Changes announced to risk-based pricing rule

The Federal Trade Commission and the Federal Reserve Board have announced final changes to the Risk-Based Pricing Rule that requires creditors to disclose credit score information to consumers when a credit score is used in setting or adjusting credit terms.

Changes in the rule includes language that clarifies the circumstances under which a creditor using a proprietary credit score – a credit score developed for that creditor’s own use – must disclose that score to the consumer.

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, such as a home mortgage.

Since January 1, 2011, the rule has required creditors to provide consumers with a “risk-based pricing” notice when, based on the consumer’s credit report, the creditor provides credit to the consumer on less-favorable terms than it provides to other consumers.

Consumers who receive the risk-based pricing notice can obtain a free credit report to check their report’s accuracy. As an alternative to providing a risk-based pricing notice, the rule allows creditors to provide all credit applicants with a free credit score and information about their score.

The amendments to the rule reflect the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires creditors to disclose a credit score in risk-based pricing notices (if one was used in making the credit decision) along with certain other additional information.

The Dodd-Frank requirements go into effect on July 21, 2011.