United States: Don't Risk It! Merchant Billing And Compliance With The Risk-Based Pricing Rule

Last Updated: November 18 2015
Article by Andrew E. Bigart, Jonathan L. Pompan and Alexandra Megaris

A recent Federal Trade Commission (FTC) enforcement action highlights the need for merchants that provide credit to consumers to review their policies and procedures for compliance with the Risk-Based Pricing Rule under the Fair Credit Reporting Act (FCRA). This Rule requires a creditor—defined to include a merchant that bills on a deferred basis—to provide consumers with a risk-based pricing notice if the creditor offers the consumer credit on less favorable terms based on information from the consumer's credit report or score.

On October 21, 2015, the FTC announced a proposed settlement with Sprint concerning allegations that the company had failed to provide consumers with risk-based pricing notices in connection with wireless phone contracts as required by the Risk-Based Pricing Rule. Thus, while the Risk-Based Pricing Rule applies broadly to traditional creditors like banks, credit card companies, and mortgage and auto lenders, the Sprint settlement underscores that the Rule also applies to merchants that provide credit by billing for services after they are used (such as through monthly billing for services rendered). In this regard, the Rule potentially applies to a broad spectrum of merchants, including public utilities, cable and satellite television providers, wireless phone providers, gyms, security companies, lawn service providers, and any other merchant that charges on a periodic basis for services provided (e.g., monthly bills).

This article summarizes the Risk-Based Pricing Rule, reviews the FTC's recent enforcement action, and provides guidance to help merchants that engage in risk-based pricing minimize the risk of violating the Rule.

What Is the Risk-Based Pricing Rule?

The Fair and Accurate Credit Transactions Act of 2003 (FACT Act) amended the FCRA to address risk-based pricing, defined as the practice of setting or adjusting the price and other terms of credit to reflect the risk of nonpayment by a specific consumer. Creditors that engage in risk-based pricing generally offer materially less favorable terms to consumers with poor credit histories or scores. Following the FACT Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) further amended the FCRA to require risk-based pricing notices to disclose information relating to a consumer's credit score if such information was used in making a credit decision. The purpose of the Risk-Based Pricing Rule is to inform consumers of negative information in their consumer reports so that consumers have the ability to review and correct any inaccurate information in their consumer reports.

On January 15, 2010, the Federal Reserve and FTC issued regulations implementing the FACT Act requirements for risk-based pricing. Under the regulations, a creditor must provide a risk-based pricing notice to a consumer with specific disclosures when the creditor, based in whole or in part on a consumer report, extends credit to the consumer on terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers. "Materially less favorable terms" generally means a higher annual percentage rate (APR); however, when there is no APR, the material term is the one that has the most significant financial impact on the consumer and varies based on information in a consumer report—and includes a periodic fee requirement. See 12 C.F.R. § 1022.71(n)(3).

Importantly, the term "credit" is defined as "the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor." Id. § 1022.71(h). Thus, the Risk-Based Pricing Rule applies to a much broader class of persons than traditional creditors or financial institutions. In particular, merchants that allow customers to be billed for services after they are used are subject to the Rule if they condition service or price service less favorably for consumers based on information in a consumer report or credit score.

Why Is the Sprint Consent Decree Important?

As explained in the complaint, Sprint advertised, marketed, distributed, and sold mobile phone and data plans to consumers whereby consumers incurred charges for voice, data, text, and third-party services for payment on a later date (e.g., at the end of the billing month). According to the FTC complaint, Sprint placed consumers with lower credit scores in an Account Spending Limit (ASL) program that required the consumers to pay a monthly fee of $7.99 in addition to the charges for cell phone and data services. Sprint, however, "failed to give many consumers required information about why they were placed in a more costly program, and when they did, the notice often came too late for consumers to choose another mobile carrier," according to the FTC press release announcing the settlement.

The proposed settlement requires Sprint to pay a $2.95 million penalty and requires the company to comply with the Risk-Based Pricing Rule in the future. In addition, Sprint is required to provide the required notices to consumers within five days of signing up for Sprint service or by a date that gives consumers the ability to avoid recurring charges like those in the ASL program. Finally, Sprint must send corrected risk-based pricing notices to consumers who received incomplete notices from the company.

The Sprint action underscores the need for merchants that bill on a deferred basis to comply with the Risk-Based Pricing Rule if they rely on consumer reports or credit scores when offering services to consumers. Under the Rule, requiring consumers with lower credit scores to pay additional fees for service or submit a deposit would qualify as offering credit on materially less favorable terms. Although not an issue in the Sprint action, the FCRA and Equal Credit Opportunity Act also include "adverse action" notice requirements that are triggered when an application for credit is denied or revoked based on information in a consumer report. These requirements also apply to merchants that provide services on a deferred-payment basis.

What Can Merchants Do to Minimize Risk?

The FTC's proposed settlement with Sprint shines a light on the need for merchants that allow customers to be billed for services after they are used to review their practices for compliance with the Risk-Based Pricing Rule (as well as adverse action requirements). Such merchants should review the Rule, as well as the guidance that the FTC has issued, to ensure that appropriate notices are provided to consumers who receive services on less favorable terms. In particular, as demonstrated by the Sprint matter, it is important for merchants to provide notices that include all of the information required under the Risk-Based Pricing Rule.

To minimize potential gaps or oversights, merchants should implement policies and procedures for risk-based pricing and adverse action notices, and such policies and procedures, including training and testing programs, should be reviewed periodically as part of the merchant's compliance management system.

Finally, the Sprint consent decree demonstrates that federal agencies are targeting the FCRA as an enforcement priority. The CFPB, for example, has brought several enforcement actions against data furnishers that allegedly provided inaccurate information to credit reporting agencies or failed to investigate consumer disputes forwarded by consumer reporting agencies. As with risk-based pricing, the data furnisher rules are focused on ensuring that consumers have access to accurate information about their credit histories.

Together, recent FTC and CFPB enforcement actions demonstrate that the agencies will continue to monitor users and furnishers of consumer data for compliance with the FCRA and its implementing regulations, including the Risk-Based Pricing Rule. To prepare for future scrutiny, any merchant or lender that provides credit to consumers—including billing on a deferred basis—should review its policies and procedures for compliance with the FCRA and its implementing regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions