given that the proposed language simply could not be used.

The second question is what other scores might be covered. Creditors need to evaluate other scores that may be used in their systems to determine if such scores meet the definition of credit score. Given that there are numerous scores – other than those traditionally understood to be credit scores – it will be important that creditors know what they are and how they are used. If the scores meet the definition of credit score, creditors will need to determine whether the provider of the score will be prepared to provide the disclosure to the creditor.

There are, of course, other important issues, such as how to treat notices to joint applicants, that have not been addressed by the FRB, and which creditors may wish to raise in a comment.

Comments on the proposed model adverse action forms must be received on or before April 14, 2011.

Risk-Based Pricing Notices

The early proposal to amend the RBP Rule was somewhat unexpected, given that it took the FRB and FTC six years before the current rule became effective on January 1, 2011. Now that creditors have expended significant resources this year to comply with the Rule, the Agencies propose a change and suggest that the change needs to be implemented by July 21.

The change is significant. For those creditors who elected to give an RBP notice (as opposed to a credit score exception notice), the Agencies have proposed an additional form of notice that must be used when a credit score is used in the risk assessment and pricing. The new RBP notice will include substantially the same language discussed above for adverse action notices. The Agencies state that they expect that analysis, programming, implementation and testing of the new disclosure could be accomplished in 16 hours. We believe this estimate is completely unrealistic. In view of the amount of time it took the Agencies to propose the rule (8 months), it is unlikely that they will publish a final rule in time for creditors to develop and implement the necessary systems and procedures to comply with the final rule’s requirements.

Nonetheless, given the uncertainty and current regulatory environment, creditors are advised to have a plan in place to meet the requirements of the RBP rule.

Comments on the proposal to amend the RBP Rule must be received on or before April 14, 2011.

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.