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Risk-Baced Pricing

The alternative credit score disclosure may become quite popular as an alternative to the risk-based pricing notice. The alternative notice would be given to all applicants, not just consumers who fall outside of the best pricing grid.

—David Close, general counsel, Zoot Enterprises

Risk-Based Pricing Regulations Effective January 1, 2011
Financial institutions have had no shortage of regulatory changes to manage in recent months. While the CARD Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act have occupied the majority of the headlines, there are other regulatory changes the financial sector is trying to navigate. The most recent compliance questions are related to risk-based pricing regulations under section 615(h) of the federal Fair Credit Reporting Act (FCRA).

The new FCRA regulations, effective January 1, 2011, will impact actions creditors need to take when using consumer reports to either extend offers of credit or conduct account reviews of existing portfolios. The new rules state that a “risk-based pricing notice” must be provided by the creditor when a consumer report is used in connection with providing credit “on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers.” In addition, if a creditor conducts periodic account reviews of its consumer credit portfolios, and increases a consumer’s annual percentage rate because of a deteriorated credit report, the creditor must provide a risk-based pricing/account review notice to the consumer. The new regulations also set forth a number of exceptions to the risk-based pricing notice requirement, including an exception where the creditor instead elects to provide credit score notices and disclosures to consumers in connection with credit applications.

How Zoot Can Help
Zoot can compile all of the appropriate data, such as credit score and the corresponding distribution information, and populate the required disclosure forms as necessary to send to your mailing company. We can also assist you in determining your portfolio score cut-offs for sending risk-based pricing notices. We stand ready to consult with you and assist you to ensure timely compliance with these new rules.

Learn more:
Bankrate.com, Overlap of Rules to Spread Scores
Collections and Credit Risk, Risk-Based Pricing Regulations: What Creditors Need to Know
Zoot Brief, Risk-Based Pricing Regulations: What Creditors Need to Know