In 2009, the Federal Reserve Board and Federal Trade Commission issued final rules that require credit card issuers and other lenders to tell consumers when they've been granted credit on worse terms than other consumers, based on their credit report or score. The new "risk-based pricing" regulations take effect Jan. 1.
The risk-based pricing rules expand existing provisions under the Fair Credit Reporting Act that require creditors to provide an adverse action notice to a consumer if denied credit following a credit check. With that notice, consumers can request free copies of their credit reports.
See a sample credit score notice
A model form for the credit score disclosure exception notice shows the components it will have.
"The idea behind this was to let consumers know when they were receiving a higher rate because of their credit history," says Rebecca Kuehn, assistant director of the division of privacy and identity protection at the Federal Trade Commission, referring to the new risk-based pricing rules. Consumers who receive a risk-based pricing notice can use it to obtain a free copy of their credit report and check it for errors.
In addition, consumers must receive either a risk-based pricing notice or an adverse action notice if the creditor performs an account review and increases the interest rate because of the person's credit report or score.
Why you could see your credit score for freeCreditors have two options for complying with the regulations. The final rules state that the creditor may provide a risk-based pricing notice to consumers who receive "material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers." For credit cards that have interest rates for different transaction types, the "material terms" will be the APR for purchases. As an alternative, the creditor can provide a free credit score disclosure to every borrower.
Other cases in which a risk-based pricing notice doesn't have to be provided: if the consumer receives an adverse action notice, if the consumer applies and is approved for specific terms, if credit is granted for business purposes, or when the creditor makes a prescreened offer of credit.
Not providing a credit score disclosure to all applicants, regardless of approval, means that the creditor has to figure out which consumers should receive a risk-based pricing notice. The risk-based pricing rule outlines three methods.
- Credit score proxy method. Consumers with credit scores below a cutoff receive the notice; those with scores above it don't.
- Tiered pricing method. Consumers who fall into lower pricing tiers get a notice; those in the top tiers don't.
- Direct comparison method. The creditor compares the terms that consumers receive for the same type of credit product on a case-by-case basis.
Many credit grantors appear interested in providing a free credit disclosure over a risk-based pricing notice for some consumers. "Based on the types of questions that we're fielding, I would say 90 percent of clients are preferring to comply with the credit score disclosure exception notice," says Felicia Peng, director of prospect marketing and acquisitions at Experian, one of the three major credit reporting agencies.
One reason: Sending credit score disclosures to everyone makes compliance simpler. "You don't have to figure out which consumers get a notice," says Kuehn.