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Dealers must get ready for Jan. 1 start of Risk-Based Pricing Rules

November 15, 2010

Sweeping rules that generally apply to dealers who obtain a consumer’s credit report and then enter into a credit transaction with that consumer take effect Jan. 1. The long-awaited Final Risk-Based Pricing Rule was constructed jointly by the Federal Reserve Board and the Federal Trade Commission.

Risk-Based Pricing refers to the practice of setting or adjusting the price and other terms of credit provided to a particular consumer based on the consumer’s creditworthiness.

The final FTC/FRB Rule provides creditors with several methods for determining which consumers must receive Risk-Based Pricing Notices (RBPN).

As an alternative to providing risk-based pricing notices, the final Rules permit creditors to provide consumers who apply for credit with a free credit score and information about their score. Today, most consumers must pay a fee to obtain their credit score.

The new rule generally applies to creditors that engage in risk-based pricing and use a credit report to set the terms on which credit is extended to consumers. The rule does not apply to extensions of business credit or to lease transactions.

Dealers and other creditors who use credit reports will have to deliver a RBPN to consumers whom the dealer will extend credit but on "material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person."

The new Risk-Based Pricing Rule is the latest duty mandated by the Fair and Accurate Credit Transactions Act of 2003. Also, the RBPN requirement is entirely separate from the new Model Privacy Notice that the FTC and the federal banking regulatory agencies issued recently under the FTC Privacy Rule.

The RBPN requirement is intended to improve the accuracy of credit reports by alerting consumers whose credit applications have been approved (but generally on less favorable terms) to the existence of negative information in their credit reports which they can check for accuracy and, if warranted, challenge.

This is meant to "complement" the Fair Credit Reporting Act’s adverse action notice requirement, which requires creditors who deny a consumer’s credit application based in whole or part on information in a credit report to provide information about credit reports to those consumers.

Because of the difficulty in determining which customers fit into this ill-defined category, the agencies adopted an Exception Notice that dealers and other creditors may issue in lieu of the RBPN.

The criteria for using the Exception Notice and other elements of the Risk-Based Pricing Rule and associated model forms are in the 202-page final rule, posted on the FTC Web site at