Effective July, 21, 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) creates new disclosure requirements for dealers. Two key obligations emerge from Dodd-Frank which will affect dealers.
First, credit score disclosures are now required for adverse action notices (AAN). There are no new requirements regarding when an AAN must be provided; Dodd-Frank merely requires supplemental information to be included within the AAN itself. The new law forges 5 essential components previously unnecessary: (1) the credit score itself; (2) the range of possible credit scores under the model used; (3) the key factors, up to four, that affected the consumer’s score (up to five factors if the number of inquiries made with respect to that consumer report is a key factor); (4) the date on which the credit score was created; and (5) the name of the person or entity that provided the credit score.
Second, Dodd-Frank produces an entirely new notice requirement under the Risk-Based Pricing Rule. The new risk-based pricing notice (RBPN), is required when an entity both: (1) uses a consumer report in connection with an application for, or a grant, extension or other provision of, credit to a consumer and (2) based in whole of 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 terms available to a substantial portion of consumers from or through that entity. A determination of whether a consumer received materially less favorable terms may be done on a case-by-case basis. Because such a case-by-case comparison may not be operationally feasible, the final rules establish two alternative methods for determining which consumers must receive a RBPN. In lieu of the RBPN, the rule creates an exemption for creditors that provide consumers who apply for credit with a notice consisting of their credit score and certain additional information – the credit score disclosure exception notice (CSDEN). Due to the implementation challenges the RBPN requirement poses, most dealers are going to opt to comply with the rule by utilizing a CSDEN. Unlike the RBPN, the CSDEN must be issued to all consumers who request credit, thus avoiding the need to identify a subset of customers to whom the notice must be provided.
Reading the new rules in tandem, dealers are often curious as to whether an AAN has to include a consumer’s credit score information when that information was already provided via a CSDEN. As redundant as this may seem, the answer is YES. The provision allowing for a CSDEN in lieu of a RBPN does not satisfy the new rule requirements for additional information under an AAN.
The Risk-Based Pricing Rule clearly states if a consumer has been or will be provided an AAN a RBPN is not necessary; the rule is unclear as to whether an AAN will satisfy the exemption requirements for dealers who are using a CSDEN instead of a RBPN. In order to prevent compliance nightmares down the road, always include the new credit score disclosures when an AAN is required and always provide all credit applicants with a CSDEN.
Steven Kahana is an associate with the firm and concentrates his practice in commercial litigation and corporate law matters.