Home-Alarm Company Punished for Using Credit Scores for Pricing

The Consumer Financial Protection Bureau (Bureau) and the Arkansas Attorney General settled with Alder Holdings, LLC (Alder), resolving their allegations that Alder failed to provide proper notices under the Fair Credit Reporting Act (FCRA). Alder is a Utah-based company that sells home-security and alarm systems, primarily door-to-door, throughout the country and has sold its products and services to over 115,000 customers.

The Bureau and Arkansas filed a proposed stipulated final judgment and order in the United States District Court for the Eastern District of Arkansas. If entered by the court, the settlement would require Alder to pay a $600,000 civil money penalty, $100,000 of which will be offset if Alder pays that amount to settle related litigation with the State of Arkansas that is currently pending in state court in Arkansas. The settlement would also require Alder to provide proper notices under FCRA.

The FCRA and its implementing regulation, Regulation V, require companies to give consumers notice when the companies provide consumers with less favorable credit terms based on a review of their credit reports—also known as risk-based pricing. The complaint alleged that Alder, in extending credit to its customers for its home-alarm products and services, charged customers who had lower credit scores higher activation fees, but failed to provide those customers with the required risk-based pricing notice. Arkansas also alleged that Alder violated the Consumer Financial Protection Act of 2010.

The CFPB and the State of Arkansas alleged the home alarm company sold ” customers the right to defer payment for its alarm and security-system equipment over the life of a long- term contract.”

“Alder uses a point-based-incentive system for sales representatives’ commissions that penalizes sales representatives who give away too much

“Alder determines the amount of the activation fee that it charges consumers, which is a material term, by evaluating the consumer’s credit score, without providing consumers notice that their credit scores are being used to determine pricing.

Alder’s sales representatives run a credit check during their door-to-door sales presentations. Further, Alder’s salespeople use tablets or smartphones during their sales pitches that reveal potential customers’ credit scores at the outset of the sales presentation and before they negotiate the contract’s activation fee and other key terms.

Alder’s point-based-commissions program incentivizes the use of risk-based pricing. Sales affiliates lose points and may be penalized for failing to charge higher fees to customers with lower credit scores.

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For example, an Alder training quiz explicitly states that sales representatives are “required” to collect different amounts of activation fees from customers based on their credit scores.

Credit-score and pricing data from Alder show an inverse correlation between customers’ credit scores and the amount of the activation fee that Alder charged them, if Alder charged an activation fee at all.

In fact, Alder is more than twice as likely to charge customers with the lowest credit score an activation fee as those with the highest credit scores.

Customers with the worst credit or no credit score are charged
substantially more in average activation fees than customers with the highest credit scores.

For example, 55% of customers with credit scores between 300 and 599 were required to pay activation fees, as opposed to only 19% of customers with credit scores over 800. Forty-nine percent of customers without a credit score or an invalid credit score (one where the credit-reporting agency has invalid or missing information) were also required to pay an activation fee.

The average activation fee paid by customers in the lowest credit- score bracket and without a credit score or with an invalid credit score are $46.18 and $41.15, respectively. But customers with the highest credit scores are, on average, charged only $14.71.

This shows how Alder uses credit scores, in whole or in part, to offer credit to customers on terms that are materially less favorable than those available to a substantial proportion of customers.” – Source

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