Risk-Based Pricing Rules You Should Be Familiar With
Risk-based pricing has been introduced as a section under the Fair and Accurate Credit Transaction Act (FACTA), which in turn amended the Fair Credit Reporting Act (FCRA). The main aim of introducing risk-based pricing model is to follow the practice of providing credit by a creditor to a consumer on the basis of risks reflected by the latter’s credit report. Hence, the potential creditor offers more favorable credit terms to consumers with a good credit report and less favorable terms to those with a poor credit report.
However, there are some rules that must be followed by the creditor while employing risk-based pricing, some of which are discussed below.
Issuing the Pricing Notices
The creditor using risk-based pricing methodology is required to issue a pricing notice to the consumers, informing them about the reason for offering particular credit terms to them. This rule is mandatory for those consumers, who are deprived of more favorable credit terms due to their poor credit history. The creditor may be a loan or mortgage provider or a credit card issuer or any other lending individual or company.
Rule for Notice Content
According to FCRA, the creditor must include a statement in the pricing notice to the consumer, clearly mentioning if the consumer is being provided with less favorable credit terms than the norm. This is to encourage the consumers to check their credit reports and make efforts to improve their credit score.
Rule for Free Credit Report
The pricing notice issued by the creditor to the consumer must also mention that the consumer can apply for a free credit report after receiving the notice, with one of the credit reporting agencies mentioned in the notice. This free credit report is granted as a right to the consumer, in addition to the usual annual free credit report.
Rule for Notice Timing
According to the rules for risk-based pricing, the pricing notice must be issued by the creditor after reviewing the credit history of the consumer, and setting up the credit reports, but before the consumer agrees to the terms.
Rule for Exceptions to Notice Issuers
According to this rule, the creditor is not required to issue a notice in cases where it will provide no benefit to the consumer. Also, the creditors offering residential real property secured loans are not required to issue a notice. The creditors providing credit score disclosures to the consumer are also not required to issue a notice. Finally, the notice is not required in case of prescreened solicitations, non-mortgage credit and non-availability of consumer’s credit score.