Final answer:
A risk-based pricing notice must be provided when a consumer is offered credit on terms that are materially less favorable than those offered to other consumers with better credit. The notice is mandated when the lender increases interest rates specifically due to the consumer's credit report.
Step-by-step explanation:
According to the regulations, a risk-based pricing notice must be provided when a lender offers credit to a consumer on terms that are materially less favorable than the most favorable terms available to a substantial portion of consumers from or through that lender.
In simpler terms, if due to a credit report, a consumer is offered credit with a higher interest rate or less favorable terms compared to what other consumers with better credit receive, the lender is required to give a risk-based pricing notice.
This approach of varying interest rates depending on the borrower's creditworthiness is a form of risk management for lenders. For instance, a borrower who has been consistently late on loan payments is considered higher risk and thus could be subjected to higher rates.
On the other hand, if a borrower has a track record of high profits or reliable repayment, they may be offered more favorable terms and wouldn't typically receive such a notice.
The decision is influenced by several factors, including the borrower's credit history, savings, other investments, and the lending institution's confidence level in the borrower's ability to repay. These dynamics show that the pricing of a loan is intimately connected to the perceived risk associated with lending to a particular borrower and current market conditions, such as overall interest rates.