There is confusion over the issue of whether a dealer should provide a risk based pricing notice, followed by an adverse action notice if credit is declined. You have probably read that: (1) the notice that most dealers have chosen to provide under the Risk Based Pricing Rule to consumers who apply for credit must be given to all who apply for credit, and an adverse action notice must be sent to customers when credit is declined. That is true. You have also probably read that: (2) a creditor must either give a risk based pricing notice if credit is granted on less advantageous terms or an adverse action notice if credit is declined, but not both. That is also true. Wait, how can both of those statements be true?
The answer lies in the difference between the risk based pricing exception notice that most dealers give to customers and the risk based pricing notice itself. To best understand that difference, let’s go back to the inception of the Risk Based Pricing Rule.
The requirement to promulgate the Risk Based Pricing Rule was originally included in the Fair and Accurate Credit Transactions Act of 2003. Basically it required notice to a consumer if credit was offered on terms that are “materially less favorable than the most favorable terms available to a substantial proportion of consumers.” If you are confused by that language, you are not alone. It took years for the FTC to sort out what it should do in the final regulation. Finally, when it issued the Risk Based Pricing Rule, it recognized the arguments from the auto dealer industry that the process contemplated by Congress was just not feasible for dealers. Consequently, the FTC agreed to provide an exception. It allows dealers and others who offer credit the chance to avoid giving an actual risk based pricing notice to those who obtain credit on less advantageous terms. Instead they can provide to all customers who apply for credit a notice that includes the customer’s credit score and related information in a risked based pricing exception notice.
Most dealers now use the risk based pricing exception notice. Consequently, dealers must provide this notice to every customer who applies for credit.
Let’s now discuss the adverse action notice requirements. Under the Equal Opportunity Act and the Fair Credit Reporting Act, a consumer whose application for credit is not approved must be given notice of the reason why. The finance source to whom the credit application was sent provides (or should provide) an adverse action notice when turning down a consumer’s credit application. For a number of years, dealers (who are the initial creditors under retail installment sale contracts in most states) have been advised to comply separately and issue adverse action notices in addition to those provided by proposed assignees of credit.
All of this became the subject of substantial discussion in July because of a government change to the risk based pricing notice and the adverse action notice forms effective July 21. The risk based pricing exception note always required disclosure to the applicant of his or her credit score and related information. As of July 21, the risk based pricing notice and the adverse action notice were both changed to require similar credit score disclosures as the risk based pricing exception notice. Against that background, let’s examine the two statements in the first paragraph of this article to show why they are both true.
If the dealer decides to deliver the risk based pricing exception notice instead of the risk based pricing notice, that must be delivered to all customers who apply for credit. To those customers whose application for credit is denied, an adverse action notice should be delivered. Because of that, both a risk based pricing exception notice and an adverse action notice should be delivered to customers whose credit is denied.
The risk based pricing notice which advises a customer why less advantageous credit is granted must only be delivered to those who receive approval for less advantageous credit. An adverse action notice goes to customers whose applications for credit are denied. Since one lender cannot both grant credit and deny credit, a customer should not get both the risk based pricing notice and the adverse action notice from the same creditor. What does all this mean?
- If you are one of the majority of dealers who has chosen to comply with the Risk Based Pricing Rule through delivery of risk based pricing exception notice, then that notice must be provided to all customers who apply for credit.
- If a customer is denied credit, then provide an adverse action notice to that customer.
- A risk based pricing exception notice will not suffice as an adverse action notice. An adverse action notice will not suffice as a risk based pricing exception notice. To those posing the frequently asked question of whether a dealer must provide both a risk based pricing exception notice to a customer who applies for credit and then an adverse action notice if credit is denied, the answer is yes. Both notices must be provided in those circumstances.
- Statement number 2 in the first paragraph that both a risk based pricing notice and an adverse action notice need not be delivered to a customer probably does not apply to you. That only applies to creditors who deliver an actual risk based pricing notice that explains why credit has been granted on a less advantageous basis.