By: Wendy Greenawalt
In a recent poll conducted by Experian, 82 percent of the respondents indicated they were undecided or currently assessing options for complying with the Risk-Based Pricing Rule. If your organization is also considering which compliance option is right based on your unique circumstances, I would encourage you to act soon, as the deadline is quickly approaching.
Some organizations have decided that they will be utilizing the Credit Score Disclosure Notice as their preferred compliance option, as it is supplied to all consumers and requires minimal procedural changes and maintenance. While at first glance this option may seem to be the most streamlined approach, it does come with its own considerations. The Disclosure Notice form letter is straightforward and includes minimal inputs such as the consumers credit score, score source, range of the score and a corresponding score distribution. The downside is that the Disclosure Notice must be provided individually to all consumers, even those that reside at the same address, and must be given in a format in which the consumer can keep/reference. This means there will be an inherently higher cost to mail or electronically provide the form to each applicant and obtain the required eSign confirmation (where applicable). The score distributions must be updated on a regular basis and lenders must be prepared to answer consumer questions related to scores and how they are derived.
Conversely, the Risk Based Pricing Notice, which is the primary compliance option outlined in the rule, is provided to a specific segment of consumers and can be provided verbally, electronically or in writing. A model form is supplied in the ruling and requires a lender to provide the credit reporting agency used to obtain the consumers credit data and contact information for the agency. Some lenders feel the notice has awkward language; however I tend to think most consumers have a basic understanding of their credit and the language in the form will not provide a negative consumer experience. The language tells the consumer “the terms offered to you may be less favorable than the terms offered to consumers who have better credit histories”. The disadvantage of this notice is that a lender must determine which consumers must receive the notice, and this policy must be updated periodically. Fortunately, the ruling states that a lender must only review the policy every two years. For most lenders this will not be a problem as they perform more frequent reviews and validations of their portfolios and determining which consumers receive a notice can be performed at the same time with minimal resources.
Lenders should carefully consider their compliance obligations in relation to the ruling and determine which notice is best for their organization given resource, maintenance and cost requirements. The January 1, 2011 deadline is looming and there is no indication that the effective date will be extended. I suspect the regulatory requirements will continue to evolve over the next few years with the creation of the Consumer Financial Protection Agency, which has the authority to set and enforce rules under 12 federal laws and the implications will continue to put a strain on lending institutions.