20.3 Risk-Based Pricing and Furnisher Accuracy Duties

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1. Risk-Based Pricing Architecture (12 CFR § 1022.70 - § 1022.75)

Lenders routinely adjust credit pricing—specifically interest rates and fees—based on credit risk profiles. Before FACTA, consumers receiving less favorable credit terms received no notification unless their application was outright denied or subjected to adverse action under ECOA. The Risk-Based Pricing (RBP) Rule fills this information gap.

General Rule and Triggering Events (§ 1022.72)

A creditor must provide a Risk-Based Pricing Notice to a consumer whenever the creditor:

1. Uses a consumer report in connection with an application for, or an extension of, credit primarily for personal, family, or household purposes; and
2. Based in whole or in part on the consumer report, grants credit on terms materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor.

Material Terms Defined

• Closed-End Credit: The Annual Percentage Rate (APR) evaluated at origination.
• Open-End Credit: The Annual Percentage Rate (APR), specifically the purchase APR for credit card accounts or the base APR for home equity lines of credit (HELOCs). If there is no purchase APR, it is the highest APR applicable to core transactions.

Methods for Identifying Consumers Entitled to RBP Notices (§ 1022.72)

Creditors may choose from three approved methodologies to identify which approved consumers must receive the standard RBP Notice:

Tiered pricing method

Where four or fewer tiers exist, the rule generally excludes the top tier; where five or more exist, it generally excludes the top two tiers and remaining tiers receive notices. Special treatment applies when tiers with the most favorable terms comprise only a small proportion of consumers under the rule. Do not assume every lender has the same cutoff. A direct comparison method and credit-score proxy method are alternatives. The proxy generally provides notices to the bottom 60% of scores, unless the permitted distribution-based alternative applies.

Timing and Content of Standard RBP Notice (§ 1022.73)

• Timing: For closed-end credit, the notice must be delivered before consummation of the transaction, but not earlier than the credit approval decision. For open-end credit, the notice must be provided before the first transaction is made, but not earlier than approval.
• Mandatory Content: Clear statement that a consumer report was used; statement that terms offered may be less favorable than terms offered to others; explanation that credit score affects terms; contact information for nationwide CRAs; notification of the right to obtain a free consumer report within 60 calendar days; and instructions on how to dispute inaccurate data.

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2. Credit Score Disclosure Exception Notices (12 CFR § 1022.74)

Administering proxy cutoff formulas or tier-based RBP notices creates operational friction and compliance examination risk. Recognizing this, the CFPB and federal banking agencies established statutory Credit Score Exception Notices. A properly delivered credit-score exception notice satisfying Section 1022.74 eliminates the standard risk-based-pricing notice for that covered transaction. The exception does not exempt every transaction at the institution or eliminate separate adverse-action requirements.

The Three Exception Categories

1. Mortgage Credit Score Exception (Model Form H-3):
   • Applies to loans secured by 1-to-4 family residential real property where a credit score is used in underwriting.
   • Operational Standard: The notice must be delivered to all consumers who apply for a residential mortgage loan, regardless of whether they receive best or worse pricing.
   • Incorporates the mandatory disclosure required under FCRA § 609(g) ('Notice to Home Loan Applicants'), detailing the credit score, score range, date calculated, key factors, CRA name, and educational explanations.
2. Non-Mortgage Consumer Credit Score Exception (Model Form H-4):
   • Applies to all non-real-estate consumer loans (e.g., auto loans, unsecured credit lines, credit cards).
   • Must be delivered to all consumers who are approved for credit, disclosing their credit score, score distribution bar graph, key factors, and credit education.
3. Credit Score Not Available Exception (Model Form H-5):
   • Utilized when a creditor attempts to obtain a credit score but the CRA cannot generate one due to insufficient credit history.

Credit-score exception: A creditor may adopt the permitted exception-notice approach, provided the correct notice, recipients, content and timing are satisfied. Giving a document named H-3 or H-4 alone does not establish total compliance with FCRA, adverse action or furnishing duties.

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3. Duties of Furnishers of Information Under FCRA § 623 (12 CFR Part 1022 Subpart E)

A furnisher is an entity that reports consumer account information (e.g., balance, loan type, payment history, charge-offs) to a CRA. Financial institutions are the primary furnishers of consumer credit data in the United States.

General Duty to Provide Accurate and Complete Information (§ 623(a))

Under 15 U.S.C. § 1681s-2(a) and 12 CFR § 1022.42, furnishers must establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information:

• Prohibition on Reporting Inaccurate Data: A furnisher shall not report information to a CRA if the furnisher knows or has reasonable cause to believe that the information is inaccurate (§ 623(a)(1)(A)).
• Duty to Correct and Update: If a furnisher determines that information furnished was incomplete or inaccurate, it must promptly notify the CRA, provide complete and accurate corrections, and cease reporting inaccurate data (§ 623(a)(2)).
• Duty to Report Account Closures: If a consumer voluntarily closes an account, the furnisher must report that the account was 'closed by consumer' in the regular reporting cycle (§ 623(a)(4)).
• Date of First Delinquency (DOFD) Reporting: When reporting an account that was charged off or placed for collection, the furnisher must report the Date of First Delinquency (month and year) that immediately preceded the collection or charge-off (§ 623(a)(5)). The DOFD is relevant to the statutory reporting period; for collections and charge-offs the seven-year period runs after the 180-day period beginning with the applicable delinquency.