7/21/2011 Why Most Employers Shouldn't Care About New Adverse Action Requirements

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Effective July 21, 2011, Fair Credit Reporting Act (“FCRA”) adverse-action and risk-based pricing notices must disclose any numerical credit score that contributed to the: (1) adverse action; or (2) extension of credit on terms materially less favorable than those available to a substantial portion of customers.

If you are hearing this for the first time, you aren’t alone.  And here’s why most of you shouldn’t care.

These rules only apply if you are evaluating a credit score.  Remember that employment credit reports (most commonly used on employment background checks) do not include a credit score.

Why are we bothering you with this useless information if it doesn’t affect you?  Well, to let you know if you hear about it, that it most likely doesn’t affect you. If you are reviewing credit scores, you might want to read the information below provided by Seyfarth Shaw labor and employment attorney, Pam Devata.

The FCRA requires a person taking adverse action based in whole or in part on a consumer report to provide an adverse-action notice. Section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act) amended Section 615(a) of the FCRA to require users of credit scores to include those scores, and related information, in adverse-action notices provided to consumers. The requirement to disclose credit score information in FCRA adverse-action notices also applies to adverse-action decisions not related to credit.

Consequently, when a user takes any adverse action based in whole or in part on information contained in a consumer report, regardless of the weight of the credit score in the decision, the user must provide the consumer with the following:

*          The credit score;

*          The range of possible credit scores under the model used;

*          All of the key factors that adversely affected the credit score

(not to exceed four factors, unless one factor is the number of inquiries made with respect to the report, in which case the key factors may not exceed five);

*          The date on which the credit score was created; and

*          The name of the person or entity that provided the credit score.

New Risk-Based Pricing Notice Requirements:

Risk-based pricing refers to the practice of setting or adjusting the price and other terms of credit offered or extended to a particular consumer to reflect the risk of nonpayment by that consumer. The FCRA also requires a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report in connection with a credit application or review of an existing account and, based on the report, grants credit or amends existing credit on terms that are materially less favorable than the most favorable terms obtained by a substantial portion of consumers. The Federal Reserve Board (the

“Board”) and the Federal Trade Commission (“FTC”) recently amended their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting or adjusting the material terms of credit.

The Board’s and the FTC’s rules require the same additional information to be included in a risk-based pricing notice as is required for the adverse-action notices.  In addition, the risk-based pricing notices must include a prescribed statement explaining credit scores that includes a disclosure that the credit score was used in setting the credit terms. For example, a statement such as:

*          “Your credit score is a number that reflects the information in

your credit report.  We used your credit score to set the terms of credit we are offering you.  Your credit score can change, depending on how your credit history changes.”

The Board’s and the FTC’s rules also recommend that the risk-based pricing notices contain optional contact information for the entity that provided the credit score.

Common Questions:

The new rules raise a lot of questions, many of which are addressed in the commentary to the rules, such as: (1) whether credit score disclosures are required when only the credit score of a guarantor, co-signer, surety, or endorser is used (no disclosure is required); (2) whether there are safe-harbor model notices that can be used (yes there are); and (3) what to do when dealing with proprietary scores, three-party financing transactions, more than one applicant, no credit score, and multiple credit scores (the commentary addresses these questions as well).

Two of the more common questions, however, concern “what is a credit score” and “when is a credit score used.”  The commentary makes clear that a score that is not used to predict creditworthiness, such as an insurance score, is not a “credit score” and need not be disclosed.  The commentary also makes clear that “use” occurs at a very low threshold and if the credit score played any role in the decision (for example, if the credit score led the user of the credit score to investigate further and the results of that investigation played a role in the decision), then the credit score was used and must be disclosed.

Many of these same questions can also be answered by reviewing the “Forty Years of Experience with the Fair Credit Reporting Act” report that the FTC issued today and is available at http://www.ftc.gov/os/2011/07/110720fcrareport.pdf.  This report is the most up-to-date FTC guidance on interpreting the FCRA.

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