Fair Credit Reporting Risk-Based Pricing Regulations, 2724-2784 [E9-30678]

Agencies

• FEDERAL TRADE COMMISSION
• FEDERAL RESERVE SYSTEM

[Federal Register Volume 75, Number 10 (Friday, January 15, 2010)]
[Rules and Regulations]
[Pages 2724-2784]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-30678]



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Part III





Federal Reserve System





12 CFR Part 222



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Federal Trade Commission

16 CFR Parts 640 and 698



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Fair Credit Reporting Risk-Based Pricing Regulations; Final Rule

Federal Register / Vol. 75 , No. 10 / Friday, January 15, 2010 / 
Rules and Regulations

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FEDERAL RESERVE SYSTEM

12 CFR Part 222

[Regulation V; Docket No. R-1316]

FEDERAL TRADE COMMISSION

16 CFR Parts 640 and 698

RIN 3084-AA94


Fair Credit Reporting Risk-Based Pricing Regulations

AGENCIES: Board of Governors of the Federal Reserve System (Board) and 
Federal Trade Commission (Commission).

ACTION: Final rules.

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SUMMARY: The Board and the Commission are jointly issuing final rules 
to implement the risk-based pricing provisions in section 311 of the 
Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which 
amends the Fair Credit Reporting Act (FCRA). The final rules generally 
require a creditor to provide a risk-based pricing notice to a consumer 
when the creditor uses a consumer report to grant or extend credit to 
the consumer on material terms that are materially less favorable than 
the most favorable terms available to a substantial proportion of 
consumers from or through that creditor. The final rules also provide 
for two alternative means by which creditors can determine when they 
are offering credit on material terms that are materially less 
favorable. The final rules also include certain exceptions to the 
general rule, including exceptions for creditors that provide a 
consumer with a disclosure of the consumer's credit score in 
conjunction with additional information that provides context for the 
credit score disclosure.

DATES: These rules are effective on January 1, 2011.

FOR FURTHER INFORMATION CONTACT:
    Board: David A. Stein, Managing Counsel; Amy B. Henderson, Senior 
Attorney; or Mandie K. Aubrey, Attorney, Division of Consumer and 
Community Affairs, (202) 452-3667 or (202) 452-2412; or Kara L. 
Handzlik, Attorney, Legal Division, (202) 452-3852, Board of Governors 
of the Federal Reserve System, 20th and C Streets, NW., Washington, DC 
20551. For users of a Telecommunications Device for the Deaf (TDD) 
only, contact (202) 263-4869.
    Commission: Manas Mohapatra and Katherine White, Attorneys, 
Division of Privacy and Identity Protection, Bureau of Consumer 
Protection, (202) 326-2252, Federal Trade Commission, 600 Pennsylvania 
Avenue, NW., Washington, DC 20580.

SUPPLEMENTARY INFORMATION: 

I. Background

    The Fair and Accurate Credit Transactions Act of 2003 (FACT Act) 
was signed into law on December 4, 2003. Public Law 108-159, 117 Stat. 
1952. In general, the FACT Act amended the Fair Credit Reporting Act 
(FCRA) to enhance the ability of consumers to combat identity theft, 
increase the accuracy of consumer reports, and allow consumers to 
exercise greater control regarding the type and amount of solicitations 
they receive.
    Section 311 of the FACT Act added a new section 615(h) to the FCRA 
to address risk-based pricing. 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. Information from a consumer report is 
often used in evaluating the risk posed by the consumer. Creditors that 
engage in risk-based pricing generally offer more favorable terms to 
consumers with good credit histories and less favorable terms to 
consumers with poor credit histories.
    Under section 615(h) of the FCRA, a risk-based pricing notice must 
be provided to consumers in certain circumstances. Generally, a person 
must provide a risk-based pricing notice to a consumer when the person 
uses a consumer report in connection with an application, grant, 
extension, or other provision of credit and, based in whole or in part 
on the consumer report, grants, extends, or provides credit to the 
consumer on material terms that are materially less favorable than the 
most favorable terms available to a substantial proportion of consumers 
from or through that person. The risk-based pricing notice requirement 
is designed primarily to improve the accuracy of consumer reports by 
alerting consumers to the existence of negative information on their 
consumer reports so that consumers can, if they choose, check their 
consumer reports for accuracy and correct any inaccurate information. 
It is meant to complement the existing adverse action notice provisions 
of the FCRA.\1\
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    \1\ Under Sec.  615(a) of the FCRA, creditors that deny a 
consumer's application for credit, based in whole or in part on 
information in a consumer report, must provide an adverse action 
notice to that consumer. Where a creditor does not reject an 
applicant with impaired credit, however, but instead offers credit 
on less favorable terms, the creditor generally is not required to 
provide an adverse action notice. The Senate Committee on Banking, 
Housing, and Urban Affairs cited concerns that the adverse action 
notification construct had been made obsolete in certain 
circumstances and found this problematic because the adverse action 
notice is the ``primary tool the FCRA contains to ensure that 
mistakes in credit reports are discovered.'' See S. Rep. No. 108-
166, at 20 (Oct. 17, 2003).
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    Section 615(h) requires the Board and the Commission (the Agencies) 
jointly to issue rules implementing the risk-based pricing provisions. 
The statute requires the Agencies to address in the implementing rules 
the form, content, timing, and manner of delivery of any notices 
pursuant to section 615(h). The rules also must clarify the meaning of 
certain terms used in this section, including what are ``material'' 
credit terms and when credit terms are ``materially less favorable.'' 
Section 615(h) gives the Agencies the authority to provide exceptions 
to the notice requirement for classes of persons or transactions for 
which the Agencies determine that risk-based pricing notices would not 
significantly benefit consumers. Finally, the Agencies must provide a 
model notice that can be used to comply with section 615(h).
    The Agencies published proposed regulations that would implement 
these risk-based pricing provisions on May 19, 2008 (73 FR 28966). The 
comment period closed on August 18, 2008. The Agencies received more 
than 80 comment letters regarding the proposal from banks and other 
creditors, industry trade associations, consumer groups, a trade 
association representing consumer reporting agencies, and others.

II. Developing the Final Rules

    In developing the risk-based pricing rules, the Agencies sought to 
implement the statutory provisions in a manner that would provide a 
substantial benefit to consumers and be operationally feasible for the 
wide variety of entities subject to the rules. Based on in-depth 
outreach with interested parties undertaken before issuing the proposed 
rules, the Agencies determined that it would not be operationally 
feasible in many cases for creditors to compare the terms offered to 
each consumer with the terms offered to other consumers to whom the 
creditor has extended credit. The Agencies considered several 
approaches and concluded that the most effective way to implement the 
statute was to develop certain tests that could serve as proxies for 
comparing the terms offered to different consumers. The Agencies' goal 
was to determine which tests would both identify those consumers who 
likely received materially less favorable terms than the

[[Page 2725]]

terms obtained by other consumers and be operationally feasible for 
creditors to implement. The tests that satisfied these criteria were 
included in the proposed rules.
    The final rules retain the tests the Agencies identified in the 
proposal as the best approaches for meeting the statute's requirements 
with some revisions made in response to the comments received on the 
proposal. As noted in the proposal, the Agencies recognize that no 
single test or approach is likely to be feasible for all of the various 
types of creditors to which the rules apply or for the many different 
credit products for which risk-based pricing is used. Therefore, the 
final rules provide a menu of approaches that creditors may use to 
comply with the statute's legal requirements. The next section provides 
a brief explanation of the final rules.

III. Summary of the Final Rules \2\
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    \2\ The Board is placing the final regulations implementing 
section 311 in the part of their regulations that implements the 
FCRA--12 CFR part 222. For ease of reference, the discussion in the 
SUPPLEMENTARY INFORMATION section uses the numerical suffix of each 
of the Board's regulations. The FTC also is placing the final 
regulations and guidelines in the part of its regulations 
implementing the FCRA, specifically 16 CFR part 640. However, the 
FTC uses different numerical suffixes that equate to the numerical 
suffixes discussed in the SUPPLEMENTARY INFORMATION section as 
follows: suffix .70 = FTC suffix .1, suffix .71 = FTC suffix .2, 
suffix .72 = FTC suffix .3, suffix .73 = FTC suffix .4, suffix .74 = 
FTC suffix .5, and suffix .75 = FTC suffix .6.
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Risk-Based Pricing Notice

    The final rules implement the risk-based pricing notice requirement 
of section 615(h). The final rules apply to any person that both: (i) 
Uses a consumer report in connection with an application for, or a 
grant, extension, or other provision of, credit to a consumer; and (ii) 
based in whole or 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 proportion of consumers from or through that person. The 
rules clarify that the risk-based pricing notice requirements apply 
only in connection with credit that is primarily for personal, 
household, or family purposes, but not in connection with business 
credit. For more information about the scope of the final rules, see 
the discussion of Sec.  ----.70 in the Section-by-Section Analysis.

Definitions

    The final rules define certain key terms. Specifically, the final 
rules define ``material terms'' as the annual percentage rate for 
credit that has an annual percentage rate,\3\ or, in the case of credit 
that does not have an annual percentage rate, as the financial term 
that the person varies based on the consumer report and that has the 
most significant financial impact on consumers, such as an annual 
membership fee or a deposit. For credit cards, which may have multiple 
annual percentage rates applicable to different features, ``material 
terms'' is defined generally as the annual percentage rate applicable 
to purchases. In addition, the final rules define ``materially less 
favorable,'' as it applies to material terms, to mean that the terms 
granted or extended to a consumer differ from the terms granted or 
extended to another consumer from or through the same person such that 
the cost of credit to the first consumer would be significantly greater 
than the cost of credit to the other consumer. For more information 
about the definitions of these and other terms used in the final rules, 
see the discussion of Sec.  ----.71 in the Section-by-Section Analysis.
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    \3\ Under Regulation Z, which implements the Truth in Lending 
Act, 15 U.S.C. 1601 et seq., the annual percentage rate is a measure 
of the cost of credit, expressed as a yearly or annualized rate. See 
12 CFR 226.14, 226.22. Regulation Z requires creditors to disclose 
accurately the cost of credit, including the annual percentage rate. 
See 12 CFR 226.5a(b)(1), 226.5b(d)(6) and (12), and 226.18(e).
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General Rule and Methods for Identifying Consumers Who Must Receive 
Notice

    The final rules state that a person must provide the consumer with 
a notice if that person both: (i) uses a consumer report in connection 
with an application for, or a grant, extension, or other provision of, 
credit to that consumer primarily for personal, family, or household 
purposes; and (ii) based in whole or 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 proportion of consumers from 
or through that person. The final rules apply to the person to whom the 
obligation is initially payable (also referred to as ``the original 
creditor'').
    A person subject to the rule may determine, on a case-by-case 
basis, whether a consumer has received material terms that are 
materially less favorable than terms other consumers have received from 
or through that person by comparing the material terms offered to the 
consumer to the material terms offered to other consumers for a 
specific type of credit product. Because it may not be operationally 
feasible for many persons subject to the rule to make such direct 
comparisons between consumers, the final rules provide two alternative 
methods for determining which consumers must receive risk-based pricing 
notices for those persons that prefer not to compare directly the 
material terms offered to their consumers. Using either of the 
alternative methods, a person may determine when credit offered from or 
through that person is on material terms that are materially less 
favorable than the most favorable terms available to a substantial 
proportion of consumers from or through that person.
    The first alternative method is the credit score proxy method. A 
credit score is a numerical representation of a consumer's credit risk 
based on information in the consumer's credit file. The final rules 
permit a creditor that uses credit scores to set the material terms of 
credit to determine a cutoff score, representing the point at which 
approximately 40 percent of its consumers have higher credit scores and 
60 percent of its consumers have lower credit scores, and provide a 
risk-based pricing notice to each consumer who has a credit score lower 
than the cutoff score. The final rules also provide that, in the case 
of credit that has been granted, extended, or provided on the most 
favorable material terms to more than 40 percent of consumers, a person 
may set its cutoff score at a point at which the approximate percentage 
of consumers who historically have been granted, extended, or provided 
credit on material terms other than the most favorable terms would 
receive risk-based pricing notices under this section. The final rules 
require periodic updating of the cutoff score.
    The second alternative method is the tiered pricing method. Under 
this method, a creditor that sets the material terms of credit by 
assigning each consumer to one of a discrete number of pricing tiers, 
based in whole or in part on a consumer report, may use this method and 
provide a risk-based pricing notice to each consumer who is not 
assigned to the top pricing tier or tiers. The number of tiers of 
consumers to whom the notice is required to be given depends upon the 
total number of tiers. For more information about the general rule and 
the alternative methods for determining which consumers must receive 
notices, see the discussion of Sec.  ----.72 in the Section-by-Section 
Analysis.

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Application of Rule to Credit Card Issuers

    The final rules set forth a special test that a credit card issuer 
may use to identify the circumstances in which the issuer must provide 
a risk-based pricing notice to consumers, as an alternative to the 
options discussed above. If a credit card issuer uses this option, the 
issuer is required to provide a risk-based pricing notice to a consumer 
if the consumer applies for a credit card in connection with a 
multiple-rate offer and, based in whole or in part on a consumer 
report, is granted credit at an annual percentage rate referenced in 
Sec.  ----.71(n)(1)(ii) that is higher than the lowest annual 
percentage rate referenced in Sec.  ----.71(n)(1)(ii) available under 
that offer. The final rules assume that a consumer who applies for 
credit in response to a multiple-rate offer is applying for the best 
rate available. For more information about the application of the rule 
to credit card issuers, see the discussion of Sec.  ----.72 in the 
Section-by-Section Analysis.

Account Review

    A creditor may periodically review the consumer report of a 
consumer with whom the creditor has an existing credit relationship as 
permitted under section 604 of the FCRA. If a consumer's credit history 
has deteriorated, the creditor may, pursuant to applicable account 
terms, increase the annual percentage rate applicable to that 
consumer's account. The final rules generally require the creditor to 
provide a risk-based pricing notice to the consumer if the creditor 
increases the consumer's annual percentage rate in an account review 
based in whole or in part on a consumer report, unless the creditor 
provides an adverse action notice to the consumer. For more information 
about the application of the general rule to account reviews, see the 
discussion of Sec.  ----.72 in the Section-by-Section Analysis.

Content of the Notice

    In addition to the minimum content prescribed by section 615(h)(5) 
of the FCRA, the final rules require the risk-based pricing notice to 
include a statement that the terms offered may be less favorable than 
the terms offered to consumers with better credit histories. The 
Agencies believe that including such a statement in the notice could 
encourage consumers to check their consumer reports for inaccuracies. 
The final rules also include special content requirements for the 
notice that must be provided in the context of account reviews. For 
more information about the content of the risk-based pricing notices, 
see the discussion of Sec.  ----.73 in the Section-by-Section Analysis.

Form of the Notice

    The final rules require the risk-based pricing notice and account 
review notice to be clear and conspicuous and to be provided to the 
consumer in oral, written, or electronic form. The final rules also 
state that creditors are deemed to be in compliance with the provisions 
requiring risk-based pricing notices and account review notices through 
use of the appropriate model forms. Use of the forms is optional. For 
more information about the form of these notices, see the discussion of 
Sec.  ----.73 in the Section-by-Section Analysis.

Timing of the Notice

    The final rules generally require a risk-based pricing notice to be 
provided to the consumer after the terms of credit have been set, but 
before the consumer becomes contractually obligated on the credit 
transaction. In the case of closed-end credit, the notice must be 
provided to the consumer before consummation of the transaction, but 
not earlier than the time the approval decision is communicated to the 
consumer. In the case of open-end credit, the notice must be provided 
to the consumer before the first transaction is made under the plan, 
but not earlier than the time the approval decision is communicated to 
the consumer. For account reviews, the notice must be provided at the 
time that the decision to increase the annual percentage rate is 
communicated to the consumer or, if no notice of the increase in the 
annual percentage rate is provided to the consumer prior to the 
effective date of the change (to the extent permitted by law), no later 
than five days after the effective date of the change in the annual 
percentage rate. The final rules explain how the required notices may 
be delivered in the case of certain automobile lending transactions and 
also include an exception to the general timing rules in the case of 
contemporaneous purchase credit (instant credit). For more information 
about the timing requirements, see the discussion of Sec.  ----.73 in 
the Section-by-Section Analysis.

Exceptions to the Risk-Based Pricing Notice Requirement

    The final rules contain a number of exceptions to the risk-based 
pricing notice requirement. The final rules implement the statutory 
exceptions that apply: (i) When a consumer applies for, and receives, 
specific material terms; and (ii) when a consumer has been or will be 
provided a notice of adverse action under section 615(a) of the FCRA in 
connection with the transaction.
    In addition, the Agencies have used their exception authority set 
forth in section 615(h)(6)(iii) of the FCRA to create exceptions for 
creditors that provide consumers who apply for credit with a notice 
consisting of their credit score and certain additional information, in 
lieu of the risk-based pricing notice. For credit secured by one to 
four units of residential real property, a creditor may provide 
consumers with a notice containing the credit score disclosure required 
by section 609(g) of the FCRA along with certain additional information 
that provides context for the credit score disclosure. This notice also 
describes the creditor's use of credit scores to set the terms of 
credit and explains how consumers can obtain their free annual consumer 
reports. In the case of credit that is not secured by one to four units 
of residential real property, a creditor similarly may provide 
consumers with a notice of their credit score and certain additional 
information specified in the final rules. The final rules also include 
optional model forms for use by creditors.
    In some cases, a consumer's credit file may not contain sufficient 
information to permit a consumer reporting agency or other person to 
calculate a score for that individual. In those cases, a creditor using 
either of the credit score disclosure exceptions described above is 
permitted to comply with the rules by providing an alternate narrative 
notice that does not include a credit score to those consumers for whom 
a score is not available.
    The final rules also include an exception for prescreened 
solicitations. Under this exception, a creditor is not required to 
provide a risk-based pricing notice if that creditor obtains a consumer 
report that is a prescreened list and uses that consumer report to make 
a firm offer of credit to consumers, regardless of how the material 
terms of that offer compare to the terms that the creditor includes in 
other firm offers of credit. For more information about the exceptions, 
see the discussion of Sec.  ----.74 in the Section-by-Section Analysis.

Free Consumer Report

    Section 615(h)(5)(C) of the FCRA states that the risk-based pricing 
notice must contain a statement informing the consumer that he or she 
may obtain a copy of a consumer report, without charge, from the 
consumer reporting agency identified in the notice. The final rules are 
based on the Agencies' reading of section 615(h) as giving

[[Page 2727]]

consumers a right to a separate free consumer report upon receipt of a 
risk-based pricing notice.
    The notices provided under the credit score disclosure exceptions 
are not risk-based pricing notices, and therefore do not give rise to 
the right to a free consumer report. Instead, a consumer who receives a 
credit score disclosure notice that identifies a consumer reporting 
agency or other third party as the source of the credit score could 
request the free annual consumer report that is available from each of 
the three nationwide consumer reporting agencies. For more information 
about the credit score disclosure exceptions, see the discussion of 
Sec.  ----.74 in the Section-by-Section Analysis.

One Notice per Credit Extension

    The final rules contain a rule of construction to clarify that, in 
general, only one risk-based pricing notice is required to be provided 
per credit extension, except in the case of a notice provided in 
connection with an account review. The person to whom the obligation is 
initially payable must provide the risk-based pricing notice, or 
satisfy one of the exceptions, even if the loan is assigned to a third 
party or if that person is not the funding source for the loan. 
Although legal responsibility for providing the notice rests with the 
person to whom the obligation is initially payable, the various parties 
involved in a credit extension may determine by contract which party 
will send the notice. Generally, purchasers or assignees of credit 
contracts are not subject to the risk-based pricing notice 
requirements, except in the case of a notice provided in connection 
with an account review. For more information about the rules of 
construction, see the discussion of Sec.  ----.75 in the Section-by-
Section Analysis.

Multiple Consumers

    The final rules contain a rule of construction to clarify that in a 
transaction involving two or more consumers who are granted, extended, 
or otherwise provided credit, a person must provide a risk-based 
pricing notice to each consumer. If the consumers have the same 
address, a person may satisfy the requirements by providing a single 
notice addressed to both consumers. If the consumers do not have the 
same address, a person must provide a notice to each consumer.
    For credit score disclosure exception notices, a person must 
provide a separate notice to each consumer in a transaction involving 
two or more consumers who are granted, extended, or otherwise provided 
credit. Whether the consumers have the same address or not, the person 
must provide a separate notice to each consumer. Each separate notice 
must contain only the credit score(s) of the consumer to whom the 
notice is provided, and not the credit score(s) of the other consumer. 
For more information about the rules of construction, see the 
discussion of Sec.  ----.75 in the Section-by-Section Analysis.

Model Forms

    Section 615(h)(6)(B)(iv) requires the Agencies to provide a model 
notice that may be used to comply with the risk-based pricing rules. 
For each of the risk-based pricing notices and alternative credit score 
disclosures, the Agencies have finalized model forms that are appended 
to the final rules as Appendices H-1 through H-5 of the Board's rule 
and Appendices B-1 through B-5 of the Commission's rule. For more 
information, see the discussion of the model forms in the Section-by-
Section Analysis.

IV. Section-by-Section Analysis

Section ----.70 Scope

    Proposed Sec.  ----.70 set forth the scope of the Agencies' rules. 
Proposed paragraph (a)(1) generally tracked the statutory language from 
section 615(h)(1) of the FCRA, except that it limited coverage of the 
proposed rules to credit to a consumer that is primarily for a 
consumer's personal, family, or household purposes.
    Proposed paragraph (a)(2) provided that the risk-based pricing 
rules do not apply to persons who use consumer reports in connection 
with an application for, or grant, extension, or other provision of, 
credit for business purposes. Section 615(h) of the FCRA does not 
explicitly state that it applies only to a person using a consumer 
report in connection with consumer purpose credit. However, the 
statute's repeated use of the term ``consumer,'' which section 603(c) 
of the FCRA defines to mean ``an individual,'' suggests that Congress 
intended for the risk-based pricing provisions to apply only to credit 
that is primarily for personal, family, or household purposes.
    Business-purpose loans generally are made to partnerships or 
corporations, as well as to individual consumers in the case of sole 
proprietorships. The Agencies understand that business borrowers 
generally are more sophisticated than individual consumers. For 
business loans made to partnerships or corporations, a creditor may 
obtain consumer reports on the principals of the business who may serve 
as guarantors for the loan.\4\ The credit is granted or extended to the 
business entity, however, based primarily on that entity's 
creditworthiness, and that entity is primarily responsible for the 
loan. In addition, credit is not granted, extended, or provided to a 
guarantor; rather a guarantor simply supports, and assumes liability 
for, the credit granted, extended, or provided to the consumer. Also, 
when a consumer report is used in connection with a small business 
loan, the report may factor into the underwriting process quite 
differently than a consumer report utilized in connection with a 
consumer purpose loan.
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    \4\ See FTC Staff Opinion Letter from Joel Winston to Julie L. 
Williams, J. Virgil Mattingly, William F. Kroener, III, and Carolyn 
Buck (June 22, 2001) (available at https://www.ftc.gov/os/statutes/fcra/tatelbaumw.shtm).
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    Most commenters agreed that the coverage of the proposed rule, 
including the exclusion of business purpose credit, was appropriate. 
Some commenters requested that the Agencies clarify that the rules do 
not apply to consumer leases. Consumer leases generally are not treated 
as ``credit'' under the Equal Credit Opportunity Act (ECOA) and the 
Board's Regulation B (12 CFR 202.1 et seq.), which implements the 
ECOA.\5\ Thus, the rule does not apply to consumer lease transactions. 
The final rules retain paragraph (a) substantively as proposed.
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    \5\ In Brothers v. First Leasing, 724 F.2d 789 (9th Cir.), cert. 
denied, 105 S. Ct. 121 (1984), the U.S. Court of Appeals for the 
Ninth Circuit held that consumer leases as defined by the Consumer 
Leasing Act are subject to the ECOA. However, the Board believes 
Congress did not intend the ECOA to cover lease transactions unless 
the transaction results in a ``credit sale'' as defined in the TILA 
and Regulation Z. Congress has consistently viewed lease and credit 
transactions as distinct financial transactions and has treated them 
separately under the Consumer Credit Protection Act.
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    Proposed paragraph (b) provided that compliance with either the 
Board's or the Commission's substantively identical risk-based pricing 
rules would be deemed to satisfy the requirements of the statute. The 
Board proposed to codify its risk-based pricing rules at 12 CFR 222.70 
et seq., and the Commission proposed to codify its risk-based pricing 
rules at 16 CFR 640 et seq. Proposed paragraph (c), consistent with the 
statutory language in section 615(h)(8), provided that the risk-based 
pricing rules would be enforced in accordance with sections 621(a) and 
(b) by the relevant federal agencies and officials identified in those 
sections, including state officials. Under the statute and proposed 
rules, the risk-based pricing provisions would not provide for a

[[Page 2728]]

private right of action. The Agencies did not receive comments on 
proposed paragraphs (b) or (c). Therefore, paragraphs (b) and (c) are 
adopted substantively as proposed in the final rules, with minor 
changes for clarity.

Section ----.71 Definitions

    Proposed Sec.  ----.71 contained definitions for the following 
terms: ``annual percentage rate'' (and the related terms ``closed-end 
credit'' and ``open-end credit plan''), ``credit,'' ``creditor,'' 
``credit card,'' ``credit card issuer,'' ``credit score,'' ``material 
terms'' (and the related term ``consummation''), and ``materially less 
favorable.'' These definitions are retained in the final rules, with 
certain revisions as discussed below.
Annual Percentage Rate and Related Terms
    Proposed paragraph (a) defined ``annual percentage rate'' by 
incorporating the definitions of ``annual percentage rate'' for open-
end credit plans and closed-end credit set forth in sections 226.14(b) 
and 226.22 of Regulation Z, respectively (12 CFR 226.14(b), 12 CFR 
226.22). Paragraph (b) of the proposal defined ``closed-end credit'' to 
have the same meaning as in Regulation Z (12 CFR 226.2(a)(10)). 
Paragraph (k) of the proposal defined ``open-end credit plan'' to have 
the same meaning as set forth in the Truth in Lending Act (TILA), as 
implemented by the Board in Regulation Z and the Official Staff 
Commentary to Regulation Z (15 U.S.C. 1602(i), 12 CFR 226.2(a)(20)).
    The Agencies received one comment in support of the definition of 
``annual percentage rate'' and no comments regarding ``closed-end 
credit'' and ``open-end credit plan.'' The Agencies believe that use of 
the Regulation Z definitions promotes consistency among the rules 
pertaining to consumer credit, including the rules that implement the 
FCRA and the TILA. Therefore, the definitions of ``annual percentage 
rate,'' ``closed-end credit,'' and ``open-end credit plan'' are adopted 
as proposed in the final rules, but renumbered as paragraphs (b), (c), 
and (p), respectively.
Consummation
    Proposed paragraph (c) defined the term ``consummation'' to mean 
the time that a consumer becomes contractually obligated on a credit 
transaction. The proposed definition was identical to the definition of 
``consummation'' in Regulation Z. 12 CFR 226.2(a)(13). The Agencies 
received no comments on this definition. In the final rules, the 
definition of ``consummation'' is substantively the same as in the 
proposal, but the text has been revised (and redesignated as paragraph 
(e)) so that the term is defined to have the same meaning as in 12 CFR 
226.2(a)(13). This is consistent with other definitions in the final 
rules that cross-reference existing definitions.
Credit, Creditor, Credit Card, Credit Card Issuer, and Credit Score
    Proposed paragraphs (d), (e), (f), (g), and (h) incorporated the 
FCRA's statutory definitions of ``credit,'' ``creditor,'' ``credit 
card,'' ``credit card issuer,'' and ``credit score.'' The Agencies 
received few comments on these definitions, all of which incorporate 
existing statutory definitions. They are adopted as proposed in the 
final rules as paragraphs (h), (i), (j), (k), and (l).
Material Terms
    Proposed paragraph (i) contained three separate definitions of 
``material terms,'' depending on whether the credit (1) is extended 
under an open-end credit plan for which there is an annual percentage 
rate, (2) is closed-end credit for which there is an annual percentage 
rate, or (3) is credit for which there is no annual percentage rate. 
Proposed paragraph (i)(1) defined ``material terms'' for credit 
extended under an open-end credit plan as the annual percentage rate 
required to be disclosed in the account-opening disclosures required by 
Regulation Z. The definition excluded both any temporary initial rate 
that is lower than the rate that would apply after the temporary rate 
expires and any penalty rate that would apply upon the occurrence of 
one or more specific events, such as a late payment or extension of 
credit that exceeds the credit limit. For credit cards (other than 
those used to access a home equity line of credit), the proposal 
defined ``material terms'' as the annual percentage rate applicable to 
purchases (``purchase annual percentage rate''), and no other annual 
percentage rate.
    Proposed paragraph (i)(2) defined ``material terms'' for closed-end 
credit as the annual percentage rate required to be disclosed prior to 
consummation under the provisions of Regulation Z regarding closed-end 
credit (12 CFR 226.17(c) and 226.18(e)). This definition did not 
address temporary initial rates or penalty rates because, for purposes 
of the closed-end provisions of Regulation Z, a penalty rate is not 
included in the calculation of the annual percentage rate and a 
temporary initial rate is but one component of a single annual 
percentage rate for the transaction.
    Most commenters supported defining material terms as the annual 
percentage rate for credit extended under an open-end credit plan and 
closed-end credit and, in the case of credit cards, the purchase annual 
percentage rate. Some commenters, however, suggested that the 
definition should include certain additional terms, such as fees or a 
down payment, depending upon the particular loan product. A consumer 
group commenter suggested that the definition should not be limited to 
a single term, but instead should be defined as any change to a credit 
transaction that is based upon a consumer's credit history or credit 
score.
    For practical and operational reasons, Sec. Sec.  ----.71(i)(1) and 
(i)(2) are adopted largely as proposed as renumbered Sec. Sec.  --
--.71(n)(1) and (n)(2), but with certain substantive revisions as 
discussed below. The Agencies recognize that the pricing of credit 
products is complex and that the annual percentage rate is only one of 
the costs of consumer credit. However, the Agencies have adopted a 
definition of ``material terms'' that generally focuses on a single 
term in order to ensure that there is a feasible way for creditors to 
identify those consumers who must receive risk-based pricing notices. 
Based on the comments received, extensive outreach to interested 
parties, and their own analysis, the Agencies conclude that it would 
not be feasible for creditors to compare credit terms on the basis of 
multiple variables. For example, it is unclear how a creditor would 
compare one mortgage loan with a given combination of annual percentage 
rate, down payment, and points and fees to another such loan where all 
three variables differ, even for the same product, such as a 30-year 
fixed-rate loan.
    Focusing on the annual percentage rate is appropriate because most 
consumer credit products have an annual percentage rate, and it has 
historically been a significant factor, and often the most significant 
factor, in the pricing of credit. The Agencies understand that the 
annual percentage rate is the primary term that varies as a result of 
risk-based pricing. For credit cards, which often have multiple annual 
percentage rates applicable to purchases, cash advances, and balance 
transfers, purchases are the most common type of transaction. The 
Agencies understand that the annual percentage rate applicable to 
purchases is the primary term that varies as a result of risk-based 
pricing. Thus, the Agencies conclude that, in most cases, defining 
``material terms'' with reference to the annual percentage rate (or the 
purchase annual percentage rate, in the case of credit cards) will 
effectively

[[Page 2729]]

target those consumers who are likely to have received credit on terms 
that are materially less favorable than the terms offered to other 
consumers.
    One commenter requested clarification regarding whether the 
definition of ``material terms'' for credit cards in Sec.  --
--.71(n)(1)(ii) excludes the temporary initial annual percentage rate 
and penalty annual percentage rate, as are excluded in Sec.  --
--.71(n)(1)(i), the definition applicable to credit extended under an 
open-end credit plan. Section ----.71(n)(1)(ii) is a specific 
application of the general definition of ``material terms'' for credit 
extended under an open-end credit plan to a specific type of product, 
credit cards, that frequently has multiple annual percentage rates 
applicable to different balances. Therefore, the exclusions in Sec.  --
--.71(n)(1)(i) of the final rules apply to all credit extended under an 
open-end credit plan, including credit cards.
    Upon further analysis, the Agencies also have added ``any fixed 
annual percentage rate option for a home equity line of credit'' as an 
additional exclusion from Sec.  ----.71(n)(1)(i). Most annual 
percentage rates for home equity lines of credit are variable. Some 
creditors, however, also offer a fixed annual percentage rate option, 
which may be exercised on some portion of the advances. In these 
arrangements, the variable annual percentage rate is the most 
significant pricing term. Therefore, the Agencies have excluded the 
fixed annual percentage rate option from the definition. Finally, the 
Agencies have changed the citations in Sec.  ----.71(n)(1)(i) of the 
final rules to reflect amendments to Regulation Z made subsequent to 
the proposed rule.\6\
---------------------------------------------------------------------------

    \6\ 74 FR 5244 (Jan. 29, 2009).
---------------------------------------------------------------------------

    In response to one commenter's suggestion, the Agencies have 
excluded charge cards from Sec.  ----.71(n)(1)(ii). Under Regulation Z, 
a ``charge card'' is defined as a credit card on an account for which 
no periodic rate is used to compute a finance charge. 12 CFR 
226.2(a)(15). This exclusion reflects the fact that charge cards do not 
have an annual percentage rate. As discussed below, material terms of 
charge cards are addressed in paragraph (n)(3).
    Another commenter suggested that the rule should account for 
situations where a credit card has no purchase annual percentage rate. 
The final rules provide that in those instances, material terms means 
``the annual percentage rate that varies based on information in a 
consumer report and that has the most significant financial impact on 
consumers.'' For example, if a credit card product does not permit 
purchases, but allows for balance transfers and cash advances, the 
material term would be whichever of the two annual percentage rates 
varies based on information in a consumer report and has the most 
significant impact on consumers.
    Proposed paragraph (i)(3), renumbered as paragraph (n)(3) in the 
final rules, defined ``material terms'' for credit with no annual 
percentage rate as any monetary terms that the person varies based on 
information in a consumer report, such as the down payment or deposit. 
Some commenters agreed with the definition, but other commenters 
suggested that ``any monetary terms'' should be limited to a single 
monetary term. For the same operational concerns that led the Agencies 
to focus exclusively on the annual percentage rate, the Agencies agree 
that the third prong of the definition should focus on a single 
significant term. Thus, in the final rules, ``material terms'' for 
credit with no annual percentage rate is defined as ``the financial 
term that varies based on information in a consumer report and that has 
the most significant financial impact on consumers.'' By way of 
example, the final rules clarify that, depending upon the creditor's 
business and pricing practices, a significant financial term may 
include a deposit required by a telephone company or utility or an 
annual membership fee required to obtain a charge card.
Materially Less Favorable Material Terms
    Proposed paragraph (j) defined ``materially less favorable,'' when 
applied to material terms, to mean that the terms granted, extended, or 
otherwise provided to a consumer differ from the terms granted or 
extended to another consumer from or through the same person such that 
the cost of credit to the first consumer would be significantly greater 
than the cost of credit granted or extended to the other consumer. This 
definition clarified that a comparison between one set of material 
terms and another set of material terms generally would be required to 
satisfy the general rule and to identify which consumers must receive 
the notice.
    Some commenters stated that the definition of ``materially less 
favorable'' was generally appropriate, but other commenters believed 
the Agencies should define the term with more objective criteria. The 
Agencies believe the definition of ``materially less favorable'' 
provides sufficient guidance regarding how to determine whether a 
particular set of terms is materially less favorable. Thus, the 
Agencies are adopting the definition of ``materially less favorable'' 
substantively as proposed as renumbered paragraph (o), with some 
revisions for clarity. The phrase ``or otherwise provided'' has been 
added to the definition to track the language of the statute. As noted 
in the supplementary information to the proposal, factors relevant to 
determining the significance of a difference in the cost of credit 
include the type of credit product, the term of the credit extension, 
if any, and the extent of the difference between the material terms 
granted, extended, or otherwise provided to the consumer and the 
material terms granted, extended, or otherwise provided to the 
comparison group.
Suggested Definitions
    Two commenters suggested that terms such as ``consumer'' should 
also be defined in the final rules. For clarity and consistency, the 
final rules add definitions of the following terms by reference to the 
FCRA's statutory definitions: ``adverse action'' is defined in 
paragraph (a); ``consumer'' is defined in paragraph (d); ``consumer 
report'' is defined in paragraph (f); ``consumer reporting agency'' is 
defined in paragraph (g); ``firm offer of credit'' is defined in 
paragraph (m); and ``person'' is defined in paragraph (q).

Section ----.72 General Requirements for Risk-Based Pricing Notices

General Rule
    Proposed Sec.  ----.72 established the basic rules implementing the 
risk-based pricing notice requirement of section 615(h). Paragraph (a) 
stated the general requirement that a person must provide the consumer 
with a notice if that person both: (i) uses a consumer report in 
connection with an application for, or a grant, extension, or other 
provision of, credit to that consumer that is primarily for personal, 
family, or household purposes; and (ii) based in whole or 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 proportion of 
consumers from or through that person. This paragraph mirrored the 
language in proposed Sec.  ----.70(a) and generally tracked the 
statutory language. In the final rules, paragraph (a) is adopted as 
proposed.
    The proposed rules did not define what constitutes ``a substantial 
proportion'' of consumers. Some commenters stated that this term was 
too subjective and should be defined. The Agencies, however, do not 
believe

[[Page 2730]]

it is appropriate to define ``a substantial proportion'' because no 
definition of ``a substantial proportion'' could reflect the widely 
varying pricing practices of creditors. For example, one creditor may 
offer its most favorable material terms to ninety percent of its 
consumers and materially less favorable material terms to ten percent 
of its consumers, while another may offer its most favorable material 
terms to ten percent of its consumers and materially less favorable 
material terms to ninety percent of its consumers. A third creditor may 
offer its most favorable material terms to one percent of its 
consumers, slightly less favorable material terms to twenty percent of 
its consumers, and materially less favorable material terms to its 
remaining consumers.
    While each creditor's ``substantial proportion'' determination is 
an individual decision, the Agencies expect that creditors will 
consider ``a substantial proportion'' as constituting more than a de 
minimis percentage, but that may or may not represent a majority. The 
Agencies caution that creditors should not automatically apply the 
proportions set forth in the proxy methods when determining what 
constitutes ``a substantial proportion'' for purposes of making a 
direct comparison. Rather, creditors should determine what constitutes 
``a substantial proportion'' based on their own circumstances.
    Although the statute would permit various interpretations of ``from 
or through that person,'' the Agencies in the proposal interpreted the 
phrase to refer to the person to whom the obligation is initially 
payable, i.e., the original creditor. Under this interpretation, the 
original creditor would be responsible for determining whether 
consumers received materially less favorable material terms and 
providing risk-based pricing notices to such consumers, whether or not 
that person is the source of funding for the loan. The Agencies 
recognized that this interpretation would exclude from the scope of the 
proposed rules brokers and other intermediaries who do not themselves 
grant, extend, or provide credit to consumers, but who, based in whole 
or in part on a consumer report, shop credit applications to creditors 
that offer less favorable rates than other creditors.
    Many commenters generally agreed that it is appropriate to require 
the original creditor to provide the risk-based pricing notice, rather 
than a broker or other intermediary. Some commenters, however, 
suggested that the Agencies require intermediaries to provide the 
notices in certain contexts, such as automobile or mortgage lending, 
instead of the original creditor. Others recommended that the Agencies 
allow either the original creditor or the intermediary to provide the 
notice.
    The Agencies continue to believe that it is appropriate to require 
the original creditor, but not a broker or other intermediary, to 
provide the risk-based pricing notice. An intermediary's decision 
regarding where to shop a consumer's credit application generally 
occurs before the material terms are set. Thus, at the time the 
application is shopped to various creditors, it is too early in the 
process to perform the direct comparison of material terms required by 
the statute, even if a consumer report influenced the intermediary's 
decision regarding where to shop the consumer's credit application. 
Moreover, a rule requiring intermediaries to provide notices when they 
shop applications to certain creditors would frequently result in the 
consumer receiving multiple risk-based pricing notices in connection 
with a single extension of credit. The Agencies believe that, in 
general, a consumer would not benefit from receiving more than one 
risk-based pricing notice in connection with a single extension of 
credit and requiring multiple notices would increase compliance burdens 
and costs.
    In certain situations, automobile dealers serve as the original 
creditor, but extend credit contingent on the ability to assign the 
loan to a third-party--a process known as ``three-party financing.'' A 
typical three-party automobile financing transaction involves an 
automobile dealer, a consumer, and a third-party creditor or financing 
source. In these transactions, the dealer sells a vehicle to a 
consumer, the consumer signs a retail installment sale contract with 
the dealer, and the dealer assigns the contract to a third-party 
financing source that has notified the dealer that it will purchase the 
consumer's contract on specified terms. The third-party financing 
source then services the debt directly with the customer.
    Some commenters asserted that in three-party financing 
transactions, automobile dealers are not engaged in risk-based pricing 
and therefore should not be subject to the requirements of the rules. 
These commenters stated that, although the dealer obtains a consumer's 
credit report in a three-party financing transaction, it does so in 
order to determine which third-party creditors to send the consumer's 
credit application, and not to set the terms of the retail installment 
sale contract. According to these commenters, the rate offered to the 
consumer by the automobile dealer is not based on the consumer's 
credit-worthiness, but rather on the combination of the ``buy'' rate--
the wholesale rate at which the third-party creditor has indicated it 
will purchase the consumer's loan (which is determined, in part, by the 
third-party creditor's underwriting standards)--and the retail margin 
the dealer has been able to negotiate with the consumer. These 
commenters stated that in such circumstances, the automobile dealer is 
not engaged in risk-based pricing because it is the third-party 
creditor, not the dealer, who analyzes the consumer's credit-
worthiness.
    The Agencies disagree with the commenters' contention that three-
party financing does not involve risk-based pricing by the automobile 
dealer. In the examples provided by the commenters, the automobile 
dealer uses a consumer report in connection with an application for 
credit to determine which third-party financing source it will attempt 
to assign the retail installment sale contract, and on what material 
terms. The material terms of the sales contract--specifically the 
annual percentage rate of the automobile loan--are based, in part, on 
the ``buy'' rate offered or expected to be offered by the third-party 
financing source. The automobile dealer's use of a consumer report to 
determine which third-party financing source is likely to purchase the 
retail installment sale contract and at what ``buy rate,'' and to set 
the annual percentage rate based in part on the ``buy rate,'' is 
conduct that fits squarely within the description of risk-based pricing 
in Sec.  ----.72(a) of the final rules. Thus, automobile dealers that 
are original creditors in a three-party financing transaction must 
provide risk-based pricing notices to consumers, in accordance with the 
rules.
    Commenters also suggested that the Agencies allow the original 
creditor to provide a risk-based pricing notice to all consumers who 
apply for credit, including those who did not receive materially less 
favorable terms. However, the statute's general rule does not suggest 
that a notice should be provided to every consumer who applies for 
credit. Moreover, the risk-based pricing notice requirement was 
designed to be a substitute for adverse action notices when a consumer 
received less favorable credit terms based on his or her consumer 
report, rather than being denied credit.\7\ The

[[Page 2731]]

Agencies believe that providing a notice to all consumers who apply for 
credit would diminish the impact of notifying a subset of consumers 
that they received credit on less than the best terms based on 
information in a consumer report. Providing a notice to all consumers 
who apply for credit would also have the effect of allowing consumers 
to receive a free consumer report whenever they applied for credit. For 
the foregoing reasons, the Agencies conclude that a person that uses a 
consumer report to grant, extend, or otherwise provide credit on 
material terms that are materially less favorable than the most 
favorable terms available to a substantial proportion of consumers is 
required to provide a risk-based pricing notice only to those consumers 
who receive materially less favorable terms.
---------------------------------------------------------------------------

    \7\ S. Rept. No. 108-166 (Oct. 17, 2003) at 20 provides: ``Under 
current law, a consumer is only provided an adverse action notice 
when the consumer does not qualify for credit or rejects a 
counteroffer made by a creditor. * * * [D]espite the many benefits 
of risk-based pricing, it has made the current adverse action 
notification construct obsolete in certain circumstances. This is 
problematic in as much as the adverse action notice is the primary 
tool the FCRA contains to ensure that mistakes in credit reports are 
discovered.''
---------------------------------------------------------------------------

    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.
    Some commenters requested that the Agencies clarify whether a 
notice is required when a person grants credit, but a consumer does not 
accept the credit. As explained below in the discussion of Sec.  --
--.73(c), a person is generally only required to provide a notice 
before consummation in the case of closed-end credit and before the 
first transaction in the case of open-end credit. A person may grant 
credit to a consumer, and the consumer may reject the offer of credit 
before a notice is required to be provided. Thus, some consumers who 
are granted credit may not receive a notice if they decline that credit 
before they are given the notice. In practice, however, some of these 
consumers may receive risk-based pricing notices if creditors provide 
notices at the time the decision to grant, extend, or provide credit is 
communicated to the consumer.\8\
---------------------------------------------------------------------------

    \8\ However, where a consumer applies for specific credit terms 
and the creditor makes a counteroffer which the consumer does not 
accept, the creditor must provide an adverse action notice to the 
consumer. See 12 CFR 202.2(c)(1)(i).
---------------------------------------------------------------------------

Determining Which Consumers Must Receive a Notice
    The Agencies proposed three methods that a person could use to 
determine which consumers must receive a risk-based pricing notice. The 
proposed direct comparison method would permit a person to apply the 
statutory test and determine on a case-by-case basis whether a consumer 
received from the person materially less favorable terms than the terms 
a substantial proportion of consumers received from that person. The 
Agencies also proposed two proxy methods: the credit score proxy method 
and the tiered pricing method. Under the credit score proxy method, a 
person could comply with the rules by (i) determining the credit score 
that represents the point at which approximately 40 percent of its 
consumers have higher credit scores and approximately 60 percent of its 
consumers have lower credit scores, and (ii) providing a risk-based 
pricing notice to each consumer with a credit score below that cutoff 
score. Under the tiered pricing method, a person that sets the material 
terms of credit granted, extended, or otherwise provided to a consumer 
by placing the consumer within one of a discrete number of pricing 
tiers could comply with the rules by providing a risk-based pricing 
notice to those consumers who are not placed in the person's best 
pricing tier or tiers. Consumers identified by either of these two 
alternative methods would be deemed to have been granted, extended, or 
otherwise provided credit on materially less favorable material terms.
    Commenters supported the Agencies' decision to provide several 
methods for determining which consumers must receive a risk-based 
pricing notice. Many commenters believed the three methods were 
appropriate.
    One commenter suggested an alternative method for determining which 
consumers must receive a risk-based pricing notice. This commenter 
suggested that the Agencies permit a method whereby creditors would 
determine the median annual percentage rate of consumers who received a 
particular type of product over a period of time and provide the notice 
to those receiving an annual percentage rate less favorable than that 
median. This suggestion was not adopted because it poses certain 
practical difficulties. Because rates fluctuate over time, sometimes 
quite dramatically, the median would have to be recalculated and 
recalibrated relatively frequently to retain an accurate measure of the 
median annual percentage rate. This would likely be impractical in many 
cases.
Direct Comparisons and Materially Less Favorable Material Terms
    Under the proposed rule, creditors could determine, on a case-by-
case basis, whether a consumer had received materially less favorable 
terms than the terms a substantial proportion of consumers have 
received from or through that creditor. The Agencies acknowledged that 
when a creditor undertakes direct, consumer-to-consumer comparisons, 
such comparisons necessarily must take into account the unique aspects 
of that creditor's business. Creditors would have to compare the 
transaction at issue with past transactions of a similar type and 
control for changes in interest rates and other market conditions over 
time. In addition, the Agencies recognized that a particular method of 
comparison that is sensible and feasible for one creditor may not be 
sensible and feasible for another creditor. Thus, the Agencies did not 
propose a quantitative standard or specific methodology for determining 
whether a consumer is receiving materially less favorable terms.
    Nevertheless, the Agencies stated that the determination should be 
made in a reasonable manner and outlined their expectations for 
creditors who use this method. The creditor would first need to 
identify the appropriate subset of its current or past consumers to 
compare to any given consumer. The subset would need to be an adequate 
sample of consumers who have applied for a specific type of credit 
product. The creditor also would need to tailor its comparison to 
disregard any underwriting criteria that do not depend upon consumer 
report information. Such a comparison also would have to account for 
changes in the creditor's customer base, product offerings, or 
underwriting criteria over time. Similarly, adjustments would have to 
be made if the terms offered to consumers in the past are not presently 
offered to consumers. The Agencies would expect that creditors would 
provide risk-based pricing notices to some, but fewer than all, of the 
consumers to whom they extend credit.
    Many commenters believed the direct comparison method would likely 
be impractical for most creditors. Some stated that the method was too 
subjective. Commenters nevertheless recommended that the option should 
be retained in the final rules. Industry

[[Page 2732]]

commenters also requested clarification regarding the phrases ``similar 
types of transactions'' and ``given class of products.'' Some of those 
commenters suggested that the Agencies provide reasonable flexibility 
to creditors when classifying a ``given class of products.'' They also 
suggested that the Agencies provide a better definition of the term. 
One commenter suggested that the Agencies use either the term ``similar 
types of transactions'' or ``given class of products,'' rather than 
both terms.
    In the final rules, Sec.  ----.72(b) is generally adopted as 
proposed, with certain changes. The Agencies have substituted the term 
``specific type of credit product'' for the proposed terms ``similar 
types of transactions'' and ``given class of products'' in the final 
rules in order to eliminate ambiguity in the terminology. The final 
rules define the term ``specific type of credit product'' to mean ``one 
or more credit products with similar features that are designed for 
similar purposes.'' The final rules also provide examples of what 
constitutes a specific type of credit product, such as student loans, 
new auto loans, used auto loan, and others. The Agencies have also made 
non-substantive changes for clarity.
    The Agencies recognize that different creditors' consideration of 
various factors when making direct comparisons may result in two 
creditors reaching opposite conclusions about the materiality of the 
same difference in annual percentage rates. For example, a credit card 
issuer considering these factors may conclude that a one-quarter 
percentage point difference in the annual percentage rate is not 
material, whereas a mortgage lender may conclude that a one-quarter 
percentage point difference in the annual percen