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National Mortgage Professional
Aug 15, 2008

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 change. 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 Act (FACTA). 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 tclemans@ncrainc.org.
Published
Aug 15, 2008
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