Jenna B. Taub, Esq.
Dwyer, Smith, Gardner, Lazer, Pohren, Rogers & Forest, LLP
8712 W. Dodge Rd., Suite 400
Omaha, NE 68114
Re: Risk-Based Credit Card Accounts.
Dear Ms. Taub:
You have asked if a federal credit union (FCU) may establish different interest
rates for member credit card accounts based on differences in credit scores.
If that is permissible, you have also asked if an FCU must disclose that it
bases its rate determinations on those differences. An FCU may establish a
different rate structure for its members based upon their credit scores. While
current law does not require that an FCU disclose the basis for its rate determinations,
FCUs using risk-based pricing will have additional disclosure obligations that
become effective in December 2004.
A risk-based pricing model enables a credit union to make credit cards available
to more of its members, including those with less-than-perfect credit histories.
Inevitably, it will result in some members having more expensive credit than
others. Nothing in either the Federal Credit Union Act or in NCUA’s regulations
prohibits an FCU from offering a credit card program in which it determines
rates based on the credit profile of the member.
An FCU must base its pricing determinations on evaluation of legitimate credit
risk and not on any discriminatory basis prohibited by the Equal Credit Opportunity
Act. 15 U.S.C. §§1691 et seq. We also note that risk-based pricing
means that members will not know the rate for which they qualify until after
the FCU has approved an application and established a card account in the member’s
name. Potentially, this can have an adverse impact on the applicant’s
credit score, since an applicant may need to submit numerous applications for
credit to find a lender offering an affordable rate. Consumer reporting agencies
may consider a substantial number of credit applications to be a negative factor
in their calculation of a credit score. We recommend that the FCU take some
affirmative steps to assure that its members understand this.
The Truth in Lending Act (TILA), as implemented by Regulation Z, is the primary
federal law that governs credit cards. 15 U.S.C. §§1601 et seq; 12
C.F.R. Part 226. TILA requires that lenders provide consumers with disclosures
about the costs and terms of a credit card on or with a solicitation or application,
at account opening before the first transaction, and with each periodic billing
statement. 12 C.F.R. §226.5(b). The intent of these requirements is to
assure that consumers receive key cost information about credit and charge
cards early enough to have the opportunity to comparison shop. You represent
that the FCU is disclosing the available range of annual percentage rates (APR)
in its application form, which TILA and Regulation Z do require. 15 U.S.C. §1637(c);
12 C.F.R. §226.5a(b)(1). We do not interpret TILA or Regulation Z to require
an FCU, in the context of a risk-based pricing program, to notify applicants
that the APR offered to them will be determined based upon their credit score.
Recent amendments to the federal Fair Credit Reporting Act (FCRA) will impose additional disclosure requirements on creditors using risk-based pricing models involving a range of possible rates. Fair and Accurate Credit Transactions Act of 2003, Pub. L. No. 108-159, §311,117 Stat. 1952, 1988 (FACTA). Effective December 2004, FACTA will require a risk-based pricing notice if a lender approves an application for credit but offers terms to the applicant that are “materially less favorable than the most favorable terms available to a substantial proportion of consumers” obtaining credit from or through that lender. Id. The notice must explain that the lender is basing its terms on information in a credit report. The notice must identify the consumer reporting agency that provided the credit report, including contact information, and state the consumer can request a free copy of the report. Id.
FACTA requires a lender to give the risk-based pricing notice at the time
of application or at the time of communication of the approval. This notice
may be given orally, in writing or electronically. The FCU need not provide
a risk-based pricing notice if the member applied for the specific material
terms the FCU offered, or if FCRA otherwise requires the FCU to provide an
adverse action notice. The FCU also need not provide the notice to members
who have qualified for its best offered rate. Id. FACTA directs the Federal
Trade Commission (FTC) and the Federal Reserve Board (FRB) to prepare regulations
implementing these requirements, including clarification of the meaning of
certain terms and development of a model notice. We anticipate the FTC and
the FRB will issue final regulations before the law goes into effect in December
2004.
In the meantime, you may find additional useful guidance on risk-based lending
programs, including an expansive discussion of fair lending and anti-discrimination
considerations, in NCUA’s Letter to Credit Unions No. 174, dated August
1995, available on our website.
Sincerely,
Sheila A. Albin
Associate General Counsel
OGC/RPK:bhs
04-0325