FEBRUARY 2005

FTC Issues Final Ruling
on Pre-Screened Credit Disclosures

The Federal Trade Commission (FTC) apparently paid almost no heed to a recent Federal Reserve report in crafting its final rule on the necessary consumer disclosures in prescreened credit offers. The result, in the opinion of your editors, is yet another case of disclosure run amok. Of all the elements of a credit offer that could be considered sufficiently important to warrant prominent disclosure (e.g., cost of credit; creditor option to reprice balances on credit cards based on change in the borrower's creditworthiness), the FTC has decided that the consumer's right to opt-out of prescreened, preapproved offers should receive top billing. Beginning next summer, the FTC will require at least two disclosures of opt-out rights in every pre-screened offer, one of which must be a prominent "first page" disclosure. The impact may very well be to discourage innovation of new products and the entry of new competitors, all in the name of vague "privacy" concerns and unsubstantiated allegations of a link between prescreened offers of credit and identity theft.

The FTC was required by the Fair and Accurate Credit Transactions Act (FACT Act) to prescribe notices on prescreened offers of credit that are "simple and easy to understand," to increase consumer awareness of their rights under the Fair Credit Reporting Act to opt-out of having their credit report data used in prescreened solicitations. Since 1996, these notices have been required on pre-screened solicitations, but privacy advocates and consumer groups argued that they were not sufficiently prominent, as evidenced by the fact that relatively few people (6% according to a recent Federal Reserve Board study) had opted out of such usage.

Beginning August 1, 2005, lenders who mail prescreened credit offers will be required to use a "layered" disclosure notice. A short notice on the first page of the solicitation (often the cover letter) must be in larger type than the body of the text—at least 12 point type—and must be prominently labeled "Opt-Out Notice." The notice must also contain a toll-free phone number that the consumer can call to opt-out. One call covers all credit bureau usage of the consumer's file for prescreened solicitations of any type for five years. This applies to all potential creditors, not just the issuer who sends the credit offer that triggers the call. A longer, more detailed disclosure notice must also be included elsewhere in the solicitation. Since 1996, companies sending prescreened offers have been required to include a single notice, which usually appeared at the bottom of a solicitation, and often in smaller type.

Banks and other types of lenders had strongly opposed the layered notice approach first proposed by the FTC. Portions of the comment letter from one organization, the Consumer Bankers Association, illustrate some of the industry's argument. The CBA's comment letter noted that "The regulation should not be held to a higher 'clear and conspicuous' standard than the other disclosures, including the 'Schumer Box' credit card disclosure [i.e., the cost of credit disclosure required under the Truth in Lending Act]. The Proposed Rule has the effect of establishing the Opt-Out Notice as more important than any other federally required disclosure." The comment letter continued, "By using a format that resembles warnings on cigarette labels, and placing the word 'prescreening' in scare quotes, the Opt Out Notice suggests that prescreening is somehow nefarious. After all, why else would the government require such a foreboding disclosure on the first page of the solicitation? We do not believe that this is the appropriate message to convey from a policy perspective."

The Federal Reserve Board agreed. Its report noted that increased reliance on prescreened disclosures had dramatically reduced the cost of entry of new lenders into credit markets, resulting in more choices and lower prices for consumers. The report found that "for consumers, prescreened solicitations reduce search costs by providing them with ready information about product availability and pricing tailored more closely to their financial experiences and needs." The report concluded that further restrictions on pre-screened marketing of financial services could hurt competition, raise prices and limit underserved consumers' access to credit.