A risk-based pricing notice is required when a creditor uses information from your consumer report to offer you credit on terms materially less favorable than the best terms it offers to a substantial share of its other customers. The rule comes from Section 1681m(h) of the Fair Credit Reporting Act and the implementing regulations in 12 CFR Part 1022, Subpart H.1Office of the Law Revision Counsel. 15 U.S. Code 1681m – Requirements on Users of Consumer Reports The point of the notice is to tell you that your credit history moved your pricing, so you can pull your report and check it for errors.
The Three Conditions That Trigger the Notice
All three of the following have to be true before a creditor owes you a notice:2eCFR. 12 CFR Part 1022 Subpart H – Duties of Users Regarding Risk-Based Pricing
- The credit is being extended for personal, family, or household purposes.
- The creditor used a consumer report to set the terms.
- The terms offered are materially less favorable than the best terms a substantial portion of the creditor’s customers receive.
“Materially less favorable” has a regulatory meaning: the cost of credit to you would be significantly greater than the cost to a consumer who got the creditor’s better terms.3eCFR. 12 CFR 1022.71 – Definitions The “material term” being compared depends on the product. For open-end credit like credit cards, it’s the purchase APR, setting aside introductory and penalty rates. For closed-end credit like auto loans and mortgages, it’s the APR disclosed at closing. For credit that has no APR, it’s whatever financial term varies based on the credit report and hits your wallet hardest, such as a required security deposit or an annual membership fee.
The comparison is always internal to that one creditor. A lender offering you 9% doesn’t owe you a notice because a competitor down the street offers 6%. It owes you a notice when its own best customers routinely get 6%.
The obligation falls on the creditor the loan is initially payable to, even if the contract is assigned right away. If an auto dealer originates a retail installment contract and sells it to a bank that afternoon, the dealer owes you the notice, not the bank, though the bank can arrange for the dealer to deliver it on the bank’s behalf.4eCFR. 12 CFR Part 222 Subpart H – Duties of Users Regarding Risk-Based Pricing – Section 222.75
How Creditors Identify Who Falls Below the Line
Creditors don’t run applicant-by-applicant comparisons against their whole customer base. The regulations give them three methods, and the one they choose determines who ends up on the notice list.5eCFR. 12 CFR 1022.72 – General Requirements for Risk-Based Pricing Notices
Tiered Pricing
Creditors that sort applicants into pricing tiers use the tier structure itself. With four or fewer tiers, everyone outside the top tier gets a notice. So if the tiers are 8%, 10%, 12%, and 14%, only the 8% borrowers skip the notice. With five or more tiers, the top two tiers are exempt, plus enough additional tiers so that the exempt group makes up 30% to 40% of all tiers. In a nine-tier structure, the top three would be exempt.
Credit Score Proxy
Creditors without fixed tiers can set a cutoff score. The cutoff is the score at which about 40% of the creditor’s customers score higher and 60% score lower. Applicants who fall below the cutoff get a notice. Creditors must recalculate the cutoff at least every two years using their own customer data.6Consumer Financial Protection Bureau. 12 CFR 1022.72 – General Requirements for Risk-Based Pricing Notices
Direct Comparison
Creditors that price case by case compare the terms offered to one consumer against the terms offered to other consumers for the same type of product, meaning products with similar features and purposes (used auto loans, variable-rate mortgages, and so on). If the consumer’s terms come out materially less favorable, the notice is required.
Rate Increases on Existing Accounts
The notice isn’t limited to new applications. When a creditor pulls your credit report as part of a periodic account review and raises your APR based on what it finds, that also triggers a notice.7eCFR. 12 CFR Part 1022 Subpart H – Duties of Users Regarding Risk-Based Pricing – Section 1022.72(d) Credit card issuers do this routinely. You’re entitled to one notice per original credit grant on the front end and a separate notice every time an account review leads to an APR increase.
When a Notice Is Not Required
Several exceptions excuse the notice even when the terms would otherwise trigger it.
Credit Score Disclosure Exception
A creditor can skip the risk-based pricing notice by giving a credit score disclosure to every applicant, regardless of the terms offered. The regulations create two versions: one for home loans secured by one to four residential units, and one for all other credit.8Consumer Financial Protection Bureau. 12 CFR 1022.74 – Exceptions Both require the creditor to provide the applicant’s credit score, the score range, key factors that lowered the score, and information about the reporting agencies. This is the most common compliance path because it’s easier to give the same disclosure to everyone than to track who qualifies for a notice. The home-loan version is sometimes called the Notice to Home Loan Applicant.
Adverse Action Notice
If the creditor denies your application (or takes another adverse action) and gives you an adverse action notice under FCRA Section 615(a), no separate risk-based pricing notice is owed. An adverse action notice already covers the reporting agency’s identity and your right to a free report, and the regulations avoid duplication.
Specific Terms Requested and Granted
If you ask for specific terms and the creditor grants exactly what you asked for, no notice is required. The exception disappears if the creditor was the one who specified those terms after pulling your credit. You have to name the terms before the credit report is pulled, and it has to be a specific number. Saying “whatever rate I qualify for” does not count. Asking for a 7% APR does.
Prescreened Solicitations
When a creditor pulls a prescreened list from a reporting agency and mails a firm offer of credit, no risk-based pricing notice is required. The pre-approved credit card offers that arrive in your mailbox fall into this category, because the creditor initiated the offer rather than responding to an application.
When the Notice Has to Arrive
Once the notice is owed, timing depends on the type of credit:9eCFR. 12 CFR Part 222 Subpart H – Duties of Users Regarding Risk-Based Pricing – Section 222.73(c)
- Closed-end credit: before the transaction closes, but not before the creditor communicates the approval decision.
- Open-end credit: before the first transaction under the plan, again not before the approval communication.
- Account reviews: at the time the rate increase is communicated, or within five days after the increase takes effect if no advance notice is given.
The notice can be delivered in writing, orally, or electronically, though electronic delivery requires prior consumer consent that complies with the federal E-SIGN Act.
What the Notice Tells You, and What to Do With It
A compliant notice tells you the terms were based on your consumer report, names each reporting agency that supplied a report, tells you how to get a free copy from each of them, and prompts you to review that report for errors and dispute anything wrong.1Office of the Law Revision Counsel. 15 U.S. Code 1681m – Requirements on Users of Consumer Reports When a credit score was used, the notice also includes your score, the score range, the date it was generated, and up to four key factors that hurt it (five if one of them is the number of recent inquiries).
If a notice reaches you, it means your credit history cost you money on that loan. Pull your free report from each agency named and look for errors: accounts you don’t recognize, late payments that were actually on time, wrong balances. Dispute anything inaccurate with the reporting agency. A corrected report won’t rewrite the terms you already signed for, but it sets you up to refinance or negotiate better terms next time. If the score factors on the notice point to real issues like high balances or recent late payments, the notice still tells you exactly what’s dragging your rate up, which is more actionable than a general sense that your credit could be better.