Disclosure Duties


Keeping the right adverse consumer loan-pricing disclosures in the mix

By Mary Wright

To be alive at all involves some risk,” Harold Macmillan, a previous British prime minister was once quoted as saying.

Community bankers are keenly aware of that fact, and the necessity for managing and monitoring regulatory risk from all directions in today’s post-Wall Street financial crisis banking environment. Nowhere is that more true than when working to maintain compliance with regulations that involve pricing and executing consumer loans.

Within 30 days of receiving an application for a consumer loan, lenders must evaluate the level of risk and the merits of the credit and make a decision to approve, deny or make a counteroffer to the request. Generally, approved loan applications, or those for which a counteroffer is made, follow pre-established lending standards that are followed consistently.

But added to that mix of consumer lending are thorny regulations for disclosing adverse consumer loan- pricing decisions. Final rules became effective in 2011 that generally require a lender to tell a consumer when, based on the consumer’s credit report, the lender is offering a loan with less favorable terms than it would have generally provided to otherwise similarly situated consumers. The final rules resulted from the Fair and Accurate Credit Transactions Act of 2003 (FACTA), which amended the Fair Credit Reporting Act (FCRA). In July 2011, the Federal Reserve System relinquished its authority for FCRA and FACTA regulation to the Consumer Financial Protection Bureau.

Risk-based pricing

If a lender relies on a credit report to grant a consumer less-favorable loan terms than it would for other similarly situated borrowers with better credit scores, then a risk-based pricing notice should generally be provided to the consumer. Such a notice should include information about how the consumer can get a free annual credit report, his or her credit score, the range of the score and the factors negatively affecting the score. As an alternative to providing such loan-pricing notices to borrowers, lenders may provide the results of the borrower’s credit score inquiry and information about the score.

Model disclosure forms in seven formats are provided in Appendix H to Regulation V – Fair Credit Reporting Act. The model forms are available for viewing or downloading from the CFPB’s website www.cfpb.gov. The formats meet different purposes, including general risk-based pricing notice requirements that apply if:

  • a credit score is not used in setting the material terms of credit;
  • risk-based pricing notices are provided after an account review;
  • credit is secured by one to four units of residential real property;
  • loans are not secured by residential real property; and
  • a credit score is not available.

From a practical standpoint, lenders must have a method in place to recognize when the conditions require a risk-based pricing disclosure. This means having a knowledge base, reporting system or other tracking mechanism that is based on the lending standards generally employed by the creditor. It also means having the capability to identify outliers from those standards and to discern, compare and report on when variances in lending standards are applied to individual borrowers.

This compliance challenge is exacerbated when a creditor relies on third parties, such as automobile dealers, to provide disclosures. If a creditor relies on the dealer to deliver the notice, for example, the creditor must maintain policies and procedures to verify that the dealer or other party provides the notice within the required time frame.

Timing of disclosures

  • Risk-based loan-pricing disclosures have specific timing requirements that vary with the type of credit product and notice involved. Here are primary examples:
  • Closed-end credit. A notice should be given before the loan transaction is completed, but not before the credit approval is communicated to the consumer. See §1022.73(c)(1)(i).
  • Open-end credit. A notice should be provided before the first transaction from an open-end credit account, but not before credit approval is communicated to the consumer. See §1022.73(c)(1)(ii).
  • Account review. If advance notice of an annual percentage rate (APR) increase is required, a notice should be given when the decision to increase a loan’s APR is communicated to the consumer. If advance notice of the increase in the APR is not required, notice should be given no later than five days after the effective date of the change in the APR. See §1022.73(c)(1)(iii).
  • Automobile lending. A notice should be provided before the loan transaction is completed, but not before a credit approval is communicated to the consumer. See §1022.73(c)(2).

Contemporaneously granted open-end credit plans. If credit is granted contemporaneously with a purchase of goods or services, a risk-based pricing notice may be provided at the time of the first mailing by the creditor to the consumer after credit is granted or within 30 days after the decision to approve credit, whichever is earlier. For example, a consumer may apply and be approved for a credit card when making a purchase at a department store. If a notice is required to be given to the consumer, the creditor may provide the notice in a mailing containing the account agreement or the credit card or within 30 days after the decision to approve credit, whichever is earlier. See §1022.73(c)(3).

To stay in compliance with FCRA and FACTA risk-based loan-pricing notice requirements, community banks should implement a method to identify when risk-based pricing disclosures are required, to use a disclosure format appropriate to the transaction, and to meet timing requirements for the credit offered. Such procedures and processes should now be an inherent part of consumer lending.

Mary Wright, a former Federal Reserve managing examiner and compliance consultant, is a financial writer in Virginia.