1

WebinarSeptember 28, 20111:00 pm-2:00 pm EDT

Dodd-Frank Wall Street Reform ActNew Credit Score Disclosure Rules

2

Presenters• Lisa Williams

Vice President of Management Systems, Bozzuto Management Company

• John L. Culhane, Jr.Partner, Ballard Spahr LLP

• David CarnerPresident, Leasing Desk (a division of RealPage)

• Jay HarrisVice President, Business Services, CoreLogic SafeRent

3

Background• Fair Credit Reporting Act (FCRA)

– Adverse action notice

• Fair & Accurate Credit Transactions Act (FACT Act)– Risk-based pricing notice

• Dodd-Frank Wall Street Reform & Consumer Protection Act (Dodd-Frank)– Credit score disclosure

4

Polling Question 1What is an adverse action?

a) Denial of application

b) Requiring a co-signor

c) Requiring a larger security deposit than might be required for another applicant

d) All of the above

5

FCRA Adverse Action Notice• An adverse action is an unfavorable action or determination

based in whole or in part on information in a credit report.

• Adverse action notices are required for denials.

• Adverse action notices are also required for conditional approvals, i.e. an approval requiring a guarantor, a deposit not required for others, an additional deposit, or charging a higher rent (based on information from a credit report).

• Effective since 1996.

6

FACT Act Risk-Based Pricing Notice

• Risk-based pricing – Offering credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers, based in whole or in part on information in a credit report. Among other things, the notice tells you that your terms may be less favorable than the terms offered to others with better credit histories.

• Credit – 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. (603(a) of the FCRA and 702(d) of the Equal Credit Opportunity Act)

7

What about leasing? Is rent credit?

• FTC opinion letter to NMHC – Rent is not credit.

• FRB position is the same – Rent is not credit.

• 9th Circuit issues – Rent is credit – Brothers v. First Leasing, 724 F.2d 789 (9th Cir. 1984).

8

Dodd-Frank Credit Score Disclosure

• Requires disclosure of the credit score when adverse action is based in whole or in part on a numerical credit score (even if the credit score was not a significant factor in the decision).

• Requires disclosure of the credit score in a risk-based pricing notice if a credit score is used in setting material terms of credit (even if the credit score was not a significant factor in setting those terms).

• NEW disclosure - effective July 21, 2011.

9

What is a Dodd-Frank credit score?• Not every scoring system is a “credit score” for these purposes.

• A credit score is a numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default (the numerical value or the categorization derived from such analysis may also be referred to as a “risk predictor” or “risk score”).

• A credit score does not include any mortgage score or rating of an automated underwriting system that considers one or more factors in addition to credit information, including the loan-to-value ratio, the amount of down payment, the financial assets of a consumer, or any other elements of the underwriting process or underwriting decision.

10

Examples of Credit ScoresTriggering Dodd-Frank Disclosure

• Fair Isaac: FICO Score

• Experian: Experian Credit Score

• Equifax: Beacon, Pinnacle Score

• TransUnion: Empirica, Precision Score

• 3 bureaus: VantageScore

11

Types of Scores Usedin Resident Screening

• Statistical Lease Risk Model (with no consideration of credit scores)– No Dodd-Frank Act disclosure needed

• Rules-based Decision (with no consideration of credit scores)– No Dodd-Frank Act disclosure needed

• Statistical Lease Risk Model (with consideration of credit scores)– Dodd-Frank Act disclosure needed

• Rules-based Decision (with consideration of credit scores)– Dodd-Frank Act disclosure needed

12

Examples of Tenant Decisions ThatDo NOT Trigger DFA Disclosure

• Statistical Lease Risk Score Not Involving A Credit Scorei.e. SafeRent’s ScorePLUS, Scorex

• Rules-based Decisions Not Involving a Score– Rent/income ratios and other proxy rules for lease-risk

modeling

13

Examples of Tenant Decisions ThatDO Trigger DFA Disclosure

• Statistical Lease Risk Model (with consideration of credit scores)i.e. LeasingDesk

• Rules-based Decision (with consideration of credit scores)– Rent/income ratio with credit score

14

Polling Question 2Does your resident screening provider use a

credit score in the screening process?

a) Yes, my resident screening provider uses a credit score.

b) No, my resident screening provider does not use a credit score.

c) I have no idea!!

15

Determining if Your Screener Uses a Credit Score• Discuss with your provider.• Review any recent communications.• Review your invoice to determine if you are charged for a

credit score product.• Look for credit scores on detail screening report.• Review adverse action letters.

16

What information is requiredin credit score disclosure

• The credit score used by the person in making the credit decision;• The range of possible credit scores under the model used to generate the

credit score;• All of the key factors that adversely affected the credit score, which shall not

exceed four factors, except that if one of the key factors is the number of inquiries made with respect to the consumer report, the number of key factors shall not exceed five;

• The date on which the credit score was created; and • The name of the consumer reporting agency or other person who provided

the credit score.

AND

• a statement that a credit score is a number that takes into account information in a consumer report and that a credit score can change over time to reflect changes in the consumer’s credit history.

17

Comparison of Adverse Action LettersAdverse Action Disclosure Adverse Action Credit Score Disclosure

Enforcement and Penalties for Non-Compliance• Civil - lawsuits by applicants/residents.

– No individual lawsuits or class actions (615(h)(8) of the FCRA and Murray v. Cross Country Bank, 399 F. Supp. 2d 843 (N.D. Ill. 2005).

• Administrative – FTC and state attorneys general.– FTC can treat a violation as an unfair or deceptive act or practice

under the FTC Act and under the FCRA, for a knowing violation, which constitutes part of a pattern or practice of violations, can also sue for a civil penalty of up to $2,500 per violation.

– State attorney general – can seek any remedies under state law and under the FCRA can also sue for an injunction and either damages that state residents could get if they could sue or up to $1,000 per violation.

19

QUESTIONS?

Presenter Contact InformationLisa WilliamsVice President of Management SystemsBozzuto Management Companylwilliams@bozzuto.com(301) 446-2216

David CarnerPresidentLeasing Desk (a division of RealPage) David.Carner@RealPage.com(972) 820-3035

John L. Culhane, Jr.PartnerBallard Spahr LLPCulhane@ballardspahr.com(215) 864-8535

Jay HarrisVice President, Business ServicesCoreLogic SafeRentjwharris@saferent.com(301) 881-3400 x1934