New Rules: Reg V Reporting Notices

The Federal Reserve Board has issued final rules for providing consumers with a notice required by the FACT Act. The Act requires creditors to notify consumers when the creditor reports negative information to a credit bureau.

The act directs the Federal Reserve Board to issue model notices but does not give the Board the authority to issue regulations implementing the section. For this reason, the model notices stand alone in the appendix to Regulation B.

If you are looking for guidance, the best resource will be the Federal Register document issued with the final rule. In this document, the FRB explains its interpretation of the act's requirement and discusses how it expects the notices to work. The document is available on the FRB's website.

Triggers
There are several triggers to the notice requirement. The first is "credit." The notice applies whenever negative information regarding credit is reported on a consumer. For purposes of this rule, the definition of credit is borrowed from ECOA and Regulation B. This means that the definition of credit is as broad as possible.

Under ECOA, credit is the right to defer payment of a debt, or to incur a debt and defer its payment. This may include purchasing or acquiring goods, property or services and deferring payment. Clearly all classic credit - mortgages, car loans, credit cards - is covered. This rule also includes overdraft credit - including bounce protection. Bounce protection allows the consumer to incur a debt to the bank and defer its payment, even if only for a day. While bounce protection programs may not constitute credit under Truth in Lending, they clearly meet the test under ECOA.

Timing
The act specifies that the notice must be given either prior to reporting negative information or within 30 days of making the report. This timing allows two fairly straightforward procedures. The reporter may notify the borrower when the account is opened or any time thereafter as a general notice. Or the reporter may notify the customer on a periodic statement if one is provided for the account.

Once the consumer has been notified, the creditor may continue to report negative information without triggering a new notice requirement. This permission or exception is limited to the same transaction, credit or customer. The purpose of this notice is to inform the consumer of the consequences of late or delinquent payments.

Content
Commenters told the FRB that the proposed notice language was a bit bureaucratic. Commenters also made suggestions for improvements. The FRB listened and the final model notices are in clearer, plainer English. For example, the terms "delinquency" and "insolvency" have been dropped, replaced by "late payments, missed payments or other defaults."

The notice also contains a statement of the consequences of having negative information reported without requiring the creditor to make a definitive statement about what the credit bureau will do with the information. The final model notice states that the information "may be reflected in your credit report" rather than stating that it will be.

The act specifically permits combining the notice with default notices, billing statements, or other notices that you provide to the customer. However, any procedure for providing the notice must meet the clear and conspicuous standard. While the rule does not provide specific criteria for clear and conspicuous, mouseprint is clearly not allowed.

In designing your notices, take heed of the fact that consumer groups wanted the FRB to specify placement (front page) and type size (large) in order to meet the clear and conspicuous test. The FRB rejected these requests, placing a certain amount of trust in the industry. However, if notices are in fact not clear and conspicuous, there will be renewed pressure on the FRB to tighten the rule.

Changes to the model notice are allowed, but the changes must be consistent with the content and clarity standards set by the model notices.

Safe Harbor
You can protect your institution by having policies and procedures, if policies and procedures are designed to ensure compliance. In preparing procedures, give attention to different types of notification to consumers based on the nature of the loan. For example, a credit card customer will get a periodic statement. Installment loan customers may already have a coupon payment book and will only be getting notices in the event of delinquency. If so, you will need separate procedures for each process of communication with the consumer.

You also get protection by using the model notices. If you use the model language, be sure it accurately describes what your institution is reporting. The FRB gives examples such as using plural instead of or in addition to singular, or changing the order. Any modifications must be simple. If you decide to make changes, stick to the 30-word rule. That's the limit the act placed on the FRB.

This rule takes effect on July 16, 2004.

ACTION STEPS

If you report negative credit information, review the procedures for making the reports. Compare these to statement procedures.
Procedures for open-end credit such as HELOCs and credit cards may need to be different from procedures for installment loans and mortgages.
Compare timing of reporting negative information to credit bureaus with timing of statements or notices to consumers. Look for a procedure that will safely fall within 30 days of reporting negative information.
Consider developing an informational guide for consumers on credit histories, using materials from the FTC. The notice, if clear and conspicuous, can be combined with this.