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The bank sent prescreened offers of credit based on FICO scores and included a stated Annual Percentage Rate. The bank, in some cases, honored the offered APR even if the applicant's FICO score had dropped. If the FICO score had dropped significantly, the bank issued a denial. Should the bank have included risk-based pricing notices?

Using FICO scores as part of the selection criteria, the bank sent prescreened offers of credit to those with higher FICO scores. The offer stated an Annual Percentage Rate (APR). If a recipient applied for the loan, the bank, in some cases, honored the APR stated in the offer even if the applicant's FICO score had dropped since the prescreening. However, if the FICO score had dropped significantly, the bank issued a denial. The bank did not provide risk-based pricing notices to these customers, since the ultimate credit score did not impact the pricing. The bank's auditor is now questioning whether the bank complied with Regulation V's requirements to provide risk-based pricing notices. Was this process compliant?

A: Yes. Regulation V’s §1022.72(a) provides that (unless an exception applies) risk-based price notices are required if the creditor uses a consumer report (including a FICO score) in connection with an application of consumer credit and, based in whole or in part on that report, grants credit to the applicant on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumer from that creditor. The key words here are “grants credit.” In this case, the bank denied the credit based on the score. Indeed, the bank did not use any form of risk-based pricing. It applied a single APR to all of those who received credit. (March 2019)

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