Risk-Based Pricing FAQs; Privacy Rule Update!
Written By, Reginald Watson, NAFCU Regulatory Compliance Counsel, NAFCU
Greetings Compliance Friends!
With NAFCU’s BSA and Risk Management Seminars kicking off this week in Denver, CO, there’s no better time to discuss risk-based pricing! Risk-based pricing is a great way for credit unions to maximize profitability across the wide variety of risks throughout their loan portfolios. It also helps ensure the availability of credit products for higher risk members whose loan application may have otherwise been rejected. Section 1022.72 of Regulation V includes a requirement for credit unions to send risk-based pricing notices to members when granting credit on material terms that are materially less favorable than the terms granted to other members (i.e., a higher annual percentage rate). NAFCU has seen a recent uptick in questions regarding risk-based pricing notices, so I compiled some of our more frequently asked questions to help with compliance. Ready? Set. Let’s go!
Is our credit union required to send a risk-based pricing notice in addition to an adverse action notice when denying a credit application?
There is actually an exception to the risk-based pricing notice rule for situations in which the credit union sends an adverse action notice to a member. See, 12 C.F.R. §1022.74(b). This makes sense as the adverse action notice is sent when the credit union denies credit, whereas the risk-based pricing notice is required when the credit union grants credit on terms that are materially less favorable than for other applicants. There is also an exception for prescreened offers of credit. Where credit is granted to a member on the terms of a prescreened offer, Regulation V does not require the credit union to provide a risk-based pricing notice simply because other members may have the same credit card with a lower rate. See, 12 C.F.R. §1022.74(c).
When it comes to co-signors, is the risk-based pricing notice required to be provided to both customers?
Section 1022.72 requires the provision of a risk-based pricing notice if the credit union uses information from a consumer report to provide credit to a member on terms that are materially less favorable than the most favorable material terms available to a substantial proportion of members. The preamble to the final rule provides guidance on whether this requirement will apply to a co-signor:
Under the final rules, a person is required to provide notice only to consumers to whom it “grants, extends, or otherwise provides credit.” Except as discussed below, this generally refers to any consumer who applies and is approved for credit. A person does not grant, extend, or otherwise provide credit to a consumer who merely acts as a guarantor, co-signer, surety, or endorser for another consumer who applies and is approved for credit. As noted above, a guarantor, co-signer, surety, or endorser simply supports and assumes liability for, credit granted, extended, or provided to a consumer, but does not itself receive a grant, extension, or other provision of credit.
75 Fed. Reg. 2723, 2731 (Jan. 10, 2010) (emphasis added).
Thus, it does not seem that someone acting merely as a co-signer would be required to receive the risk-based pricing notice.
Is our credit union prohibited from sending the risk-based pricing notice to business customers?
The rules only determine who must receive notice under the rule (consumers) and not who may receive notice. The requirement to provide a risk-based pricing notice applies to the use of a credit report in connection with "credit to a consumer for personal, family or household purposes." See, 12 C.F.R. § 1022.72(a)(1). The definitions section of Regulation V similarly refers to consumers as “individuals.” See, 12 C.F.R. § 1022.3. While there does not appear to be a provision in the regulation that requires credit unions to provide risk-based pricing notices to commercial members, NAFCU is also unaware of anything in the regulation that would prevent the credit union from sending this notice. Accordingly, the determination on whether to provide the notice to all approved applicants regardless of the type of credit (business vs. household) will be a risk-based business decision for the credit union.
NAFCU has heard from some credit unions who see a legitimate business purpose in notifying commercial members in the unfortunate event where the credit union must increase rates due to a reevaluation of the member’s credit risk down the road. While section 1022.72(d) would also require the credit union to issue a risk-based pricing notice to consumers at the time of the increase, providing business members with advance warning may be a way for the credit union to limit any reputational risk or “payment shock” associated with increased rates.
BCFP Updates Regulation P
On Friday, August 10, 2018, the Bureau of Consumer Financial Protection finalized amendments to implement legislation amending the Gramm-Leach Bliley Act (GLBA). The amendment provides credit unions that meet certain criteria a much-needed exemption from the requirement under GLBA to deliver an annual privacy notice. The NAFCU Compliance team plans to elaborate more on these changes in future blogs, so stay tuned!