Dodd-Frank Changes to Adverse Action and Risk-Based Pricing Notices SLSA Private Loan Committee Meeting June 21, 2011 Presented by Arthur J. Rotatori

Overview Dodd-Frank Act amendment to the FCRA adverse action and risk-based pricing notice requirements. New, additional disclosures required when using a credit score in taking adverse action or making risk-based pricing determination. Scheduled to become effective July 21, 2011.

Significant Issues When the new Dodd-Frank credit score disclosure is required. Content of the credit score disclosures. Questions about use of multiple scores, multiple consumers, etc.

Current FCRA Adverse Action Notice Requirements If any person takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report, the person must provide an adverse action notice to the consumer. FCRA § 615(a); 15 USC § 1681m(a).

What is Adverse Action? Under the FCRA, adverse action in a credit transaction has the same meaning as under the Equal Credit Opportunity Act (ECOA). The term means – Refusal to grant credit in substantially the amount or on substantially the terms requested in an application – unless the creditor makes a counteroffer and the applicant uses the credit or expressly accepts the offer; Termination of an account; Unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor's accounts; or Refusal to increase the amount of credit if the applicant applies for an increase.

Risk-Based Pricing Notice FACTA amendments required FRB and FTC to issue Risk-Based Pricing (RBP) Rule RBP Rule (12 CFR Part 222, Subpart H; and 16 CFR Part 640) requires notice to consumer if a creditor both – Uses a consumer report in connection with an application for, or a grant, extension, or other provision of, consumer credit; and Based in whole or in part on the consumer report, grants, extends, or otherwise provides credit to that consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through the creditor.

Risk-Based Pricing Notice Exceptions Consumer makes application for specific terms; Adverse action notice; Prescreened solicitation; Mortgage score exception notice; Credit score exception notice; or Credit score not available.

Content of RBP Notice - General The risk-based pricing notice must state that – a consumer report (or credit report) includes information about the consumer's credit history and type of information included in the history; the terms offered (e.g., APR) have been set based on information from a consumer report; the terms offered may be less favorable than the terms offered to consumers with better credit histories; the consumer is encouraged to verify the accuracy of the information contained in the consumer report and has the right to dispute any inaccurate information in the report.

Content of RBP Notice – General (continued) RBP Notice must – Identify each consumer reporting agency that furnished a consumer report used in the credit decision; State that federal law gives the consumer the right to obtain a copy of a free consumer report from the consumer reporting agency or agencies identified in the notice for 60 days after receipt of the notice; Inform the consumer how to obtain a consumer report from the consumer reporting agency or agencies identified in the notice and providing contact information (including a toll-free telephone number, where applicable) specified by the consumer reporting agency or agencies; and Direct consumers to the FRB’s and the FTC’s websites to obtain more information about consumer reports.

Dodd-Frank Credit Score Disclosure Dodd-Frank section 1100F (“Use of Consumer Reports”) amends FCRA Sections 615(a) and 615(h). Notices required under FCRA Section 615(a) and under FACTA RBP Rule must include a numerical credit score used in – taking any adverse action (based whole or in part of any information in a consumer report) or making a RBP decision.

FCRA Definition of Credit Score Credit score means “a numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default.” • Because it includes “risk predictors" or "risk scores,“ this definition would include bankruptcy scores and other scores that predict risk of certain credit behaviors in addition to traditional FICO scores.

Exceptions of FCRA Definition of Credit Score “Credit score” excludes – any mortgage score or rating of an automated underwriting system that considers one or more factors in addition to credit information, including the loan to value ratio, the amount of down payment, or the financial assets of a consumer; or • any other elements of the underwriting process or underwriting decision.

Conditions of Requirement to Give Dodd-Frank Credit Score Disclosure If you “use” a “credit score” in taking “adverse action” or in making a RBP decision you must give the Dodd-Frank credit score disclosure. If no credit score is used, no requirement to provide credit score disclosure. If a credit score is used but it is not the principal reason for the adverse action or RBP, you must still give credit score disclosure.

Conditions for Requirement to Give Dodd-Frank Credit Score Disclosure (continued) If you obtain or use more than one credit score, you need disclose only one credit score. If you use a credit score as a factor in a proprietary scoring system and you take adverse action or make a RBP decision based on a proprietary score, you must give the credit score disclosure. If you use a credit score, but there is no adverse action (e.g. consumer accepts counter-offer or one of the exceptions to the adverse action definition applies), no need to provide credit score disclosure.

Content of Dodd-Frank Credit Score Disclosure Notice The notice must also include the – range of possible credit scores under the model used; key factors that adversely affected the consumers credit score (not to exceed 4 factors, unless one factor was the number of inquiries); date on which the score was created, and name of the entity that provided the credit score or credit file on which the score was created.

NPRM Affecting Dodd-Frank Credit Score Disclosures – Reg. B NPRM published at 76 Fed. Reg. 13896 (3/15/11) Supplementary information gives only limited guidance Creditor cannot defer delivery of credit score disclosure until/if consumer requests statement of specific reasons for adverse action under ECOA Reg. B. Disclosing the key factors that adversely affected the consumer’s credit score under Dodd-Frank does not satisfy the ECOA requirement to disclose specific reasons for adverse action in a credit application or transaction. Also, disclosing key factors in Dodd-Frank credit score disclosure will not satisfy ECOA requirement to give principal reasons for decline if they are not also key factors.

Regulation B NPRM – Proposed New Model Language • We also obtained your credit score from this consumer reporting agency and used it in making our credit decision. Your credit score is a number that reflects the information in your credit report. Your credit score can change, depending on how the information in your credit report changes. Your credit score: ___________________ Date: ___________________ Scores range from a low of _____________ to a high of ______________ Key factors that adversely affected your credit score: _________________________________ [Number of recent inquiries on credit report]

Regulation B – NPRM Some Unresolved Issues A creditor must include the credit score if the creditor “used” the score in making its decision to deny the application. What does “using” a credit score mean? Is obtaining and viewing the score “using” it? What about cosigners? Original RBP rule said that a creditor is not required to provide a RBP notice to a cosigner. Supplementary information to 2003 Regulation B revision stated that an applicant whose application was denied because of the cosigners credit report should be given the reasons why the cosigner was not qualified based on an implied consent to such information sharing.

Regulation B – NPRM Some Unresolved Issues (Continued) The NPRM and Model Forms do not address whether the cosigner’s score should be disclosed to the applicant. The NPRM and Model Forms does not provide guidance when only the cosigner’s credit score is used to evaluate the application. The NPRM does not address whether it would ever be appropriate to share the applicant’s score with the cosigner.

Regulation B – NPRM Some Unresolved Issues (Continued) Are the NPRM and Model Forms clear about the relationship between the key factors for the credit score and the denial reasons? The proposed regulations do not address the use of multiple scores while the Model Form says “we also obtained your credit score from this consumer reporting agency” This implies only one score was obtained. The Model Form and the prepared regulations do not address a no-score scenario.

Regulation B – NPRM Some Unresolved Issues (Continued) The NPRM does not clearly state that the creditor can rely on the key factors provided by the credit reporting agency The NPRM and Model Forms appear to require stating the same information twice in many instances; the usefulness to the consumer’s questionable Model Form C-3 is confusing. The time estimates for implementation are too optimistic; deadline is too short.

Risk-Based Pricing Revision NPRM Simultaneously with the Regulation B NPRM, the FRB and the FTC proposed amended RBP Rules to require disclosure of credit scores and related information in risk-based pricing notices to reflect the new Dodd-Frank credit score disclosure requirements. The amendments will amend the content requirements of RBP notices. But the amendments will not affect real property score disclosure exception or credit score disclosure exception notices.

Risk-Based Pricing NPRM (Continued) The RBP proposed rule would add two new model forms for use when making credit score disclosures in a RBP notice. New Model forms H-6 and B-6 for use with the general risk-based pricing requirements. New Model forms H-7 and B-7 for use with account review risk-based pricing notice.

Risk-Based Pricing NPRM (Continued) Unlike the Regulation B NPRM, the RBP NPRM clarifies several issues. If there are multiple credit scores; the creditor should pick the one that was used. If no score is used or available, no score is disclosed. If the creditor uses the cosigner’s credit score to set the terms of credit, the cosigner’s credit score is not disclosed to the consumer. If there are multiple consumers (joint credit), each receives a separate notice containing only the credit score of the recipient even if they have the same address. Can creditors import these rules into revised Regulation B?

McGlinchey Stafford, PLLC QUESTIONS? Arthur J. Rotatori McGlinchey Stafford, PLLC 25550 Chagrin Blvd., Suite 406 Cleveland, OH 44122-4640 Direct: (216) 378-9932) Fax: (216) 378-9910 592267