Mortgage Concepts: Issuing a risk-based pricing notice | firsttuesday Journal
Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators. This video discusses circumstances that require the issuances of the risk-based pricing notice. For course credit toward renewing your NMLS license, visit firsttuesday.us.
The risk-based pricing notice
The risk-based pricing notice is required when the lender offers credit to a consumer that is materially less favorable than credit offered to other consumers, based on the consumer’s credit report. To determine whether credit is “materially less favorable”, the lender is to measure the cost of the loan offered attributed to factors such as the type of credit product, the term of the credit, the interest rates, points, etc. [12 CFR §1022.72(a); 12 CFR §1022.71(o)]
There are three different ways to determine which consumers are to receive the risk-based pricing notice:
direct comparison;
the credit score proxy method; or
a tiered pricing method. [12 CFR §1022.72(b)]
Direct comparison requires the lender to compare the terms being offered to the consumer against the most favorable terms offered to past consumers for the same product. Direct comparison is often unfeasible.
The credit score proxy method requires the lender to approximate a credit score “cutoff”, above which the lender’s past borrowers have received the most favorable loan terms. The lender then provides all applicants whose credit scores are below the cutoff score with the risk-based pricing notice. [12 CFR §1022.72(b)(1)]
The tiered pricing method sets pricing based on a number of discrete tiers chosen by the lender. The risk-based pricing notice is provided to those who are not in the top tiers. The total number of tiers determines which tiers receive the notice. For example, the regulations indicate that if there are four or fewer tiers, all but the top tier receive the risk-based pricing notice. [12 CFR §1022.72(b)(2)]
The risk-based pricing notice is to contain:
a statement of the consumer’s credit history and the type of information included in that history;
a statement directing consumers to the CFPB website to obtain more information about consumer reports;
if the consumer’s credit score was used in setting the material terms of credit:
a statement that a credit score is a number that takes into account information in a consumer report, that the consumer‘s credit score was used to set the terms of credit offered and that a credit score can change over time to reflect changes in the consumer‘s credit history;
all of the key factors that adversely affected the credit score; and
the date on which the credit score was created;
the name of the consumer reporting agency or other person that provided the credit score;
a statement that the terms offered, such as the annual percentage rate (APR), have been set based on information from a consumer report; and
a statement that the terms offered may be less favorable than the terms offered to consumers with better credit histories. [12 CFR §1022.73(a)(1)]
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