–By Wendy Greenawalt
Recently the Federal Reserve Board and Federal Trade Commission issued a new rule requiring any lender who utilizes a credit report or score when making a credit decision to provide consumers with a risk-based pricing notice. The new regulation goes into effect on January 1, 2011, but lenders must begin the planning process now–as compliance will require potential changes to their current lending practices.
The regulation is another evolution in an attempt to provide consumers with more visibility to their credit history and the impact a blemished record may have on their finances. The ruling is good for consumers, but will require lenders to modify existing lending processes and add another consumer disclosure, as well as additional costs to the lending process.
The risk-based pricing rule provides lenders with two compliance options–the risk-based pricing notice or a credit score disclosure exception. In this blog, I will discuss the primary compliance option, the risk-based pricing notice.
The risk-based pricing notice is a document that notifies consumers that the terms of their new credit account are materially less favorable than the most favorable terms. The notice will not be provided to all consumers, but rather just those that receive account terms that are worse than what is offered to the most credit worthy consumers. Determining who will receive the notice has been outlined in the rule, and lenders can use several options including the direct comparison, credit score proxy or tiered pricing method. For lenders that perform regular validation of their portfolio, determining which consumers to issue a notice to should not be difficult. However, for those lenders who do not perform regular scorecard performance monitoring, this is another reminder of the importance of on-going validations and monitoring.
As the economy continues to recover and lenders begin to re-enter the market, it will be more important than ever to validate that scores are performing as expected to manage risk and revenue goals. In my next blog, I will discuss the credit score disclosure exception.