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The FACT Act risk-based pricing rules are going to require some planning on the part of your credit union because there are some choices you need to make before January 1, 2011. In short, if you are using risk-based pricing, the rules require you to provide a notice under certain circumstances when you use a consumer report in connection with an application or extension of credit. Which notice you will provide and to whom are the ultimate questions.
The rule has some definitions you will want to know, including “material terms” and “materially less favorable,” as well as a lot of other necessary information. However, in order to keep this post short enough so that you will read it, I am going to focus on the major choices you need to make surrounding the notice.
The first major choice you need to make is which type of notice to provide. There are basically two choices: (1) Provide a “Risk-based pricing notice” to consumers that you grant, extend, or otherwise provide credit to on materially less favorable terms; or (2) Provide an “Exception notice” to all consumers requesting an extension of credit for risk-based pricing products. There are very specific rules for either choice as to who gets the notice and when it is provided.
If you choose to provide a “risk-based pricing notice,” you then have another major choice (or choices, depending on whether you use different methods for different risk-based products)–you must choose which method (or methods) you will use to determine who you provide the notice to. In other words, there are several methods to determine whether a consumer has received “materially less favorable terms,” and thus should receive a notice. The methods are: (1) Consumer-to-Consumer Comparison; (2) Credit Score Proxy; or (3) Tiered Pricing. Moreover, there is an additional choice that may only be used for credit cards. Keep in mind that you must do some analysis before making your choice—not all of the methods are suitable for all credit unions and their operations.
Finally, you need to decide whether you will provide the same type of notice and/or use the same method for each of your risk-based pricing products (e.g. student loans, credit cards, automobile loans, fixed-rate mortgage loans, or variable-rate mortgage loans).
If nothing else, I strongly recommend that you do not wait until the last minute to make your decisions about your notice, as that would be a bad choice.
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