Risk-Based Credit Cards are Permissible FCU Activity

ALEXANDRIA, Va. – In response to a request from an Omaha, Neb. law firm, NCUA stated in a legal opinion letter (04-0325) that federal credit unions may use a risk-based structure for their credit card programs and are not currently required to make any disclosures about pricing. “A risk-based pricing model enables a credit union to make credit cards available to more of its members, including those with less-than-perfect credit histories,” NCUA Associate General Counsel Sheila Albin wrote in the May 17 letter. “Inevitably, it will result in some members having more expensive credit than others. Nothing in either the Federal Credit Union Act or in NCUA’s regulations prohibits an FCU from offering a credit card program in which it determines rates based on the credit profile of the member.” She cautioned that the federal credit union must base its pricing on legitimate credit risks and not on a discriminatory basis, as banned under the Equal Credit Opportunity Act. “We also note that risk-based pricing means that members will not know the rate for which they qualify until after the FCU has approved an application and established a card account in the member’s name.” Albin continued. “Potentially, this can have an adverse impact on the applicant’s credit score, since an applicant may need to submit numerous applications for credit to find a lender offering an affordable rate. Consumer reporting agencies may consider a substantial number of credit applications to be a negative factor in their calculation of a credit score.” NCUA suggested the federal credit union be proactive in explaining this to their members. Beginning December 2004, federal credit unions will have to begin disclosing how it arrives at risk-based pricing decisions under the Fair and Accurate Credit Transactions Act. Disclosures are not required when the member applied for the specific material terms offered, if an adverse action notice is required, or for members who qualify for the best offered rate. Albin explained that the Federal Trade Commission and the Federal Reserve Board are charged with implementing the related FACT Act regulations, which are expected to be out by December. For now, NCUA’s Letter to Credit Unions No. 174 from August 1995 should be useful.