By Timothy Raty – Compliance Specialist, DocuTech Corporation
On January 1, 2011 joint Federal regulations from the Federal Trade Commission (16 CFR §§640 et seq.) and the Federal Reserve Board (12 CFR §§222 et seq.) will require creditors to provide new disclosures in transactions where they grant credit to a consumer based upon a consumer’s credit score, but grant it on materially less favorable terms than the most favorable terms granted to a substantial number of consumers who are provided credit by the same creditor. These disclosures are commonly known as risk based pricing notices.
There are several methods for determining whether a borrower has received credit on less favorable terms and whether the form should be provided. These methods include a direct comparison of material terms between other borrowers, a Credit Score Proxy Method, and a Tiered Pricing Method, which are described in detail in 16 CFR §640.3(b)(2) and 12 CFR §222.72(b)(2).
The Boards have published model disclosure forms for use in conjunction with the new regulation. These can be found in 16 CFR Pt. 698, App. B or 12 CFR Pt. 222, App. H and are as follows:
- Model Form for Risk-Based Pricing Notice (B-1 or H-1);
- Model Form for Account Review Risk-Based Pricing Notice (B-2 or H-2);
- Model Form for Credit Score Disclosure Exception for Loans Secured By One to Four Units of Residential Real Property (B-3 or H-3);
- Model Form for Credit Score Disclosure Exception for Loans Not Secured by Residential Real Property(B-4 or H-4); and
- Model Form for Loans Where Credit Score is Not Available (B-5 or H-5).
According to these regulations, the H-1 form must be given by a creditor when a borrower receives credit on less favorable terms. However, the H-3, H-4, or H-5 forms may be given in lieu of H-1 under certain circumstances. The rule provides for exceptions when the H-1 Risk Based Pricing Notice does not need to be given. The most common for DocuTech users will be the H-3 form which is for loans secured by residential real estate. In these circumstances, if the creditor provides the H-3 form, the H-1 Risk Based Pricing Notice is not required. The H-4 form is the credit score exception notice for loans that are not secured by residential real property and will not be used within DocuTech’s software. The H-5 form is used when credit scores are not available. This form will be triggered to print when the credit score fields are empty inside ConformX.
The H-1, H-3, and H-5 forms will be available in the software. If there is more than one consumer in a transaction, a copy of the appropriate form will be given to each borrower and will (in the case of the H-3 form) contain the credit score of that particular borrower. There are slightly different timing requirements for each form, but they will all be provided in both initial and closing document packages.
The H-3 form may be given when a “consumer requests from the [creditor] an extension of credit that is or will be secured by one to four units of residential real property.” (16 CFR §640.5[d]; 12 CFR §222.74[d]). This will be the default form offered by DocuTech and it will be configured to print in initial and closing packages when credit scores are available.. The form must be given to the consumer when reasonably practicable after the use of a credit score in connection with a loan application, but no later than consummation.
The H-5 form was created for situations where a “a credit score is not available from the consumer reporting agency from which the person regularly obtains credit scores” for the consumer that the credit is extended to and the creditor does not receive another credit report for this consumer from another agency (see 16 CFR §640.5[f]; 12 CFR §222.74[f]). DocuTech will provide this form under circumstances where the borrower has no credit score. It must be provided to the consumer as soon as reasonably practicable after the creditor has requested the consumer’s credit score, but not after consummation.
Although the H-1 form is the primary form that should be given, it will only be available upon request, since the H-3 form is the one primarily demanded by our clients and fulfills the same requirements. This form must be given between the time the consumer is notified that his credit application is approved and consummation.
The H-2 form is used for instances of credit reviews and the H-4 is for transactions that are not secured by a one to four residential property. Since these forms are to be used for situations that are beyond the field of services provided by DocuTech, these forms will not be provided.
A creditor is not obligated to provide any of these forms if a consumer applies for, and is granted, specific material terms (unless the terms were specified by the creditor after receiving the consumer’s credit report, after the consumer applies for credit). Nor are they obligated to provide it when they provide an adverse action notice required by 15 USCA §1681m(a) (see 16 CFR §640.5[a] & [b]; 12 CFR §222.74[a] & [b]).
If you have any question related to these new forms please contact DocuTech customer support at 1-800-497-3584 option 3