FCRA required adverse action notice to be adjusted: Adjustment will account for risk-based pricingTerry W. ClemansFair Credit Reporting Act, Fair and Accurate Credit Transactions Act, Federal Trade Commission, Federal Reserve
In days long gone by, when a consumer was either approved or
denied a loan due to his credit history without variations, the
Fair Credit Reporting Act (FCRA) required an adverse action notice
be sent to the consumer to alert him that he was being "adversely"
impacted, or denied the loan, due to his credit report. Since the
1990s, when automated underwriting systems with credit
score-driven, risk-based pricing models were implemented, many more
consumers are now being approved for loans. Due to these new
processes, consumers with damaged credit histories are not being
denied, but approved at higher interest rates. The old adverse
action notice was no longer fulfilling the needs of many consumers,
due to the changes in lending technologies. All of that is about to
A new notice, one that alerts the consumer when he has been
adversely impacted by a risk-based pricing decision, is being
created to reflect the modernized lending practices. This change
was demanded by Congress as part of the sweeping revision to the
FCRA in 2003, known as the Fair and Accurate Credit Transactions
FACTA is the same law that provides every consumer the
opportunity to obtain a free copy of his credit report annually.
Responsibilities for drafting the changes being proposed are the
Federal Reserve System (FRS) and the Federal Trade Commission
(FTC), which published variations of the proposed new rules in May.
They are now open for a three-month comment period, after which the
final rules will be created and implemented.
Whatever the shape of the final rules for the risk-based pricing
notice takes, lenders will have to provide this notice to consumers
who are quoted a higher interest rate than the best available
terms, due in-whole or in-part to information in their credit file.
This notice will inform the consumer of a new type of adverse
action in the change of credit terms.
This new notice is especially important in today's mortgage
market, as more lendersincluding Federal Housing Administration
lendersincrease their credit-score requirements for loan pricing
and approval. While we focus on mortgage lending, the proposed
risk-based pricing notices would cover all consumer lending
situations, not just home mortgages. This notice was one of the
last changes required by Congress to be implemented by FACTA.
It will no longer take a complete denial to invoke the system to
alert the consumer that he has been adversely affected by the
contents of his credit report. The new standard will be if the
lender offers the consumer "loan terms less favorable than the
terms it offers or provides to other consumers." Now, which parties
involved in the loan process are required to provide the notice and
what "less favorable terms" really means has yet to be finalized.
The published proposal has some options to be debated.
One option exempts the impact to Mortgage Brokers from these new
proposed rules, as they would not require most Mortgage Brokers to
issue the new risk-based pricing notices. Only those brokers that
function as lender during the transaction, instead of a pure
broker, would be required under the proposed rules to send the
notices. Remember, these are not final, and they may change,
pending the content of the comments submitted.
One major debate about the proposed rules will be in defining
what "less favorable terms" really means. The proposal provides
different approaches that lenders may use to identify the consumers
to whom they must provide risk-based pricing notices. One option
includes an exception to the notice requirement when lenders
provide all of their consumers with their credit scores and
explanatory information about those scores.
The FRS and the FTC will be accepting comments on the proposed
rule-making until Monday, Aug. 18. To obtain a copy of the notice
or submit comments about the proposed rules, visit the Federal
Reserve Web site at www.federalreserve.gov.
Terry W. Clemans is the executive director of the National
Credit Reporting Association Inc. (NCRA). He may be reached at
(630) 539-1525 or e-mail [email protected]