Complying with the New Risk Based Pricing Regulations

Risk-based pricing refers to the practice of using a consumer's credit report, which reflects the risk of default, in setting or adjusting the price and other terms of credit offered or extended to a particular consumer.  The new FCRA regulations, effective January 1, 2011, will impact actions creditors are required to take when using consumer reports to determine financing terms.  The new rule generally would require a creditor to provide a consumer with a risk-based pricing notice when, based in whole or in part on the consumer's credit report, the creditor offers or provides credit to the consumer on terms less favorable than the terms it offers or provides to other consumers.  The regulation is not limited to new accounts; creditors that conduct periodic reviews of existing accounts and increase the annual percentage rate based on credit scores also fall under the scope of the regulation.

Compliance with the new regulations will require the implementation of new policies and procedures for determining which consumers must receive risk-based pricing notices or credit score disclosure notices.  But businesses have a variety of compliance options depending on the nature of business they conduct, either using a case-by-case approach or using one of the two alternatives - credit score proxy or tiered pricing method.

The proposed rule includes certain exceptions to the notice requirement and the most significant of them permits creditors to provide all of their consumers with their credit scores and explanatory information, instead of providing a risk-based pricing notice to those consumers who receive less favorable terms.  In other words, the lending institution can avoid telling some customers that they are getting less favorable terms than other customers by providing all of their customers with their actual credit scores along with a detailed explanation.  No one likes to find out that other consumers are getting better rates, but it is costly for lenders to provide credit scores to every potential borrower.  Lenders will have to weigh the added cost compared to any negative impact the notices may have on customers.  It is projected that many consumers will make a better effort to shop around for more competitive rates after receiving the new notices.

Institutions must carefully assess their product offerings and risk-based pricing models to determine how to comply with the new risk-based pricing regulations. Early implementation is encouraged, and a phased approached to providing the notices and disclosures may help to ensure that all procedures are in place in time for the January 1, 2011 effective date.