If your company extends credit based on risk-based pricing policies, you may be subject to a new administrative burden beginning January 1, 2011. On January 15, 2010, the Board of Governors of the Federal Reserve System and the Federal Trade Commission issued the Fair Credit Reporting Risk-Based Pricing Regulations – Final Rule. Risk-based pricing is the practice of setting or adjusting the price and terms of credit offered to a particular consumer to reflect the risk of non-payment by that particular consumer. The Final Rule, which implements Section 311 of the FACT Act, will become effective on January 1, 2011, giving companies a year to get the appropriate processes in place.
As one of the nation’s most widely recognized laws regulating the collection, dissemination, and usage of personal information, the Fair Credit Reporting Act, as amended by the FACT Act, broadly regulates companies that use consumer reports for vital decision making purposes. The Final Rule extends the fair information principles of notice and openness to those companies that:
(i) use a consumer report in connection with the application for, or a grant, extension, or other provision of credit that is primarily for personal, family, or household purposes;
(ii) grant, extend, or otherwise provide credit to consumers on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of other consumers from or through that person based in whole or in part on the consumer report.
The scope of the term “credit” extends the Final Rule’s potential reach beyond banks and card issuers to other types of service providers who allow customers to defer paying for goods or services until after they are delivered, such as utilities and mobile service providers.
Under the Final Rule, a consumer who receives material terms from a company that are materially less favorable than the most favorable terms available to a substantial portion of the company’s other customers must receive a clear and conspicuous notice. This notice must notify the consumer that the terms he or she received may be less favorable than those offered to other customers with better credit histories. The Final Rule provides form notices that may be used.
One of the more difficult aspects of the Final Rule to apply will be determining which consumers must receive a risk-based pricing notice by differentiating which terms are “materially less favorable.” For instance, something as simple as requiring a deposit for some customers but not for others, based on credit-worthiness, may implicate the requirement for notice. Companies will need to carefully consider their current internal processes to apply the most appropriate of the three methods permitted under the Final Rule: (i) the direct comparison method, (ii) the credit score proxy method, or (iii) the tiered pricing method.
There are also several possible exceptions that may exempt a company from the reach of the Final Rule. However, companies should begin reviewing the Final Rule to determine its applicability to their credit granting operations. Those companies who are not exempted from the Final Rule should begin to develop concise risk-based pricing notices and clear standards for determining which consumers should receive such notices. By adopting compliant policies and procedures early on, companies can reduce the risks of non-compliance – including, any subsequent second-guessing by the plaintiff’s bar.©Troutman Sanders LLP