The FACT Act’s Risk-Based Pricing Rules (Part 1 – The Big Picture)

Effective January 1, 2011 section 311 of the FACT Act requires a risk-based pricing notice. The notice is required when a person both:
(1) Uses a consumer report in connection with an application for, or a grant, extension, or other provision of, credit to that consumer that is primarily for personal, family, or household purposes; and
(2) Based in whole or in part on the consumer report, grants, extends, or otherwise provides credit to that 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.
Many lenders have concluded that the new risk-based pricing rules do not impact their banks since they use a credit report for underwriting a loan, but not for setting the terms of the loan. But, what is the appropriate response when the examiner asks for proof that the credit report is not used for pricing purposes. Unless a lender can demonstrate that the credit report has nothing to do with setting the material terms on the loan, the lender should comply with the new notice requirements.
The new rules apply to consumer credit, that is credit primarily for personal, household, or family purposes. Business purpose credit is excluded.
This series of articles explores:
• Key terms;
• Determining who must receive a notice;
• Direct comparison method;
• Credit score proxy method;
• Tiered pricing method;
• Special rules for credit card issuers;
• Account review notice;
• Content and form of risk-based pricing notices;
• Timing of the risk-based pricing notice;
• Exceptions to use of the risk-based pricing notice;
• Credit Score Notice for Real Estate Transactions;
• Credit Score Notice for non-Real Estate Transactions;
• Credit Score Notice When No Credit Score is Available; and
• Rules of Construction
Come back often as this series of articles unfolds.