Risky business

No one is sliding across the living room floor in shades lip synching to Bob Seger, but violating the FTC’s Risk-Based Pricing Rule is risky business nonetheless. That’s the message of the FTC’s $1.9 million settlement with telecom company Time Warner Cable, Inc., the first case brought under the Risk-Based Pricing Rule.

Part of the Fair Credit Reporting Act, the Risk-Based Pricing Rule has been in place for almost three years.  If a company extends less favorable credit terms to some consumers based on information in their credit report, that’s risk-based pricing.  Under the Rule, the company has to give those people a Risk-Based Pricing Notice.  You’ll want to read the Rule for specifics, but the Notice needs to tell people that the less favorable terms are based on information in their credit report, that they can get a copy of their report for free, and that they have a right to dispute mistakes in it.

Why is the information in the Notice so important to consumers?  As an FTC study suggests, there are a troubling number of inaccuracies in people’s credit reports.  It’s one thing to offer less-than-stellar terms to people with less-than-stellar credit.  But it’s not right when consumers get hit in the pocketbook based on inaccurate information – and that happens too often when credit decisions are made behind closed doors. 

The purpose of the Risk-Based Pricing Rule is to shed light on the practice so people are aware of the company’s basis for offering less favorable terms.  The Notice gives them the tools they need to dispute information in their credit report they believe to be inaccurate.

So where does the FTC say Time Warner Cable went wrong?  Because the company lets people defer payment for some services, that amounts to an extension of credit – which triggers the protections of the Fair Credit Reporting Act.  When people applied for cable TV, internet, or other services in some states, Time Warner Cable pulled their credit report.  If the company liked what it saw, it typically didn’t require the customer to pay a deposit or the first month’s bill.  But other customers had to pay deposits or pay their first month of service upfront if information in their credit report raised an eyebrow.

As of January 11, 2011 – the date the Risk-Based Pricing Rule took effect – Time Warner Cable had an obligation to give those people the Risk-Based Pricing Notice.  But according to the FTC's complaint, Time Warner Cable went two years without honoring its obligations under the Rule.  The upshot:  Thousands of people were simply told they had to pay a deposit or prepay the first month to get service.  They weren’t told that the decision was based on what was in their credit report – information that may have been inaccurate.  The FTC's lawsuit alleges that by failing to give people the required Notice, Time Warner Cable violated the Risk-Based Pricing Rule.

In addition to the $1.9 million civil penalty, Time Warner Cable has agreed to comply with the law from here on in.  But the FTC isn’t just taking their word for it.  The order puts record-keeping and reporting requirements in place so the FTC can keep tabs on how the company implements the Risk-Based Pricing Rule in the future.

Looking for guidance to make sure you’re not risking a violation? The Rule include model forms to streamline compliance.  What's more, the FTC has published a new brochure, Using Consumer Reports for Credit Decisions:  What to Know About Adverse Action and Risk-Based Pricing Notices, with nuts-and-bolts advice on what the Rule requires.