Plan offered to give people notice about rates on some loans

By JEANNINE AVERSA AP Economics Writer

WASHINGTON (AP) - People taking out credit cards, home mortgages, auto loans and other loans would be notified when they are offered higher interest rates because of poor credit histories, under a plan federal regulators proposed Thursday.

Many lenders offer borrowers rates and terms based on their credit reports, which reflect the borrowers' ability to repay loans. It's called "risk-based pricing."

Under the proposal, a notice "would generally be provided to the consumer after the terms of credit have been set, but before the consumer becomes contractually obligated on the credit transaction," the Federal Reserve and the Federal Trade Commission said in a joint release.

Congress directed the Fed and the FTC to take the action under a 2003 law. The provisions, announced Thursday, are aimed at helping borrowers better understand the rates they are being offered on certain loans and to get more information about their credit reports, Federal Reserve attorneys said.

The notification kicks in when a lender - based on the borrower's credit report - "offers or provides credit to the consumer on terms less favorable than the terms it offers or provides to other consumers," the regulators said.

If the lender offers a higher rate not related to the borrower's credit report - for instance - because less money was provided as a downpayment on a loan, then the notice would not be required, the attorneys said.

"The proposed rules would apply, with certain exceptions, to all creditors that engage in risk-based pricing," the regulators said. One of the most significant exceptions, regulators said, would allow lenders to skip the notice if they "provide all of their consumers with their credit scores and explanatory information," the regulators said.

The public, industry and others will have an opportunity to weigh in on the proposal, which could be subject to changes, before a final plan is adopted.