Over the years, I have seen quite a bit of confusion relating to requirements under the Fair Credit Reporting Act (FCRA) when it comes to risk-based pricing. One misunderstanding I have seen several times is that some believe a “credit score disclosure” is required for non-real estate applications, even if a financial institution does not set rates based on the risk (credit score) of the customer. As I will explain below, this is not a correct understanding.
In my recent article on the Difference Between the Credit Score Disclosure and the Risk-Based Pricing Notice, I explained that both the risk-based pricing notice and the credit score exception notice are both designed to provide disclosure to consumers when a financial institution utilizes risk-based pricing. In short, the risk-based pricing notice is the first disclosure option outlined in 1022.73 of Regulation V. As an alternative to the somewhat complex requirements of the risk-based pricing notice, the Federal Reserve provided a second disclosure option in 1022.74 of Regulation V: the credit score exception notice.
The bottom line is that both of these disclosures - the risk-based pricing notice from 1022.73 and the exception notice from 1022.74 - are only required if a financial institution sets rates based on the risk/credit score of a customer (i.e. risk-based pricing).
Disclosure Only Required if Pricing on Risk
What often happens is that some will think that the credit score exception notice is required for a non-real estate application, even if a financial institution does not have risk-based pricing. As I just explained, this is incorrect as the exception notice is an alternative to the risk-based pricing notice, meaning that if a financial institution does not price based on risk, neither the credit score exception notice nor the risk-based pricing notice are required.
The Federal Reserve explained this in plain English in the 1st quarter 2012 edition of their publication, Consumer Compliance Outlook. In this publication, they have a Q&A that reiterates the risk-based pricing rules under Regulation V. Question 3 specifically addresses the question of whether a notice is required if a bank does not utilize risk-based pricing:
If the same rates are charged to all approved applicants for a particular product, do notices need to be provided?
As discussed in §1022.74(a)(1), if a lender offers one rate for a product and the applicant either receives that rate or is denied, no risk-based pricing or exception notice is required for approved applicants but an adverse action notice is still required for denied applicants.
While the Fed referenced 1022.74(a)(1), the actual citation that states a notice is not required is found in 1022.70 of Regulation V which states the following:
(a) Coverage. (1) In general. This subpart applies to any person, except for a person excluded from coverage of this part by section 1029 of the Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 137, that both:
(i) Uses a consumer report in connection with an application for, or a grant, extension, or other provision of, credit to a consumer that is primarily for personal, family, or household purposes; and
(ii) Based in whole or in part on the consumer report, grants, extends, or otherwise provides credit to the consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that person.
In summary, this section of Regulation V is stating that the risk-based pricing notice or the credit score exception notice are only required if a creditor provides credit to some consumers that are “materially less favorable,” which is just another of saying that they utilize risk-based pricing.
Credit Score Disclosure
One thing I have seen several times is that a financial institution (or even an auditor) will believe that a seperate “credit score disclosure” is required for non-real estate applications, even if a bank does not use risk-based pricing. Part of the challenge with this misunderstanding is that there really isn’t a “credit score disclosure” as this is just a reference to the credit score exception notice found in 1022.74. While the titling language in the subsection to 1022.74 use the phrase “credit score disclosure,” the actual disclosure is the “exception notice” which correlates to model forms H-3, H-4, and H-5.
Therefore, it is important to understand that a reference to the “credit score disclosure” is most often just a reference to the credit score exception notice, which is only required if a bank utilizes risk-based pricing. Therefore, there is no requirement found in the FCRA for a “credit score disclosure” when a bank does not offer risk-based pricing.
Mortgage Loans and the Notice to Home Loan Applicant
If a financial institution does not utilize risk-based pricing, it is important to note that there are still disclosure requirements for mortgage loans. The Fair Credit Reporting Act (FCRA) outlines rules in section 609(g) that require a notice to home loan applicant. This rule is completely separate from the risk-based pricing disclosure requirements and only applies to mortgage loans. Specifically, this rule requires that anyone who makes loans and uses a consumer credit score in connection with a loan application (open-end or closed-end) initiated by a consumer for a consumer purpose that is secured by 1 to 4 units of residential real property must provide 1) disclosures required in subsection f (disclosures of credit scores) and 2) a notice to home loan applicants.
This separate requirement of the FCRA is a disclosure that includes things like the credit score of the applicant, the range of possible scores, key factors that adversely affected the credit score, the date of the score, and the name of the person or entity that provided the score. It also includes a special statement for the home loan applicant.
By all practical reasons, the requirement in 609(g) is sometimes met by using the H-3 disclosure, even if a financial institution does not utilize risk-based pricing for their mortgage loans. The H-3 disclosure is used because the preamble to the 2010 ruling states that “appropriate use of model form H-3 or model form B-3 is also intended to be compliant with the disclosure that may be required under section 609(g) of the FCRA.” This practice of using the H-3 disclosure, even if a financial institution does not utilize risk-based pricing for their mortgage loan loans, is debatable as the option to use the H-3 form is technically permitted under 1022.74(d), which is the exception section for those institutions that utilize risk-based pricing. Therefore, some argue that the H-3 disclosure cannot be used in lieu of the 609(g) disclosure if a financial institution is not subject to 1022.74(d) in the first place. That said, It should be noted, however, that the Federal Reserve explained in their 2012 first quarter edition of their Consumer Compliance Outlook that “the model form exception notice contains all of the information required by 609(g) plus required additional disclosures…” (which is also referenced the preamble to the 2010 final rule which says “proposed paragraph d(1)(ii)(D) would have required the notice to include all of the information required to be disclosed to the consumer pursuant to section 609(g) of the FCRA”). In other words, the argument for using the H-3 form in lieu of the 609(g) disclosures (for financial institutions who don’t utilize risk-based pricing) is that the H-3 form, while different in format from the 609(g) disclosures, does contain “all of the information required by 609(g)” and, therefore, would satisfy the disclosure requirements of 609(g).
The bottom line is that there is a disclosure requirement for mortgage loans when a financial institution does not use risk-based pricing. Non-real estate loans, however, do not have such a requirement.
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