Dodd-Frank Act amendment for credit scores took effect July 21, 2011

The Federal Reserve Board and the Federal Trade Commission (FTC) issued final rules to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).

The final rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements. These rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA.

For employers, this means that if a consumer report that includes a credit score is used to determine eligibility for employment, the employer will be required to disclose to the subject the usage of the credit score in an adverse employment decision and to provide information about the credit score, including the score itself, up to four key adverse factors in the score, and the identity of the agency that provided the score.

For credit transactions, creditors, including banks, credit unions, credit card issuers, and utilities, that extend credit on terms that are less favorable than those offered to other consumers because of information contained in a credit report, or if other adverse action is taken, will have to provide to the subject a “risk-based pricing notice” which discloses the credit scores and related information. Such notice will include: 1) the numerical credit score used by the creditor in making the decision; 2) the range of possible scores under the model used by the creditor; 3) the key factors that adversely affected the credit score; 4) the date on which the credit score was created, and 5) the name of the entity that provided the score.

In certain cases, such as for applications for a mortgage, auto loan, or another type of credit, a lender will have to furnish to the subject a “credit score notice” that lists the credit score and how the score compares to other consumers’ scores regardless of the credit terms offered. If no credit score is available for a consumer, the lender’s notice will identify the particular credit bureau which reported this information. Additionally, if a consumer’s annual percentage rate (APR) on an existing credit account is increased based on a review of a credit report, the creditor will have to provide an “account review notice.

The Board and the FTC have stated that it is imperative to have the regulations and revised model forms in place as close as possible to July 21, 2011. This will help ensure that consumers receive consistent disclosures of credit scores and related information, and facilitate uniform compliance when Section 1100F of the Dodd-Frank Act becomes effective.

Consumer Financial Protection Bureau seeks input on non-bank entities

On June 23, 2011, the Consumer Financial Protection Bureau (CFPB) released a Notice and Request for Comment seeking public input on a key element of its non-bank supervision program — the statutory requirement to define who is a “larger participant” in certain consumer financial markets.

Created by the Dodd-Frank Act, the CFPB has been empowered to regulate non-bank financial entities. But exactly what is a “non-bank?” Various literature generally defines “non-bank” as a company that offers consumer financial products or services, but does not have a bank, thrift, or credit union charter and does not take deposits. Products from non-banks have a significant share of the overall consumer financial marketplace. Under Dodd-Frank, many of these non-banks will be subject to a federal supervision program for the first time.

In its Notice and Request for Comment, the CFPB has identified the following markets for potential inclusion in an initial rule: debt collection, consumer reporting, consumer credit and related activities, money transmitting, check cashing and related activities, prepaid cards, and debt relief services. The larger participant rule will not impose substantive consumer protection requirements. Instead, the rule will enable CFPB to begin a supervision program for larger participants in certain markets.

The issues for discussion in the Notice include:

  • What criteria to use to measure a market participant;
  • Where to set the thresholds for inclusion;
  • Whether to adopt a single test to define larger participants in all markets (measure the same criteria and use the same thresholds) or to use tests designed for specific markets;
  • What data is available to use for these purposes;
  • What time period to use to measure the size of a market participant;
  • How long a participant is to remain subject to supervision after initially meeting the larger participant threshold, and if it subsequently falls  below the threshold; and
  • What consumer financial markets to include in the initial rule.

SEC Defines Due Diligence for Dodd-Frank ABS Certification Requirements

On May 28, 2011, as part of its ongoing efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) approved for public comments (which will be accepted until July 18, 2011) proposed rules pursuant to Section 932 that would require nationally recognized statistical rating organizations (NRSROs), issuers and underwriters to make public the findings and conclusions of any due diligence reports prepared by a third-party service provider in an asset-backed securities transaction. Such third-parties would also have to furnish a certification to each NRSRO rating the securities.

Since the Dodd-Frank Act does not define “due diligence services,” the SEC has identified four categories of reviews, and thus has defined “due diligence services” in the proposed Rule 17g-10 to mean “an entity that engages in a review of the assets underlying an Exchange Act-ABS for purposes of making findings with respect to:

  • quality or integrity of the information or data about the assets provided, directly or indirectly, by the securitizer or originator of the assets;
  • whether the assets origination conformed to stated underwriting or credit extension guidelines, standards, criteria or other requirements;
  • value of collateral securing such assets;
  • whether the assets originator complied with federal, state or local laws or regulations; and
  • any other factor or characteristic of such asset that would be material to the likelihood that the issuer of the Exchange Act-ABS will pay interest and principal according to its terms and conditions.”

Proposed Rule 17g-10 will also define “issuer” to include a sponsor (as defined in 17 CFR 229.11) or depositor (as defined in 17 CFR 229.1011) that participates in the issuance of an Exchange Act-ABS. The terms “originator” and “securitizer” as used in proposed Rule 17g-10 will have the meanings stated in Section 15Gf of the Exchange Act.

An issuer or underwriter is not required to furnish a Form ABS-15G if such issuer or underwriter obtains a representation from each NRSRO engaged in the rating of the Exchange Act-ABS that the NRSRO will publicly disclose the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. The NRSRO must disclose the finding and conclusions of any third-party due diligence report with the publication of the credit rating in an information disclosure form prepared pursuant to new paragraph (a)(1) of Rule 17g-7 no less than five business days prior to the first sale in the offering. Rule 17g-7 as amended by the proposed rules, would require an NRSRO to disclose in the information disclosure form:

  • whether and to what extent it relied upon third-party due diligence services;
  • description of the information that such third-party reviewed in conducting its due diligence services; and
  • description of the findings or conclusions of such third-party.

Also in accordance with Section 15E(s)(4)(C) of the Exchange Act, the SEC proposed that the format of the certification in Form ABS Due-Diligence-15E include the following line items:

  • identity and address of the provider of the third-party due diligence services;
  • identity and address of the issuer, underwriter or NRSRO that hired the provider of the third-party due diligence services;
  • identity of each NRSRO that published criteria for performing;
  • scope and manner of the due diligence performed, including but not limited to the type of assets that were reviewed, the same size of the assets reviewed, how the sample size was determined and any other type of review conducted with respect to the assets; and
  • findings and conclusions resulting from the review.

In addition, any individual executing the Form ABS Due Dilignce-15E on behalf of a third-party due diligence provider will be required to represent that he/she executed the form on behalf of, and on the authority of, the third-party due diligence provider and the third-party due diligence provider conducted a complete due diligence review.

Dodd-Frank rule disqualifies felons and bad actors from securities offerings

On May 25, 2011, the Securities and Exchange Commission (SEC) proposed a rule to deny certain securities offerings from qualifying for exemption from registration if they involve “felons and other bad actors.”

When an individual or a company offers or sells a security such as a stock or bond, generally the offering must be registered with the SEC. However, the SEC’s Regulation D provides three exemptions that can used to avoid such registration.  The most widely used exemption is Rule 506, which accounts for more than 90% of the offerings made, as well as the majority of capital raised. If an offering qualifies for the Rule 506 exemption, an issuer can raise unlimited capital from an unlimited number of “accredited investors” and from up to 35 non-accredited investors.

Section 926 of the Dodd-Frank Act requires the SEC to adopt rules that would deny this exemption to any securities offering in which certain “felons and other bad actors” are involved. This new rule is substantially similar to the bad actor disqualification provisions of another limited offering exemptive rule – Rule 262 of Regulation A – which provides for an exemption from registration for certain small offerings.

Under the proposed rule, an offering cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule (including the issuer’s predecessors and affiliated issuers, directors, officers, general partners and managing members of the issuer, 10% beneficial owners and promoters of the issuer, persons compensated for soliciting investors, and the general partners, directors, officers and managing members of any compensated solicitor) has had a “disqualifying event” identified as follows:

  • Criminal conviction in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The criminal conviction would have to have occurred within 10 years of the proposed sale of securities (or five years, in the case of the issuer and its predecessors and affiliated issuers).

  • Court injunction and restraining order in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The injunction or restraining order would have to have occurred within five years of the proposed sale of securities.

  • Final order from state securities, insurance, banking, savings association or credit union regulators, federal banking agencies or the National Credit Union Administration that bar the issuer from: 1) associating with a regulated entity; 2) engaging in the business of securities, insurance or banking; 3) engaging in savings association or credit union activities, or 4) orders that are based on fraudulent, manipulative or deceptive conduct and are issued within 10 years before the proposed sale of securities.

  • Certain commission disciplinary order relating to brokers, dealers, municipal securities dealers, investment companies and investment advisers and their associated persons, which would be disqualifying for as long as the order is in effect.

  • Suspension or expulsion from membership in a “self-regulatory organization” or from association with an SRO member, which would be disqualifying for the period of suspension or expulsion.

  • Commission stop order and order suspending the Regulation A exemption issued within five years before the proposed sale of securities; and

  • U.S. Postal Service false representation order issued within five years before the proposed sale of securities.

The proposed rule would provide an exception from disqualification when the issuer can show it did not know and, in the exercise of reasonable care, could not have known that a disqualification existed. Any pre-existing convictions, suspensions, injunctions and orders would be disqualifying. For further information, see







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