[Federal Register: March 18, 2003 (Volume 68, Number 52)]
[Rules and Regulations]
[Page 13143-13198]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18mr03-22]
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Part III
Federal Reserve System
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12 CFR Part 202
Equal Credit Opportunity; Final Rule
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FEDERAL RESERVE SYSTEM
12 CFR Part 202
[Regulation B; Docket No. R-1008]
Equal Credit Opportunity
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is publishing a final rule amending Regulation B,
pursuant to the Board's policy of periodically reviewing and updating
its regulations. Regulation B implements the Equal Credit Opportunity
Act. Among other things, the final rule retains the general prohibition
against inquiring about, or noting, applicant characteristics for
nonmortgage credit transactions, and creates an exception when such
data are collected for the purpose of conducting a self-test. The final
rule also requires creditors to retain certain records related to
prescreened solicitations for 25 months, to enable Federal financial
enforcement agencies to assess whether or how national origin, race,
age, or other prohibited bases of discrimination under the ECOA are
taken into account in prescreened solicitations. The official staff
commentary has also been amended; consideration of several previously
proposed amendments has been deferred to allow for supplemental
comment.
DATES: Effective April 15, 2003; however, to allow time for any
necessary operational changes, the mandatory compliance date is April
15, 2004.
FOR FURTHER INFORMATION CONTACT: John C. Wood, Counsel; Kathleen C.
Ryan or David A. Stein, Senior Attorneys; or Minh-Duc T. Le, Attorney;
Division of Consumer and Community Affairs, Board of Governors of the
Federal Reserve System, at (202) 452-3667 or 452-2412; for users of
Telecommunications Device for the Deaf (``TDD'') only, contact (202)
263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691-1691f,
makes it unlawful for a creditor to discriminate against an applicant
in any aspect of a credit transaction on the basis of the applicant's
national origin, marital status, religion, sex, color, race, age
(provided the applicant has the capacity to contract), receipt of
public assistance benefits, or the good faith exercise of a right under
the Consumer Credit Protection Act (15 U.S.C. 1601 et seq.).
The ECOA is implemented by the Board's Regulation B. In addition to
a general prohibition against discrimination, the regulation contains
specific rules concerning: the taking and evaluation of credit
applications, how credit history information is reported on accounts
used by spouses, procedures and notices for credit denials and other
adverse action, and limitations on requiring signatures of persons
other than the applicant on credit documents. The regulation also
excepts certain types of credit (such as securities credit) from some
requirements, and provides model forms for optional use by creditors.
When enacted in 1974, the ECOA prohibited discrimination on the
basis of marital status and sex. In 1976, the Act was amended to
designate other prohibited bases of discrimination, including race and
national origin. Over the years, several significant amendments have
been made. In 1989, the ECOA was amended by the Women's Business
Ownership Act of 1988 (Pub. L. 100-533, 102 Stat. 2692) to require that
creditors give business applicants notice of the right to a written
statement of reasons for a credit denial, and to impose a record
retention requirement for certain business credit applications. In
1991, the ECOA was amended by the Federal Deposit Insurance Corporation
Improvement Act (Pub. L. 102-242, 105 Stat. 2236) to provide applicants
with the right to obtain a copy of any appraisal report used in
connection with an application for credit to be secured by residential
real property. The amendments also established referral
responsibilities on the part of the Federal financial supervisory
agencies (for referrals to the Department of Justice and the Department
of Housing and Urban Development) for certain violations of the ECOA.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
(Pub. L. 104-208, 110 Stat. 3009) amended the ECOA to create a
privilege against disclosure for information developed by creditors as
a result of ``self-tests'' they conduct.
II. Review of Regulation B
Pursuant to requirements of section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994, section 610(c) of
the Regulatory Flexibility Act of 1994, and section 2222 of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996, the
Board began a review of Regulation B in March 1998. (The Board's
previous comprehensive review of Regulation B was completed in 1985.)
An Advance Notice of Proposed Rulemaking (Advance Notice) was published
to solicit general comment on revisions to the regulation, and also
identified specific issues for comment (63 FR 12326, March 12, 1998).
The Board received 330 comment letters on the Advance Notice. Most
commenters addressed only the issues identified in the Advance Notice.
In August 1999, the Board issued a proposed rule (64 FR 44581,
August 16, 1999). The major proposed revisions included the following:
Removing the general prohibition against creditors' noting or inquiring
about applicant characteristics such as race, national origin, and sex
for nonmortgage credit; requiring creditors to retain certain records
for prescreened credit solicitations; and expanding from 12 to 25
months the record retention period for most business credit
applications.
For public utilities, securities, and business credit, credit
extended to governments, and incidental credit (for example, credit
extended by a physician), Regulation B provides exceptions from certain
of the notice, record retention, and other requirements. The Board
proposed to retain the general categories of exceptions with some
modifications. Other proposed revisions to the regulation (and to the
official staff commentary) involved the definition of an
``application'' (including guidance on the distinction between an
inquiry about credit and an application for credit); the definition of
``creditor''; the term ``adverse action''; the credit evaluation of
married and unmarried applicants; and what constitutes evidence of a
joint application for credit.
In addition to comments on the proposed revisions, the Board
requested specific suggestions for other revisions that would
facilitate compliance with, or improve, the regulation. Approximately
750 comments were received on the proposed rulemaking, and are
discussed below under the relevant sections. Industry commenters
opposed most of the major proposed revisions to the regulation, but
provided suggestions for additional revisions to help facilitate
compliance with the regulation, such as providing additional reasons,
or clarifying existing reasons, for adverse action on the model forms.
Most of the comments addressed the proposal to remove the prohibition
on data notation, expressing views both for and against.
III. Summary of Revisions to the Regulation
Major revisions adopted by the Board include rules that adjust the
limited
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exceptions for public utilities credit (Sec. 202.3(a)); create an
exception to the general prohibition against inquiring about, or
noting, applicant characteristics for nonmortgage credit transactions
for the purpose of conducting a self-test (Sec. 202.5(b)(1)); and
require record retention for prescreened credit solicitations (Sec.
202.12(b)(7)). Other amendments clarify the definitions of ``adverse
action'' (Sec. 202.2(c)) and ``creditor'' (Sec. 202.2(l)); the rules
for evaluating married and unmarried credit applicants (Sec.
202.6(b)(8)); and certain rules about obtaining signatures of
nonapplicants (Sec. 202.7(d)(1)).
IV. Section-by-Section Analysis
The following discussion addresses the regulatory revisions
section-by-section. Technical and non-substantive revisions generally
are not separately discussed. Revisions to the official staff
commentary are addressed in parts V and VI.
Section 202.1--Authority, scope and purpose
There are no revisions to this section.
Section 202.2--Definitions
Sections 202.2(c)(1) and (2), and 202.2(l) have been revised.
Proposed revisions to Sec. 202.2(f) were not adopted.
2(c) Adverse action
2(c)(1)
Adverse action on a class of accounts--Section 202.2(c)(1)(ii)
provides that adverse action includes a creditor's termination of or
unfavorable change to the terms of an account, unless the action
affects ``all or a substantial portion of a class of the creditor's
accounts.'' Under the proposal, ``substantial portion'' was changed to
``substantially all'' to clarify that a creditor's action must affect
the overwhelming majority of accounts in a designated class to be
excluded from the definition of adverse action. This revision
emphasized that the exception applies only when the creditor's action
is not based on the individual credit characteristics of the affected
accountholders. For example, the exception would apply where a creditor
terminates all secured credit accounts because it no longer offers that
type of credit. The exception would not apply if the creditor
terminated only those secured credit accounts that could not be moved
into another card program after an evaluation of the individual credit
characteristics of the accountholders.
Industry commenters expressed concern that the proposal would
significantly narrow the application of the exception. Some of these
commenters noted that adverse action notices would serve no useful
purpose in the circumstances outside the narrower exception. On the
other hand, community groups urged the Board to revise the exception so
that it would apply only if all accounts in a class were adversely
affected.
The revision has been adopted by the Board as proposed. The ECOA
and Regulation B require creditors to give consumers reasons for an
adverse credit decision. This notice requirement enables some
recipients to identify and remedy errors in credit reports and credit
problems generally, and may also help in the detection of unlawful
credit discrimination. The exception in Sec. 202.2(c)(1)(ii) is
intended to address the limited circumstance where an adverse action
notice will not likely serve the intended informational or
antidiscrimination goals. The Board expects to request supplemental
comment on guidance for defining a ``class of accounts.''
2(c)(2)
Section 202.2(c)(2)(iii) has been revised to conform to changes in
Sec. 202.2(c)(1)(ii).
2(f) Application
The Board proposed to revise Sec. 202.2(f) to include in the
definition of application a request for a preapproved loan under
procedures in which a creditor issues creditworthy persons a written
commitment to extend credit up to a designated amount that is valid for
a designated period of time, even if subject to conditions. In the
final rule, the proposed language on preapprovals is not included in
the regulation's definition of application, but is instead contained in
the official staff commentary, which clarifies that certain
preapprovals are covered by the definition of application. (See comment
2(f)-5 and the supplementary information thereto.) A technical change
in the definition (replacing ``established'' with ``used'') has been
made for clarity.
2(l) Creditor
Section 202.2(l) has been adopted substantially as proposed. The
final rule changes the words ``regularly participates in the decision
of whether or not to extend credit'' to ``regularly participates in a
credit decision, including setting the terms of the credit'' to clarify
the definition of ``creditor.''
Some commenters agreed with the proposed clarification, noting that
it makes the rules parallel for insured depository institutions and
private-sector loan intermediaries. A few commenters disagreed with the
proposal, believing the scope of the definition was unclear. Other
commenters asked that the Board clarify that a potential assignee that
establishes terms of general applicability for credit extensions that
it may acquire, but does not otherwise participate in setting the terms
of individual loans, is not a creditor for purposes of the regulation.
The final rule clarifies that the definition of creditor includes those
who make the decision to deny or extend credit, as well as those who
negotiate and set the terms of the credit with the consumer. But a
potential assignee who establishes underwriting guidelines for its
purchases but does not influence individual credit decisions is not a
creditor. (See comment 2(l)-1).
Section 202.3--Limited Exceptions for Certain Classes of Transactions
The regulation provides certain exceptions for public utilities,
securities, incidental, and government credit. Each of these types of
credit remains subject to the general prohibition against
discrimination on a prohibited basis. The exceptions generally address
issues such as record retention, furnishing credit information, and
inquiries about marital status and spousal information.
Revisions were proposed to the exceptions for public utilities,
securities, and incidental credit. Based on comments and further
analysis, the Board believes that providing certain exceptions is still
appropriate, and that applying the rules of Regulation B in their
entirety would not contribute substantially to effectuating the
purposes of the Act, as discussed below.
3(a) Public Utilities Credit
3(a)(2) Exceptions
Public utilities credit refers to extensions of credit that involve
public utility services if the charges for the service, delayed
payment, and any discount for prompt payment are filed with or
regulated by a governmental unit, such as a public utilities
commission. Public utilities credit is currently subject to all of the
regulatory requirements except those relating to furnishing credit
information to consumer reporting agencies, collecting information
about marital status, and retaining records. Under the proposed rule,
only the exception for record retention would have been retained. The
final rule has been modified. As discussed below, public utilities
credit
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is now subject to all of the regulatory requirements except those
relating to record retention and marital status information.
Commenters generally supported the proposal to remove the exception
relating to the furnishing of credit information under Sec. 202.10
(concerning accounts held or used by spouses). A number of commenters
believed that removing the exception would help spouses build credit
histories. A few commenters mistakenly thought the proposal required
public utility companies that do not currently report payment history
information to start reporting such information. The requirements of
Sec. 202.10 apply only to creditors that furnish credit information to
consumer reporting agencies or to other creditors. Such creditors are
required to furnish information that reflects the participation of both
spouses if the applicant's spouse is permitted to use or is
contractually liable on the account. Because some creditors now
consider public utility payments as a source of repayment history for
underwriting purposes, eliminating the exception from Sec. 202.10
seems necessary to facilitate the availability of this information to
such other creditors.
Upon further analysis, the Board has retained the marital status
exception. Although some public utilities do not currently collect
marital status information, or are prohibited by state law from doing
so, others may collect such information. Permitting utility firms to
collect such information is consistent with eliminating the exception
for furnishing credit information--those creditors that collect marital
status information and report to credit bureaus will be able to reflect
the participation of both spouses on the account.
The final rule retains the exception for record retention because
public utility companies must keep records pursuant to regulations of
other governmental bodies--often for longer periods of time than
required by the ECOA. Extending this exception is appropriate because
requiring record retention pursuant to Regulation B would not
contribute substantially to effectuating the purposes of the Act.
3(b) Securities Credit
3(b)(2) Exceptions
Securities credit is credit subject to section 7 of the Securities
Exchange Act of 1934, regulations under that act, and rules of the
self-regulatory organizations. Brokers and dealers are required to
inquire about the financial activities of spouses to comply with the
rules of the Securities Exchange Act and the National Association of
Securities Dealers. For this reason, Regulation B excepts securities
credit from several provisions including, among others, rules governing
signature requirements, record retention, and asking about the sex of
an applicant.
Because securities credit is subject to an extensive regulatory
scheme, the Board proposed to retain the limited exceptions for such
credit, with one exception--information about the sex of an applicant.
The proposal to eliminate the exception was for consistency with the
Board's proposal under Sec. 202.5 to remove the general prohibition
against the collection of applicant characteristics for nonmortgage
credit. Since the Board has retained the general prohibition, there is
a continued need for an exception regarding the sex of an applicant.
Technical revisions have been made for clarity with no substantive
change intended.
3(c) Incidental Credit
3(c)(1) Definition
Currently, incidental credit is limited to consumer credit that is
not: (1) Made pursuant to the terms of a credit card account, (2)
subject to a finance charge under Regulation Z (Truth in Lending), or
(3) payable by agreement in more than four installments. This type of
credit might be extended by a local merchant that does not normally
extend credit, for example, to a long-standing customer; or by a doctor
or lawyer, as an accommodation to a patient or a client.
The proposed rule would have expanded the definition of incidental
credit to include incidental business credit. While some commenters
supported the expansion, other commenters opposed it because of
concerns about discrimination against minority-owned businesses. Upon
further analysis, based on commenters' concerns about possible
discrimination, the Board has retained the current definition of
incidental credit.
3(c)(2) Exceptions
Incidental credit is excepted from a number of provisions in the
regulation including those that govern requests for information about
an applicant's marital status, an applicant's spouse or former spouse,
and sources of an applicant's income. The proposed rule would have
eliminated the exception for requesting information about the sex of an
applicant, consistent with the Board's proposal under Sec. 202.5 to
remove the general prohibition against the collection of applicant
characteristics for nonmortgage credit. Since the general prohibition
has been retained, this exception also has been retained.
3(d) Government Credit
The exceptions for government credit apply to extensions of credit
made to governments or governmental subdivisions, agencies, or
instrumentalities. The exceptions do not apply to credit extended by
such entities; for example, a government agency that extends credit to
a consumer who applies for individual credit may not require the
signature of another person (including the spouse) on a credit
instrument if the applicant is individually creditworthy. The Board
believes that extending the exceptions for government credit remains
appropriate, as applying the rules would not contribute substantially
to effectuating the purposes of the Act.
Section 202.4--General Rules
Section 202.4 has been revised, as proposed, to incorporate general
rules that apply under the regulation, some of which were previously in
other sections. Specifically, Sec. 202.4(a) contains the general rule
against discrimination; Sec. 202.4(b) (former Sec. 202.5(a)) contains
the general rule against discouraging applications; and Sec. 202.4(c)
(former Sec. 202.5(e)) contains the requirement for written
applications in mortgage transactions covered by Sec. 202.13(a).
Section 202.4(d) is new and generally requires written notices and
other disclosures to be provided in a clear and conspicuous manner and
in a form an applicant may retain. Most of the other consumer
protection regulations administered by the Board already contain these
standards.
The clear and conspicuous and the retainability standards have been
revised in response to commenters' concerns. Some commenters stated
that the proposed language appeared to suggest that disclosures under
the sections specified (Sec. Sec. 202.5, 202.5a (now Sec. 202.14),
202.9, and 202.13(c)) are required to be given in writing. While
certain disclosures under Sec. Sec. 202.9 and 202.14 are required to
be in writing, others may be provided orally. Accordingly, the final
rule provides generally that if a disclosure is given in writing, it
must be clear and conspicuous and in a form the applicant may retain.
Other commenters suggested that the retainability requirement
should not apply to certain disclosures given on or with an
application, such as those under Sec. Sec. 202.5 and 202.13. These
disclosures relate, for example, to the option not to
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list income from alimony, child support, or separate maintenance, and
to the collection of information about an applicant's national origin,
race, sex, marital status, and age for mortgage credit. These
disclosures are relevant primarily at the time of application. In
addition, since the application will be submitted to the creditor, the
only way to provide the disclosures to the applicant in retainable form
would be to provide an extra copy of the application. The final rule
exempts disclosures under Sec. Sec. 202.5 and 202.13 (even if provided
in writing) from the retainability requirement.
In addition, the Board issued an interim final rule in April 2001
concerning the electronic delivery of disclosures under Regulation B.
(66 FR 17779, April 4, 2001.) A new Sec. 202.4(b) was added in that
rulemaking to provide rules on foreign-language disclosures. The
present rulemaking re-designates that revision as Sec. 202.4(e).
Section 202.5--Rules Concerning Requests for Information
Section 202.5 has been revised from the proposal. The final rule
adopted by the Board retains the general prohibition against creditors'
inquiring about, or noting, an applicant's sex, race, color, religion,
or national origin for nonmortgage credit products, subject to some
exceptions, including a new exception that permits collection for the
purpose of conducting a self-test that meets the requirements of Sec.
202.15, as discussed below.
Because the ECOA makes it unlawful for creditors to consider any
prohibited bases of discrimination in a credit transaction, Regulation
B has generally prohibited creditors from inquiring about, or noting,
an applicant's sex, race, color, religion and national origin. This
general prohibition was intended to discourage discrimination, based on
the premise that if creditors cannot inquire about or note applicants'
personal characteristics, such as national origin or race, they are
less likely unlawfully to consider the information in connection with a
credit transaction.
For home mortgage lending, there were specific concerns at the time
the regulation was adopted in the 1970s about discrimination based on
applicants' personal characteristics; and thus Regulation B requires
creditors to record the applicant's national origin or race, marital
status, sex, and age in applications for purchasing or refinancing home
loans. (This requirement was added in 1977 when the regulation was
amended to implement expanded coverage of the ECOA to include national
origin, race, and other prohibited bases of discrimination. As enacted
by the Congress in 1974, the ECOA initially barred discrimination only
on the basis of sex and marital status.) The data collection enables
enforcement agencies to better monitor home mortgage lenders'
compliance with the ECOA. In 1989, the Congress amended the Home
Mortgage Disclosure Act (HMDA), implemented by the Board's Regulation
C, to impose a similar data collection requirement that applies to
mortgage loans more broadly, encompassing home improvement loans in
addition to purchase-money and refinanced home loans.
In 1995, the Board proposed to remove the prohibition against
noting applicants' personal characteristics for nonmortgage credit
products. The proposed revision was published at the time the federal
financial regulatory agencies were revising regulations that implement
the Community Reinvestment Act to respond to concerns about whether
creditors were meeting the needs of their communities, particularly for
small business and small farm lending. The majority of commenters on
the 1995 proposal opposed removal of the prohibition. After extensive
deliberation, the Board withdrew the proposal in December 1996, and
stated that, given the political sensitivity of the issues, the matter
was better left to the Congress.
In 1998, the Board again solicited comment in its Advance Notice of
Proposed Rulemaking on removal of the prohibition. The Board raised the
issue in response to concerns that continued to be expressed by the
Department of Justice and some of the federal financial regulatory
agencies. These agencies pointed to anecdotal evidence of
discrimination in connection with small business and other types of
credit. Comments received in response to the Advance Notice were fairly
evenly divided between those in support of, and those in opposition to,
lifting the ban. Most of those who favored lifting the prohibition were
focused, however, on removing it for small business lending only.
In its August 1999 proposed rule to amend Regulation B, the Board
proposed to remove the general prohibition against inquiring about or
noting information about an applicant's race, national origin,
religion, color, or sex to allow voluntary collection of such data for
nonmortgage credit products. Consideration of applicant characteristics
such as race in evaluating creditworthiness, except as permitted by
law, would continue to be prohibited. The Board recognized that
removing the prohibition could give loan officers access to information
on applicants' personal characteristics that might not otherwise be
available and, thus, could provide the opportunity for unlawful
discrimination. Also, the usefulness of the data for fair lending
enforcement would depend on whether creditors implemented standards for
uniform collection of the data--such as by product, for all applicants,
or for all borrowers. Nevertheless, the Board believed that removing
the prohibition for all nonmortgage credit might allow issues of credit
discrimination to be better addressed. Because data notation by the
creditor would be on a voluntary basis, creditors could target those
products where they might have particular concern about potential
discrimination.
The proposed rule lifting the prohibition also provided that
applicants could not be required to provide information about their
race, national origin, religion, color, or sex. Creditors that chose to
engage in data notation would have been required to disclose--at the
time they requested the information--that providing the data was
optional, and that the creditor would not take the information (or the
applicant's decision not to provide it) into account in any aspect of
the credit transaction. A proposed model notice was included.
More than 600 commenters addressed the issue of data notation
raised by the 1999 proposal. Many commenters--including most of the
federal financial regulatory agencies, the Department of Justice, the
Department of Housing and Urban Development, small businesses and their
trade associations, consumer advocates, community organizations,
individual consumers, and a few banks--favored removing the
prohibition. Enforcement agencies and others believed that creditors'
ability to collect and analyze information about the ethnicity and race
of applicants and an agency's ability to review that information could
provide a better fair lending tool than prohibiting the notation of
such information. A significant number of these commenters favored
removing the prohibition for all nonmortgage credit products, but most
of those who favored lifting the ban focused their comments on small
business lending.
Most of the commenters favoring removal of the prohibition believed
that mandatory collection is the more effective way to monitor and
enforce fair lending compliance for small business and other
nonmortgage loans. Consumer advocate and community group
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commenters generally endorsed voluntary data collection, but often as a
first step toward mandatory data collection and disclosure. These
commenters also believed that standards for data collection were needed
and urged the Board to develop HMDA-like standards for data collection
on nonmortgage loans. These commenters said that allowing data notation
would enable creditors and government agencies to monitor for possible
discriminatory practices, and might enable creditors to better target
underserved markets. Some commenters believed that, in the case of home
mortgage lending, the mandatory collection and disclosure of data have
increased access to those products for low-income and minority
consumers.
Most industry commenters preferred to retain the general
prohibition. A number of them indicated that they would not collect
data if the prohibition were removed. These commenters expressed
reservations about the Board's lifting the prohibition, including
concerns about the likely pressure to collect data and the risk of
litigation based on unreliable data. Commenters also expressed concern
that creditors that obtained data about ethnicity, race, and other
personal characteristics would be placed at a competitive disadvantage
relative to other lenders because some consumers might find notation
offensive. Some commenters expressed concern that a requirement for
mandatory collection of data would soon follow the lifting of the
prohibition, which would impose substantial burdens and costs on
institutions. Many commenters criticized the lack of standards to
ensure the collection of accurate and reliable data. They expressed
concern, for example, that the lack of any uniform guidance regarding
how to determine the minority-owned or women-owned status of small
businesses would render any data meaningless. Some commenters believed
the current rule has been effective in discouraging discrimination by
denying creditors access to information that would enable them to
discriminate on a prohibited basis. Some commenters, including
individual consumers, asserted that data notation intrudes upon
consumers' privacy.
Some commenters indicated that if the prohibition were removed,
they would likely not collect information about applicants' personal
characteristics unless collection was subject to the ECOA's self-test
privilege, and urged the Board to extend the self-test privilege to
information about applicants' personal characteristics. (Under the
statutory amendments of 1996, the self-test privilege protects
creditors against disclosure of the results of a self-test to a
government agency in an examination or investigation or by an agency or
an applicant in any proceeding or lawsuit alleging a violation of the
ECOA or Regulation B.) In the August 1999 proposal, the Board noted
that creditors choosing to collect applicant characteristics would
likely do so on the application form or in the application process, and
therefore the privilege would not apply to this data collection.
Industry commenters challenged this view of the scope of the self-test
privilege.
Some congressional commenters submitted a legal analysis which
included the argument that the prohibition against inquiring about
applicants' personal characteristics is required by the ECOA and must
be enforced by the Board, and which stated that creditors would
continue to be barred from collecting information about personal
characteristics even if the Board amended Regulation B to remove the
regulatory prohibition. They argued in their legal analysis that the
ECOA's enumeration of exceptions to the general prohibition against
discrimination on the basis of race, color, sex, national origin,
religion, age and certain other characteristics implied a prohibition
on any other collection by creditors of data regarding these personal
characteristics of applicants. The Board disagrees with this analysis;
the fact that the ECOA provides that certain types of inquiries
regarding personal characteristics are permitted does not mean that
other inquiries are prohibited.
The Board believes that it has the authority under the ECOA to
permit data collection. The Board has express authority under the ECOA
to adopt regulations that carry out the purposes of the Act. The ECOA
does not contain an express prohibition against inquiring about an
applicant's personal characteristics; it prohibits the practice of
discriminating on a prohibited basis, a prohibition that the Board's
amendment does not change. The Board adopted its regulatory provision
prohibiting collection of personal characteristics data in order to
further the purpose of the ECOA. The Board believes it is well within
its authority to adopt the self-testing exception to its regulatory
prohibition because it better achieves the purposes of both the central
prohibition against discrimination contained in the ECOA and the self-
testing provision in the ECOA.
The fact that the ECOA provides that certain types of inquiries
regarding personal characteristics are permitted does not imply that
other inquiries are prohibited. The list of exceptions in the ECOA is
needed for another purpose. The list allows creditors to inquire about
characteristics of an applicant and to use that information in the
credit decision--such as asking about marital status to determine
property rights. Without expressly permitting these inquiries, a
creditor could not use information about an applicant's personal
characteristics in making its decision without violating the ECOA's
central prohibition. Removal by the Board in whole or in part of the
regulatory prohibition on inquiring about characteristics of applicants
does not allow the creditor to consider this information in violation
of the ECOA.
Based on comments received and its own analysis and for the reasons
stated below, the Board has retained the general prohibition on
inquiring about, or noting, information about nonmortgage credit
applicants' personal characteristics, such as race and national origin;
and has created an exception for collection of this information by a
creditor for the purpose of conducting a self-test under Sec. 202.15.
The Board adopted its regulatory provision prohibiting collection
of personal characteristic data for nonmortgage credit in order to
further the purposes of the ECOA. The Board believes that the existing
prohibition, by restricting creditors' access to information about
applicants' personal characteristics, contributes to reducing or
avoiding credit discrimination. Lifting the prohibition and permitting
creditors to collect and use data on applicant characteristics for any
purpose without limitation, as was proposed, would create some risk of
use of the data for discriminatory purposes. For example, lifting the
prohibition without constraints could have resulted in selective
inquiries or notation. Moreover, without standards, the reliability of
voluntarily collected data is questionable.
At the same time, creditors desiring to monitor and assure
compliance with the ECOA by collecting information about applicants'
personal characteristics should not be prevented from doing so. The
Board believes that creating an exception for collecting such
information as part of a self-test would further the purposes of the
ECOA by providing creditors with an additional tool for measuring and
improving their levels of compliance with the ECOA and Regulation B.
Permitting data notation
[[Page 13149]]
as part of a self-test would enable creditors to develop compliance
programs that utilize data about applicant characteristics in a
controlled and targeted manner. The Board has, therefore, created an
exception to the general regulatory prohibition to permit creditors to
inquire about, and note, information about nonmortgage credit
applicants' personal characteristics for the purpose of conducting
self-tests under Sec. 202.15.
The Congress adopted the self-test privilege in 1996 as part of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Pub. L.
104-208, 110 Stat. 3009). The purpose for creating a self-test
privilege was ``to encourage institutions to undertake candid and
complete self-tests for possible fair lending violations and to act
decisively to correct any discovered problems.'' S. Rep. No. 104-185,
at 15 (Dec. 14, 1995). Section 202.15 of Regulation B, which implements
the self-test provision, defines a self-test as a program, practice, or
study designed and used specifically to determine compliance with the
Act and regulation, that creates data or factual information that is
not available and cannot be derived from loan or application files or
other records related to credit transactions. The privilege applies
only if the creditor takes appropriate corrective action when it
determines that it is more likely than not that a violation has
occurred. The results of the self-test cannot be obtained by a
government agency in an examination or investigation, or by an agency
or an applicant in any proceeding or lawsuit alleging a violation of
the ECOA or Regulation B.
As adopted by the Board, Sec. 202.5 of the final rule retains the
general prohibition on collecting information about applicants'
personal characteristics and creates an exception to permit the
collection of personal characteristics for the purpose of conducting a
self-test. Section 202.5(a) now contains the general rules previously
contained in former Sec. 202.5(b). Section 202.5(a)(1) has been
revised to apply to information requests in connection with a credit
transaction to reflect more accurately the scope of the regulation.
Certain headings in Sec. 202.5(a) have been revised for clarity.
Former Sec. Sec. 202.5(a) and (e) have been moved to Sec. 202.4 to
facilitate compliance with the regulation.
New Sec. 202.5(b) sets forth the general prohibition against a
creditor's inquiring about the race, color, religion, national origin,
or sex of an applicant or any other person in connection with a credit
transaction. The general prohibition incorporates the rules previously
contained in the first sentences of former Sec. 202.5(d)(3) and (5).
The general prohibition is subject to the exceptions found in
subsections (b)(1) and (2).
Section 202.5(b)(1), which is new, permits creditors to inquire
about, and note, personal characteristics such as race or national
origin for the purpose of conducting a self-test under Sec. 202.15 to
determine the creditor's compliance with the ECOA or Regulation B. To
qualify for this exception, the creditor must satisfy all the elements
of a self-test as set forth in Sec. 202.15, and must provide the
disclosures required by Sec. 202.5(b)(1) at the time the information
is requested. (A model notice is included in Appendix C.)
This exception to the general prohibition applies to a self-test
even if the creditor should subsequently lose or waive the self-test
privilege by disclosing any privileged information as provided in Sec.
202.15(d)(2)(i) and (ii). Other laws or regulations, such as the Gramm-
Leach-Bliley Act privacy regulations, may restrict other disclosure of
such data.
Creditors that opt to conduct a self-test may rely upon the
principles discussed below. Much of this guidance is set forth in Sec.
202.15 and the accompanying official staff commentary and this
preamble. Any additional guidance, including the guidance provided in
this preamble, will be incorporated into the official staff commentary
at a later date, as appropriate. A ``self-test'' is defined as any
program, practice, or study that is designed and used specifically to
determine the extent or effectiveness of a creditor's compliance with
the Act or Regulation B and creates new data or factual information
that is not available and cannot be derived from loan or application
files or other records related to credit transactions. 12 CFR
202.15(b)(1).
The constraints imposed by the regulation's self-test provision
will help ensure that the information is not used to discriminate on a
prohibited basis and is only collected and used for the purpose of
monitoring compliance with the ECOA and Regulation B and for taking
appropriate corrective action. Any information about applicant's
personal characteristics collected as part of a self-test would have to
be kept separate from the loan or application files and from other
business records related to credit transactions, in order for the
privilege to apply. Thus, creditors may not place such data with non-
privileged business records, such as the credit application, loan
documents, or minutes of loan-committee meetings. See 12 CFR Supp. I,
202.15(b)(1)(ii)-2 and 202.15(b)(3)(ii)-1. In response to the issue
raised by certain commenters, the Board notes that the existing
regulation regarding the self-test privilege does not prohibit
collection of data in the application process. Although creditors may
collect the information during the application process, the information
may not be placed with nonprivileged business records, such as the
credit application or loan documents, and may not be considered in
extending credit.
Information about applicants' personal characteristics that is
collected pursuant to this exception should be analyzed in a timely
fashion as part of a program, practice, or study under the self-test
provision. Timely analysis of data is essential to ensure that a self-
test was conducted to determine compliance with the ECOA and Regulation
B. Creditors retain the flexibility to establish the time, place,
scope, and methodology of any self-test. See 12 CFR Supp. I,
202.15(b)(3)(i)-1. In preparing to conduct a self-test that involves
the collection of applicants' personal characteristics, creditors would
be expected to develop a written plan that describes, among other
things, the specific purpose of the self-test, the methodology to be
used, the geographic area covered by the test, the types of credit
transactions involved, the identity of the entity that will conduct the
test and analyze the data (such as the creditor's audit department),
and the timing of the test, including the expected start date and end
date or the expected duration of the test. The creditor is generally
required to retain records regarding a self-test, including personal-
characteristics data and all other written or recorded information
about the self-test for 25 months after a test has been completed (and
longer in the case of an investigation or enforcement proceeding or
civil action of which the creditor has received notice.) See 12 CFR
202.12(b)(6).
Currently, creditors may use ``mystery shoppers'' or fictitious
applicants (``testers'') to determine compliance with the ECOA at the
pre-application stage. With the revision to the regulation, creditors
would have the flexibility to utilize and develop a variety of self-
testing techniques (internally or using independent third-parties) to
ensure ECOA compliance at various stages of a credit transaction using
information collected about applicant characteristics combined with
other information. For example, a self-test using information about
actual applicants' personal characteristics might better determine
whether, at the application stage, persons seeking credit
[[Page 13150]]
are being treated differently from other applicants on the basis of
race, age, sex, religion, or national origin; or, for loan
originations, whether disparities based on race or other prohibited
bases of discrimination may exist in the terms and conditions of loan
agreements entered into by similarly situated applicants. A self-test
might also be conducted to test account review or collection
procedures, or other aspects of the credit transaction where unlawful
discrimination might occur.A creditor may not use the data collected
under the new exception for other purposes, such as marketing, unless
necessary to take corrective action, without losing the self-test
privilege.
The data about applicant characteristics collected as part of a
self-test may only be used and evaluated by persons conducting the
self-test. The data may not be used or evaluated by persons involved in
a credit transaction, except in the context of taking corrective action
when it is more likely than not that a violation has occurred. The data
may not be used in a credit decision. In collecting information about
personal characteristics as part of a self-test, creditors must
disclose to applicants that providing the information is optional, that
the information is being collected to monitor for compliance with the
ECOA and will not be used in making a credit decision, and where
applicable, that certain information will be noted based on visual
observation or surname.
The self-test provision requires that creditors take appropriate
and timely corrective action when the self-test shows that it is ``more
likely than not'' that a violation of the ECOA or Regulation B has
occurred, even though no violation has been formally adjudicated. 12
CFR 202.15(c)(1) (emphasis added). Creditors should ensure that
corrective action is taken on a timely basis and is ``reasonably likely
to remedy the cause and effect of a likely violation.'' 12 CFR
202.15(a)(2) and 202.15(c)(1). The commentary to Sec. 202.15(c)
suggests various forms of corrective action that may be appropriate,
such as correcting institutional policies or procedures that may have
contributed to the likely violation and adopting new policies as
appropriate, or improving audit and oversight systems to avoid a
recurrence of the likely violation. See 12 CFR Supp. I, 202.15(c)(2)-3.
The appropriateness of a particular form of corrective action is
determined on a case-by-case basis and the scope of the corrective
action that is required depends upon the scope of the self-test. See 12
CFR Supp. I, 202.15(c)(2)-1. No corrective action is required if a
self-test does not identify any likely violation of the ECOA or
Regulation B. See 12 CFR Supp. I, 202.15(a)(2)-1.
Section 202.5(b)(2) permits a limited inquiry that may indicate the
sex of an applicant through an optional designation of title on an
application form. This exception is identical to the exception
previously contained in former Sec. 202.5(d)(3). No substantive change
is intended.
Section 202.5(c) is substantially unchanged. Section 202.5(d)(1)-
(3) incorporates the provisions previously contained in former Sec.
202.5(d)(1), (d)(2), and (d)(4) without substantive change.
New Sec. 202.5(e) permits creditors to inquire about the permanent
residency and immigration status of an applicant or any other person in
connection with a credit transaction. This rule was previously
contained in former Sec. 202.5(d)(5). The exception for inquiries
about the permanent residence and immigration status has been conformed
to the general rule in Sec. 202.5(b), which explicitly covers both an
applicant and any other person in connection with a credit transaction,
such as a guarantor or co-signer.
Section 202.5a--Rules on Providing Appraisal Reports
This section now appears as Sec. 202.14.
Section 202.6--Rules Concerning Evaluation of Applications
Sections 202.6(b)(8) and (9) have been adopted, as proposed.
6(b) Specific Rules Concerning use of Information
6(b)(8)
Section 202.6(b)(8) of the regulation, adopted as proposed, makes
clear that a creditor may not evaluate married and unmarried applicants
by different standards. Some commenters were concerned that the rule
would prevent creditors from considering state property laws. The rule
provides that the requirement applies except as otherwise permitted or
required by law. Thus, a creditor may consider the rules in Sec. Sec.
202.5, 202.6, and 202.7 in evaluating applications. But a creditor that
aggregates the incomes of married co-applicants, for example, is
required to aggregate the incomes of unmarried co-applicants under this
rule.
6(b)(9)
Section 202.6(b)(9) has been adopted as proposed, consistent with
the Board's decision to retain the general prohibition in Sec. 202.5
(against collecting applicants' personal characteristics) except for
the purpose of conducting a self-test under Sec. 202.15. This
provision clarifies that data collected for a self-test may not be used
in any aspect of a credit transaction.
Section 202.7--Rules Concerning Extensions of Credit
Section 202.7(d)(1) has been revised.
7(d) Signature of Spouse or Other Person
Section 202.7(d)(1) provides that a creditor may not require the
signature of a person other than the applicant, or joint applicant, on
any credit instrument if the applicant is individually creditworthy.
Over the years, the Board has received questions about how creditors
can establish that applicants intend to apply jointly. Although the
issue arises in consumer credit, it is more prevalent in the context of
business credit. Some creditors have sought to treat the submission of
a joint financial statement or other evidence of jointly held assets as
an application for joint credit. The proposed rule bars a creditor from
presuming that the submission of joint financial information
constitutes an application for joint credit.
Some commenters disagreed with the proposal, stating that a
creditor should always be able to deem the submission of joint
information as an application for joint credit. Other commenters
believed the rule should simply state that the mere submission of joint
information may not be used to establish intent and something more is
needed.
Evidence of intent to apply for joint credit requires more than the
submission of joint financial information. The fact that a credit
applicant owns property with another and submits information concerning
the property and the joint owner in order to establish creditworthiness
does not mean that both owners intend to be obligated for the extension
of credit; other evidence must expressly reflect that intent. Section
202.7(d)(1) has been adopted as proposed. Additional guidance
concerning how to evidence intent to apply for joint credit is provided
in the official staff commentary in comment 7(d)(1)-3. Also, see the
supplementary information to Appendix B concerning revisions to Model
Application Forms 1-4.
Section 202.8--Special-Purpose Credit Programs
The proposed revisions to Sec. 202.8(a)(3) have not been adopted.
[[Page 13151]]
8(a) Standards for Programs
Section 202.8(a)(3) addresses special-purpose credit programs
offered by for-profit organizations, or in which for-profit
organizations participate. Under the proposed rule, that section would
have been revised to delete the phrase ``special social needs.'' The
meaning of the phrase is specifically set forth in Sec. 202.8(a)(3)(i)
and (ii). Although few commenters addressed the issue, there was some
concern that by removing the phrase, a creditor might not understand
that the program must meet special social needs. Upon further analysis,
because the legislative history of this provision is clear that
special-purpose credit programs offered by for-profit organizations
must meet special social needs, and because the statute includes the
phrase, the proposed revision was not adopted.
Section 202.9--Notifications
A technical revision has been made to Sec. 202.9(a)(3)(i)(B). The
proposed revision to Sec. 202.9(a)(3)(ii)(A) has not been adopted.
Section 202.9(b)(2) has been revised as proposed.
9(a) Notification of Action Taken, ECOA Notice, and Statement of
Specific Reasons
9(a)(3) Notification to Business Credit Applicants
A technical revision has been made to Sec. 202.9(a)(3)(i)(B) to
omit the proposed language requiring a creditor to provide the
disclosure of an applicant's right to a statement of reasons in a form
the applicant may retain. New Sec. 202.4(d) requires that disclosures
provided in writing be clear and conspicuous and in a form the
applicant may retain. Since the disclosure required by Sec.
202.9(a)(3)(i)(B) must be in writing, the language referring to
retention is deleted as unnecessary.
The regulation provides for exceptions from certain notification
and record retention requirements for business credit. The Board is
required periodically to review the exceptions to determine whether
they should be retained. The ECOA provides that the Board may extend an
exception if the Board determines, after making an express finding,
``that the application of [the Act] or of any provision of [the Act] of
such transaction would not contribute substantially to effecting the
purposes of [the Act].'' 15 U.S.C. 1691b. As discussed below, the Board
expressly finds that application of additional provisions of the ECOA
to business credit would not contribute substantially to effectuating
the purposes of the Act.
In the proposal, the Board stated its belief that applying the
notification rules in full, or changing the current threshold of $1
million in gross revenues to distinguish between large and small
businesses for purposes of Regulation B, would not contribute
substantially to effectuating the purposes of the ECOA. The $1 million
threshold is consistent with the legislative history of the Women's
Business Ownership Act of 1988 (Pub. L. No. 100-533, 102 Stat. 2692),
which amended the ECOA. That history suggests that the amendments were
intended primarily to apply to small businesses. When the rule was
adopted in 1989, 86 percent of all businesses had gross revenues of $1
million or less a year; nearly the same percentage of all businesses
(85 percent) currently fall below that threshold. In addition, a gross
revenue test is likely easier for creditors to administer than other
suggested tests, such as basing the exceptions on the sophistication of
the applicant. Commenters did not oppose this aspect of the proposal.
The Board proposed to revise Sec. 202.9(a)(3)(ii)(A) to require
that creditors disclose, to businesses with gross revenues in excess of
$1 million in the preceding fiscal year, the right to a written
statement of reasons for denial or other adverse action. Under the
regulation, creditors must provide a written statement of reasons for
adverse action if the applicant requests the statement within 60 days
of being notified of adverse action. But although the regulation
requires creditors to notify business credit applicants (orally or in
writing) of the adverse action, it does not require notification of the
right to obtain the statement of reasons. The Board stated in its
proposal that requiring the disclosure should not significantly
increase the compliance burden for creditors, and would benefit
applicants who may not be aware of their right to the written statement
of reasons.
Some commenters supported or did not oppose the proposed change;
some commenters urged that creditors be required to provide business
applicants with a written notice of reasons for adverse action, or of
the right to request such reasons. Other commenters suggested that
notification of the right to reasons is unnecessary because businesses
in this category are sophisticated and communication between the
creditor and the applicant is extensive and ongoing.
Based on the comments and further analysis, the Board believes that
notification of the right to request the reasons for adverse action
would not contribute substantially to effectuating the purposes of the
ECOA. Accordingly, the final rule does not include the requirement.
9(b) Form of ECOA Notice and Statement of Specific Reasons
9(b)(2) Statement of Specific Reasons
Section 202.9(b)(2), adopted as proposed, clarifies that whether a
creditor's denial of credit is based on the creditworthiness of the
applicant, a joint applicant, or guarantor, the reasons for adverse
action must be specific. For example, a general statement that ``the
guarantor did not meet the creditor's standards of creditworthiness''
is insufficient.
The legislative history of the requirement to provide specific
reasons for adverse action indicates that the purposes of the
disclosure are to help achieve the anti-discrimination goals of the
ECOA and to educate and inform consumers. These dual purposes are
served by the clarification in Sec. 202.9(b)(2). For example, the
disclosure may discourage a creditor from discriminating based on a co-
applicant's or guarantor's race, sex, age, or other prohibited basis.
Also, the disclosure may help educate and inform applicants, co-
applicants, or guarantors as to reasons for denial that are not
apparent from looking at their credit report.
Many commenters were concerned about the co-applicant's or
guarantor's privacy when the reasons for adverse action pertaining to
creditworthiness are given to the primary applicant. When a person
agrees to be a co-applicant, guarantor, or similar party, however,
there is (or should be) a general understanding that information will
be shared. Accordingly, the rule has been adopted as proposed.
Section 202.10--Furnishing of Credit Information
There are no revisions to this section.
Section 202.11--Relation to State Law
There are no revisions to this section.
Section 202.12--Record Retention
The proposed revisions to Sec. 202.12(b)(1)-(4) have not been
adopted. New Sec. 202.12(b)(7) has been adopted, as proposed.
12(b) Preservation of Records
Section 703(a)(4) of the ECOA requires creditors to retain records
or other data related to business loans as may be necessary to evidence
compliance with the Act. These records must be retained for no less
than one year, unless otherwise excepted. Section 202.12(b) requires
creditors to retain credit applications and other records for
[[Page 13152]]
12 months for credit extended to businesses with gross revenues of $1
million or less. For businesses with gross revenues in excess of $1
million, a creditor must retain records for 60 days. If within that
time the applicant requests in writing the reasons for adverse action,
or requests that records be retained, the creditor must retain the
records for 12 months.
The Board proposed to extend the record retention period to 25
months for credit applications involving businesses with gross revenues
of $1 million or less in response to concerns expressed by some Reserve
Banks and enforcement agencies about the short duration of the record
retention period for business credit. (The rule would remain unchanged
for credit applications involving larger businesses or extensions of
trade credit, credit incident to a factoring agreement, or other
similar types of business credit.) The volume of business loans on a
yearly basis for some financial institutions is low, and the banking
agencies have changed the frequency of examinations (from 18 to 24
months or, in some instances, to 36 months). Thus, it is sometimes
difficult for examiners to obtain an adequate sample in order to
determine whether the creditor is complying with the requirements of
Regulation B. The Board believed that extending the record retention
period would better enable the federal financial regulatory agencies to
monitor and enforce compliance with the ECOA. Also, the Board believed
that previously expressed concerns about storing business credit files
might no longer be compelling given technological advances and the
increased use of electronic storage.
Community groups and a civil rights organization supported the
proposed extension of the record retention period, to better determine
patterns of unlawful discrimination in connection with business credit.
Some industry commenters also supported the proposed extension; they
believed compliance would be easier with consistent rules for consumer
and small business credit. Most industry commenters opposed the
proposal, however, stating that it would impose a significant burden by
increasing the need for storage space and equipment and for additional
employees. Some of these commenters noted that business documentation
is typically more voluminous than documentation for consumer loans, and
that a substantial amount of business loan documentation is kept in
paper form. One commenter stated that the burden would be greater for
smaller creditors than for larger creditors; larger creditors likely
benefit from the development of standardized business loan products and
credit scoring models, while smaller creditors may rely more heavily on
judgmental evaluation and paper documentation. Some commenters believed
that records for the 12-month period preceding an examination are
sufficient to establish lending patterns within a financial
institution.
The final rule retains the current record retention period of 12
months. Although an expanded retention period could assist the
enforcement agencies in monitoring and enforcing compliance with the
Act, the Board believes that the benefits of expanding the record
retention requirement are outweighed by the compliance burdens. For
example, the use of electronic record storage for many business credit
records is not as prevalent as the Board believed when it issued the
proposal.
12(b)(7) Prescreened Solicitations
Section 202.12(b)(7) is new and has been adopted to require record
retention for certain information used in prescreened credit
solicitations so that enforcement agencies can review and analyze
creditors' possible use of prohibited bases in connection with such
solicitations. The ECOA prohibits discrimination by a creditor against
an applicant--a person who has requested or received credit--on a
prohibited basis regarding any aspect of a credit transaction. A credit
transaction is defined by Regulation B as covering every aspect of an
applicant's dealings with a creditor, beginning with requests for
information. Thus, the coverage of the ECOA encompasses a person who
has, at a minimum, sought credit. But because a person could be
discouraged from seeking credit or credit information, the regulation
expressly prohibits a creditor from engaging in any practice (including
its advertisements) that would discourage a reasonable person, on a
prohibited basis, from applying for credit.
In some circumstances, consumers do not have to initiate a request
for credit, but rather respond to a solicitation from the creditor.
Creditors use a number of techniques to identify potential customers.
For instance, creditors will often specify criteria to consumer
reporting agencies, which then draw on information from credit files to
compile lists of persons who meet those criteria. This marketing
technique--involving prescreened solicitations--is typically carried
out through mailed solicitations as well as by telemarketing. In the
marketing of some credit products through prescreened solicitations,
creditors often offer discounted introductory rates, attractive credit
terms, and enhancements (such as purchase discounts, in the case of
credit cards) that may not be available through other application
channels.
Prescreened credit solicitations, particularly for credit cards,
are not new. With advances in technology that facilitate the building
of databases, however, the use of prescreened solicitations has become
more commonplace and more sophisticated. Prescreened solicitations can
be used to target consumers most likely to use a particular credit
product, or to target segments of the population that are most likely
to respond to the offer of credit. Conversely, prescreened
solicitations can be used to exclude some consumers from receiving
offers of credit. They can potentially be used to target consumers in
low-income neighborhoods (which are often predominantly minority) for
less favorable credit products or credit terms on the supposition that
these consumers are less creditworthy. The Board has become aware
(through the compliance examination function of the Board and other
federal financial regulatory agencies) of instances in which creditors,
primarily in the credit card industry, have used age to identify
potential recipients of preapproved credit.
Over the years, there has been concern that Regulation B generally
does not apply to marketing through prescreened solicitations. When the
regulation was originally implemented in 1975, the definition of
``credit transaction'' included ``solicitation of prospective
applicants by advertising or other means.'' Thus, the prohibition
against discrimination based on marital status and sex applied to
solicitations. In December 1976--when Regulation B was revised to
prohibit discrimination based on national origin, race, and other
specified bases--the definition of credit transaction omitted any
reference to solicitations. In the final rule, the regulation instead
prohibited creditors from discouraging persons on a prohibited basis
from applying for credit.
Under the proposed rule, the Board would require that creditors
retain their existing records for those prescreened solicitations
defined as ``firm offers of credit'' under the Fair Credit Reporting
Act (FCRA). Creditors would retain information about the criteria used
to select potential customers, the text of any solicitation, complaints
that might be received about the solicitation, and the portion of the
marketing plan related to the solicitation.
[[Page 13153]]
The Board received about 100 comment letters on this proposal.
Commenters generally acknowledged that prospective applicants and
advertisements are covered by the regulation's rule against
discouraging prospective applicants on a prohibited basis. But some of
them questioned the Board's legal authority to require record retention
for prescreened solicitations given that the ECOA and the regulation's
protections generally apply only to persons who have requested credit.
The Board has clear authority to require the retention of
information regarding prescreened solicitation practices. In enacting
the ECOA, the Congress found that there is a need to ensure that
creditors exercise their responsibility to make credit available with
fairness and impartiality and without discrimination on a prohibited
basis. Thus, creditors must make credit available equally to all
creditworthy customers regardless of race, national origin, sex, or
other prohibited bases of credit discrimination. In this regard,
Regulation B prohibits a creditor from making any statement, in
advertising or otherwise, that would discourage on a prohibited basis a
reasonable person from making or pursuing an application for credit.
The ECOA authorizes the Board to prescribe regulations to carry out
the purposes of the Act including, in particular, regulations that ``in
the judgment of the Board are necessary or proper to effectuate the
purposes of this title, to prevent circumvention or evasion thereof, or
to facilitate or substantiate compliance therewith.'' 15 U.S.C.
1691b(a)(1). This provides the Board authority to require creditors to
retain records that the Board believes are necessary to assure that
creditors are not circumventing or evading the requirements of the ECOA
and Regulation B.
Prescreened solicitations are an increasingly important mechanism
for making certain types of credit available to consumers, and can be
an effective way of enhancing a creditor's compliance with the ECOA. On
the other hand, prescreened solicitations also could provide a means
for creditors to circumvent or evade the ECOA and defeat its purposes
by excluding prospective applicants on a prohibited basis. The Board
believes that, in order to help monitor solicitation practices and
prevent evasion or circumvention of the ECOA, creditors should be
required to retain records related to prescreened solicitations, so
that enforcement agencies can review and analyze creditor practices in
generating offers of credit. The Board believes that imposing this
recordkeeping requirement is within its authority and is consistent
with the Act's purpose.
Some commenters criticized the proposed requirements as burdensome.
In particular, they expressed concern about the retention of
correspondence relating to complaints and the retention of ``components
of marketing plans related to solicitations.'' They did not, however,
quantify in cost or time the additional burdens associated with the
requirements.
Commenters focused on how correspondence about complaints is kept
and organized, rather than suggesting that creditors do not retain such
correspondence. They said that complaint correspondence may not be
stored and tracked by solicitation in existing complaint tracking
systems, and may not be retained in a central location within a
financial institution. Also, commenters noted that marketing plans may
vary significantly from creditor to creditor; some plans may not have a
specific ``component'' devoted to prescreened solicitations.
Consumer representatives and others supporting the proposed record
retention believed that the benefit of the requirement substantially
outweighs any compliance burden. They believed that creditors already
retain most, if not all, of the documents required by the proposal for
business or other reasons, such as to monitor the effectiveness of
their marketing approach. Many of these commenters believed that
Regulation B should cover creditors' pre-application marketing
practices more generally, beyond credit advertisements and beyond the
record retention requirements that were proposed.
Based on comments and its own further analysis, the Board is
adopting the proposal requiring creditors to retain records related to
the text of the solicitation, the criteria used to select potential
customers for prescreened solicitations, and correspondence related to
consumer complaints. The Board believes that record retention will
provide useful information without imposing excessive burden for
determining at some future date whether additional steps might be
warranted for coverage of prescreened solicitations by Regulation B.
Nothing in the final rule requires creditors to establish a
separate database or set of files for correspondence relating to
complaints about prescreened solicitations. Creditors will not be
required to match consumer complaints with specific solicitation
programs. Creditors have the flexibility to retain correspondence in
any manner that would make it reasonably accessible and understandable
to examiners.
The Board has made one modification to reduce compliance burden.
Upon further analysis, the Board believes that the proposed requirement
to identify and retain the component of the marketing plan to which the
solicitation relates may be overly burdensome. And since prescreened
solicitations may be one aspect of a creditor's overall marketing
program, reviewing a single component may not provide the proper
context. Therefore, the Board is not adopting the proposed requirement
related to creditors' marketing plans.
The Board believes that these steps will enable the Board to
monitor solicitation practices, based on information that creditors
currently maintain, in a systematic way. Generally, for business and
other reasons, creditors retain much of the required information. For
example, under the Fair Credit Reporting Act (FCRA), persons that use
information in consumer reports to select consumers to receive offers
of credit are required to maintain the criteria used to select the
consumers for three years after the date the offer is made to the
consumer. The Board's rule requires a 25-month retention period.
There will be some incremental burden associated with retaining
information in a form necessary to demonstrate compliance. The Board
believes, however, that the costs of retaining these records for
purposes of examination under Regulation B will not likely be
substantial; and commenters did not provide evidence to the contrary.
Section 202.13--Information for Monitoring Purposes
Technical revisions have been made to this section to conform to a
directive issued in 1997 by the U.S. Office of Management and Budget.
For ethnicity, the standards provide for requesting data on whether (or
not) individuals are Hispanic or Latino. The standards prescribe five
racial designations: American Indian or Alaska Native; Asian; Black or
African American; Native Hawaiian or Other Pacific Islander; and White.
The standards eliminate the option of designating ``Other,'' which
Regulation B currently allows. The standards also require that
respondents be offered the option of selecting more than one racial
designation. 62 FR 58782, 58786 (October 30, 1997).
The Appendix B model application form for use in complying with
Sec. 202.13 is issued by Fannie Mae and Freddie
[[Page 13154]]
Mac, which are in the process of making revisions to their forms.
Creditors may continue to use the current model form until the Board
publishes a revised form that reflects the new ethnicity and racial
designations.
Section 202.14--Rules on Providing Appraisal Reports
The rules previously contained in Sec. 202.14, Enforcement,
Penalties, and Liabilities, have been moved to Sec. 202.17. Section
202.14 now contains the rules from former Sec. 202.5a. There are no
revisions to this section.
Section 202.15--Incentives for Self-testing and Self-correction
Technical revisions have been made to Sec. 202.15(d)(1).
Section 202.16--Requirements for Electronic Communication
Section 202.16 now contains the rules from former Sec. 202.17.
Section 202.16 contains an interim final rule published in April 2001,
incorporating the requirements of the Electronic Signatures in Global
and National Commerce Act (the E-Sign Act) into Regulation B for
disclosures provided by electronic communication (66 FR 17779, April 4,
2001). The interim final rule is republished for convenience; the Board
lifted the mandatory compliance date for the interim final rule in
August 2001 (66 FR 41439, August 8, 2001). Any substantive revisions to
the interim final rule for Sec. 202.16--as well as for other
electronic disclosures under Regulations E, M, Z, and DD--will be made
at a future date.
Section 202.17--Enforcement, Penalties, and Liabilities
Section 202.17 now contains the rules from former Sec. 202.14.
Technical revisions have been made to Sec. 202.17(a) and (b). Proposed
revisions to Sec. 202.17(c) have not been adopted.
17(c) Failure of Compliance
The Board proposed to delete the third sentence of Sec. 202.17(c)
to conform with the proposal to remove the general prohibition against
data notation. Consistent with the Board's decision to retain the
general prohibition in Sec. 202.5 against noting applicants' personal
characteristics in nonmortgage credit transactions, except for the
purpose of conducting a self-test, the proposed revision has not been
adopted. Section 202.17(c) is retained in its current form.
Appendix A to Part 202--Federal Enforcement Agencies
Appendix A has been revised to reflect changes in the names and
addresses of some agencies.
Appendix B to Part 202--Model Application Forms
Technical revisions have been made to the introductory paragraphs.
As proposed, the ``Residential Loan Application'' has been replaced
with an updated ``Uniform Residential Loan Application'' (Freddie Mac
65/Fannie Mae 1003). Also, the first four model forms have been revised
to clarify the guidance in the official staff commentary in comment
7(d)(1)-3 concerning how to evidence applicants' intent to apply for
joint credit.
Appendix C--Sample Notification Forms
Appendix C has been revised in the final rule, consistent with the
Board's decision to retain the general prohibition in Sec. 202.5
against notation of applicants' personal characteristics for
nonmortgage credit except for the purpose of conducting a self-test.
New model form C-10 is added to provide the disclosure requirements for
creditors that request applicants' race, ethnicity, and other such
characteristics for conducting a self-test under Sec. 202.15.
A number of commenters suggested revisions to the sample forms,
such as using consistent language for all references to the Fair Credit
Reporting Act, and adding or rearranging adverse action reasons. Some
of these suggestions are adopted, with no substantive change intended.
Appendix D--Issuance of Staff Interpretations
There are no revisions to this section.
V. Summary of Revisions to the Commentary
Major revisions to the commentary include clarifying that the
definition of application includes certain preapproval requests (Sec.
202.2(f)); providing an exception from the requirement to provide a
notice of incompleteness for preapprovals that constitute applications
(Sec. 202.9(c)(1)); and clarifying the record retention requirements
for prescreened solicitations (Sec. 202.12(b)(7)). The commentary also
clarifies when an inquiry about credit becomes an application for
credit (Sec. Sec. 202.2(f) and 202.9).
VI. Section-by-Section Analysis
The following discussion addresses the commentary revisions
section-by-section. Technical and non-substantive revisions generally
are not separately discussed. Proposed amendments to several provisions
of the staff commentary relating to the definition of ``adverse
action'' are not being adopted at this time in order to allow the Board
to solicit supplemental comment.
Section 202.1--Authority, Scope and Purpose
There are no revisions to this section.
Section 202.2--Definitions
Revisions have been made to comments in Sec. 202.2(f) concerning
the definition of application; and Sec. 202.2(l) concerning the
definition of creditor. A technical revision has been made to a comment
in Sec. 202.2(z).
2(c) Adverse Action
Proposed comments 2(c)(1)(i)-2; 2(c)(1)(ii)-1; 2(c)(2)(i)-1; 2(
c)(2)(ii)-3; and a revision to 2(c)(2)(ii)-2 are not being adopted at
this time. These interpretations will be reviewed and reissued for
additional public comment.
2(f) Application
A technical change (replacing ``established'' with ``used'') has
been made to comment 2(f)-2 to conform the comment to the technical
change in the definition of application in Sec. 202.2(f) of the
regulation.
Comments 2(f)-3 and -5 have been adopted as proposed with some
modifications. Comment 2(f)-3 clarifies that prequalification requests
are subject to the same test applicable to inquiries. In addition, the
term ``applicant'' has been changed to ``consumer.'' Using
``applicant'' presumes that an application exists, while the point of
the comment is that, in the case of an inquiry or prequalification
request, an application may or may not exist depending upon the
circumstances. Also, cross-references have been added in comment 2(f)-
3, referencing comment 9-5, which provides a more detailed discussion
of when a prequalification request becomes an application, and new
comment 2(f)-5, which clarifies when a request for a preapproval
constitutes an application.
The treatment of inquiries and prequalification requests, on the
one hand, and certain preapproval requests, on the other, now differs
for purposes of determining whether an application exists. Comment
2(f)-5 clarifies this difference. As discussed in the supplementary
information to Sec. 202.2(f) of the regulation, the Board proposed to
include within the definition of application a request for a
preapproved loan under procedures in which a
[[Page 13155]]
creditor issues creditworthy persons a written commitment to extend
credit up to a designated amount that is valid for a designated period
of time, even if subject to conditions. The Board further stated that a
``preapproval'' without procedures involving a written commitment would
be treated as a prequalification.
Some commenters supported the proposed revision, noting that
preapprovals should be considered applications since creditors require
applicants to complete applications before issuing written commitments
to lend. Other commenters opposed the proposal, arguing that it would
have a chilling effect on lenders offering preapproval programs, and
would discourage potential applicants; that the utility of covering
preapprovals as applications is questionable since they generally
contain contingencies and are subject to verification; and that many
applicants requesting preapprovals never return to the creditor to
pursue the request, suggesting that notices required by Sec. 202.9
would not be useful.
The Board believes that preapproval requests are applications,
because they involve requests for extensions of credit made in
accordance with creditors' procedures. The fact that a preapproval
request is not a completed application is not relevant, because
Regulation B generally applies even to applications that are
incomplete. (But see comment 9(c)(1)-1). In addition, Regulation C
(Home Mortgage Disclosure) as revised (67 FR 7222, February 15, 2002)
includes preapproval requests as applications for purposes of that
regulation. In general, the Board believes that the coverage of
applications under Regulations B and C should be consistent, to the
extent possible. Accordingly, comment 2(f)-5 clarifies that certain
preapproval requests constitute applications for purposes of Regulation
B. The text of the final comment has been revised slightly to more
closely parallel the Regulation C amendment relating to preapprovals.
Commenters raised an issue concerning the treatment of an inquiry
in regard to a creditor's preapproval program. For example, if a
creditor has a preapproval program involving written commitments and
other features discussed in comment 2(f)-5, a request for preapproval
under the program constitutes an application. If, however, a consumer
merely inquires about the program, but does not initiate a preapproval
request under it, commenters questioned whether the creditor must treat
the inquiry as an application. The Board believes that whether the
inquiry in this case is an application should be determined under the
criteria set forth in comments 2(f)-3 and 9-5.
Finally, some commenters asked whether a preapproval that
constitutes an application includes preapproved credit solicitations.
Prescreened solicitations are not applications for purposes of
Regulation B. (See Sec. 202.12(b)(7)).
2(l) Creditor
Comment 2(l)-2 has been revised to clarify the type of creditors
subject only to the general prohibitions against discrimination and
discouragement in Sec. Sec. 202.4(a) and (b), respectively.
Some industry commenters expressed concern that the clarification
would include in the definition of creditor persons without discretion
to decide whether credit will be extended. The Board recognizes that in
the credit application process persons may play a variety of roles,
from accepting applications through extending or denying credit.
Comment 2(l)-2 is intended to clarify that where the only role a person
plays is accepting and referring applications for credit, or selecting
creditors to whom applications will be made, the person meets the
definition of creditor, but only for purposes of the prohibitions
against discrimination and discouragement. For example, an automobile
dealer may merely accept and refer applications for credit, or it may
accept applications, perform underwriting, and make a decision whether
to extend credit. Where the automobile dealer only accepts applications
for credit and refers those applications to another creditor who makes
the credit decision--for example, where the dealer does not participate
in setting the terms of the credit or making the credit decision--the
dealer is subject only to Sec. Sec. 202.4(a) and (b) for purposes of
compliance with Regulation B.
2(z) Prohibited Basis
A technical revision has been made to comment 2(z)-1 for clarity.
Comment 2(z)-3 has been amended to reflect the change in the name of
the Aid to Families with Dependent Children program.
Section 202.3--Limited Exceptions for Certain Classes of Transactions
A technical revision has been made to comment 3-1.
Section 202.4--General Rule Prohibiting Discrimination
Section 202.4 has been substantially revised, as proposed. Former
comment 4(a)-1 has been divided into comments 4(a)-1 and -2. Additional
examples of disparate treatment have been included in comment 4(a)-2.
Comments 4(b)-1 and -2 are former comments 5(a)-1 and -2, respectively,
with minor revisions. References to ``potential'' applicants in former
comment 5(a)-1, which is now comment 4(b)-1, have been changed to
``prospective'' applicants with no substantive change intended.
Comments 4(c)-1, -2, and -3 are former comments 5(e)-1, -2, and -3,
respectively. New comment 4(d)-1 clarifies the ``clear and
conspicuous'' requirement.
Section 202.5--Rules Concerning Taking of Applications
Section 202.5 has been substantially revised. Comments 5(a)-1 and -
2 have been moved to comments 4(b)-1 and -2, respectively, consistent
with changes to the regulation. Comment 5(b)-1 has been re-designated
as comment 5(a)(1)-1. Comments 5(b)(2)-1, -2, and -3 have been re-
designated as comments 5(a)(2)-1, -2, and -3, respectively, consistent
with the restructuring of the regulation and the Board's decision to
retain the general prohibition against inquiring about, or noting,
applicants' personal characteristics for nonmortgage credit, with some
exceptions. Comments 5(d)(1)-1 and 5(d)(2)-1, -2, and -3 have not been
revised. Comments 5(e)-1, -2, and -3 have been moved to comments 4(c)-
1, -2, and -3, respectively, consistent with changes to the regulation.
Section 202.5a--Rules on Providing Appraisal Reports
Former Sec. 202.5a is now Sec. 202.14.
Section 202.6--Rules Concerning Evaluation of Applications
Comments to Sec. Sec. 202.6(a), 202.6(b)(1), (2), (5) and (8) have
been revised.
6(a) General Rule Concerning use of Information
Comment 6(a)-1 has been revised to reflect the exception for
collecting applicant characteristics for purposes of a self-test.
6(b) Specific Rules Concerning use of Information
6(b)(1)
As proposed, former comment 6(b)(1)-1 has been divided and certain
portions have been moved to Sec. 202.6(b)(8) of the regulation and
other portions have been moved to Sec. 202.6(b)(8) of the commentary
for clarity. Comment 6(b)(1)-2 has been re-designated as 6(b)(1)-1.
[[Page 13156]]
6(b)(2)
Technical revisions have been made to comments 6(b)(2)-2 and -3,
with no substantive change intended. A technical amendment to comment
6(b)(2)-6 reflects the change in the name of the Aid to Families with
Dependent Children program.
6(b)(5)
Comments 6(b)(5)-1, -3, and -4 have been revised for clarity, with
no substantive change intended.
6(b)(8)
New comment 6(b)(8)-1 incorporates a portion of former comment
6(b)(1)-1 and clarifies that a creditor may consider the marital status
of an applicant or joint applicant to ascertain its rights and remedies
under state law for the particular extension of credit.
Section 202.7--Rules Concerning Extensions of Credit
Revisions have been made in comments to Sec. 202.7(d)(1).
7(d)(1)
Comment 7(d)(1)-1, adopted substantially as proposed, clarifies
that when an applicant is individually creditworthy, a creditor may not
require the signature of any person besides the applicant on a credit
instrument. A cross-reference has been added to note the special rule
under comment 7(d)(6)-1 for guarantors of closely held corporations.
Comment 7(d)(1)-3 provides guidance on how to evidence applicants'
intent to apply for joint credit. The proposed rule clarified that
creditors must document in some manner a person's intent to become
jointly liable for a credit obligation, and provided examples. Some
commenters expressed concern that the Board is requiring written
applications for business credit. Other commenters believed that the
best method to evidence intent is to require written applications. A
few commenters asked that the Board afford creditors the flexibility to
determine how to evidence intent for joint credit.
Written applications for business credit are not required, nor has
the Board proposed to require such applications. While creditors are
required to have documentation evidencing intent to apply for joint
credit, creditors have the flexibility to determine the methods used to
establish intent. The comment has been adopted substantially as
proposed, with revisions for clarity. First, the comment clarifies that
evidence of intent must be provided at the time of application.
Accordingly, a creditor could not use the fact that two parties signed
the note, for example, as evidence of intent to be jointly liable at
the time of application. Second, the examples in the proposed rule have
been revised to provide greater clarity. Consistent with providing
greater clarity in the examples, some of the model forms in Appendix B
have been modified slightly to reflect this guidance.
Section 202.8--Special Purpose Credit Programs
Minor revisions have been made in comments to Sec. 202.8(a).
Proposed revisions to comments in Sec. 202.8(c) and (d) have not been
adopted.
8(a) Standards for Programs
Comment 8(a)-5 adds an example of how creditors designing a special
purpose credit program may determine need, and has been adopted as
proposed.
8(c) Special Rule Concerning Requests and Use of Information
Proposed revisions to comment 8(c)-1 have not been adopted,
reflecting the Board's decision to retain the general prohibition under
Sec. 202.5 against the collection of applicant characteristic
information, except for the purpose of conducting a self-test.
Technical revisions have been made for clarity.
8(d) Special Rule in the Case of Financial Need
Proposed revisions to comment 8(d)-1 have not been adopted,
reflecting the Board's decision to retain the general prohibition under
Sec. 202.5 against the collection of applicant characteristic
information, except for the purpose of conducting a self-test.
Technical revisions have been made for clarity.
Section 202.9--Notifications
Revisions have been made in comments to Sec. Sec. 202.9,
202.9(b)(2), 202.9(c), and 202.9(g). In comment 9-5 concerning
prequalifications, the discussion of preapprovals has been removed as
proposed, and certain preapproval requests are now treated differently
from prequalification requests, as clarified in comments 2(f)-3 and
2(f)-5. Also, in response to public comments, language has been added
to clarify that a creditor may tell consumers not only the maximum
amount they may borrow under various loan programs, but also the rates
and other terms available, without turning prequalification requests
into applications for credit.
Some commenters suggested adding language to clarify that the
specific information that a creditor may evaluate about a consumer in a
prequalification includes credit information. The Board believes that
the language in the comment as revised is sufficiently broad to cover
credit information. Creditors should bear in mind, however, that unless
an application for credit has been made by the consumer, or the
creditor has written instructions from the consumer to obtain a credit
report, a permissible purpose for obtaining a credit report on the
consumer may not exist under the Fair Credit Reporting Act.
9(b) Form of ECOA Notice and Statement of Specific Reasons
9(b)(2)
Comment 9(b)(2)-7 has been adopted as proposed with minor revisions
for clarity. The proposed comment clarified that in a combined credit
scoring and judgmental system where an applicant is neither approved
nor denied based on the first component of the system but is denied
based on the second component, the adverse action reasons must come
from both components of the system. Several commenters found the
comment confusing. These commenters believed that the proposed language
of the comment contradicts the general rule of the comment that the
reasons for denial must come from the component of the system the
applicant failed. The comment, however, is intended to address several
distinct situations.
The comment applies when applications are automatically denied
based on the first component, for example the credit scoring component,
and are not forwarded to the judgmental component. In those cases, the
adverse action reasons must come solely from the credit scoring
component. The comment also applies when applications pass the credit
scoring system, are automatically forwarded to the judgmental
component, and are denied based on the judgmental component. In those
cases, the adverse action reasons must come solely from the judgmental
component. These examples are consistent with the rule that the reasons
for denial must come from the component the applicant failed.
The amendments to the comment apply when a creditor utilizes a
scorecard with ``gray bands,'' meaning that the applicant's score does
not pass or fail the credit scoring component but falls within a range
where referral to an analyst for judgmental review is required. If
credit is denied, the adverse action reasons must come from both the
credit scoring component and the judgmental component of the system.
[[Page 13157]]
Providing one or more adverse action reasons from the credit scoring
component will help educate consumers about why their credit score did
not pass the credit scoring component. In all situations addressed by
the comment, a combination of more than four principal adverse action
reasons is not likely to be helpful to applicants.
9(c) Incomplete Applications
9(c)(1) Notice Alternatives
As discussed in the supplementary information to Sec. 202.2(f) of
the regulation and commentary, the definition of application includes
certain preapproval requests. Some commenters expressed concern that in
many cases applicants make preapproval requests and then fail to follow
through on the request. Under Sec. 202.9(c), within 30 days of
receiving an application that is incomplete regarding matters that the
applicant can complete, the creditor must notify the applicant of
action taken or of the incompleteness. According to some commenters,
where a preapproval request remains incomplete, sending the applicant a
notice of incompleteness does not appear useful.
The Board believes that in the case of a traditional application,
the applicant is interested in pursuing a loan, but may be unaware that
the application remains incomplete in some respect; in this situation,
a notice of incompleteness can serve an important function. This seems
less likely in the case of a preapproval request, which is often a less
complicated and more expeditious process. Therefore, comment 9(c)(1)-1
has been added to include an exception from the requirement to provide
a notice of incompleteness for preapprovals that meet the definition of
``application'' as clarified in comment 2(f)-5. This exception
parallels the amendment to Regulation C (Home Mortgage Disclosure),
which treats preapproval requests as applications, but does not require
reporting of preapproval requests that remain incomplete. (See 67 FR
7222, February 15, 2002.)
9(g) Applications Submitted Through a Third Party
The proposed revisions to comment 9(g)-1 clarified that the
requirements of Sec. 202.9(a)(2) apply to applications submitted
through a third party. The requirement to include the address of each
creditor gives the applicant the information necessary to request a
statement of specific reasons for the adverse action or an explanation
of the reasons. Accordingly, comment 9(g)-1 has been adopted as
proposed.
Section 202.10--Furnishing of Credit Information
There are no revisions to this section.
Section 202.11--Relation to State Law
There are no revisions to this section.
Section 202.12--Record Retention
As proposed, comments in Sec. 202.12(b) have been added to reflect
changes to the regulation concerning retention of certain records
related to prescreened solicitations.
12(b)(7) Prescreened Solicitations
The Board proposed to add three new comments to new Sec.
202.12(b)(7) to clarify the record retention requirements for
prescreened solicitations. With one exception, the comments have been
adopted as proposed, with technical revisions for clarity. Proposed
comment 12(b)(7)-3 would have clarified the regulatory requirement to
retain the portion of the marketing plan to which the solicitation
relates. Since the final rule eliminates the marketing plan
requirement, the proposed comment has not been adopted. Comment
12(b)(7)-3 now clarifies the requirement to retain records of
correspondence relating to complaints (whether formal or informal)
about prescreened solicitations. (See detailed discussion in the
supplementary information to Sec. 202.12(b)(7) of the regulation.)
Section 202.13--Information for Monitoring Purposes
The proposed revision to a comment in Sec. 202.13(a) has not been
adopted. A technical revision has been made for clarity. Comments in
Sec. 202.13(b) have been revised.
13(a) Information To Be Requested
Comment 13(a)-7 has been retained, consistent with the Board's
decision to retain the general prohibition against the notation of
applicant characteristics for nonmortgage credit transactions, subject
to certain exceptions. The citation in the comment has been revised to
conform with the reorganization of the regulation.
13(b) Obtaining of Information
Consistent with a revision to Sec. 202.13(a) of the regulation,
comment 13(b)-1 has been revised to clarify the guidance issued in 1997
by the Office of Management and Budget.
Comment 13(b)-3 has been revised to make the treatment of
applications received by telephone consistent with Appendix A,
paragraph V.D. 2., and Appendix B, paragraph I.B.4. of Regulation C
(Home Mortgage Disclosure) for the purpose of collecting monitoring
information. Comment 13(b)-4 combines existing comments 13(b)-4 and -5,
and has been revised to make the treatment of applications received
electronically consistent with comment 203.4(a)(7)-5 of Regulation C.
Comment 13(b)-7 has been retained and re-designated as comment
13(b)-6, consistent with the Board's decision to retain the general
prohibition against the notation of applicant characteristics for
nonmortgage credit transactions, except for the purpose of conducting a
self-test.
Section 202.14--Rules on Providing Appraisal Reports
Section 202.14 is former Sec. 202.5a. There are no revisions to
comments in this section.
Section 202.15--Incentives for Self-testing and Self-correction
The proposed addition of a comment to Sec. 202.15(b)(3) has not
been adopted.
15(b)(3)
As discussed earlier, the Board is retaining the general
prohibition against inquiring about, or noting, information about an
applicant's personal characteristics, such as race or national origin,
except for the purpose of conducting a self-test under Sec. 202.15.
Accordingly, proposed comment 15(b)(3)(ii)-2--which would have
clarified that the collection of information about an applicant's
characteristics does not qualify for the self-test privilege--has not
been adopted. For a discussion of the exception for self-testing, see
Sec. 202.5(b)(1) and the supplementary information to that section.
Section 202.16--Requirements for Electronic Communication
Section 202.16 is former Sec. 202.17. The comments in Sec. 202.16
have been republished for convenience. Consistent with the Board's
decision to lift the mandatory compliance date for the interim final
rule in Sec. 202.16 (66 FR 41439, August 8, 2001), the comments in
this section are not currently in effect on a mandatory basis and will
be separately finalized. Accordingly, there are no revisions to
comments in this section.
Section 202.17--Enforcement, Penalties, and Liabilities
Section 202.17 is former Sec. 202.14. There are no revisions to
comments in this section.
[[Page 13158]]
Appendix B to Part 202--Model Application Forms
Comment 1 to Appendix B has been revised to delete a reference to
U.S. Office of Management and Budget classifications. Other proposed
changes to comment 1 have not been adopted, reflecting the Board's
decision to retain the general prohibition against the collection of
applicant characteristics for nonmortgage credit. Consistent with that
decision, comment 2 has been retained.
Appendix C--Sample Notification Forms
There are no revisions to the comment in Appendix C.
VII. Reorganization of the Regulation
Provisions of the regulation and commentary are re-designated as
indicated in the tables below. While the tables present a substantially
complete summary of the reorganization, they should not be used as a
substitute for a detailed comparison of the revised regulation with the
old regulation.
Table 1.--Section 202.2--Definitions
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Comment 2(f)-5................ Comment 2(f)-6.
------------------------------------------------------------------------
Table 2.--Section 202.3--Limited Exceptions for Certain Classes of
Transactions
------------------------------------------------------------------------
Current New
------------------------------------------------------------------------
Regulation 202.3(a)(2)(ii).... Deleted.
Regulation 202.3(a)(2)(iii)... Regulation 202.3(a)(2)(ii).
Regulation 202.3(b)(2)(i)..... Regulation 202.3(b)(2)(ii).
Regulation 202.3(b)(2)(ii).... Regulation 202.3(b)(2)(iii).
Regulation 202.3(b)(2)(iii)... Regulation 202.3(b)(2)(i).
Regulation 202.3(c)(2)(i)..... Regulation 202.3(c)(2)(ii).
Regulation 202.3(c)(2)(ii).... Regulation 202.3(c)(2)(iii).
Regulation 202.3(c)(2)(iii)... Regulation 202.3(c)(2)(iv).
Regulation 202.3(c)(2)(iv).... Regulation 202.3(c)(2)(i).
------------------------------------------------------------------------
Table 3.--Section 202.4--General Rules
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Comment 202.4-1............... Comment 4(a)-1, -2.
Regulation 202.4(b)........... Regulation 202.4(e).
------------------------------------------------------------------------
Table 4.--Section 202.5--Rules Concerning Requests for Information
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Regulation 202.5(a)........... Regulation 202.4(b).
Comment 202.5(a)-1............ Comment 202.4(b)-1.
Comment 202.5(a)-2............ Comment 202.4(b)-2.
Comment 202.5(b)-1............ Comment 202.5(a)(1)-1.
Regulation 202.5(b)(1)........ Regulation 202.5(a)(1).
Regulation 202.5(b)(2)........ Regulation 202.5(a)(2).
Comment 202.5(b)(2)-1......... Comment 202.5(a)(2)-1.
Comment 202.5(b)(2)-2......... Comment 202.5(a)(2)-2.
Comment 202.5(b)(2)-3......... Comment 202.5(a)(2)-3.
Regulation 202.5(b)(3)........ Regulation 202.5(a)(3).
Regulation 202.5(d)(3)........ Regulation 202.5(b), (b)(2).
Regulation 202.5(d)(4)........ Regulation 202.5(d)(3).
Regulation 202.5(d)(5)........ Regulation 202.5(b), (e).
Regulation 202.5(e)........... Regulation 202.4(c).
Comment 202.5(e)-1............ Comment 202.4(c)-1.
Comment 202.5(e)-2............ Comment 202.4(c)-2.
Comment 202.5(e)-3............ Comment 202.4(c)-3.
------------------------------------------------------------------------
Table 5.--Section 202.5a--Rules on Providing Appraisal Reports
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Regulation 202.5a(a).......... Regulation 202.14(a).
Comment 202.5a(a)-1........... Comment 202.14(a)-1.
Comment 202.5a(a)-2........... Comment 202.14(a)-2.
Comment 202.5a(a)(2)(i)-1..... Comment 202.14(a)(2)(i)-1.
Comment 202.5a(a)(2)(ii)-1.... Comment 202.14(a)(2)(ii)-1.
Regulation 202.5a(b).......... Regulation 202.14(b).
Regulation 202.5a(c).......... Regulation 202.14(c).
Comment 202.5a(c)-1........... Comment 202.14(c)-1.
[[Page 13159]]
Comment 202.5a(c)-2........... Comment 202.14(c)-2.
------------------------------------------------------------------------
Table 6.--Section 202.6--Rules Concerning Evaluation of Applications
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Comment 202.6(b)(1)-1......... Regulation 202.6(b)(8), Comment
202.6(b)(8)-1.
Comment 202.6(b)(1)-2......... Comment 202.6(b)(1)-1.
------------------------------------------------------------------------
Table 7.--Section 202.7--Rules Concerning Extensions of Credit
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Comment 7(d)(1)-1............. Comment 7(d)(1)-2.
------------------------------------------------------------------------
Table 8.--Section 202.13--Information for Monitoring Purposes
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Regulation 202.13(a).......... Regulation 202.13(a)(1), (a)(2).
Regulation 202.13(a)(1)....... Regulation 202.13(a)(1)(i).
Regulation 202.13(a)(2)....... Regulation 202.13(a)(1)(ii).
Regulation 202.13(a)(3)....... Regulation 202.13(a)(1)(iii).
Regulation 202.13(a)(4)....... Regulation 202.13(a)(1)(iv).
Comment 202.13(b)-4, -5....... Comment 202.13(b)-4.
Comment 202.13(b)-6........... Comment 202.13(b)-5.
Comment 202.13(b)-7........... Comment 202.13(b)-6.
------------------------------------------------------------------------
Table 9.--Section 202.14--Enforcement, Penalties and Liabilities
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Regulation 202.14(a).......... Regulation 202.17(a).
Regulation 202.14(b).......... Regulation 202.17(b).
Regulation 202.14(c).......... Regulation 202.17(c).
Comment 202.14(c)-1........... Comment 202.17(c)-1.
Comment 202.14(c)-2........... Comment 202.17(c)-2.
------------------------------------------------------------------------
Table 10.--Section 202.17--Requirements for Electronic Communications
------------------------------------------------------------------------
Current Revised
------------------------------------------------------------------------
Regulation 202.17(a).......... Regulation 202.16(a).
Regulation 202.17(b).......... Regulation 202.16(b).
Comment 202.17(b)-1........... Comment 202.16(b)-1.
Comment 202.17(b)-2........... Comment 202.16(b)-2.
Comment 202.17(b)-3........... Comment 202.16(b)-3.
Comment 202.17(b)-4........... Comment 202.16(b)-4.
Comment 202.17(b)-5........... Comment 202.16(b)-5.
Regulation 202.17(c).......... Regulation 202.16(c).
Regulation 202.17(d).......... Regulation 202.16(d).
Comment 202.17(d)(1)-1........ Comment 202.16(d)(1)-1.
Comment 202.17(d)(2)-1........ Comment 202.16(d)(2)-1.
Comment 202.17(d)(2)-2........ Comment 202.16(d)(2)-2.
Regulation 202.17(e).......... Regulation 202.16(e).
Comment 202.17(e)-1........... Comment 202.16(e)-1.
Regulation 202.17(f).......... Regulation 202.16(f).
Comment 202.17(f)-1........... Comment 202.16(f)-1.
------------------------------------------------------------------------
VIII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (PRA) (44
U.S.C. 3506; 5 CFR 1320, Appendix A.1), the Board reviewed the final
rule under the authority delegated to the Board by the U.S. Office of
Management and Budget. The Federal Reserve may not conduct or sponsor,
and an organization is not required to respond to, an information
collection unless it displays a currently valid OMB control number. The
OMB
[[Page 13160]]
control number for this final rule is 7100-0201.
The information collection that is revised by this rulemaking is
found in 12 CFR part 202. This information collection is mandatory to
evidence compliance with the requirements of 15 U.S.C. 1691b(a)(1) and
Public Law 104-208, Sec. 2302(a), and also to ensure that credit is
made available to all creditworthy customers without discrimination on
the basis of race, color, religion, national origin, sex, marital
status, age (provided the applicant has the capacity to contract),
receipt of public assistance income, or the fact that the applicant has
in good faith exercised any right under the Consumer Credit Protection
Act (15 U.S.C. 1600 et seq.).
Regulation B applies to all types of creditors, not just state
member banks (SMBs). However, under the Paperwork Reduction Act, the
Federal Reserve accounts for the burden of the paperwork associated
with the regulation only for entities that are supervised by the
Federal Reserve. Appendix A of Regulation B defines these creditors as
SMBs, branches and agencies of foreign banks (other than Federal
branches, Federal agencies, and insured state branches of foreign
banks), commercial lending companies owned or controlled by foreign
banks, and organizations operating under section 25 or 25A of the
Federal Reserve Act. Other Federal agencies account for the paperwork
burden for the institutions they supervise. Creditors are required to
retain records for 12 to 25 months as evidence of compliance.
The estimated annual burden for entities supervised by the Federal
Reserve is approximately 175,700 hours for the 1,312 creditors that are
``respondents'' for purposes of the Paperwork Reduction Act. In
conjunction with the proposed revisions to Regulation B, the Board
sought comment on the burden estimate for the proposed changes.
Approximately 750 comments were received on the proposed rulemaking.
Commenters generally opposed most of the major proposed revisions to
the regulation, but provided suggestions for additional revisions to
help facilitate compliance with the regulation. Creditors commented
that the burden estimate in the proposed rulemaking was too low;
however, none quantified or provided evidence of acceptable higher
estimates.
The increase in the estimated annual burden, from previously
published burden estimates, is due to the new disclosure requirement
associated with Sec. 202.5(b)(1). Section 202.5(b)(1) requires
creditors that collect applicant characteristics for purposes of
conducting a self-test to disclose to credit applicants that providing
the information is optional, that the creditor will not take the
information into account in any aspect of the credit transaction, and,
if applicable, that the information will be noted by visual observation
or surname if the applicant chooses not to provide it. To help ease
burden, a model notice is provided in Appendix C to Regulation B.
The exact burden of the disclosure requirement is difficult to
quantify because it is unclear how many creditors will choose to
conduct self-tests, but that burden is expected to be minimal given
that a model form is provided. The estimated annual burden for the new
disclosure is approximately 10,000 hours. The estimated annual burden
represents about 3.5 percent of total Federal Reserve System burden.
For purposes of the PRA, no paperwork burden is associated with the
recordkeeping requirement for information about prescreened
solicitations (Sec. 202.12(b)(7)). The final rule generally requires
creditors to retain information they already retain for business
purposes. Thus, there will likely be some incremental compliance burden
but no additional paperwork burden; and commenters did not provide any
comments to the contrary.
Because the records would be maintained at state member banks and
the notices are not provided to the Federal Reserve, no issue of
confidentiality normally arises. However, the information may be
protected from disclosure under exemptions (b)(4), (6), and (8) of the
Freedom of Information Act (5 U.S.C. 522(b)).
The Board has a continuing interest in the public's opinions of the
Federal Reserve's collections of information. At any time, comments
regarding the burden estimate, or any other aspect of this information
collection, including suggestions for reducing the burden, may be sent
to: Secretary, Board of Governors of the Federal Reserve System, 20th
and C Streets, NW., Washington, DC 20551; and to the Office of
Management and Budget, Paperwork Reduction Project (7100-0201),
Washington, DC 20503.
IX. Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 604(a)), the Board has prepared a final regulatory
flexibility analysis of these revisions to Regulation B. The final rule
is a consequence of Board policy to review and update its regulations
periodically. The Board's previous comprehensive review of Regulation B
was completed in 1985.
The Board received no comments specifically responding to the
initial regulatory flexibility analysis published in conjunction with
the proposed rule. As discussed in the supplementary information
presented above, however, many comments the Board received discussed
the compliance burdens arising from particular proposals. Such comments
are summarized throughout the supplementary information, as are the
Board's responses. The supplementary information also contains
discussions of the alternative measures the Board considered, and in
some cases adopted, to reduce burden.
Some changes in the final rule should not impose additional burden
on institutions. The general prohibition on data notation for
nonmortgage credit products has been retained, subject to an exception
to allow the collection of applicants' personal characteristics for the
purpose of conducting a self-test under Sec. 202.15. To the extent
creditors choose to collect these data, however, the final rule
requires a disclosure to be made to applicants. The Board has tried to
minimize any burden imposed by the disclosure requirement by publishing
a model disclosure form. The exact burden of the disclosure requirement
is difficult to quantify; it is uncertain how many creditors will
choose to conduct self-tests and collect these data.
The final rule imposes a new requirement upon creditors to retain
certain records in connection with certain prescreened solicitations.
This requirement will enable the Board and the other enforcement
agencies to monitor solicitation practices in a systematic way that to
date has not been possible, based on information that creditors
currently maintain. The Board will at some future date determine
whether additional steps might be warranted for coverage of prescreened
solicitations by Regulation B.
Although the new rule will impose some burden on creditors, the
Board has sought to minimize burden by tracking existing legal
requirements and current business practice. For example, users of
consumer reports are required to retain some prescreening information
under the Fair Credit Reporting Act. The final rule under Regulation B
parallels this requirement. In addition, many creditors retain part or
much of the solicitation information for business purposes, such as to
evaluate marketing plans.
The Board has modified the final rule to further reduce compliance
burden. The proposed rule would have required creditors to keep the
marketing plan to
[[Page 13161]]
which a solicitation relates. The Board has not adopted this
requirement because it may be overly burdensome. And since prescreened
solicitations may be one aspect of a creditor's overall marketing
program, reviewing a single component might not have provided the
proper context. While creditors will be required to keep information
relating to complaints about solicitations, creditors will not be
required to store the information in a centralized database or set of
files. Creditors will have the flexibility to retain such
correspondence in any manner that would be reasonably accessible and
understandable to examiners.
Burdens associated with the requirement to retain records relating
to prescreened solicitations likely will be greater for large creditors
than for small creditors, because large creditors are more active in
this area. The number of small creditors affected by the recordkeeping
requirement is unknown but is likely to be small.
The proposed rule would have required creditors to retain records
for 25 months rather than 12 months for certain types of business
credit. The Board has not adopted the proposed rule, based on its
belief that the compliance burden would outweigh the benefits. For
example, the use of electronic record storage for many business credit
records is not as prevalent as the Board believed when it issued the
proposal. Thus, no additional burden is imposed by the final rule.
In light of the purposes of the Equal Credit Opportunity Act, the
Board believes it is not feasible to create different rules for large
and small creditors.
List of Subjects in 12 CFR Part 202
Aged, Banks, Banking, Civil rights, Consumer protections, Credit,
Discrimination, Federal Reserve System, Marital status discrimination,
Penalties, Religious discrimination, Reporting and recordkeeping
requirements, Sex discrimination.
For the reasons set forth in the preamble, 12 CFR part 202 is
revised as follows:
PART 202--EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)
Regulation B (Equal Credit Opportunity)
Sec.
202.1 Authority, scope and purpose.
202.2 Definitions.
202.3 Limited exceptions for certain classes of transactions.
202.4 General rules.
202.5 Rules concerning requests for information.
202.6 Rules concerning evaluation of applications.
202.7 Rules concerning extensions of credit.
202.8 Special purpose credit programs.
202.9 Notifications.
202.10 Furnishing of credit information.
202.11 Relation to state law.
202.12 Record retention.
202.13 Information for monitoring purposes.
202.14 Rules on providing appraisal reports.
202.15 Incentives for self-testing and self-correction.
202.16 Requirements for electronic communication.
202.17 Enforcement, penalties and liabilities.
Appendix A to Part 202--Federal Enforcement Agencies
Appendix B to Part 202--Model Application Forms
Appendix C to Part 202--Sample Notification Forms
Appendix D to Part 202--Issuance of Staff Interpretations
Supplement I to Part 202--Official Staff Interpretations
Authority: 15 U.S.C. 1691-1691f.
Sec. 202.1 Authority, scope and purpose.
(a) Authority and scope. This regulation is issued by the Board of
Governors of the Federal Reserve System pursuant to title VII (Equal
Credit Opportunity Act) of the Consumer Credit Protection Act, as
amended (15 U.S.C. 1601 et seq.). Except as otherwise provided herein,
this regulation applies to all persons who are creditors, as defined in
Sec. 202.2(1). Information collection requirements contained in this
regulation have been approved by the Office of Management and Budget
under the provisions of 44 U.S.C. 3501 et seq. and have been assigned
OMB No. 7100-0201.
(b) Purpose. The purpose of this regulation is to promote the
availability of credit to all creditworthy applicants without regard to
race, color, religion, national origin, sex, marital status, or age
(provided the applicant has the capacity to contract); to the fact that
all or part of the applicant's income derives from a public assistance
program; or to the fact that the applicant has in good faith exercised
any right under the Consumer Credit Protection Act. The regulation
prohibits creditor practices that discriminate on the basis of any of
these factors. The regulation also requires creditors to notify
applicants of action taken on their applications; to report credit
history in the names of both spouses on an account; to retain records
of credit applications; to collect information about the applicant's
race and other personal characteristics in applications for certain
dwelling-related loans; and to provide applicants with copies of
appraisal reports used in connection with credit transactions.
Sec. 202.2 Definitions.
For the purposes of this regulation, unless the context indicates
otherwise, the following definitions apply.
(a) Account means an extension of credit. When employed in relation
to an account, the word use refers only to open-end credit.
(b) Act means the Equal Credit Opportunity Act (title VII of the
Consumer Credit Protection Act).
(c) Adverse action--(1) The term means:
(i) A refusal to grant credit in substantially the amount or on
substantially the terms requested in an application unless the creditor
makes a counteroffer (to grant credit in a different amount or on other
terms) and the applicant uses or expressly accepts the credit offered;
(ii) A termination of an account or an unfavorable change in the
terms of an account that does not affect all or substantially all of a
class of the creditor's accounts; or
(iii) A refusal to increase the amount of credit available to an
applicant who has made an application for an increase.
(2) The term does not include:
(i) A change in the terms of an account expressly agreed to by an
applicant.
(ii) Any action or forbearance relating to an account taken in
connection with inactivity, default, or delinquency as to that account;
(iii) A refusal or failure to authorize an account transaction at
point of sale or loan, except when the refusal is a termination or an
unfavorable change in the terms of an account that does not affect all
or substantially all of a class of the creditor's accounts, or when the
refusal is a denial of an application for an increase in the amount of
credit available under the account;
(iv) A refusal to extend credit because applicable law prohibits
the creditor from extending the credit requested; or
(v) A refusal to extend credit because the creditor does not offer
the type of credit or credit plan requested.
(3) An action that falls within the definition of both paragraphs
(c)(1) and (c)(2) of this section is governed by paragraph (c)(2) of
this section.
(d) Age refers only to the age of natural persons and means the
number of fully elapsed years from the date of an applicant's birth.
(e) Applicant means any person who requests or who has received an
extension of credit from a creditor, and includes any person who is or
may
[[Page 13162]]
become contractually liable regarding an extension of credit. For
purposes of Sec. 202.7(d), the term includes guarantors, sureties,
endorsers, and similar parties.
(f) Application means an oral or written request for an extension
of credit that is made in accordance with procedures used by a creditor
for the type of credit requested. The term application does not include
the use of an account or line of credit to obtain an amount of credit
that is within a previously established credit limit. A completed
application means an application in connection with which a creditor
has received all the information that the creditor regularly obtains
and considers in evaluating applications for the amount and type of
credit requested (including, but not limited to, credit reports, any
additional information requested from the applicant, and any approvals
or reports by governmental agencies or other persons that are necessary
to guarantee, insure, or provide security for the credit or
collateral). The creditor shall exercise reasonable diligence in
obtaining such information.
(g) Business credit refers to extensions of credit primarily for
business or commercial (including agricultural) purposes, but excluding
extensions of credit of the types described in Sec. 202.3(a)-(d).
(h) Consumer credit means credit extended to a natural person
primarily for personal, family, or household purposes.
(i) Contractually liable means expressly obligated to repay all
debts arising on an account by reason of an agreement to that effect.
(j) Credit means the right granted by a creditor to an applicant to
defer payment of a debt, incur debt and defer its payment, or purchase
property or services and defer payment therefor.
(k) Credit card means any card, plate, coupon book, or other single
credit device that may be used from time to time to obtain money,
property, or services on credit.
(l) Creditor means a person who, in the ordinary course of
business, regularly participates in a credit decision, including
setting the terms of the credit. The term creditor includes a
creditor's assignee, transferee, or subrogee who so participates. For
purposes of Sec. 202.4(a) and (b), the term creditor also includes a
person who, in the ordinary course of business, regularly refers
applicants or prospective applicants to creditors, or selects or offers
to select creditors to whom requests for credit may be made. A person
is not a creditor regarding any violation of the Act or this regulation
committed by another creditor unless the person knew or had reasonable
notice of the act, policy, or practice that constituted the violation
before becoming involved in the credit transaction. The term does not
include a person whose only participation in a credit transaction
involves honoring a credit card.
(m) Credit transaction means every aspect of an applicant's
dealings with a creditor regarding an application for credit or an
existing extension of credit (including, but not limited to,
information requirements; investigation procedures; standards of
creditworthiness; terms of credit; furnishing of credit information;
revocation, alteration, or termination of credit; and collection
procedures).
(n) Discriminate against an applicant means to treat an applicant
less favorably than other applicants.
(o) Elderly means age 62 or older.
(p) Empirically derived and other credit scoring systems--(1) A
credit scoring system is a system that evaluates an applicant's
creditworthiness mechanically, based on key attributes of the applicant
and aspects of the transaction, and that determines, alone or in
conjunction with an evaluation of additional information about the
applicant, whether an applicant is deemed creditworthy. To qualify as
an empirically derived, demonstrably and statistically sound, credit
scoring system, the system must be:
(i) Based on data that are derived from an empirical comparison of
sample groups or the population of creditworthy and noncreditworthy
applicants who applied for credit within a reasonable preceding period
of time;
(ii) Developed for the purpose of evaluating the creditworthiness
of applicants with respect to the legitimate business interests of the
creditor utilizing the system (including, but not limited to,
minimizing bad debt losses and operating expenses in accordance with
the creditor's business judgment);
(iii) Developed and validated using accepted statistical principles
and methodology; and
(iv) Periodically revalidated by the use of appropriate statistical
principles and methodology and adjusted as necessary to maintain
predictive ability.
(2) A creditor may use an empirically derived, demonstrably and
statistically sound, credit scoring system obtained from another person
or may obtain credit experience from which to develop such a system.
Any such system must satisfy the criteria set forth in paragraph
(p)(1)(i) through (iv) of this section; if the creditor is unable
during the development process to validate the system based on its own
credit experience in accordance with paragraph (p)(1) of this section,
the system must be validated when sufficient credit experience becomes
available. A system that fails this validity test is no longer an
empirically derived, demonstrably and statistically sound, credit
scoring system for that creditor.
(q) Extend credit and extension of credit mean the granting of
credit in any form (including, but not limited to, credit granted in
addition to any existing credit or credit limit; credit granted
pursuant to an open-end credit plan; the refinancing or other renewal
of credit, including the issuance of a new credit card in place of an
expiring credit card or in substitution for an existing credit card;
the consolidation of two or more obligations; or the continuance of
existing credit without any special effort to collect at or after
maturity).
(r) Good faith means honesty in fact in the conduct or transaction.
(s) Inadvertent error means a mechanical, electronic, or clerical
error that a creditor demonstrates was not intentional and occurred
notwithstanding the maintenance of procedures reasonably adapted to
avoid such errors.
(t) Judgmental system of evaluating applicants means any system for
evaluating the creditworthiness of an applicant other than an
empirically derived, demonstrably and statistically sound, credit
scoring system.
(u) Marital status means the state of being unmarried, married, or
separated, as defined by applicable state law. The term ``unmarried''
includes persons who are single, divorced, or widowed.
(v) Negative factor or value, in relation to the age of elderly
applicants, means utilizing a factor, value, or weight that is less
favorable regarding elderly applicants than the creditor's experience
warrants or is less favorable than the factor, value, or weight
assigned to the class of applicants that are not classified as elderly
and are most favored by a creditor on the basis of age.
(w) Open-end credit means credit extended under a plan in which a
creditor may permit an applicant to make purchases or obtain loans from
time to time directly from the creditor or indirectly by use of a
credit card, check, or other device.
(x) Person means a natural person, corporation, government or
governmental subdivision or agency, trust, estate, partnership,
cooperative, or association.
(y) Pertinent element of creditworthiness, in relation to a
judgmental system of evaluating
[[Page 13163]]
applicants, means any information about applicants that a creditor
obtains and considers and that has a demonstrable relationship to a
determination of creditworthiness.
(z) Prohibited basis means race, color, religion, national origin,
sex, marital status, or age (provided that the applicant has the
capacity to enter into a binding contract); the fact that all or part
of the applicant's income derives from any public assistance program;
or the fact that the applicant has in good faith exercised any right
under the Consumer Credit Protection Act or any state law upon which an
exemption has been granted by the Board.
(aa) State means any state, the District of Columbia, the
Commonwealth of Puerto Rico, or any territory or possession of the
United States.
Sec. 202.3 Limited exceptions for certain classes of transactions.
(a) Public utilities credit--(1) Definition. Public utilities
credit refers to extensions of credit that involve public utility
services provided through pipe, wire, or other connected facilities, or
radio or similar transmission (including extensions of such
facilities), if the charges for service, delayed payment, and any
discount for prompt payment are filed with or regulated by a government
unit.
(2) Exceptions. The following provisions of this regulation do not
apply to public utilities credit:
(i) Section 202.5(d)(1) concerning information about marital
status; and
(ii) Section 202.12(b) relating to record retention.
(b) Securities credit--(1) Definition. Securities credit refers to
extensions of credit subject to regulation under section 7 of the
Securities Exchange Act of 1934 or extensions of credit by a broker or
dealer subject to regulation as a broker or dealer under the Securities
Exchange Act of 1934.
(2) Exceptions. The following provisions of this regulation do not
apply to securities credit:
(i) Section 202.5(b) concerning information about the sex of an
applicant;
(ii) Section 202.5(c) concerning information about a spouse or
former spouse;
(iii) Section 202.5(d)(1) concerning information about marital
status;
(iv) Section 202.7(b) relating to designation of name to the extent
necessary to comply with rules regarding an account in which a broker
or dealer has an interest, or rules regarding the aggregation of
accounts of spouses to determine controlling interests, beneficial
interests, beneficial ownership, or purchase limitations and
restrictions;
(v) Section 202.7(c) relating to action concerning open-end
accounts, to the extent the action taken is on the basis of a change of
name or marital status;
(vi) Section 202.7(d) relating to the signature of a spouse or
other person;
(vii) Section 202.10 relating to furnishing of credit information;
and
(viii) Section 202.12(b) relating to record retention.
(c) Incidental credit--(1) Definition. Incidental credit refers to
extensions of consumer credit other than the types described in
paragraphs (a) and (b) of this section:
(i) That are not made pursuant to the terms of a credit card
account;
(ii) That are not subject to a finance charge (as defined in
Regulation Z, 12 CFR 226.4); and
(iii) That are not payable by agreement in more than four
installments.
(2) Exceptions. The following provisions of this regulation do not
apply to incidental credit:
(i) Section 202.5(b) concerning information about the sex of an
applicant, but only to the extent necessary for medical records or
similar purposes;
(ii) Section 202.5(c) concerning information about a spouse or
former spouse;
(iii) Section 202.5(d)(1) concerning information about marital
status;
(iv) Section 202.5(d)(2) concerning information about income
derived from alimony, child support, or separate maintenance payments;
(v) Section 202.7(d) relating to the signature of a spouse or other
person;
(vi) Section 202.9 relating to notifications;
(vii) Section 202.10 relating to furnishing of credit information;
and
(viii) Section 202.12(b) relating to record retention.
(d) Government credit--(1) Definition. Government credit refers to
extensions of credit made to governments or governmental subdivisions,
agencies, or instrumentalities.
(2) Applicability of regulation. Except for Sec. 202.4(a), the
general rule against discrimination on a prohibited basis, the
requirements of this regulation do not apply to government credit.
Sec. 202.4 General rules.
(a) Discrimination. A creditor shall not discriminate against an
applicant on a prohibited basis regarding any aspect of a credit
transaction.
(b) Discouragement. A creditor shall not make any oral or written
statement, in advertising or otherwise, to applicants or prospective
applicants that would discourage on a prohibited basis a reasonable
person from making or pursuing an application.
(c) Written applications. A creditor shall take written
applications for the dwelling-related types of credit covered by Sec.
202.13(a).
(d) Form of disclosures. A creditor that provides in writing any
disclosures or information required by this regulation must provide the
disclosures in a clear and conspicuous manner and, except for the
disclosures required by Sec. Sec. 202.5 and 202.13, in a form the
applicant may retain.
(e) Foreign-language disclosures. Disclosures may be made in
languages other than English, provided they are available in English
upon request.
Sec. 202.5 Rules concerning requests for information.
(a) General rules--(1) Requests for information. Except as provided
in paragraphs (b) through (d) of this section, a creditor may request
any information in connection with a credit transaction.\1\
---------------------------------------------------------------------------
\1\ This paragraph does not limit or abrogate any Federal or
State law regarding privacy, privileged information, credit
reporting limitations, or similar restrictions on obtainable
information.
---------------------------------------------------------------------------
(2) Required collection of information. Notwithstanding paragraphs
(b) through (d) of this section, a creditor shall request information
for monitoring purposes as required by Sec. 202.13 for credit secured
by the applicant's dwelling. In addition, a creditor may obtain
information required by a regulation, order, or agreement issued by, or
entered into with, a court or an enforcement agency (including the
Attorney General of the United States or a similar state official) to
monitor or enforce compliance with the Act, this regulation, or other
federal or state statutes or regulations.
(3) Special-purpose credit. A creditor may obtain information that
is otherwise restricted to determine eligibility for a special purpose
credit program, as provided in Sec. 202.8(b), (c), and (d).
(b) Limitation on information about race, color, religion, national
origin, or sex. A creditor shall not inquire about the race, color,
religion, national origin, or sex of an applicant or any other person
in connection with a credit transaction, except as provided in
paragraphs (b)(1) and (b)(2) of this section.
(1) Self-test. A creditor may inquire about the race, color,
religion, national origin, or sex of an applicant or any other person
in connection with a credit transaction for the purpose of
[[Page 13164]]
conducting a self-test that meets the requirements of Sec. 202.15. A
creditor that makes such an inquiry shall disclose orally or in
writing, at the time the information is requested, that:
(i) The applicant will not be required to provide the information;
(ii) The creditor is requesting the information to monitor its
compliance with the federal Equal Credit Opportunity Act;
(iii) Federal law prohibits the creditor from discriminating on the
basis of this information, or on the basis of an applicant's decision
not to furnish the information; and
(iv) If applicable, certain information will be collected based on
visual observation or surname if not provided by the applicant or other
person.
(2) Sex. An applicant may be requested to designate a title on an
application form (such as Ms., Miss, Mr., or Mrs.) if the form
discloses that the designation of a title is optional. An application
form shall otherwise use only terms that are neutral as to sex.
(c) Information about a spouse or former spouse--(1) General rule.
Except as permitted in this paragraph, a creditor may not request any
information concerning the spouse or former spouse of an applicant.
(2) Permissible inquiries. A creditor may request any information
concerning an applicant's spouse (or former spouse under paragraph
(c)(2)(v) of this section) that may be requested about the applicant
if:
(i) The spouse will be permitted to use the account;
(ii) The spouse will be contractually liable on the account;
(iii) The applicant is relying on the spouse's income as a basis
for repayment of the credit requested;
(iv) The applicant resides in a community property state or is
relying on property located in such a state as a basis for repayment of
the credit requested; or
(v) The applicant is relying on alimony, child support, or separate
maintenance payments from a spouse or former spouse as a basis for
repayment of the credit requested.
(3) Other accounts of the applicant. A creditor may request that an
applicant list any account on which the applicant is contractually
liable and to provide the name and address of the person in whose name
the account is held. A creditor may also ask an applicant to list the
names in which the applicant has previously received credit.
(d) Other limitations on information requests--(1) Marital status.
If an applicant applies for individual unsecured credit, a creditor
shall not inquire about the applicant's marital status unless the
applicant resides in a community property state or is relying on
property located in such a state as a basis for repayment of the credit
requested. If an application is for other than individual unsecured
credit, a creditor may inquire about the applicant's marital status,
but shall use only the terms married, unmarried, and separated. A
creditor may explain that the category unmarried includes single,
divorced, and widowed persons.
(2) Disclosure about income from alimony, child support, or
separate maintenance. A creditor shall not inquire whether income
stated in an application is derived from alimony, child support, or
separate maintenance payments unless the creditor discloses to the
applicant that such income need not be revealed if the applicant does
not want the creditor to consider it in determining the applicant's
creditworthiness.
(3) Childbearing, childrearing. A creditor shall not inquire about
birth control practices, intentions concerning the bearing or rearing
of children, or capability to bear children. A creditor may inquire
about the number and ages of an applicant's dependents or about
dependent-related financial obligations or expenditures, provided such
information is requested without regard to sex, marital status, or any
other prohibited basis.
(e) Permanent residency and immigration status. A creditor may
inquire about the permanent residency and immigration status of an
applicant or any other person in connection with a credit transaction.
Sec. 202.6 Rules concerning evaluation of applications.
(a) General rule concerning use of information. Except as otherwise
provided in the Act and this regulation, a creditor may consider any
information obtained, so long as the information is not used to
discriminate against an applicant on a prohibited basis.\2\
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\2\ The legislative history of the Act indicates that the
Congress intended an ``effects test'' concept, as outlined in the
employment field by the Supreme Court in the cases of Griggs v. Duke
Power Co., 401 U.S. 424 (1971), and Albemarle Paper Co. v. Moody,
422 U.S. 405 (1975), to be applicable to a creditor's determination
of creditworthiness.
---------------------------------------------------------------------------
(b) Specific rules concerning use of information--(1) Except as
provided in the Act and this regulation, a creditor shall not take a
prohibited basis into account in any system of evaluating the
creditworthiness of applicants.
(2) Age, receipt of public assistance. (i) Except as permitted in
this paragraph, a creditor shall not take into account an applicant's
age (provided that the applicant has the capacity to enter into a
binding contract) or whether an applicant's income derives from any
public assistance program.
(ii) In an empirically derived, demonstrably and statistically
sound, credit scoring system, a creditor may use an applicant's age as
a predictive variable, provided that the age of an elderly applicant is
not assigned a negative factor or value.
(iii) In a judgmental system of evaluating creditworthiness, a
creditor may consider an applicant's age or whether an applicant's
income derives from any public assistance program only for the purpose
of determining a pertinent element of creditworthiness.
(iv) In any system of evaluating creditworthiness, a creditor may
consider the age of an elderly applicant when such age is used to favor
the elderly applicant in extending credit.
(3) Childbearing, childrearing. In evaluating creditworthiness, a
creditor shall not make assumptions or use aggregate statistics
relating to the likelihood that any category of persons will bear or
rear children or will, for that reason, receive diminished or
interrupted income in the future.
(4) Telephone listing. A creditor shall not take into account
whether there is a telephone listing in the name of an applicant for
consumer credit but may take into account whether there is a telephone
in the applicant's residence.
(5) Income. A creditor shall not discount or exclude from
consideration the income of an applicant or the spouse of an applicant
because of a prohibited basis or because the income is derived from
part-time employment or is an annuity, pension, or other retirement
benefit; a creditor may consider the amount and probable continuance of
any income in evaluating an applicant's creditworthiness. When an
applicant relies on alimony, child support, or separate maintenance
payments in applying for credit, the creditor shall consider such
payments as income to the extent that they are likely to be
consistently made.
(6) Credit history. To the extent that a creditor considers credit
history in evaluating the creditworthiness of similarly qualified
applicants for a similar type and amount of credit, in evaluating an
applicant's creditworthiness a creditor shall consider:
(i) The credit history, when available, of accounts designated as
accounts that the applicant and the applicant's spouse are permitted to
use or for which both are contractually liable;
[[Page 13165]]
(ii) On the applicant's request, any information the applicant may
present that tends to indicate the credit history being considered by
the creditor does not accurately reflect the applicant's
creditworthiness; and
(iii) On the applicant's request, the credit history, when
available, of any account reported in the name of the applicant's
spouse or former spouse that the applicant can demonstrate accurately
reflects the applicant's creditworthiness.
(7) Immigration status. A creditor may consider the applicant's
immigration status or status as a permanent resident of the United
States, and any additional information that may be necessary to
ascertain the creditor's rights and remedies regarding repayment.
(8) Marital status. Except as otherwise permitted or required by
law, a creditor shall evaluate married and unmarried applicants by the
same standards; and in evaluating joint applicants, a creditor shall
not treat applicants differently based on the existence, absence, or
likelihood of a marital relationship between the parties.
(9) Race, color, religion, national origin, sex. Except as
otherwise permitted or required by law, a creditor shall not consider
race, color, religion, national origin, or sex (or an applicant's or
other person's decision not to provide the information) in any aspect
of a credit transaction.
(c) State property laws. A creditor's consideration or application
of state property laws directly or indirectly affecting
creditworthiness does not constitute unlawful discrimination for the
purposes of the Act or this regulation.
Sec. 202.7 Rules concerning extensions of credit.
(a) Individual accounts. A creditor shall not refuse to grant an
individual account to a creditworthy applicant on the basis of sex,
marital status, or any other prohibited basis.
(b) Designation of name. A creditor shall not refuse to allow an
applicant to open or maintain an account in a birth-given first name
and a surname that is the applicant's birth-given surname, the spouse's
surname, or a combined surname.
(c) Action concerning existing open-end accounts--(1) Limitations.
In the absence of evidence of the applicant's inability or
unwillingness to repay, a creditor shall not take any of the following
actions regarding an applicant who is contractually liable on an
existing open-end account on the basis of the applicant's reaching a
certain age or retiring or on the basis of a change in the applicant's
name or marital status:
(i) Require a reapplication, except as provided in paragraph (c)(2)
of this section;
(ii) Change the terms of the account; or
(iii) Terminate the account.
(2) Requiring reapplication. A creditor may require a reapplication
for an open-end account on the basis of a change in the marital status
of an applicant who is contractually liable if the credit granted was
based in whole or in part on income of the applicant's spouse and if
information available to the creditor indicates that the applicant's
income may not support the amount of credit currently available.
(d) Signature of spouse or other person--(1) Rule for qualified
applicant. Except as provided in this paragraph, a creditor shall not
require the signature of an applicant's spouse or other person, other
than a joint applicant, on any credit instrument if the applicant
qualifies under the creditor's standards of creditworthiness for the
amount and terms of the credit requested. A creditor shall not deem the
submission of a joint financial statement or other evidence of jointly
held assets as an application for joint credit.
(2) Unsecured credit. If an applicant requests unsecured credit and
relies in part upon property that the applicant owns jointly with
another person to satisfy the creditor's standards of creditworthiness,
the creditor may require the signature of the other person only on the
instrument(s) necessary, or reasonably believed by the creditor to be
necessary, under the law of the state in which the property is located,
to enable the creditor to reach the property being relied upon in the
event of the death or default of the applicant.
(3) Unsecured credit--community property states. If a married
applicant requests unsecured credit and resides in a community property
state, or if the applicant is relying on property located in such a
state, a creditor may require the signature of the spouse on any
instrument necessary, or reasonably believed by the creditor to be
necessary, under applicable state law to make the community property
available to satisfy the debt in the event of default if:
(i) Applicable state law denies the applicant power to manage or
control sufficient community property to qualify for the credit
requested under the creditor's standards of creditworthiness; and
(ii) The applicant does not have sufficient separate property to
qualify for the credit requested without regard to community property.
(4) Secured credit. If an applicant requests secured credit, a
creditor may require the signature of the applicant's spouse or other
person on any instrument necessary, or reasonably believed by the
creditor to be necessary, under applicable state law to make the
property being offered as security available to satisfy the debt in the
event of default, for example, an instrument to create a valid lien,
pass clear title, waive inchoate rights, or assign earnings.
(5) Additional parties. If, under a creditor's standards of
creditworthiness, the personal liability of an additional party is
necessary to support the credit requested, a creditor may request a
cosigner, guarantor, endorser, or similar party. The applicant's spouse
may serve as an additional party, but the creditor shall not require
that the spouse be the additional party.
(6) Rights of additional parties. A creditor shall not impose
requirements upon an additional party that the creditor is prohibited
from imposing upon an applicant under this section.
(e) Insurance. A creditor shall not refuse to extend credit and
shall not terminate an account because credit life, health, accident,
disability, or other credit-related insurance is not available on the
basis of the applicant's age.
Sec. 202.8 Special purpose credit programs.
(a) Standards for programs. Subject to the provisions of paragraph
(b) of this section, the Act and this regulation permit a creditor to
extend special purpose credit to applicants who meet eligibility
requirements under the following types of credit programs:
(1) Any credit assistance program expressly authorized by federal
or state law for the benefit of an economically disadvantaged class of
persons;
(2) Any credit assistance program offered by a not-for-profit
organization, as defined under section 501(c) of the Internal Revenue
Code of 1954, as amended, for the benefit of its members or for the
benefit of an economically disadvantaged class of persons; or
(3) Any special purpose credit program offered by a for-profit
organization, or in which such an organization participates to meet
special social needs, if:
(i) The program is established and administered pursuant to a
written plan that identifies the class of persons that the program is
designed to benefit and sets forth the procedures and standards for
extending credit pursuant to the program; and
(ii) The program is established and administered to extend credit
to a class of persons who, under the organization's customary standards
of
[[Page 13166]]
creditworthiness, probably would not receive such credit or would
receive it on less favorable terms than are ordinarily available to
other applicants applying to the organization for a similar type and
amount of credit.
(b) Rules in other sections--(1) General applicability. All the
provisions of this regulation apply to each of the special purpose
credit programs described in paragraph (a) of this section except as
modified by this section.
(2) Common characteristics. A program described in paragraph (a)(2)
or (a)(3) of this section qualifies as a special purpose credit program
only if it was established and is administered so as not to
discriminate against an applicant on any prohibited basis; however, all
program participants may be required to share one or more common
characteristics (for example, race, national origin, or sex) so long as
the program was not established and is not administered with the
purpose of evading the requirements of the Act or this regulation.
(c) Special rule concerning requests and use of information. If
participants in a special purpose credit program described in paragraph
(a) of this section are required to possess one or more common
characteristics (for example, race, national origin, or sex) and if the
program otherwise satisfies the requirements of paragraph (a) of this
section, a creditor may request and consider information regarding the
common characteristic(s) in determining the applicant's eligibility for
the program.
(d) Special rule in the case of financial need. If financial need
is one of the criteria under a special purpose credit program described
in paragraph (a) of this section, the creditor may request and
consider, in determining an applicant's eligibility for the program,
information regarding the applicant's marital status; alimony, child
support, and separate maintenance income; and the spouse's financial
resources. In addition, a creditor may obtain the signature of an
applicant's spouse or other person on an application or credit
instrument relating to a special purpose credit program if the
signature is required by federal or state law.
Sec. 202.9 Notifications.
(a) Notification of action taken, ECOA notice, and statement of
specific reasons--(1) When notification is required. A creditor shall
notify an applicant of action taken within:
(i) 30 days after receiving a completed application concerning the
creditor's approval of, counteroffer to, or adverse action on the
application;
(ii) 30 days after taking adverse action on an incomplete
application, unless notice is provided in accordance with paragraph (c)
of this section;
(iii) 30 days after taking adverse action on an existing account;
or
(iv) 90 days after notifying the applicant of a counteroffer if the
applicant does not expressly accept or use the credit offered.
(2) Content of notification when adverse action is taken. A
notification given to an applicant when adverse action is taken shall
be in writing and shall contain a statement of the action taken; the
name and address of the creditor; a statement of the provisions of
Sec. 701(a) of the Act; the name and address of the federal agency
that administers compliance with respect to the creditor; and either:
(i) A statement of specific reasons for the action taken; or
(ii) A disclosure of the applicant's right to a statement of
specific reasons within 30 days, if the statement is requested within
60 days of the creditor's notification. The disclosure shall include
the name, address, and telephone number of the person or office from
which the statement of reasons can be obtained. If the creditor chooses
to provide the reasons orally, the creditor shall also disclose the
applicant's right to have them confirmed in writing within 30 days of
receiving the applicant's written request for confirmation.
(3) Notification to business credit applicants. For business
credit, a creditor shall comply with the notification requirements of
this section in the following manner:
(i) With regard to a business that had gross revenues of $1 million
or less in its preceding fiscal year (other than an extension of trade
credit, credit incident to a factoring agreement, or other similar
types of business credit), a creditor shall comply with paragraphs
(a)(1) and (2) of this section, except that:
(A) The statement of the action taken may be given orally or in
writing, when adverse action is taken;
(B) Disclosure of an applicant's right to a statement of reasons
may be given at the time of application, instead of when adverse action
is taken, provided the disclosure contains the information required by
paragraph (a)(2)(ii) of this section and the ECOA notice specified in
paragraph (b)(1) of this section;
(C) For an application made entirely by telephone, a creditor
satisfies the requirements of paragraph (a)(3)(i) of this section by an
oral statement of the action taken and of the applicant's right to a
statement of reasons for adverse action.
(ii) With regard to a business that had gross revenues in excess of
$1 million in its preceding fiscal year or an extension of trade
credit, credit incident to a factoring agreement, or other similar
types of business credit, a creditor shall:
(A) Notify the applicant, within a reasonable time, orally or in
writing, of the action taken; and
(B) Provide a written statement of the reasons for adverse action
and the ECOA notice specified in paragraph (b)(1) of this section if
the applicant makes a written request for the reasons within 60 days of
the creditor's notification.
(b) Form of ECOA notice and statement of specific reasons--(1) ECOA
notice. To satisfy the disclosure requirements of paragraph (a)(2) of
this section regarding section 701(a) of the Act, the creditor shall
provide a notice that is substantially similar to the following: The
federal Equal Credit Opportunity Act prohibits creditors from
discriminating against credit applicants on the basis of race, color,
religion, national origin, sex, marital status, age (provided the
applicant has the capacity to enter into a binding contract); because
all or part of the applicant's income derives from any public
assistance program; or because the applicant has in good faith
exercised any right under the Consumer Credit Protection Act. The
federal agency that administers compliance with this law concerning
this creditor is [name and address as specified by the appropriate
agency listed in appendix A of this regulation].
(2) Statement of specific reasons. The statement of reasons for
adverse action required by paragraph (a)(2)(i) of this section must be
specific and indicate the principal reason(s) for the adverse action.
Statements that the adverse action was based on the creditor's internal
standards or policies or that the applicant, joint applicant, or
similar party failed to achieve a qualifying score on the creditor's
credit scoring system are insufficient.
(c) Incomplete applications--(1) Notice alternatives. Within 30
days after receiving an application that is incomplete regarding
matters that an applicant can complete, the creditor shall notify the
applicant either:
(i) Of action taken, in accordance with paragraph (a) of this
section; or
(ii) Of the incompleteness, in accordance with paragraph (c)(2) of
this section.
(2) Notice of incompleteness. If additional information is needed
from an applicant, the creditor shall send a
[[Page 13167]]
written notice to the applicant specifying the information needed,
designating a reasonable period of time for the applicant to provide
the information, and informing the applicant that failure to provide
the information requested will result in no further consideration being
given to the application. The creditor shall have no further obligation
under this section if the applicant fails to respond within the
designated time period. If the applicant supplies the requested
information within the designated time period, the creditor shall take
action on the application and notify the applicant in accordance with
paragraph (a) of this section.
(3) Oral request for information. At its option, a creditor may
inform the applicant orally of the need for additional information. If
the application remains incomplete the creditor shall send a notice in
accordance with paragraph (c)(1) of this section.
(d) Oral notifications by small-volume creditors. In the case of a
creditor that did not receive more than 150 applications during the
preceding calendar year, the requirements of this section (including
statements of specific reasons) are satisfied by oral notifications.
(e) Withdrawal of approved application. When an applicant submits
an application and the parties contemplate that the applicant will
inquire about its status, if the creditor approves the application and
the applicant has not inquired within 30 days after applying, the
creditor may treat the application as withdrawn and need not comply
with paragraph (a)(1) of this section.
(f) Multiple applicants. When an application involves more than one
applicant, notification need only be given to one of them but must be
given to the primary applicant where one is readily apparent.
(g) Applications submitted through a third party. When an
application is made on behalf of an applicant to more than one creditor
and the applicant expressly accepts or uses credit offered by one of
the creditors, notification of action taken by any of the other
creditors is not required. If no credit is offered or if the applicant
does not expressly accept or use the credit offered, each creditor
taking adverse action must comply with this section, directly or
through a third party. A notice given by a third party shall disclose
the identity of each creditor on whose behalf the notice is given.
(h) Duties of third parties. A third party may use electronic
communication in accordance with the requirements of Sec. 202.16, as
applicable, to comply with the requirements of paragraph (g) of this
section on behalf of a creditor.
Sec. 202.10 Furnishing of credit information.
(a) Designation of accounts. A creditor that furnishes credit
information shall designate:
(1) Any new account to reflect the participation of both spouses if
the applicant's spouse is permitted to use or is contractually liable
on the account (other than as a guarantor, surety, endorser, or similar
party); and
(2) Any existing account to reflect such participation, within 90
days after receiving a written request to do so from one of the
spouses.
(b) Routine reports to consumer reporting agency. If a creditor
furnishes credit information to a consumer reporting agency concerning
an account designated to reflect the participation of both spouses, the
creditor shall furnish the information in a manner that will enable the
agency to provide access to the information in the name of each spouse.
(c) Reporting in response to inquiry. If a creditor furnishes
credit information in response to an inquiry, concerning an account
designated to reflect the participation of both spouses, the creditor
shall furnish the information in the name of the spouse about whom the
information is requested.
Sec. 202.11 Relation to state law.
(a) Inconsistent state laws. Except as otherwise provided in this
section, this regulation alters, affects, or preempts only those state
laws that are inconsistent with the Act and this regulation and then
only to the extent of the inconsistency. A state law is not
inconsistent if it is more protective of an applicant.
(b) Preempted provisions of state law--(1) A state law is deemed to
be inconsistent with the requirements of the Act and this regulation
and less protective of an applicant within the meaning of section
705(f) of the Act to the extent that the law:
(i) Requires or permits a practice or act prohibited by the Act or
this regulation;
(ii) Prohibits the individual extension of consumer credit to both
parties to a marriage if each spouse individually and voluntarily
applies for such credit;
(iii) Prohibits inquiries or collection of data required to comply
with the Act or this regulation;
(iv) Prohibits asking about or considering age in an empirically
derived, demonstrably and statistically sound, credit scoring system to
determine a pertinent element of creditworthiness, or to favor an
elderly applicant; or
(v) Prohibits inquiries necessary to establish or administer a
special purpose credit program as defined by Sec. 202.8.
(2) A creditor, state, or other interested party may request that
the Board determine whether a state law is inconsistent with the
requirements of the Act and this regulation.
(c) Laws on finance charges, loan ceilings. If married applicants
voluntarily apply for and obtain individual accounts with the same
creditor, the accounts shall not be aggregated or otherwise combined
for purposes of determining permissible finance charges or loan
ceilings under any federal or state law. Permissible loan ceiling laws
shall be construed to permit each spouse to become individually liable
up to the amount of the loan ceilings, less the amount for which the
applicant is jointly liable.
(d) State and federal laws not affected. This section does not
alter or annul any provision of state property laws, laws relating to
the disposition of decedents' estates, or federal or state banking
regulations directed only toward insuring the solvency of financial
institutions.
(e) Exemption for state-regulated transactions--(1) Applications. A
state may apply to the Board for an exemption from the requirements of
the Act and this regulation for any class of credit transactions within
the state. The Board will grant such an exemption if the Board
determines that:
(i) The class of credit transactions is subject to state law
requirements substantially similar to those of the Act and this
regulation or that applicants are afforded greater protection under
state law; and
(ii) There is adequate provision for state enforcement.
(2) Liability and enforcement. (i) No exemption will extend to the
civil liability provisions of section 706 of the Act or the
administrative enforcement provisions of section 704 of the Act.
(ii) After an exemption has been granted, the requirements of the
applicable state law (except for additional requirements not imposed by
federal law) will constitute the requirements of the Act and this
regulation.
Sec. 202.12 Record retention.
(a) Retention of prohibited information. A creditor may retain in
its files information that is prohibited by the Act or this regulation
for use in
[[Page 13168]]
evaluating applications, without violating the Act or this regulation,
if the information was obtained:
(1) From any source prior to March 23, 1977;
(2) From consumer reporting agencies, an applicant, or others
without the specific request of the creditor; or
(3) As required to monitor compliance with the Act and this
regulation or other federal or state statutes or regulations.
(b) Preservation of records--(1) Applications. For 25 months (12
months for business credit, except as provided in paragraph (b)(5) of
this section) after the date that a creditor notifies an applicant of
action taken on an application or of incompleteness, the creditor shall
retain in original form or a copy thereof:
(i) Any application that it receives, any information required to
be obtained concerning characteristics of the applicant to monitor
compliance with the Act and this regulation or other similar law, and
any other written or recorded information used in evaluating the
application and not returned to the applicant at the applicant's
request;
(ii) A copy of the following documents if furnished to the
applicant in written form (or, if furnished orally, any notation or
memorandum made by the creditor):
(A) The notification of action taken; and
(B) The statement of specific reasons for adverse action; and
(iii) Any written statement submitted by the applicant alleging a
violation of the Act or this regulation.
(2) Existing accounts. For 25 months (12 months for business
credit, except as provided in paragraph (b)(5) of this section) after
the date that a creditor notifies an applicant of adverse action
regarding an existing account, the creditor shall retain as to that
account, in original form or a copy thereof:
(i) Any written or recorded information concerning the adverse
action; and
(ii) Any written statement submitted by the applicant alleging a
violation of the Act or this regulation.
(3) Other applications. For 25 months (12 months for business
credit, except as provided in paragraph (b)(5) of this section) after
the date that a creditor receives an application for which the creditor
is not required to comply with the notification requirements of Sec.
202.9, the creditor shall retain all written or recorded information in
its possession concerning the applicant, including any notation of
action taken.
(4) Enforcement proceedings and investigations. A creditor shall
retain the information beyond 25 months (12 months for business credit,
except as provided in paragraph (b)(5) of this section) if the creditor
has actual notice that it is under investigation or is subject to an
enforcement proceeding for an alleged violation of the Act or this
regulation, by the Attorney General of the United States or by an
enforcement agency charged with monitoring that creditor's compliance
with the Act and this regulation, or if it has been served with notice
of an action filed pursuant to section 706 of the Act and Sec. 202.17
of this regulation. The creditor shall retain the information until
final disposition of the matter, unless an earlier time is allowed by
order of the agency or court.
(5) Special rule for certain business credit applications. With
regard to a business that had gross revenues in excess of $1 million in
its preceding fiscal year, or an extension of trade credit, credit
incident to a factoring agreement, or other similar types of business
credit, the creditor shall retain records for at least 60 days after
notifying the applicant of the action taken. If within that time period
the applicant requests in writing the reasons for adverse action or
that records be retained, the creditor shall retain records for 12
months.
(6) Self-tests. For 25 months after a self-test (as defined in
Sec. 202.15) has been completed, the creditor shall retain all written
or recorded information about the self-test. A creditor shall retain
information beyond 25 months if it has actual notice that it is under
investigation or is subject to an enforcement proceeding for an alleged
violation, or if it has been served with notice of a civil action. In
such cases, the creditor shall retain the information until final
disposition of the matter, unless an earlier time is allowed by the
appropriate agency or court order.
(7) Prescreened solicitations. For 25 months after the date on
which an offer of credit is made to potential customers (12 months for
business credit, except as provided in paragraph (b)(5) of this
section), the creditor shall retain in original form or a copy thereof:
(i) The text of any prescreened solicitation;
(ii) The list of criteria the creditor used to select potential
recipients of the solicitation; and
(iii) Any correspondence related to complaints (formal or informal)
about the solicitation.
Sec. 202.13 Information for monitoring purposes.
(a) Information to be requested--(1) A creditor that receives an
application for credit primarily for the purchase or refinancing of a
dwelling occupied or to be occupied by the applicant as a principal
residence, where the extension of credit will be secured by the
dwelling, shall request as part of the application the following
information regarding the applicant(s):
(i) Ethnicity, using the categories Hispanic or Latino, and not
Hispanic or Latino; and race, using the categories American Indian or
Alaska Native, Asian, Black or African American, Native Hawaiian or
Other Pacific Islander, and White;
(ii) Sex;
(iii) Marital status, using the categories married, unmarried, and
separated; and
(iv) Age.
(2) Dwelling means a residential structure that contains one to
four units, whether or not that structure is attached to real property.
The term includes, but is not limited to, an individual condominium or
cooperative unit and a mobile or other manufactured home.
(b) Obtaining information. Questions regarding ethnicity, race,
sex, marital status, and age may be listed, at the creditor's option,
on the application form or on a separate form that refers to the
application. The applicant(s) shall be asked but not required to supply
the requested information. If the applicant(s) chooses not to provide
the information or any part of it, that fact shall be noted on the
form. The creditor shall then also note on the form, to the extent
possible, the ethnicity, race, and sex of the applicant(s) on the basis
of visual observation or surname.
(c) Disclosure to applicant(s). The creditor shall inform the
applicant(s) that the information regarding ethnicity, race, sex,
marital status, and age is being requested by the federal government
for the purpose of monitoring compliance with federal statutes that
prohibit creditors from discriminating against applicants on those
bases. The creditor shall also inform the applicant(s) that if the
applicant(s) chooses not to provide the information, the creditor is
required to note the ethnicity, race and sex on the basis of visual
observation or surname.
(d) Substitute monitoring program. A monitoring program required by
an agency charged with administrative enforcement under section 704 of
the Act may be substituted for the requirements contained in paragraphs
(a), (b), and (c) of this section.
Sec. 202.14 Rules on providing appraisal reports.
(a) Providing appraisals. A creditor shall provide a copy of an
appraisal report used in connection with an application for credit that
is to be
[[Page 13169]]
secured by a lien on a dwelling. A creditor shall comply with either
paragraph (a)(1) or (a)(2) of this section.
(1) Routine delivery. A creditor may routinely provide a copy of an
appraisal report to an applicant (whether credit is granted or denied
or the application is withdrawn).
(2) Upon request. A creditor that does not routinely provide
appraisal reports shall provide a copy upon an applicant's written
request.
(i) Notice. A creditor that provides appraisal reports only upon
request shall notify an applicant in writing of the right to receive a
copy of an appraisal report. The notice may be given at any time during
the application process but no later than when the creditor provides
notice of action taken under Sec. 202.9 of this regulation. The notice
shall specify that the applicant's request must be in writing, give the
creditor's mailing address, and state the time for making the request
as provided in paragraph (a)(2)(ii) of this section.
(ii) Delivery. A creditor shall mail or deliver a copy of the
appraisal report promptly (generally within 30 days) after the creditor
receives an applicant's request, receives the report, or receives
reimbursement from the applicant for the report, whichever is last to
occur. A creditor need not provide a copy when the applicant's request
is received more than 90 days after the creditor has provided notice of
action taken on the application under Sec. 202.9 of this regulation or
90 days after the application is withdrawn.
(b) Credit unions. A creditor that is subject to the regulations of
the National Credit Union Administration on making copies of appraisal
reports available is not subject to this section.
(c) Definitions. For purposes of paragraph (a) of this section, the
term dwelling means a residential structure that contains one to four
units whether or not that structure is attached to real property. The
term includes, but is not limited to, an individual condominium or
cooperative unit, and a mobile or other manufactured home. The term
appraisal report means the document(s) relied upon by a creditor in
evaluating the value of the dwelling.
Sec. 202.15 Incentives for self-testing and self-correction.
(a) General rules--(1) Voluntary self-testing and correction. The
report or results of a self-test that a creditor voluntarily conducts
(or authorizes) are privileged as provided in this section. Data
collection required by law or by any governmental authority is not a
voluntary self-test.
(2) Corrective action required. The privilege in this section
applies only if the creditor has taken or is taking appropriate
corrective action.
(3) Other privileges. The privilege created by this section does
not preclude the assertion of any other privilege that may also apply.
(b) Self-test defined--(1) Definition. A self-test is any program,
practice, or study that:
(i) Is designed and used specifically to determine the extent or
effectiveness of a creditor's compliance with the Act or this
regulation; and
(ii) Creates data or factual information that is not available and
cannot be derived from loan or application files or other records
related to credit transactions.
(2) Types of information privileged. The privilege under this
section applies to the report or results of the self-test, data or
factual information created by the self-test, and any analysis,
opinions, and conclusions pertaining to the self-test report or
results. The privilege covers workpapers or draft documents as well as
final documents.
(3) Types of information not privileged. The privilege under this
section does not apply to:
(i) Information about whether a creditor conducted a self-test, the
methodology used or the scope of the self-test, the time period covered
by the self-test, or the dates it was conducted; or
(ii) Loan and application files or other business records related
to credit transactions, and information derived from such files and
records, even if the information has been aggregated, summarized, or
reorganized to facilitate analysis.
(c) Appropriate corrective action--(1) General requirement. For the
privilege in this section to apply, appropriate corrective action is
required when the self-test shows that it is more likely than not that
a violation occurred, even though no violation has been formally
adjudicated.
(2) Determining the scope of appropriate corrective action. A
creditor must take corrective action that is reasonably likely to
remedy the cause and effect of a likely violation by:
(i) Identifying the policies or practices that are the likely cause
of the violation; and
(ii) Assessing the extent and scope of any violation.
(3) Types of relief. Appropriate corrective action may include both
prospective and remedial relief, except that to establish a privilege
under this section:
(i) A creditor is not required to provide remedial relief to a
tester used in a self-test;
(ii) A creditor is only required to provide remedial relief to an
applicant identified by the self-test as one whose rights were more
likely than not violated; and
(iii) A creditor is not required to provide remedial relief to a
particular applicant if the statute of limitations applicable to the
violation expired before the creditor obtained the results of the self-
test or the applicant is otherwise ineligible for such relief.
(4) No admission of violation. Taking corrective action is not an
admission that a violation occurred.
(d) Scope of privilege--(1) General rule. The report or results of
a privileged self-test may not be obtained or used:
(i) By a government agency in any examination or investigation
relating to compliance with the Act or this regulation; or
(ii) By a government agency or an applicant (including a
prospective applicant who alleges a violation of Sec. 202.4(b)) in any
proceeding or civil action in which a violation of the Act or this
regulation is alleged.
(2) Loss of privilege. The report or results of a self-test are not
privileged under paragraph (d)(1) of this section if the creditor or a
person with lawful access to the report or results:
(i) Voluntarily discloses any part of the report or results, or any
other information privileged under this section, to an applicant or
government agency or to the public;
(ii) Discloses any part of the report or results, or any other
information privileged under this section, as a defense to charges that
the creditor has violated the Act or regulation; or
(iii) Fails or is unable to produce written or recorded information
about the self-test that is required to be retained under Sec.
202.12(b)(6) when the information is needed to determine whether the
privilege applies. This paragraph does not limit any other penalty or
remedy that may be available for a violation of Sec. 202.12.
(3) Limited use of privileged information. Notwithstanding
paragraph (d)(1) of this section, the self-test report or results and
any other information privileged under this section may be obtained and
used by an applicant or government agency solely to determine a penalty
or remedy after a violation of the Act or this regulation has been
adjudicated or admitted. Disclosures for this limited purpose may be
used only for the particular proceeding in which the adjudication or
admission was made. Information disclosed under this
[[Page 13170]]
paragraph (d)(3) remains privileged under paragraph (d)(1) of this
section.
Sec. 202.16 Requirements for electronic communication.
(a) Definition. Electronic communication means a message
transmitted electronically between a creditor and an applicant in a
format that allows visual text to be displayed on equipment, for
example, a personal computer monitor.
(b) General rule. In accordance with the Electronic Signatures in
Global and National Commerce Act (the E-Sign Act) (15 U.S.C. 7001 et
seq.) and the rules set forth in this regulation, a creditor may
provide by electronic communication any disclosure required by this
regulation to be in writing. Disclosures provided by electronic
communication must be provided in a clear and conspicuous manner and in
a form the applicant may retain.
(c) When consent is required. For disclosures required by this
regulation to be in writing, a creditor shall obtain an applicant's
affirmative consent in accordance with the requirements of the E-Sign
Act. Disclosures under Sec. Sec. 202.9(a)(3)(i)(B), 202.13(a), and
202.14(a)(2)(i) are not subject to this requirement if provided on or
with the application.
(d) Address or location to receive electronic communication. A
creditor that uses electronic communication to provide disclosures
required by this part shall:
(1) Send the disclosure to the applicant's electronic address; or
(2) Make the disclosure available at another location such as an
Internet Web site; and
(i) Alert the applicant of the disclosure's availability by sending
a notice to the applicant's electronic address (or to a postal address,
at the creditor's option). The notice shall identify the account
involved and the address of the Internet Web site or other location
where the disclosure is available; and
(ii) Make the disclosure available for at least 90 days from the
date the disclosure first becomes available or from the date of the
notice alerting the applicant of the disclosure, whichever comes later.
(3) Exceptions. A creditor need not comply with paragraph (d)(2)(i)
and (ii) of this section for the disclosure required by Sec.
202.13(a).
(e) Redelivery. When a disclosure provided by electronic
communication is returned to a creditor undelivered, the creditor shall
take reasonable steps to attempt redelivery using information in its
files.
(f) Electronic signatures. An electronic signature as defined under
the E-Sign Act satisfies any requirement under this part for an
applicant's signature or initials.
Sec. 202.17 Enforcement, penalties and liabilities.
(a) Administrative enforcement--(1) As set forth more fully in
section 704 of the Act, administrative enforcement of the Act and this
regulation regarding certain creditors is assigned to the Comptroller
of the Currency, Board of Governors of the Federal Reserve System,
Board of Directors of the Federal Deposit Insurance Corporation, Office
of Thrift Supervision, National Credit Union Administration, Surface
Transportation Board, Secretary of Agriculture, Farm Credit
Administration, Securities and Exchange Commission, Small Business
Administration, and Secretary of Transportation.
(2) Except to the extent that administrative enforcement is
specifically assigned to other authorities, compliance with the
requirements imposed under the Act and this regulation is enforced by
the Federal Trade Commission.
(b) Penalties and liabilities--(1) Sections 702(g) and 706(a) and
(b) of the Act provide that any creditor that fails to comply with a
requirement imposed by the Act or this regulation is subject to civil
liability for actual and punitive damages in individual or class
actions. Pursuant to sections 702(g) and 704(b), (c), and (d) of the
Act, violations of the Act or this regulation also constitute
violations of other federal laws. Liability for punitive damages can
apply only to nongovernmental entities and is limited to $10,000 in
individual actions and the lesser of $500,000 or 1 percent of the
creditor's net worth in class actions. Section 706(c) provides for
equitable and declaratory relief and section 706(d) authorizes the
awarding of costs and reasonable attorney's fees to an aggrieved
applicant in a successful action.
(2) As provided in section 706(f), a civil action under the Act or
this regulation may be brought in the appropriate United States
district court without regard to the amount in controversy or in any
other court of competent jurisdiction within two years after the date
of the occurrence of the violation, or within one year after the
commencement of an administrative enforcement proceeding or of a civil
action brought by the Attorney General of the United States within two
years after the alleged violation.
(3) If an agency responsible for administrative enforcement is
unable to obtain compliance with the Act or this regulation, it may
refer the matter to the Attorney General of the United States. If the
Board, the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, or the National Credit
Union Administration has reason to believe that one or more creditors
have engaged in a pattern or practice of discouraging or denying
applications in violation of the Act or this regulation, the agency
shall refer the matter to the Attorney General. If the agency has
reason to believe that one or more creditors violated section 701(a) of
the Act, the agency may refer a matter to the Attorney General.
(4) On referral, or whenever the Attorney General has reason to
believe that one or more creditors have engaged in a pattern or
practice in violation of the Act or this regulation, the Attorney
General may bring a civil action for such relief as may be appropriate,
including actual and punitive damages and injunctive relief.
(5) If the Board, the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, or the
National Credit Union Administration has reason to believe (as a result
of a consumer complaint, a consumer compliance examination, or some
other basis) that a violation of the Act or this regulation has
occurred which is also a violation of the Fair Housing Act, and the
matter is not referred to the Attorney General, the agency shall:
(i) Notify the Secretary of Housing and Urban Development; and
(ii) Inform the applicant that the Secretary of Housing and Urban
Development has been notified and that remedies may be available under
the Fair Housing Act.
(c) Failure of compliance. A creditor's failure to comply with
Sec. Sec. 202.6(b)(6), 202.9, 202.10, 202.12 or 202.13 is not a
violation if it results from an inadvertent error. On discovering an
error under Sec. Sec. 202.9 and 202.10, the creditor shall correct it
as soon as possible. If a creditor inadvertently obtains the monitoring
information regarding the ethnicity, race, and sex of the applicant in
a dwelling-related transaction not covered by Sec. 202.13, the
creditor may retain information and act on the application without
violating the regulation.
Appendix A to Part 202--Federal Enforcement Agencies
The following list indicates the federal agencies that enforce
Regulation B for
[[Page 13171]]
particular classes of creditors. Any questions concerning a
particular creditor should be directed to its enforcement agency.
Terms that are not defined in the Federal Deposit Insurance Act (12
U.S.C. 1813(s)) shall have the meaning given to them in the
International Banking Act of 1978 (12 U.S.C. 3101).
National Banks, and Federal Branches and Federal Agencies of Foreign
Banks: Office of the Comptroller of the Currency, Customer
Assistance Group, 1301 McKinney Street, Suite 3710, Houston, Texas
77010
State Member Banks, Branches and Agencies of Foreign Banks
(other than federal branches, federal agencies, and insured state
branches of foreign banks), Commercial Lending Companies Owned or
Controlled by Foreign Banks, and Organizations Operating under
Section 25 or 25A of the Federal Reserve Act.
Federal Reserve Bank serving the district in which the
institution is located.
Nonmember Insured Banks and Insured State Branches of Foreign Banks:
FDIC Consumer Response Center, 2345 Grand Boulevard, Suite 100,
Kansas City, Missouri 64108
Savings institutions insured under the Savings Association
Insurance Fund of the FDIC and federally chartered savings banks
insured under the Bank Insurance Fund of the FDIC (but not including
state-chartered savings banks insured under the Bank Insurance
Fund).
Office of Thrift Supervision Regional Director for the region in
which the institution is located.
Federal Credit Unions: Regional office of the National Credit Union
Administration serving the area in which the federal credit union is
located.
Air carriers: Assistant General Counsel for Aviation Enforcement and
Proceedings, Department of Transportation, 400 Seventh Street, SW.,
Washington, DC 20590
Creditors Subject to Surface Transportation Board: Office of
Proceedings, Surface Transportation Board, Department of
Transportation, 1925 K Street NW., Washington, DC 20423
Creditors Subject to Packers and Stockyards Act: Nearest Packers and
Stockyards Administration area supervisor.
Small Business Investment Companies: U.S. Small Business
Administration, 409 Third Street, SW., Washington, DC 20416.
Brokers and Dealers: Securities and Exchange Commission, Washington,
DC 20549.
Federal Land Banks, Federal Land Bank Associations, Federal
Intermediate Credit Banks, and Production Credit Associations: Farm
Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-
5090.
Retailers, Finance Companies, and All Other Creditors Not Listed
Above: FTC Regional Office for region in which the creditor operates
or Federal Trade Commission, Equal Credit Opportunity, Washington,
DC 20580.
Appendix B to Part 202--Model Application Forms
1. This appendix contains five model credit application forms,
each designated for use in a particular type of consumer credit
transaction as indicated by the bracketed caption on each form. The
first sample form is intended for use in open-end, unsecured
transactions; the second for closed-end, secured transactions; the
third for closed-end transactions, whether unsecured or secured; the
fourth in transactions involving community property or occurring in
community property states; and the fifth in residential mortgage
transactions which contains a model disclosure for use in complying
with Sec. 202.13 for certain dwelling-related loans. All forms
contained in this appendix are models; their use by creditors is
optional.
2. The use or modification of these forms is governed by the
following instructions. A creditor may change the forms: by asking
for additional information not prohibited by Sec. 202.5; by
deleting any information request; or by rearranging the format
without modifying the substance of the inquiries. In any of these
three instances, however, the appropriate notices regarding the
optional nature of courtesy titles, the option to disclose alimony,
child support, or separate maintenance, and the limitation
concerning marital status inquiries must be included in the
appropriate places if the items to which they relate appear on the
creditor's form.
3. If a creditor uses an appropriate Appendix B model form, or
modifies a form in accordance with the above instructions, that
creditor shall be deemed to be acting in compliance with the
provisions of paragraphs (b), (c) and (d) of Sec. 202.5 of this
regulation.
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BILLING CODE 6210-01-c
[[Page 13184]]
Appendix C to Part 202--Sample Notification Forms
1. This appendix contains ten sample notification forms. Forms
C-1 through C-4 are intended for use in notifying an applicant that
adverse action has been taken on an application or account under
Sec. Sec. 202.9(a)(1) and (2)(i) of this regulation. Form C-5 is a
notice of disclosure of the right to request specific reasons for
adverse action under Sec. Sec. 202.9(a)(1) and (2)(ii). Form C-6 is
designed for use in notifying an applicant, under Sec. 202.9(c)(2),
that an application is incomplete. Forms C-7 and C-8 are intended
for use in connection with applications for business credit under
Sec. 202.9(a)(3). Form C-9 is designed for use in notifying an
applicant of the right to receive a copy of an appraisal under Sec.
202.14. Form C-10 is designed for use in notifying an applicant for
nonmortgage credit that the creditor is requesting applicant
characteristic information.
2. Form C-1 contains the Fair Credit Reporting Act disclosure as
required by sections 615(a) and (b) of that act. Forms C-2 through
C-5 contain only the section 615(a) disclosure (that a creditor
obtained information from a consumer reporting agency that played a
part in the credit decision). A creditor must provide the section
615(a) disclosure when adverse action is taken against a consumer
based on information from a consumer reporting agency. A creditor
must provide the section 615(b) disclosure when adverse action is
taken based on information from an outside source other than a
consumer reporting agency. In addition, a creditor must provide the
section 615(b) disclosure if the creditor obtained information from
an affiliate other than information in a consumer report or other
than information concerning the affiliate's own transactions or
experiences with the consumer. Creditors may comply with the
disclosure requirements for adverse action based on information in a
consumer report obtained from an affiliate by providing either the
section 615(a) or section 615(b) disclosure.
3. The sample forms are illustrative and may not be appropriate
for all creditors. They were designed to include some of the factors
that creditors most commonly consider. If a creditor chooses to use
the checklist of reasons provided in one of the sample forms in this
appendix and if reasons commonly used by the creditor are not
provided on the form, the creditor should modify the checklist by
substituting or adding other reasons. For example, if ``inadequate
down payment'' or ``no deposit relationship with us'' are common
reasons for taking adverse action on an application, the creditor
ought to add or substitute such reasons for those presently
contained on the sample forms.
4. If the reasons listed on the forms are not the factors
actually used, a creditor will not satisfy the notice requirement by
simply checking the closest identifiable factor listed. For example,
some creditors consider only references from banks or other
depository institutions and disregard finance company references
altogether; their statement of reasons should disclose
``insufficient bank references,'' not ``insufficient credit
references.'' Similarly, a creditor that considers bank references
and other credit references as distinct factors should treat the two
factors separately and disclose them as appropriate. The creditor
should either add such other factors to the form or check ``other''
and include the appropriate explanation. The creditor need not,
however, describe how or why a factor adversely affected the
application. For example, the notice may say ``length of residence''
rather than ``too short a period of residence.''
5. A creditor may design its own notification forms or use all
or a portion of the forms contained in this appendix. Proper use of
Forms C-1 through C-4 will satisfy the requirement of Sec.
202.9(a)(2)(i). Proper use of Forms C-5 and C-6 constitutes full
compliance with Sec. Sec. 202.9(a)(2)(ii) and 202.9(c)(2),
respectively. Proper use of Forms C-7 and C-8 will satisfy the
requirements of Sec. 202.9(a)(2)(i) and (ii), respectively, for
applications for business credit. Proper use of Form C-9 will
satisfy the requirements of Sec. 202.14 of this part. Proper use of
Form C-10 will satisfy the requirements of Sec. 202.5(b)(1).
Form C-1--Sample Notice of Action Taken and Statement of Reasons
Statement of Credit Denial, Termination or Change
Date:------------------------------------------------------------------
Applicant's Name:------------------------------------------------------
Applicant's Address:---------------------------------------------------
Description of Account, Transaction, or Requested Credit:
-----------------------------------------------------------------------
Description of Action Taken:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Part I--Principal Reason(s) for Credit Denial, Termination, or Other
Action Taken Concerning Credit
This section must be completed in all instances.
------ Credit application incomplete
------ Insufficient number of credit references provided
------ Unacceptable type of credit references provided
------ Unable to verify credit references
------ Temporary or irregular employment
------ Unable to verify employment
------ Length of employment
------ Income insufficient for amount of credit requested
------ Excessive obligations in relation to income
------ Unable to verify income
------ Length of residence
------ Temporary residence
------ Unable to verify residence
------ No credit file
------ Limited credit experience
------ Poor credit performance with us
------ Delinquent past or present credit obligations with others
------ Collection action or judgment
------ Garnishment or attachment
------ Foreclosure or repossession
------ Bankruptcy
------ Number of recent inquiries on credit bureau report
------ Value or type of collateral not sufficient
------ Other, specify: ----------
Part II--Disclosure of Use of Information Obtained From an Outside
Source
This section should be completed if the credit decision was
based in whole or in part on information that has been obtained from
an outside source.
------ Our credit decision was based in whole or in part on
information obtained in a report from the consumer reporting agency
listed below. You have a right under the Fair Credit Reporting Act
to know the information contained in your credit file at the
consumer reporting agency. The reporting agency played no part in
our decision and is unable to supply specific reasons why we have
denied credit to you. You also have a right to a free copy of your
report from the reporting agency, if you request it no later than 60
days after you receive this notice. In addition, if you find that
any information contained in the report you receive is inaccurate or
incomplete, you have the right to dispute the matter with the
reporting agency.
Name:------------------------------------------------------------------
Address:---------------------------------------------------------------
-----------------------------------------------------------------------
[Toll-free] Telephone number:------------------------------------------
------ Our credit decision was based in whole or in part on
information obtained from an affiliate or from an outside source
other than a consumer reporting agency. Under the Fair Credit
Reporting Act, you have the right to make a written request, no
later than 60 days after you receive this notice, for disclosure of
the nature of this information.
If you have any questions regarding this notice, you should
contact:
Creditor's name:-------------------------------------------------------
Creditor's address:----------------------------------------------------
Creditor's telephone number:-------------------------------------------
Notice: The federal Equal Credit Opportunity Act prohibits
creditors from discriminating against credit applicants on the basis
of race, color, religion, national origin, sex, marital status, age
(provided the applicant has the capacity to enter into a binding
contract); because all or part of the applicant's income derives
from any public assistance program; or because the applicant has in
good faith exercised any right under the Consumer Credit Protection
Act. The federal agency that administers compliance with this law
concerning this creditor is (name and address as specified by the
appropriate agency listed in appendix A).
Form C-2--Sample Notice of Action Taken and Statement of Reasons
Date
Dear Applicant: Thank you for your recent application. Your
request for [a loan/a credit card/an increase in your credit limit]
was carefully considered, and we regret that we are unable to
approve your application at this time, for the following reason(s):
Your Income:
------ is below our minimum requirement.
[[Page 13185]]
------ is insufficient to sustain payments on the amount of credit
requested.
------ could not be verified.
Your Employment:
------ is not of sufficient length to qualify.
------ could not be verified.
Your Credit History:
------ of making payments on time was not satisfactory.
------ could not be verified.
Your Application:
------ lacks a sufficient number of credit references.
------ lacks acceptable types of credit references.
------ reveals that current obligations are excessive in relation to
income.
Other:-----------------------------------------------------------------
The consumer reporting agency contacted that provided
information that influenced our decision in whole or in part was
[name, address and [toll-free] telephone number of the reporting
agency]. The reporting agency played no part in our decision and is
unable to supply specific reasons why we have denied credit to you.
You have a right under the Fair Credit Reporting Act to know the
information contained in your credit file at the consumer reporting
agency. You also have a right to a free copy of your report from the
reporting agency, if you request it no later than 60 days after you
receive this notice. In addition, if you find that any information
contained in the report you receive is inaccurate or incomplete, you
have the right to dispute the matter with the reporting agency. Any
questions regarding such information should be directed to [consumer
reporting agency]. If you have any questions regarding this letter,
you should contact us at [creditor's name, address and telephone
number].
Notice: The federal Equal Credit Opportunity Act prohibits
creditors from discriminating against credit applicants on the basis
of race, color, religion, national origin, sex, marital status, age
(provided the applicant has the capacity to enter into a binding
contract); because all or part of the applicant's income derives
from any public assistance program; or because the applicant has in
good faith exercised any right under the Consumer Credit Protection
Act. The federal agency that administers compliance with this law
concerning this creditor is (name and address as specified by the
appropriate agency listed in appendix A).
Form C-3--Sample Notice of Action Taken and Statement of Reasons
(Credit Scoring)
Date
Dear Applicant: Thank you for your recent application for ------
----. We regret that we are unable to approve your request.
Your application was processed by a credit scoring system that
assigns a numerical value to the various items of information we
consider in evaluating an application. These numerical values are
based upon the results of analyses of repayment histories of large
numbers of customers.
The information you provided in your application did not score a
sufficient number of points for approval of the application. The
reasons you did not score well compared with other applicants were:
[sbull] Insufficient bank references
[sbull] Type of occupation
[sbull] Insufficient credit experience
[sbull] Number of recent inquiries on credit bureau report
In evaluating your application the consumer reporting agency
listed below provided us with information that in whole or in part
influenced our decision. The consumer reporting agency played no
part in our decision and is unable to supply specific reasons why we
have denied credit to you. You have a right under the Fair Credit
Reporting Act to know the information contained in your credit file
at the consumer reporting agency. It can be obtained by contacting:
[name, address, and [toll-free] telephone number of the consumer
reporting agency]. You also have a right to a free copy of your
report from the reporting agency, if you request it no later than 60
days after you receive this notice. In addition, if you find that
any information contained in the report you receive is inaccurate or
incomplete, you have the right to dispute the matter with the
reporting agency.
If you have any questions regarding this letter, you should
contact us at
Creditor's Name:-------------------------------------------------------
Address:---------------------------------------------------------------
-----------------------------------------------------------------------
Telephone:-------------------------------------------------------------
Sincerely,
Notice: The federal Equal Credit Opportunity Act prohibits
creditors from discriminating against credit applicants on the basis
of race, color, religion, national origin, sex, marital status, age
(with certain limited exceptions); because all or part of the
applicant's income derives from any public assistance program; or
because the applicant has in good faith exercised any right under
the Consumer Credit Protection Act. The federal agency that
administers compliance with this law concerning this creditor is
(name and address as specified by the appropriate agency listed in
appendix A).
Form C-4--Sample Notice of Action Taken, Statement of Reasons and
Counteroffer
Date
Dear Applicant: Thank you for your application for ----------.
We are unable to offer you credit on the terms that you requested
for the following reason(s):
-----------------------------------------------------------------------
We can, however, offer you credit on the following terms: ------
----
-----------------------------------------------------------------------
If this offer is acceptable to you, please notify us within
[amount of time] at the following address: ----------.
Our credit decision on your application was based in whole or in
part on information obtained in a report from [name, address and
[toll-free] telephone number of the consumer reporting agency]. You
have a right under the Fair Credit Reporting Act to know the
information contained in your credit file at the consumer reporting
agency. The reporting agency played no part in our decision and is
unable to supply specific reasons why we have denied credit to you.
You also have a right to a free copy of your report from the
reporting agency, if you request it no later than 60 days after you
receive this notice. In addition, if you find that any information
contained in the report you receive is inaccurate or incomplete, you
have the right to dispute the matter with the reporting agency.
You should know that the federal Equal Credit Opportunity Act
prohibits creditors, such as ourselves, from discriminating against
credit applicants on the basis of their race, color, religion,
national origin, sex, marital status, age (provided the applicant
has the capacity to enter into a binding contract), because they
receive income from a public assistance program, or because they may
have exercised their rights under the Consumer Credit Protection
Act. If you believe there has been discrimination in handling your
application you should contact the [name and address of the
appropriate federal enforcement agency listed in appendix A].
Sincerely,
Form C-5--Sample Disclosure of Right to Request Specific Reasons for
Credit Denial
Date
Dear Applicant: Thank you for applying to us for ----------.
After carefully reviewing your application, we are sorry to
advise you that we cannot [open an account for you/grant a loan to
you/increase your credit limit] at this time. If you would like a
statement of specific reasons why your application was denied,
please contact [our credit service manager] shown below within 60
days of the date of this letter. We will provide you with the
statement of reasons within 30 days after receiving your request.
Creditor's Name
Address
Telephone Number
If we obtained information from a consumer reporting agency as
part of our consideration of your application, its name, address,
and [toll-free] telephone number is shown below. The reporting
agency played no part in our decision and is unable to supply
specific reasons why we have denied credit to you. [You have a right
under the Fair Credit Reporting Act to know the information
contained in your credit file at the consumer reporting agency.] You
have a right to a free copy of your report from the reporting
agency, if you request it no later than 60 days after you receive
this notice. In addition, if you find that any information contained
in the report you received is inaccurate or incomplete, you have the
right to dispute the matter with the reporting agency. You can find
out about the information contained in your file (if one was used)
by contacting:
Consumer reporting agency's name
Address
[Toll-free] Telephone number
Sincerely,
Notice: The federal Equal Credit Opportunity Act prohibits
creditors from discriminating against credit applicants on the basis
of race, color, religion, national origin, sex, marital status, age
(provided the applicant has the capacity to enter into a binding
contract); because all or part of the
[[Page 13186]]
applicant's income derives from any public assistance program; or
because the applicant has in good faith exercised any right under
the Consumer Credit Protection Act. The federal agency that
administers compliance with this law concerning this creditor is
(name and address as specified by the appropriate agency listed in
appendix A).
Form C-6--Sample Notice of Incomplete Application and Request for
Additional Information
Creditor's name
Address
Telephone number
Date
Dear Applicant: Thank you for your application for credit. The
following information is needed to make a decision on your
application: ----------
-----------------------------------------------------------------------
We need to receive this information by ----------(date). If we
do not receive it by that date, we will regrettably be unable to
give further consideration to your credit request.
Sincerely,
Form C-7--Sample Notice of Action Taken and Statement of Reasons
(Business Credit)
Creditor's Name
Creditor's address
Date
Dear Applicant: Thank you for applying to us for credit. We have
given your request careful consideration, and regret that we are
unable to extend credit to you at this time for the following
reasons:
(Insert appropriate reason, such as: Value or type of collateral
not sufficient; Lack of established earnings record; Slow or past
due in trade or loan payments)
Sincerely,
Notice: The federal Equal Credit Opportunity Act prohibits
creditors from discriminating against credit applicants on the basis
of race, color, religion, national origin, sex, marital status, age
(provided the applicant has the capacity to enter into a binding
contract); because all or part of the applicant's income derives
from any public assistance program; or because the applicant has in
good faith exercised any right under the Consumer Credit Protection
Act. The federal agency that administers compliance with this law
concerning this creditor is [name and address as specified by the
appropriate agency listed in appendix A].
Form C-8--Sample Disclosure of Right To Request Specific Reasons for
Credit Denial Given at Time of Application (Business Credit)
Creditor's name
Creditor's address
If your application for business credit is denied, you have the
right to a written statement of the specific reasons for the denial.
To obtain the statement, please contact [name, address and telephone
number of the person or office from which the statement of reasons
can be obtained] within 60 days from the date you are notified of
our decision. We will send you a written statement of reasons for
the denial within 30 days of receiving your request for the
statement.
Notice: The federal Equal Credit Opportunity Act prohibits
creditors from discriminating against credit applicants on the basis
of race, color, religion, national origin, sex, marital status, age
(provided the applicant has the capacity to enter into a binding
contract); because all or part of the applicant's income derives
from any public assistance program; or because the applicant has in
good faith exercised any right under the Consumer Credit Protection
Act. The federal agency that administers compliance with this law
concerning this creditor is [name and address as specified by the
appropriate agency listed in appendix A].
Form C-9--Sample Disclosure of Right To Receive a Copy of an Appraisal
You have the right to a copy of the appraisal report used in
connection with your application for credit. If you wish a copy,
please write to us at the mailing address we have provided. We must
hear from you no later than 90 days after we notify you about the
action taken on your credit application or you withdraw your
application.
[In your letter, give us the following information:]
Form C-10--Sample Disclosure About Voluntary Data Notation
We are requesting the following information to monitor our
compliance with the federal Equal Credit Opportunity Act, which
prohibits unlawful discrimination. You are not required to provide
this information. We will not take this information (or your
decision not to provide this information) into account in connection
with your application or credit transaction. The law provides that a
creditor may not discriminate based on this information, or based on
whether or not you choose to provide it. [If you choose not to
provide the information, we will note it by visual observation or
surname].
Appendix D to Part 202--Issuance of Staff Interpretations
1. Official Staff Interpretations. Officials in the Board's
Division of Consumer and Community Affairs are authorized to issue
official staff interpretations of this regulation. These
interpretations provide the protection afforded under section 706(e)
of the Act. Except in unusual circumstances, such interpretations
will not be issued separately but will be incorporated in an
official commentary to the regulation, which will be amended
periodically.
2. Requests for Issuance of Official Staff Interpretations. A
request for an official staff interpretation should be in writing
and addressed to the Director, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System,
Washington, DC 20551. The request should contain a complete
statement of all relevant facts concerning the issue, including
copies of all pertinent documents.
3. Scope of Interpretations. No staff interpretations will be
issued approving creditors' forms or statements. This restriction
does not apply to forms or statements whose use is required or
sanctioned by a government agency.
Supplement I to Part 202--Official Staff Interpretations
Following is an official staff interpretation of Regulation B
(12 CFR part 202) issued under authority delegated by the Federal
Reserve Board to officials in the Division of Consumer and Community
Affairs. References are to sections of the regulation or the Equal
Credit Opportunity Act (15 U.S.C. 1601 et seq.).
Introduction
1. Official status. Section 706(e) of the Equal Credit
Opportunity Act protects a creditor from civil liability for any act
done or omitted in good faith in conformity with an interpretation
issued by a duly authorized official of the Federal Reserve Board.
This commentary is the means by which the Division of Consumer and
Community Affairs of the Federal Reserve Board issues official staff
interpretations of Regulation B. Good-faith compliance with this
commentary affords a creditor protection under section 706(e) of the
Act.
2. Issuance of interpretations. Under Appendix D to the
regulation, any person may request an official staff interpretation.
Interpretations will be issued at the discretion of designated
officials and incorporated in this commentary following publication
for comment in the Federal Register. Except in unusual
circumstances, official staff interpretations will be issued only by
means of this commentary.
3. Status of previous interpretations. Interpretations of
Regulation B previously issued by the Federal Reserve Board and its
staff have been incorporated into this commentary as appropriate.
All other previous Board and staff interpretations, official and
unofficial, are superseded by this commentary.
4. Footnotes. Footnotes in the regulation have the same legal
effect as the text of the regulation, whether they are explanatory
or illustrative in nature.
5. Comment designations. The comments are designated with as
much specificity as possible according to the particular regulatory
provision addressed. Each comment in the commentary is identified by
a number and the regulatory section or paragraph that it interprets.
For example, comments to Sec. 202.2(c) are further divided by
subparagraph, such as comment 2(c)(1)(ii)-1 and comment 2(c)(2)(ii)-
1.
Section 202.1--Authority, Scope, and Purpose
1(a) Authority and scope.
1. Scope. The Equal Credit Opportunity Act and Regulation B
apply to all credit--commercial as well as personal--without regard
to the nature or type of the credit or the creditor. If a
transaction provides for the deferral of the payment of a debt, it
is credit covered by Regulation B even though it may not be a credit
transaction covered by Regulation Z (Truth in Lending) (12 CFR part
226). Further, the definition of creditor is not restricted to the
party or person to whom the obligation is initially payable, as is
the case
[[Page 13187]]
under Regulation Z. Moreover, the Act and regulation apply to all
methods of credit evaluation, whether performed judgmentally or by
use of a credit scoring system.
2. Foreign applicability. Regulation B generally does not apply
to lending activities that occur outside the United States. The
regulation does apply to lending activities that take place within
the United States (as well as the Commonwealth of Puerto Rico and
any territory or possession of the United States), whether or not
the applicant is a citizen.
3. Board. The term Board, as used in this regulation, means the
Board of Governors of the Federal Reserve System.
Section 202.2--Definitions
2(c) Adverse action.
Paragraph 2(c)(1)(i)
1. Application for credit. If the applicant applied in
accordance with the creditor's procedures, a refusal to refinance or
extend the term of a business or other loan is adverse action.
Paragraph 2(c)(1)(ii)
1. Move from service area. If a credit card issuer terminates
the open-end account of a customer because the customer has moved
out of the card issuer's service area, the termination is adverse
action unless termination on this ground was explicitly provided for
in the credit agreement between the parties. In cases where
termination is adverse action, notification is required under Sec.
202.9.
2. Termination based on credit limit. If a creditor terminates
credit accounts that have low credit limits (for example, under
$400) but keeps open accounts with higher credit limits, the
termination is adverse action and notification is required under
Sec. 202.9.
Paragraph 2(c)(2)(ii)
1. Default--exercise of due-on-sale clause. If a mortgagor sells
or transfers mortgaged property without the consent of the
mortgagee, and the mortgagee exercises its contractual right to
accelerate the mortgage loan, the mortgagee may treat the mortgagor
as being in default. An adverse action notice need not be given to
the mortgagor or the transferee. (See comment 2(e)-1 for treatment
of a purchaser who requests to assume the loan.)
2. Current delinquency or default. The term adverse action does
not include a creditor's termination of an account when the
accountholder is currently in default or delinquent on that account.
Notification in accordance with Sec. 202.9 of the regulation
generally is required, however, if the creditor's action is based on
a past delinquency or default on the account.
Paragraph 2(c)(2)(iii)
1. Point-of-sale transactions. Denial of credit at point of sale
is not adverse action except under those circumstances specified in
the regulation. For example, denial at point of sale is not adverse
action in the following situations:
i. A credit cardholder presents an expired card or a card that
has been reported to the card issuer as lost or stolen.
ii. The amount of a transaction exceeds a cash advance or credit
limit.
iii. The circumstances (such as excessive use of a credit card
in a short period of time) suggest that fraud is involved.
iv. The authorization facilities are not functioning.
v. Billing statements have been returned to the creditor for
lack of a forwarding address.
2. Application for increase in available credit. A refusal or
failure to authorize an account transaction at the point of sale or
loan is not adverse action except when the refusal is a denial of an
application, submitted in accordance with the creditor's procedures,
for an increase in the amount of credit.
Paragraph 2(c)(2)(v)
1. Terms of credit versus type of credit offered. When an
applicant applies for credit and the creditor does not offer the
credit terms requested by the applicant (for example, the interest
rate, length of maturity, collateral, or amount of downpayment), a
denial of the application for that reason is adverse action (unless
the creditor makes a counteroffer that is accepted by the applicant)
and the applicant is entitled to notification under Sec. 202.9.
2(e) Applicant.
1. Request to assume loan. If a mortgagor sells or transfers the
mortgaged property and the buyer makes an application to the
creditor to assume the mortgage loan, the mortgagee must treat the
buyer as an applicant unless its policy is not to permit
assumptions.
2(f) Application.
1. General. A creditor has the latitude under the regulation to
establish its own application process and to decide the type and
amount of information it will require from credit applicants.
2. Procedures used. The term ``procedures'' refers to the actual
practices followed by a creditor for making credit decisions as well
as its stated application procedures. For example, if a creditor's
stated policy is to require all applications to be in writing on the
creditor's application form, but the creditor also makes credit
decisions based on oral requests, the creditor's procedures are to
accept both oral and written applications.
3. When an inquiry or prequalification request becomes an
application. A creditor is encouraged to provide consumers with
information about loan terms. However, if in giving information to
the consumer the creditor also evaluates information about the
consumer, decides to decline the request, and communicates this to
the consumer, the creditor has treated the inquiry or
prequalification request as an application and must then comply with
the notification requirements under Sec. 202.9. Whether the inquiry
or prequalification request becomes an application depends on how
the creditor responds to the consumer, not on what the consumer says
or asks. (See comment 9-5 for further discussion of prequalification
requests; see comment 2(f)-5 for a discussion of preapproval
requests.)
4. Examples of inquiries that are not applications. The
following examples illustrate situations in which only an inquiry
has taken place:
i. A consumer calls to ask about loan terms and an employee
explains the creditor's basic loan terms, such as interest rates,
loan-to-value ratio, and debt-to-income ratio.
ii. A consumer calls to ask about interest rates for car loans,
and, in order to quote the appropriate rate, the loan officer asks
for the make and sales price of the car and the amount of the
downpayment, then gives the consumer the rate.
iii. A consumer asks about terms for a loan to purchase a home
and tells the loan officer her income and intended downpayment, but
the loan officer only explains the creditor's loan-to-value ratio
policy and other basic lending policies, without telling the
consumer whether she qualifies for the loan.
iv. A consumer calls to ask about terms for a loan to purchase
vacant land and states his income and the sales price of the
property to be financed, and asks whether he qualifies for a loan;
the employee responds by describing the general lending policies,
explaining that he would need to look at all of the consumer's
qualifications before making a decision, and offering to send an
application form to the consumer.
5. Examples of an application. An application for credit
includes the following situations:
i. A person asks a financial institution to ``preapprove'' her
for a loan (for example, to finance a house or a vehicle she plans
to buy) and the institution reviews the request under a program in
which the institution, after a comprehensive analysis of her
creditworthiness, issues a written commitment valid for a designated
period of time to extend a loan up to a specified amount. The
written commitment may not be subject to conditions other than
conditions that require the identification of adequate collateral,
conditions that require no material change in the applicant's
financial condition or creditworthiness prior to funding the loan,
and limited conditions that are not related to the financial
condition or creditworthiness of the applicant that the lender
ordinarily attaches to a traditional application (such as
certification of a clear termite inspection for a home purchase
loan, or a maximum mileage requirement for a used car loan). But if
the creditor's program does not provide for giving written
commitments, requests for preapprovals are treated as
prequalification requests for purposes of the regulation.
ii. Under the same facts as above, the financial institution
evaluates the person's creditworthiness and determines that she does
not qualify for a preapproval.
6. Completed application--diligence requirement. The regulation
defines a completed application in terms that give a creditor the
latitude to establish its own information requirements.
Nevertheless, the creditor must act with reasonable diligence to
collect information needed to complete the application. For example,
the creditor should request information from third parties, such as
a credit report, promptly after receiving the application. If
additional information is needed from the applicant, such as an
address or a telephone number to verify employment, the creditor
should contact the applicant promptly. (But see comment 9(a)(1)-3,
which discusses the creditor's option to deny an application on the
basis of incompleteness.)
[[Page 13188]]
2(g) Business credit.
1. Definition. The test for deciding whether a transaction
qualifies as business credit is one of primary purpose. For example,
an open-end credit account used for both personal and business
purposes is not business credit unless the primary purpose of the
account is business-related. A creditor may rely on an applicant's
statement of the purpose for the credit requested.
2(j) Credit.
1. General. Regulation B covers a wider range of credit
transactions than Regulation Z (Truth in Lending). Under Regulation
B, a transaction is credit if there is a right to defer payment of a
debt--regardless of whether the credit is for personal or commercial
purposes, the number of installments required for repayment, or
whether the transaction is subject to a finance charge.
2(l) Creditor.
1. Assignees. The term creditor includes all persons
participating in the credit decision. This may include an assignee
or a potential purchaser of the obligation who influences the credit
decision by indicating whether or not it will purchase the
obligation if the transaction is consummated.
2. Referrals to creditors. For certain purposes, the term
creditor includes persons such as real estate brokers, automobile
dealers, home builders, and home-improvement contractors who do not
participate in credit decisions but who only accept applications and
refer applicants to creditors, or select or offer to select
creditors to whom credit requests can be made. These persons must
comply with Sec. 202.4(a), the general rule prohibiting
discrimination, and with Sec. 202.4(b), the general rule against
discouraging applications.
2(p) Empirically derived and other credit scoring systems.
1. Purpose of definition. The definition under Sec.
202.2(p)(1)(i) through (iv) sets the criteria that a credit system
must meet in order to use age as a predictive factor. Credit systems
that do not meet these criteria are judgmental systems and may
consider age only for the purpose of determining a ``pertinent
element of creditworthiness.'' (Both types of systems may favor an
elderly applicant. See Sec. 202.6(b)(2).)
2. Periodic revalidation. The regulation does not specify how
often credit scoring systems must be revalidated. The credit scoring
system must be revalidated frequently enough to ensure that it
continues to meet recognized professional statistical standards for
statistical soundness. To ensure that predictive ability is being
maintained, the creditor must periodically review the performance of
the system. This could be done, for example, by analyzing the loan
portfolio to determine the delinquency rate for each score interval,
or by analyzing population stability over time to detect deviations
of recent applications from the applicant population used to
validate the system. If this analysis indicates that the system no
longer predicts risk with statistical soundness, the system must be
adjusted as necessary to reestablish its predictive ability. A
creditor is responsible for ensuring its system is validated and
revalidated based on the creditor's own data.
3. Pooled data scoring systems. A scoring system or the data
from which to develop such a system may be obtained from either a
single credit grantor or multiple credit grantors. The resulting
system will qualify as an empirically derived, demonstrably and
statistically sound, credit scoring system provided the criteria set
forth in paragraph (p)(1)(i) through (iv) of this section are met. A
creditor is responsible for ensuring its system is validated and
revalidated based on the creditor's own data when it becomes
available.
4. Effects test and disparate treatment. An empirically derived,
demonstrably and statistically sound, credit scoring system may
include age as a predictive factor (provided that the age of an
elderly applicant is not assigned a negative factor or value).
Besides age, no other prohibited basis may be used as a variable.
Generally, credit scoring systems treat all applicants objectively
and thus avoid problems of disparate treatment. In cases where a
credit scoring system is used in conjunction with individual
discretion, disparate treatment could conceivably occur in the
evaluation process. In addition, neutral factors used in credit
scoring systems could nonetheless be subject to challenge under the
effects test. (See comment 6(a)-2 for a discussion of the effects
test).
2(w) Open-end credit.
1. Open-end real estate mortgages. The term ``open-end credit''
does not include negotiated advances under an open-end real estate
mortgage or a letter of credit.
2(z) Prohibited basis.
1. Persons associated with applicant. As used in this
regulation, prohibited basis refers not only to characteristics--the
race, color, religion, national origin, sex, marital status, or
age--of an applicant (or officers of an applicant in the case of a
corporation) but also to the characteristics of individuals with
whom an applicant is affiliated or with whom the applicant
associates. This means, for example, that under the general rule
stated in Sec. 202.4(a), a creditor may not discriminate against an
applicant because of that person's personal or business dealings
with members of a certain religion, because of the national origin
of any persons associated with the extension of credit (such as the
tenants in the apartment complex being financed), or because of the
race of other residents in the neighborhood where the property
offered as collateral is located.
2. National origin. A creditor may not refuse to grant credit
because an applicant comes from a particular country but may take
the applicant's immigration status into account. A creditor may also
take into account any applicable law, regulation, or executive order
restricting dealings with citizens (or the government) of a
particular country or imposing limitations regarding credit extended
for their use.
3. Public assistance program. Any federal, state, or local
governmental assistance program that provides a continuing, periodic
income supplement, whether premised on entitlement or need, is
``public assistance'' for purposes of the regulation. The term
includes (but is not limited to) Temporary Aid to Needy Families,
food stamps, rent and mortgage supplement or assistance programs,
social security and supplemental security income, and unemployment
compensation. Only physicians, hospitals, and others to whom the
benefits are payable need consider Medicare and Medicaid as public
assistance.
Section 202.3--Limited Exceptions for Certain Classes of Transactions
1. Scope. Under this section, procedural requirements of the
regulation do not apply to certain types of credit. All classes of
transactions remain subject to Sec. 202.4(a), the general rule
barring discrimination on a prohibited basis, and to any other
provision not specifically excepted.
3(a) Public-utilities credit.
1. Definition. This definition applies only to credit for the
purchase of a utility service, such as electricity, gas, or
telephone service. Credit provided or offered by a public utility
for some other purpose--such as for financing the purchase of a gas
dryer, telephone equipment, or other durable goods, or for
insulation or other home improvements--is not excepted.
2. Security deposits. A utility company is a creditor when it
supplies utility service and bills the user after the service has
been provided. Thus, any credit term (such as a requirement for a
security deposit) is subject to the regulation's bar against
discrimination on a prohibited basis.
3. Telephone companies. A telephone company's credit
transactions qualify for the exceptions provided in Sec.
202.3(a)(2) only if the company is regulated by a government unit or
files the charges for service, delayed payment, or any discount for
prompt payment with a government unit.
3(c) Incidental credit.
1. Examples. If a service provider (such as a hospital, doctor,
lawyer, or merchant) allows the client or customer to defer the
payment of a bill, this deferral of debt is credit for purposes of
the regulation, even though there is no finance charge and no
agreement for payment in installments. Because of the exceptions
provided by this section, however, these particular credit
extensions are excepted from compliance with certain procedural
requirements as specified in Sec. 202.3(c).
3(d) Government credit.
1. Credit to governments. The exception relates to credit
extended to (not by) governmental entities. For example, credit
extended to a local government is covered by this exception, but
credit extended to consumers by a federal or state housing agency
does not qualify for special treatment under this category.
Section 202.4--General Rules
Paragraph 4(a)
1. Scope of rule. The general rule stated in Sec. 202.4(a)
covers all dealings, without exception, between an applicant and a
creditor, whether or not addressed by other provisions of the
regulation. Other provisions of the regulation identify specific
practices that the Board has decided are impermissible because they
could result in credit discrimination on a basis prohibited by the
Act. The general rule covers, for example, application procedures,
criteria used to evaluate creditworthiness, administration of
[[Page 13189]]
accounts, and treatment of delinquent or slow accounts. Thus,
whether or not specifically prohibited elsewhere in the regulation,
a credit practice that treats applicants differently on a prohibited
basis violates the law because it violates the general rule.
Disparate treatment on a prohibited basis is illegal whether or not
it results from a conscious intent to discriminate.
2. Examples.
i. Disparate treatment would exist, for example, in the
following situations:
A. A creditor provides information only on ``subprime'' and
similar products to minority applicants who request information
about the creditor's mortgage products, but provides information on
a wider variety of mortgage products to similarly situated
nonminority applicants.
B. A creditor provides more comprehensive information to men
than to similarly situated women.
C. A creditor requires a minority applicant to provide greater
documentation to obtain a loan than a similarly situated nonminority
applicant.
D. A creditor waives or relaxes credit standards for a
nonminority applicant but not for a similarly situated minority
applicant.
ii. Treating applicants differently on a prohibited basis is
unlawful if the creditor lacks a legitimate nondiscriminatory reason
for its action, or if the asserted reason is found to be a pretext
for discrimination.
Paragraph 4(b)
1. Prospective applicants. Generally, the regulation's
protections apply only to persons who have requested or received an
extension of credit. In keeping with the purpose of the Act--to
promote the availability of credit on a nondiscriminatory basis--
Sec. 202.4(b) covers acts or practices directed at prospective
applicants that could discourage a reasonable person, on a
prohibited basis, from applying for credit. Practices prohibited by
this section include:
i. A statement that the applicant should not bother to apply,
after the applicant states that he is retired.
ii. The use of words, symbols, models or other forms of
communication in advertising that express, imply, or suggest a
discriminatory preference or a policy of exclusion in violation of
the Act.
iii. The use of interview scripts that discourage applications
on a prohibited basis.
2. Affirmative advertising. A creditor may affirmatively solicit
or encourage members of traditionally disadvantaged groups to apply
for credit, especially groups that might not normally seek credit
from that creditor.
Paragraph 4(c)
1. Requirement for written applications. Model application forms
are provided in Appendix B to the regulation, although use of a
printed form is not required. A creditor will satisfy the
requirement by writing down the information that it normally
considers in making a credit decision. The creditor may complete an
application on behalf of an applicant and need not require the
applicant to sign the application.
2. Telephone applications. A creditor that accepts applications
by telephone for dwelling-related credit covered by Sec. 202.13 can
meet the requirement for written applications by writing down
pertinent information that is provided by the applicant.
3. Computerized entry. Information entered directly into and
retained by a computerized system qualifies as a written application
under this paragraph. (See the commentary to Sec. 202.13(b),
Applications through electronic media and Applications through
video.)
Paragraph 4(d)
1. Clear and conspicuous. This standard requires that
disclosures be presented in a reasonably understandable format in a
way that does not obscure the required information. No minimum type
size is mandated, but the disclosures must be legible, whether
typewritten, handwritten, or printed by computer.
Section 202.5--Rules Concerning Requests for Information
5(a) General rules.
Paragraph 5(a)(1)
1. Requests for information. This section governs the types of
information that a creditor may gather. Section 202.6 governs how
information may be used.
Paragraph 5(a)(2)
1. Local laws. Information that a creditor is allowed to collect
pursuant to a ``state'' statute or regulation includes information
required by a local statute, regulation, or ordinance.
2. Information required by Regulation C. Regulation C generally
requires creditors covered by the Home Mortgage Disclosure Act
(HMDA) to collect and report information about the race, ethnicity,
and sex of applicants for home-improvement loans and home-purchase
loans, including some types of loans not covered by Sec. 202.13.
3. Collecting information on behalf of creditors. Persons such
as loan brokers and correspondents do not violate the ECOA or
Regulation B if they collect information that they are otherwise
prohibited from collecting, where the purpose of collecting the
information is to provide it to a creditor that is subject to the
Home Mortgage Disclosure Act or another federal or state statute or
regulation requiring data collection.
5(d) Other limitations on information requests.
Paragraph 5(d)(1)
1. Indirect disclosure of prohibited information. The fact that
certain credit-related information may indirectly disclose marital
status does not bar a creditor from seeking such information. For
example, the creditor may ask about:
i. The applicant's obligation to pay alimony, child support, or
separate maintenance income.
ii. The source of income to be used as the basis for repaying
the credit requested, which could disclose that it is the income of
a spouse.
iii. Whether any obligation disclosed by the applicant has a co-
obligor, which could disclose that the co-obligor is a spouse or
former spouse.
iv. The ownership of assets, which could disclose the interest
of a spouse.
Paragraph 5(d)(2)
1. Disclosure about income. The sample application forms in
appendix B to the regulation illustrate how a creditor may inform an
applicant of the right not to disclose alimony, child support, or
separate maintenance income.
2. General inquiry about source of income. Since a general
inquiry about the source of income may lead an applicant to disclose
alimony, child support, or separate maintenance income, a creditor
making such an inquiry on an application form should preface the
request with the disclosure required by this paragraph.
3. Specific inquiry about sources of income. A creditor need not
give the disclosure if the inquiry about income is specific and
worded in a way that is unlikely to lead the applicant to disclose
the fact that income is derived from alimony, child support, or
separate maintenance payments. For example, an application form that
asks about specific types of income such as salary, wages, or
investment income need not include the disclosure.
Section 202.6--Rules Concerning Evaluation of Applications
6(a) General rule concerning use of information.
1. General. When evaluating an application for credit, a
creditor generally may consider any information obtained. However, a
creditor may not consider in its evaluation of creditworthiness any
information that it is barred by Sec. 202.5 from obtaining or from
using for any purpose other than to conduct a self-test under Sec.
202.15.
2. Effects test. The effects test is a judicial doctrine that
was developed in a series of employment cases decided by the U.S.
Supreme Court under Title VII of the Civil Rights Act of 1964 (42
U.S.C. 2000e et seq.), and the burdens of proof for such employment
cases were codified by Congress in the Civil Rights Act of 1991 (42
U.S.C. 2000e-2). Congressional intent that this doctrine apply to
the credit area is documented in the Senate Report that accompanied
H.R. 6516, No. 94-589, pp. 4-5; and in the House Report that
accompanied H.R. 6516, No. 94-210, p.5. The Act and regulation may
prohibit a creditor practice that is discriminatory in effect
because it has a disproportionately negative impact on a prohibited
basis, even though the creditor has no intent to discriminate and
the practice appears neutral on its face, unless the creditor
practice meets a legitimate business need that cannot reasonably be
achieved as well by means that are less disparate in their impact.
For example, requiring that applicants have income in excess of a
certain amount to qualify for an overdraft line of credit could mean
that women and minority applicants will be rejected at a higher rate
than men and nonminority applicants. If there is a demonstrable
relationship between the income requirement and creditworthiness for
the level of credit involved, however, use of the income standard
would likely be permissible.
6(b) Specific rules concerning use of information.
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Paragraph 6(b)(1)
1. Prohibited basis--special purpose credit. In a special
purpose credit program, a creditor may consider a prohibited basis
to determine whether the applicant possesses a characteristic needed
for eligibility. (See Sec. 202.8.)
Paragraph 6(b)(2)
1. Favoring the elderly. Any system of evaluating
creditworthiness may favor a credit applicant who is age 62 or
older. A credit program that offers more favorable credit terms to
applicants age 62 or older is also permissible; a program that
offers more favorable credit terms to applicants at an age lower
than 62 is permissible only if it meets the special-purpose credit
requirements of Sec. 202.8.
2. Consideration of age in a credit scoring system. Age may be
taken directly into account in a credit scoring system that is
``demonstrably and statistically sound,'' as defined in Sec.
202.2(p), with one limitation: applicants age 62 years or older must
be treated at least as favorably as applicants who are under age 62.
If age is scored by assigning points to an applicant's age category,
elderly applicants must receive the same or a greater number of
points as the most favored class of nonelderly applicants.
i. Age-split scorecards. Some credit systems segment the
population and use different scorecards based on the age of an
applicant. In such a system, one card may cover a narrow age range
(for example, applicants in their twenties or younger) who are
evaluated under attributes predictive for that age group. A second
card may cover all other applicants, who are evaluated under the
attributes predictive for that broader class. When a system uses a
card covering a wide age range that encompasses elderly applicants,
the credit scoring system is not deemed to score age. Thus, the
system does not raise the issue of assigning a negative factor or
value to the age of elderly applicants. But if a system segments the
population by age into multiple scorecards, and includes elderly
applicants in a narrower age range, the credit scoring system does
score age. To comply with the Act and regulation in such a case, the
creditor must ensure that the system does not assign a negative
factor or value to the age of elderly applicants as a class.
3. Consideration of age in a judgmental system. In a judgmental
system, defined in Sec. 202.2(t), a creditor may not decide whether
to extend credit or set the terms and conditions of credit based on
age or information related exclusively to age. Age or age-related
information may be considered only in evaluating other ``pertinent
elements of creditworthiness'' that are drawn from the particular
facts and circumstances concerning the applicant. For example, a
creditor may not reject an application or terminate an account
because the applicant is 60 years old. But a creditor that uses a
judgmental system may relate the applicant's age to other
information about the applicant that the creditor considers in
evaluating creditworthiness. As the following examples illustrate,
the evaluation must be made in an individualized, case-by-case
manner:
i. A creditor may consider the applicant's occupation and length
of time to retirement to ascertain whether the applicant's income
(including retirement income) will support the extension of credit
to its maturity.
ii. A creditor may consider the adequacy of any security offered
when the term of the credit extension exceeds the life expectancy of
the applicant and the cost of realizing on the collateral could
exceed the applicant's equity. An elderly applicant might not
qualify for a 5 percent down, 30-year mortgage loan but might
qualify with a larger downpayment or a shorter loan maturity.
iii. A creditor may consider the applicant's age to assess the
significance of length of employment (a young applicant may have
just entered the job market) or length of time at an address (an
elderly applicant may recently have retired and moved from a long-
term residence).
4. Consideration of age in a reverse mortgage. A reverse
mortgage is a home-secured loan in which the borrower receives
payments from the creditor, and does not become obligated to repay
these amounts (other than in the case of default) until the borrower
dies, moves permanently from the home, or transfers title to the
home, or upon a specified maturity date. Disbursements to the
borrower under a reverse mortgage typically are determined by
considering the value of the borrower's home, the current interest
rate, and the borrower's life expectancy. A reverse mortgage program
that requires borrowers to be age 62 or older is permissible under
Sec. 202.6(b)(2)(iv). In addition, under Sec. 202.6(b)(2)(iii), a
creditor may consider a borrower's age to evaluate a pertinent
element of creditworthiness, such as the amount of the credit or
monthly payments that the borrower will receive, or the estimated
repayment date.
5. Consideration of age in a combined system. A creditor using a
credit scoring system that qualifies as ``empirically derived''
under Sec. 202.2(p) may consider other factors (such as a credit
report or the applicant's cash flow) on a judgmental basis. Doing so
will not negate the classification of the credit scoring component
of the combined system as ``demonstrably and statistically sound.''
While age could be used in the credit scoring portion, however, in
the judgmental portion age may not be considered directly. It may be
used only for the purpose of determining a ``pertinent element of
creditworthiness.'' (See comment 6(b)(2)-3.)
6. Consideration of public assistance. When considering income
derived from a public assistance program, a creditor may take into
account, for example:
i. The length of time an applicant will likely remain eligible
to receive such income.
ii. Whether the applicant will continue to qualify for benefits
based on the status of the applicant's dependents (as in the case of
Temporary Aid to Needy Families, or social security payments to a
minor).
iii. Whether the creditor can attach or garnish the income to
assure payment of the debt in the event of default.
Paragraph 6(b)(5)
1. Consideration of an individual applicant. A creditor must
evaluate income derived from part-time employment, alimony, child
support, separate maintenance payments, retirement benefits, or
public assistance on an individual basis, not on the basis of
aggregate statistics; and must assess its reliability or
unreliability by analyzing the applicant's actual circumstances, not
by analyzing statistical measures derived from a group.
2. Payments consistently made. In determining the likelihood of
consistent payments of alimony, child support, or separate
maintenance, a creditor may consider factors such as whether
payments are received pursuant to a written agreement or court
decree; the length of time that the payments have been received;
whether the payments are regularly received by the applicant; the
availability of court or other procedures to compel payment; and the
creditworthiness of the payor, including the credit history of the
payor when it is available to the creditor.
3. Consideration of income.
i. A creditor need not consider income at all in evaluating
creditworthiness. If a creditor does consider income, there are
several acceptable methods, whether in a credit scoring or a
judgmental system:
A. A creditor may score or take into account the total sum of
all income stated by the applicant without taking steps to evaluate
the income for reliability.
B. A creditor may evaluate each component of the applicant's
income, and then score or take into account income determined to be
reliable separately from other income; or the creditor may disregard
that portion of income that is not reliable when it aggregates
reliable income.
C. A creditor that does not evaluate all income components for
reliability must treat as reliable any component of protected income
that is not evaluated.
ii. In considering the separate components of an applicant's
income, the creditor may not automatically discount or exclude from
consideration any protected income. Any discounting or exclusion
must be based on the applicant's actual circumstances.
4. Part-time employment, sources of income. A creditor may score
or take into account the fact that an applicant has more than one
source of earned income--a full-time and a part-time job or two
part-time jobs. A creditor may also score or treat earned income
from a secondary source differently than earned income from a
primary source. The creditor may not, however, score or otherwise
take into account the number of sources for income such as
retirement income, social security, supplemental security income,
and alimony. Nor may the creditor treat negatively the fact that an
applicant's only earned income is derived from, for example, a part-
time job.
Paragraph 6(b)(6)
1. Types of credit references. A creditor may restrict the types
of credit history and credit references that it will consider,
provided that the restrictions are applied to all credit applicants
without regard to sex, marital status, or any other prohibited
basis. On the applicant's request, however, a creditor must consider
credit information not reported through a credit bureau when the
[[Page 13191]]
information relates to the same types of credit references and
history that the creditor would consider if reported through a
credit bureau.
Paragraph 6(b)(7)
1. National origin--immigration status. The applicant's
immigration status and ties to the community (such as employment and
continued residence in the area) could have a bearing on a
creditor's ability to obtain repayment. Accordingly, the creditor
may consider immigration status and differentiate, for example,
between a noncitizen who is a long-time resident with permanent
resident status and a noncitizen who is temporarily in this country
on a student visa.
2. National origin--citizenship. A denial of credit on the
ground that an applicant is not a United States citizen is not per
se discrimination based on national origin.
Paragraph 6(b)(8)
1. Prohibited basis--marital status. A creditor may consider the
marital status of an applicant or joint applicant for the purpose of
ascertaining the creditor's rights and remedies applicable to the
particular extension of credit. For example, in a secured
transaction involving real property, a creditor could take into
account whether state law gives the applicant's spouse an interest
in the property being offered as collateral.
Section 202.7--Rules Concerning Extensions of Credit
7(a) Individual accounts.
1. Open-end credit--authorized user. A creditor may not require
a creditworthy applicant seeking an individual credit account to
provide additional signatures. But the creditor may condition the
designation of an authorized user by the account holder on the
authorized user's becoming contractually liable for the account, as
long as the creditor does not differentiate on any prohibited basis
in imposing this requirement.
2. Open-end credit--choice of authorized user. A creditor that
permits an account holder to designate an authorized user may not
restrict this designation on a prohibited basis. For example, if the
creditor allows the designation of spouses as authorized users, the
creditor may not refuse to accept a nonspouse as an authorized user.
3. Overdraft authority on transaction accounts. If a transaction
account (such as a checking account or NOW account) includes an
overdraft line of credit, the creditor may require that all persons
authorized to draw on the transaction account assume liability for
any overdraft.
7(b) Designation of name.
1. Single name on account. A creditor may require that joint
applicants on an account designate a single name for purposes of
administering the account and that a single name be embossed on any
credit cards issued on the account. But the creditor may not require
that the name be the husband's name. (See Sec. 202.10 for rules
governing the furnishing of credit history on accounts held by
spouses.)
7(c) Action concerning existing open-end accounts.
Paragraph 7(c)(1)
1. Termination coincidental with marital status change. When an
account holder's marital status changes, a creditor generally may
not terminate the account unless it has evidence that the account
holder is now unable or unwilling to repay. But the creditor may
terminate an account on which both spouses are jointly liable, even
if the action coincides with a change in marital status, when one or
both spouses:
i. Repudiate responsibility for future charges on the joint
account.
ii. Request separate accounts in their own names.
iii. Request that the joint account be closed.
2. Updating information. A creditor may periodically request
updated information from applicants but may not use events related
to a prohibited basis--such as an applicant's retirement or reaching
a particular age, or a change in name or marital status--to trigger
such a request.
Paragraph 7(c)(2)
1. Procedure pending reapplication. A creditor may require a
reapplication from an account holder, even when there is no evidence
of unwillingness or inability to repay, if (1) the credit was based
on the qualifications of a person who is no longer available to
support the credit and (2) the creditor has information indicating
that the account holder's income may be insufficient to support the
credit. While a reapplication is pending, the creditor must allow
the account holder full access to the account under the existing
contract terms. The creditor may specify a reasonable time period
within which the account holder must submit the required
information.
7(d) Signature of spouse or other person.
1. Qualified applicant. The signature rules ensure that
qualified applicants are able to obtain credit in their own names.
Thus, when an applicant requests individual credit, a creditor
generally may not require the signature of another person unless the
creditor has first determined that the applicant alone does not
qualify for the credit requested.
2. Unqualified applicant. When an applicant requests individual
credit but does not meet a creditor's standards, the creditor may
require a cosigner, guarantor, endorser, or similar partie--but
cannot require that it be the spouse. (See commentary to Sec.
202.7(d)(5) and (6).)
Paragraph 7(d)(1)
1. Signature of another person. It is impermissible for a
creditor to require an applicant who is individually creditworthy to
provide a cosigner--even if the creditor applies the requirement
without regard to sex, marital status, or any other prohibited
basis. (But see comment 7(d)(6)-1 concerning guarantors of closely
held corporations.)
2. Joint applicant. The term ``joint applicant'' refers to
someone who applies contemporaneously with the applicant for shared
or joint credit. It does not refer to someone whose signature is
required by the creditor as a condition for granting the credit
requested.
3. Evidence of joint application. A person's intent to be a
joint applicant must be evidenced at the time of application.
Signatures on a promissory note may not be used to show intent to
apply for joint credit. On the other hand, signatures or initials on
a credit application affirming applicants' intent to apply for joint
credit may be used to establish intent to apply for joint credit.
(See Appendix B). The method used to establish intent must be
distinct from the means used by individuals to affirm the accuracy
of information. For example, signatures on a joint financial
statement affirming the veracity of information are not sufficient
to establish intent to apply for joint credit.
Paragraph 7(d)(2)
1. Jointly owned property. If an applicant requests unsecured
credit, does not own sufficient separate property, and relies on
joint property to establish creditworthiness, the creditor must
value the applicant's interest in the jointly owned property. A
creditor may not request that a nonapplicant joint owner sign any
instrument as a condition of the credit extension unless the
applicant's interest does not support the amount and terms of the
credit sought.
i. Valuation of applicant's interest. In determining the value
of an applicant's interest in jointly owned property, a creditor may
consider factors such as the form of ownership and the property's
susceptibility to attachment, execution, severance, or partition;
the value of the applicant's interest after such action; and the
cost associated with the action. This determination must be based on
the existing form of ownership, and not on the possibility of a
subsequent change. For example, in determining whether a married
applicant's interest in jointly owned property is sufficient to
satisfy the creditor's standards of creditworthiness for individual
credit, a creditor may not consider that the applicant's separate
property could be transferred into tenancy by the entirety after
consummation. Similarly, a creditor may not consider the possibility
that the couple may divorce. Accordingly, a creditor may not require
the signature of the nonapplicant spouse in these or similar
circumstances.
ii. Other options to support credit. If the applicant's interest
in jointly owned property does not support the amount and terms of
credit sought, the creditor may offer the applicant other options to
qualify for the extension of credit. For example:
A. Providing a co-signer or other party (Sec. 202.7(d)(5));
B. Requesting that the credit be granted on a secured basis
(Sec. 202.7(d)(4)); or
C. Providing the signature of the joint owner on an instrument
that ensures access to the property in the event of the applicant's
death or default, but does not impose personal liability unless
necessary under state law (such as a limited guarantee). A creditor
may not routinely require, however, that a joint owner sign an
instrument (such as a quitclaim deed) that would result in the
forfeiture of the joint owner's interest in the property.
2. Need for signature--reasonable belief. A creditor's
reasonable belief as to what instruments need to be signed by a
person
[[Page 13192]]
other than the applicant should be supported by a thorough review of
pertinent statutory and decisional law or an opinion of the state
attorney general.
Paragraph 7(d)(3)
1. Residency. In assessing the creditworthiness of a person who
applies for credit in a community property state, a creditor may
assume that the applicant is a resident of the state unless the
applicant indicates otherwise.
Paragraph 7(d)(4)
1. Creation of enforceable lien. Some state laws require that
both spouses join in executing any instrument by which real property
is encumbered. If an applicant offers such property as security for
credit, a creditor may require the applicant's spouse to sign the
instruments necessary to create a valid security interest in the
property. The creditor may not require the spouse to sign the note
evidencing the credit obligation if signing only the mortgage or
other security agreement is sufficient to make the property
available to satisfy the debt in the event of default. However, if
under state law both spouses must sign the note to create an
enforceable lien, the creditor may require the signatures.
2. Need for signature--reasonable belief. Generally, a signature
to make the secured property available will only be needed on a
security agreement. A creditor's reasonable belief that, to ensure
access to the property, the spouse's signature is needed on an
instrument that imposes personal liability should be supported by a
thorough review of pertinent statutory and decisional law or an
opinion of the state attorney general.
3. Integrated instruments. When a creditor uses an integrated
instrument that combines the note and the security agreement, the
spouse cannot be asked to sign the integrated instrument if the
signature is only needed to grant a security interest. But the
spouse could be asked to sign an integrated instrument that makes
clear--for example, by a legend placed next to the spouse's
signature--that the spouse's signature is only to grant a security
interest and that signing the instrument does not impose personal
liability.
Paragraph 7(d)(5)
1. Qualifications of additional parties. In establishing
guidelines for eligibility of guarantors, cosigners, or similar
additional parties, a creditor may restrict the applicant's choice
of additional parties but may not discriminate on the basis of sex,
marital status, or any other prohibited basis. For example, the
creditor could require that the additional party live in the
creditor's market area.
2. Reliance on income of another person--individual credit. An
applicant who requests individual credit relying on the income of
another person (including a spouse in a non-community property
state) may be required to provide the signature of the other person
to make the income available to pay the debt. In community property
states, the signature of a spouse may be required if the applicant
relies on the spouse's separate income. If the applicant relies on
the spouse's future earnings that as a matter of state law cannot be
characterized as community property until earned, the creditor may
require the spouse's signature, but need not do so--even if it is
the creditor's practice to require the signature when an applicant
relies on the future earnings of a person other than a spouse. (See
Sec. 202.6(c) on consideration of state property laws.)
3. Renewals. If the borrower's creditworthiness is reevaluated
when a credit obligation is renewed, the creditor must determine
whether an additional party is still warranted and, if not
warranted, release the additional party.
Paragraph 7(d)(6)
1. Guarantees. A guarantee on an extension of credit is part of
a credit transaction and therefore subject to the regulation. A
creditor may require the personal guarantee of the partners,
directors, or officers of a business, and the shareholders of a
closely held corporation, even if the business or corporation is
creditworthy. The requirement must be based on the guarantor's
relationship with the business or corporation, however, and not on a
prohibited basis. For example, a creditor may not require guarantees
only for women-owned or minority-owned businesses. Similarly, a
creditor may not require guarantees only of the married officers of
a business or the married shareholders of a closely held
corporation.
2. Spousal guarantees. The rules in Sec. 202.7(d) bar a
creditor from requiring the signature of a guarantor's spouse just
as they bar the creditor from requiring the signature of an
applicant's spouse. For example, although a creditor may require all
officers of a closely held corporation to personally guarantee a
corporate loan, the creditor may not automatically require that
spouses of married officers also sign the guarantee. If an
evaluation of the financial circumstances of an officer indicates
that an additional signature is necessary, however, the creditor may
require the signature of another person in appropriate circumstances
in accordance with Sec. 202.7(d)(2).
7(e) Insurance.
1. Differences in terms. Differences in the availability, rates,
and other terms on which credit-related casualty insurance or credit
life, health, accident, or disability insurance is offered or
provided to an applicant does not violate Regulation B.
2. Insurance information. A creditor may obtain information
about an applicant's age, sex, or marital status for insurance
purposes. The information may only be used for determining
eligibility and premium rates for insurance, however, and not in
making the credit decision.
Section 202.8--Special Purpose Credit Programs
8(a) Standards for programs.
1. Determining qualified programs. The Board does not determine
whether individual programs qualify for special purpose credit
status, or whether a particular program benefits an ``economically
disadvantaged class of persons.'' The agency or creditor
administering or offering the loan program must make these decisions
regarding the status of its program.
2. Compliance with a program authorized by federal or state law.
A creditor does not violate Regulation B when it complies in good
faith with a regulation promulgated by a government agency
implementing a special purpose credit program under Sec.
202.8(a)(1). It is the agency's responsibility to promulgate a
regulation that is consistent with federal and state law.
3. Expressly authorized. Credit programs authorized by federal
or state law include programs offered pursuant to federal, state, or
local statute, regulation or ordinance, or pursuant to judicial or
administrative order.
4. Creditor liability. A refusal to grant credit to an applicant
is not a violation of the Act or regulation if the applicant does
not meet the eligibility requirements under a special purpose credit
program.
5. Determining need. In designing a special purpose credit
program under Sec. 202.8(a), a for-profit organization must
determine that the program will benefit a class of people who would
otherwise be denied credit or would receive it on less favorable
terms. This determination can be based on a broad analysis using the
organization's own research or data from outside sources, including
governmental reports and studies. For example, a creditor might
design new products to reach consumers who would not meet, or have
not met, its traditional standards of creditworthiness due to such
factors as credit inexperience or the use of credit sources that may
not report to consumer reporting agencies. Or, a bank could review
Home Mortgage Disclosure Act data along with demographic data for
its assessment area and conclude that there is a need for a special
purpose credit program for low-income minority borrowers.
6. Elements of the program. The written plan must contain
information that supports the need for the particular program. The
plan also must either state a specific period of time for which the
program will last, or contain a statement regarding when the program
will be reevaluated to determine if there is a continuing need for
it.
8(b) Rules in other sections.
1. Applicability of rules. A creditor that rejects an
application because the applicant does not meet the eligibility
requirements (common characteristic or financial need, for example)
must nevertheless notify the applicant of action taken as required
by Sec. 202.9.
8(c) Special rule concerning requests and use of information.
1. Request of prohibited basis information. This section permits
a creditor to request and consider certain information that would
otherwise be prohibited by Sec. Sec. 202.5 and 202.6 to determine
an applicant's eligibility for a particular program.
2. Examples. Examples of programs under which the creditor can
ask for and consider information about a prohibited basis are:
i. Energy conservation programs to assist the elderly, for which
the creditor must consider the applicant's age.
ii. Programs under a Minority Enterprise Small Business
Investment Corporation, for which a creditor must consider the
applicant's minority status.
8(d) Special rule in the case of financial need.
1. Request of prohibited basis information. This section permits
a creditor to request and
[[Page 13193]]
consider certain information that would otherwise be prohibited by
Sec. Sec. 202.5 and 202.6, and to require signatures that would
otherwise be prohibited by Sec. 202.7(d).
2. Examples. Examples of programs in which financial need is a
criterion are:
i. Subsidized housing programs for low- to moderate-income
households, for which a creditor may have to consider the
applicant's receipt of alimony or child support, the spouse's or
parents' income, etc.
ii. Student loan programs based on the family's financial need,
for which a creditor may have to consider the spouse's or parents'
financial resources.
3. Student loans. In a guaranteed student loan program, a
creditor may obtain the signature of a parent as a guarantor when
required by federal or state law or agency regulation, or when the
student does not meet the creditor's standards of creditworthiness.
(See Sec. 202.7(d)(1) and (5).) The creditor may not require an
additional signature when a student has a work or credit history
that satisfies the creditor's standards.
Section 202.9--Notifications
1. Use of the term adverse action. The regulation does not
require that a creditor use the term adverse action in communicating
to an applicant that a request for an extension of credit has not
been approved. In notifying an applicant of adverse action as
defined by Sec. 202.2(c)(1), a creditor may use any words or
phrases that describe the action taken on the application.
2. Expressly withdrawn applications. When an applicant expressly
withdraws a credit application, the creditor is not required to
comply with the notification requirements under Sec. 202.9. (The
creditor must comply, however, with the record retention
requirements of the regulation. See Sec. 202.12(b)(3).)
3. When notification occurs. Notification occurs when a creditor
delivers or mails a notice to the applicant's last known address or,
in the case of an oral notification, when the creditor communicates
the credit decision to the applicant.
4. Location of notice. The notifications required under Sec.
202.9 may appear on either or both sides of a form or letter.
5. Prequalification requests. Whether a creditor must provide a
notice of action taken for a prequalification request depends on the
creditor's response to the request, as discussed in comment 2(f)-3.
For instance, a creditor may treat the request as an inquiry if the
creditor evaluates specific information about the consumer and tells
the consumer the loan amount, rate, and other terms of credit the
consumer could qualify for under various loan programs, explaining
the process the consumer must follow to submit a mortgage
application and the information the creditor will analyze in
reaching a credit decision. On the other hand, a creditor has
treated a request as an application, and is subject to the adverse
action notice requirements of Sec. 202.9 if, after evaluating
information, the creditor decides that it will not approve the
request and communicates that decision to the consumer. For example,
if the creditor tells the consumer that it would not approve an
application for a mortgage because of a bankruptcy in the consumer's
record, the creditor has denied an application for credit.
9(a) Notification of action taken, ECOA notice, and statement of
specific reasons.
Paragraph 9(a)(1)
1. Timing of notice--when an application is complete. Once a
creditor has obtained all the information it normally considers in
making a credit decision, the application is complete and the
creditor has 30 days in which to notify the applicant of the credit
decision. (See also comment 2(f)-6.)
2. Notification of approval. Notification of approval may be
express or by implication. For example, the creditor will satisfy
the notification requirement when it gives the applicant the credit
card, money, property, or services requested.
3. Incomplete application--denial for incompleteness. When an
application is incomplete regarding information that the applicant
can provide and the creditor lacks sufficient data for a credit
decision, the creditor may deny the application giving as the reason
for denial that the application is incomplete. The creditor has the
option, alternatively, of providing a notice of incompleteness under
Sec. 202.9(c).
4. Incomplete application--denial for reasons other than
incompleteness. When an application is missing information but
provides sufficient data for a credit decision, the creditor may
evaluate the application, make its credit decision, and notify the
applicant accordingly. If credit is denied, the applicant must be
given the specific reasons for the credit denial (or notice of the
right to receive the reasons); in this instance missing information
or ``incomplete application'' cannot be given as the reason for the
denial.
5. Length of counteroffer. Section 202.9(a)(1)(iv) does not
require a creditor to hold a counteroffer open for 90 days or any
other particular length of time.
6. Counteroffer combined with adverse action notice. A creditor
that gives the applicant a combined counteroffer and adverse action
notice that complies with Sec. 202.9(a)(2) need not send a second
adverse action notice if the applicant does not accept the
counteroffer. A sample of a combined notice is contained in form C-4
of Appendix C to the regulation.
7. Denial of a telephone application. When an application is
made by telephone and adverse action is taken, the creditor must
request the applicant's name and address in order to provide written
notification under this section. If the applicant declines to
provide that information, then the creditor has no further
notification responsibility.
Paragraph 9(a)(3)
1. Coverage. In determining which rules in this paragraph apply
to a given business credit application, a creditor may rely on the
applicant's assertion about the revenue size of the business.
(Applications to start a business are governed by the rules in Sec.
202.9(a)(3)(i).) If an applicant applies for credit as a sole
proprietor, the revenues of the sole proprietorship will determine
which rules govern the application. However, if an applicant applies
for business credit as an individual, the rules in Sec.
202.9(a)(3)(i) apply unless the application is for trade or similar
credit.
2. Trade credit. The term trade credit generally is limited to a
financing arrangement that involves a buyer and a seller--such as a
supplier who finances the sale of equipment, supplies, or inventory;
it does not apply to an extension of credit by a bank or other
financial institution for the financing of such items.
3. Factoring. Factoring refers to a purchase of accounts
receivable, and thus is not subject to the Act or regulation. If
there is a credit extension incident to the factoring arrangement,
the notification rules in Sec. 202.9(a)(3)(ii) apply, as do other
relevant sections of the Act and regulation.
4. Manner of compliance. In complying with the notice provisions
of the Act and regulation, creditors offering business credit may
follow the rules governing consumer credit. Similarly, creditors may
elect to treat all business credit the same (irrespective of revenue
size) by providing notice in accordance with Sec. 202.9(a)(3)(i).
5. Timing of notification. A creditor subject to Sec.
202.9(a)(3)(ii)(A) is required to notify a business credit
applicant, orally or in writing, of action taken on an application
within a reasonable time of receiving a completed application.
Notice provided in accordance with the timing requirements of Sec.
202.9(a)(1) is deemed reasonable in all instances.
9(b) Form of ECOA notice and statement of specific reasons.
Paragraph 9(b)(1)
1. Substantially similar notice. The ECOA notice sent with a
notification of a credit denial or other adverse action will comply
with the regulation if it is ``substantially similar'' to the notice
contained in Sec. 202.9(b)(1). For example, a creditor may add a
reference to the fact that the ECOA permits age to be considered in
certain credit scoring systems, or add a reference to a similar
state statute or regulation and to a state enforcement agency.
Paragraph 9(b)(2)
1. Number of specific reasons. A creditor must disclose the
principal reasons for denying an application or taking other adverse
action. The regulation does not mandate that a specific number of
reasons be disclosed, but disclosure of more than four reasons is
not likely to be helpful to the applicant.
2. Source of specific reasons. The specific reasons disclosed
under Sec. Sec. 202.9(a)(2) and (b)(2) must relate to and
accurately describe the factors actually considered or scored by a
creditor.
3. Description of reasons. A creditor need not describe how or
why a factor adversely affected an applicant. For example, the
notice may say ``length of residence'' rather than ``too short a
period of residence.''
4. Credit scoring system. If a creditor bases the denial or
other adverse action on a credit scoring system, the reasons
disclosed must relate only to those factors actually scored in the
system. Moreover, no factor that was a principal reason for adverse
action may be excluded from disclosure. The creditor must disclose
the actual reasons for denial (for example, ``age of automobile'')
even if the relationship of that factor to predicting
[[Page 13194]]
creditworthiness may not be clear to the applicant.
5. Credit scoring--method for selecting reasons. The regulation
does not require that any one method be used for selecting reasons
for a credit denial or other adverse action that is based on a
credit scoring system. Various methods will meet the requirements of
the regulation. One method is to identify the factors for which the
applicant's score fell furthest below the average score for each of
those factors achieved by applicants whose total score was at or
slightly above the minimum passing score. Another method is to
identify the factors for which the applicant's score fell furthest
below the average score for each of those factors achieved by all
applicants. These average scores could be calculated during the
development or use of the system. Any other method that produces
results substantially similar to either of these methods is also
acceptable under the regulation.
6. Judgmental system. If a creditor uses a judgmental system,
the reasons for the denial or other adverse action must relate to
those factors in the applicant's record actually reviewed by the
person making the decision.
7. Combined credit scoring and judgmental system. If a creditor
denies an application based on a credit evaluation system that
employs both credit scoring and judgmental components, the reasons
for the denial must come from the component of the system that the
applicant failed. For example, if a creditor initially credit scores
an application and denies the credit request as a result of that
scoring, the reasons disclosed to the applicant must relate to the
factors scored in the system. If the application passes the credit
scoring stage but the creditor then denies the credit request based
on a judgmental assessment of the applicant's record, the reasons
disclosed must relate to the factors reviewed judgmentally, even if
the factors were also considered in the credit scoring component. If
the application is not approved or denied as a result of the credit
scoring, but falls into a gray band, and the creditor performs a
judgmental assessment and denies the credit after that assessment,
the reasons disclosed must come from both components of the system.
The same result applies where a judgmental assessment is the first
component of the combined system. As provided in comment 9(b)(2)-1,
disclosure of more than a combined total of four reasons is not
likely to be helpful to the applicant.
8. Automatic denial. Some credit decision methods contain
features that call for automatic denial because of one or more
negative factors in the applicant's record (such as the applicant's
previous bad credit history with that creditor, the applicant's
declaration of bankruptcy, or the fact that the applicant is a
minor). When a creditor denies the credit request because of an
automatic-denial factor, the creditor must disclose that specific
factor.
9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure
of the principal reasons for denying or taking other adverse action
on an application for an extension of credit. The Fair Credit
Reporting Act (FCRA) requires a creditor to disclose when it has
based its decision in whole or in part on information from a source
other than the applicant or its own files. Disclosing that a credit
report was obtained and used in the denial of the application, as
the FCRA requires, does not satisfy the ECOA requirement to disclose
specific reasons. For example, if the applicant's credit history
reveals delinquent credit obligations and the application is denied
for that reason, to satisfy Sec. 202.9(b)(2) the creditor must
disclose that the application was denied because of the applicant's
delinquent credit obligations. To satisfy the FCRA requirement, the
creditor must also disclose that a credit report was obtained and
used in the denial of the application. Sample forms C-1 through C-5
of Appendix C of the regulation provide for the two disclosures.
9(c) Incomplete applications.
Paragraph 9(c)(1)
1. Exception for preapprovals. The requirement to provide a
notice of incompleteness does not apply to preapprovals that
constitute applications under Sec. 202.2(f).
Paragraph 9(c)(2)
1. Reapplication. If information requested by a creditor is
submitted by an applicant after the expiration of the time period
designated by the creditor, the creditor may require the applicant
to make a new application.
Paragraph 9(c)(3)
1. Oral inquiries for additional information. If an applicant
fails to provide the information in response to an oral request, a
creditor must send a written notice to the applicant within the 30-
day period specified in Sec. 202.9(c)(1) and (2). If the applicant
provides the information, the creditor must take action on the
application and notify the applicant in accordance with Sec.
202.9(a).
9(g) Applications submitted through a third party.
1. Third parties. The notification of adverse action may be
given by one of the creditors to whom an application was submitted,
or by a noncreditor third party. If one notification is provided on
behalf of multiple creditors, the notice must contain the name and
address of each creditor. The notice must either disclose the
applicant's right to a statement of specific reasons within 30 days,
or give the primary reasons each creditor relied upon in taking the
adverse action--clearly indicating which reasons relate to which
creditor.
2. Third party notice--enforcement agency. If a single adverse
action notice is being provided to an applicant on behalf of several
creditors and they are under the jurisdiction of different federal
enforcement agencies, the notice need not name each agency;
disclosure of any one of them will suffice.
3. Third-party notice--liability. When a notice is to be
provided through a third party, a creditor is not liable for an act
or omission of the third party that constitutes a violation of the
regulation if the creditor accurately and in a timely manner
provided the third party with the information necessary for the
notification and maintains reasonable procedures adapted to prevent
such violations.
Section 202.10--Furnishing of Credit Information
1. Scope. The requirements of Sec. 202.10 for designating and
reporting credit information apply only to consumer credit
transactions. Moreover, they apply only to creditors that opt to
furnish credit information to credit bureaus or to other creditors;
there is no requirement that a creditor furnish credit information
on its accounts.
2. Reporting on all accounts. The requirements of Sec. 202.10
apply only to accounts held or used by spouses. However, a creditor
has the option to designate all joint accounts (or all accounts with
an authorized user) to reflect the participation of both parties,
whether or not the accounts are held by persons married to each
other.
3. Designating accounts. In designating accounts and reporting
credit information, a creditor need not distinguish between accounts
on which the spouse is an authorized user and accounts on which the
spouse is a contractually liable party.
4. File and index systems. The regulation does not require the
creation or maintenance of separate files in the name of each
participant on a joint or user account, or require any other
particular system of recordkeeping or indexing. It requires only
that a creditor be able to report information in the name of each
spouse on accounts covered by Sec. 202.10. Thus, if a creditor
receives a credit inquiry about the wife, it should be able to
locate her credit file without asking the husband's name.
10(a) Designation of accounts.
1. New parties. When new parties who are spouses undertake a
legal obligation on an account, as in the case of a mortgage loan
assumption, the creditor must change the designation on the account
to reflect the new parties and must furnish subsequent credit
information on the account in the new names.
2. Request to change designation of account. A request to change
the manner in which information concerning an account is furnished
does not alter the legal liability of either spouse on the account
and does not require a creditor to change the name in which the
account is maintained.
Section 202.11--Relation to State Law
11(a) Inconsistent state laws.
1. Preemption determination--New York. The Board has determined
that the following provisions in the state law of New York are
preempted by the federal law, effective November 11, 1988:
i. Article 15, section 296a(1)(b)--Unlawful discriminatory
practices in relation to credit on the basis of race, creed, color,
national origin, age, sex, marital status, or disability. This
provision is preempted to the extent that it bars taking a
prohibited basis into account when establishing eligibility for
certain special-purpose credit programs.
ii. Article 15, section 296a(1)(c)'Unlawful discriminatory
practice to make any record or inquiry based on race, creed, color,
national origin, age, sex, marital status, or disability. This
provision is preempted to the extent that it bars a creditor from
requesting and considering information regarding the particular
characteristics (for example, race,
[[Page 13195]]
national origin, or sex) required for eligibility for special-
purpose credit programs.
2. Preemption determination--Ohio. The Board has determined that
the following provision in the state law of Ohio is preempted by the
federal law, effective July 23, 1990:
i. Section 4112.021(B)(1)--Unlawful discriminatory practices in
credit transactions. This provision is preempted to the extent that
it bars asking or favorably considering the age of an elderly
applicant; prohibits the consideration of age in a credit scoring
system; permits without limitation the consideration of age in real
estate transactions; and limits the consideration of age in special-
purpose credit programs to certain government-sponsored programs
identified in the state law.
Section 202.12--Record Retention
12(a) Retention of prohibited information.
1. Receipt of prohibited information. Unless the creditor
specifically requested such information, a creditor does not violate
this section when it receives prohibited information from a consumer
reporting agency.
2. Use of retained information. Although a creditor may keep in
its files prohibited information as provided in Sec. 202.12(a), the
creditor may use the information in evaluating credit applications
only if permitted to do so by Sec. 202.6.
12(b) Preservation of records.
1. Copies. Copies of the original record include carbon copies,
photocopies, microfilm or microfiche copies, or copies produced by
any other accurate retrieval system, such as documents stored and
reproduced by computer. A creditor that uses a computerized or
mechanized system need not keep a paper copy of a document (for
example, of an adverse action notice) if it can regenerate all
pertinent information in a timely manner for examination or other
purposes.
2. Computerized decisions. A creditor that enters information
items from a written application into a computerized or mechanized
system and makes the credit decision mechanically, based only on the
items of information entered into the system, may comply with Sec.
202.12(b) by retaining the information actually entered. It is not
required to store the complete written application, nor is it
required to enter the remaining items of information into the
system. If the transaction is subject to Sec. 202.13, however, the
creditor is required to enter and retain the data on personal
characteristics in order to comply with the requirements of that
section.
Paragraph 12(b)(3)
1. Withdrawn and brokered applications. In most cases, the 25-
month retention period for applications runs from the date a
notification is sent to the applicant granting or denying the credit
requested. In certain transactions, a creditor is not obligated to
provide a notice of the action taken. (See, for example, comment 9-
2.) In such cases, the 25-month requirement runs from the date of
application, as when:
i. An application is withdrawn by the applicant.
ii. An application is submitted to more than one creditor on
behalf of the applicant, and the application is approved by one of
the other creditors.
12(b)(6) Self-tests
1. The rule requires all written or recorded information about a
self-test to be retained for 25 months after a self-test has been
completed. For this purpose, a self-test is completed after the
creditor has obtained the results and made a determination about
what corrective action, if any, is appropriate. Creditors are
required to retain information about the scope of the self-test, the
methodology used and time period covered by the self-test, the
report or results of the self-test including any analysis or
conclusions, and any corrective action taken in response to the
self-test.
12(b)(7) Preapplication marketing information.
1. Prescreened credit solicitations. The rule requires creditors
to retain copies of prescreened credit solicitations. For purposes
of this regulation, a prescreened solicitation is an ``offer of
credit'' as described in 15 U.S.C. 1681a(1) of the Fair Credit
Reporting Act. A creditor complies with this rule if it retains a
copy of each solicitation mailing that contains different terms,
such as the amount of credit offered, annual percentage rate, or
annual fee.
2. List of criteria. A creditor must retain the list of criteria
used to select potential recipients. This includes the criteria used
by the creditor both to determine the potential recipients of the
particular solicitation and to determine who will actually be
offered credit.
3. Correspondence. A creditor may retain correspondence relating
to consumers' complaints about prescreened solicitations in any
manner that is reasonably accessible and is understandable to
examiners. There is no requirement to establish a separate database
or set of files for such correspondence, or to match consumer
complaints with specific solicitation programs.
Section 202.13--Information for Monitoring Purposes
13(a) Information to be requested.
1. Natural person. Section 202.13 applies only to applications
from natural persons.
2. Principal residence. The requirements of Sec. 202.13 apply
only if an application relates to a dwelling that is or will be
occupied by the applicant as the principal residence. A credit
application related to a vacation home or a rental unit is not
covered. In the case of a two- to four-unit dwelling, the
application is covered if the applicant intends to occupy one of the
units as a principal residence.
3. Temporary financing. An application for temporary financing
to construct a dwelling is not subject to Sec. 202.13. But an
application for both a temporary loan to finance construction of a
dwelling and a permanent mortgage loan to take effect upon the
completion of construction is subject to Sec. 202.13.
4. New principal residence. A person can have only one principal
residence at a time. However, if a person buys or builds a new
dwelling that will become that person's principal residence within a
year or upon completion of construction, the new dwelling is
considered the principal residence for purposes of Sec. 202.13.
5. Transactions not covered. The information-collection
requirements of this section apply to applications for credit
primarily for the purchase or refinancing of a dwelling that is or
will become the applicant's principal residence. Therefore,
applications for credit secured by the applicant's principal
residence but made primarily for a purpose other than the purchase
or refinancing of the principal residence (such as loans for home
improvement and debt consolidation) are not subject to the
information-collection requirements. An application for an open-end
home equity line of credit is not subject to this section unless it
is readily apparent to the creditor when the application is taken
that the primary purpose of the line is for the purchase or
refinancing of a principal dwelling.
6. Refinancings. A refinancing occurs when an existing
obligation is satisfied and replaced by a new obligation undertaken
by the same borrower. A creditor that receives an application to
refinance an existing extension of credit made by that creditor for
the purchase of the applicant's dwelling may request the monitoring
information again but is not required to do so if it was obtained in
the earlier transaction.
7. Data collection under Regulation C. See comment 5(a)(2)-2.
13(b) Obtaining of information.
1. Forms for collecting data. A creditor may collect the
information specified in Sec. 202.13(a) either on an application
form or on a separate form referring to the application. The
applicant must be offered the option to select more than one racial
designation.
2. Written applications. The regulation requires written
applications for the types of credit covered by Sec. 202.13. A
creditor can satisfy this requirement by recording on paper or by
means of computer the information that the applicant provides orally
and that the creditor normally considers in a credit decision.
3. Telephone, mail applications.
i. A creditor that accepts an application by telephone or mail
must request the monitoring information.
ii. A creditor that accepts an application by mail need not make
a special request for the monitoring information if the applicant
has failed to provide it on the application form returned to the
creditor.
iii. If it is not evident on the face of an application that it
was received by mail, telephone, or via an electronic medium, the
creditor should indicate on the form or other application record how
the application was received.
4. Video and other electronic-application processes.
i. If a creditor takes an application through an electronic
medium that allows the creditor to see the applicant, the creditor
must treat the application as taken in person. The creditor must
note the monitoring information on the basis of visual observation
or surname, if the applicant chooses not to provide the information.
ii. If an applicant applies through an electronic medium without
video capability,
[[Page 13196]]
the creditor treats the application as if it were received by mail.
5. Applications through loan-shopping services. When a creditor
receives an application through an unaffiliated loan-shopping
service, it does not have to request the monitoring information for
purposes of the ECOA or Regulation B. Creditors subject to the Home
Mortgage Disclosure Act should be aware, however, that data
collection may be called for under Regulation C (12 CFR part 203),
which generally requires creditors to report, among other things,
the sex and race of an applicant on brokered applications or
applications received through a correspondent.
6. Inadvertent notation. If a creditor inadvertently obtains the
monitoring information in a dwelling-related transaction not covered
by Sec. 202.13, the creditor may process and retain the application
without violating the regulation.
13(c) Disclosure to applicants.
1. Procedures for providing disclosures. The disclosure to an
applicant regarding the monitoring information may be provided in
writing. Appendix B contains a sample disclosure. A creditor may
devise its own disclosure so long as it is substantially similar.
The creditor need not orally request the monitoring information if
it is requested in writing.
13(d) Substitute monitoring program.
1. Substitute program. An enforcement agency may adopt, under
its established rulemaking or enforcement procedures, a program
requiring creditors under its jurisdiction to collect information in
addition to information required by this section.
Section 202.14--Rules on Providing Appraisal Reports
14(a) Providing appraisals.
1. Coverage. This section covers applications for credit to be
secured by a lien on a dwelling, as that term is defined in Sec.
202.14(c), whether the credit is for a business purpose (for
example, a loan to start a business) or a consumer purpose (for
example, a loan to finance a child's education).
2. Renewals. This section applies when an applicant requests the
renewal of an existing extension of credit and the creditor obtains
a new appraisal report. This section does not apply when a creditor
uses the appraisal report previously obtained to evaluate the
renewal request.
14(a)(2)(i) Notice.
1. Multiple applicants. When an application that is subject to
this section involves more than one applicant, the notice about the
appraisal report need only be given to one applicant, but it must be
given to the primary applicant where one is readily apparent.
14(a)(2)(ii) Delivery.
1. Reimbursement. Creditors may charge for photocopy and postage
costs incurred in providing a copy of the appraisal report, unless
prohibited by state or other law. If the consumer has already paid
for the report--for example, as part of an application fee--the
creditor may not require additional fees for the appraisal (other
than photocopy and postage costs).
14(c) Definitions.
1. Appraisal reports. Examples of appraisal reports are:
i. A report prepared by an appraiser (whether or not licensed or
certified), including written comments and other documents submitted
to the creditor in support of the appraiser's estimate or opinion of
the property's value.
ii. A document prepared by the creditor's staff that assigns
value to the property, if a third-party appraisal report has not
been used.
iii. An internal review document reflecting that the creditor's
valuation is different from a valuation in a third party's appraisal
report (or different from valuations that are publicly available or
valuations such as manufacturers' invoices for mobile homes).
2. Other reports. The term ``appraisal report'' does not cover
all documents relating to the value of the applicant's property.
Examples of reports not covered are:
i. Internal documents, if a third-party appraisal report was
used to establish the value of the property.
ii. Governmental agency statements of appraised value.
iii. Valuations lists that are publicly available (such as
published sales prices or mortgage amounts, tax assessments, and
retail price ranges) and valuations such as manufacturers' invoices
for mobile homes.
Section 202.15--Incentives for Self-Testing and Self-Correction
15(a) General rules.
15(a)(1) Voluntary self-testing and correction.
1. Activities required by any governmental authority are not
voluntary self-tests. A governmental authority includes both
administrative and judicial authorities for federal, state, and
local governments.
15(a)(2) Corrective action required.
1. To qualify for the privilege, appropriate corrective action
is required when the results of a self-test show that it is more
likely than not that there has been a violation of the ECOA or this
regulation. A self-test is also privileged when it identifies no
violations.
2. In some cases, the issue of whether certain information is
privileged may arise before the self-test is complete or corrective
actions are fully under way. This would not necessarily prevent a
creditor from asserting the privilege. In situations where the self-
test is not complete, for the privilege to apply the lender must
satisfy the regulation's requirements within a reasonable period of
time. To assert the privilege where the self-test shows a likely
violation, the rule requires, at a minimum, that the creditor
establish a plan for corrective action and a method to demonstrate
progress in implementing the plan. Creditors must take appropriate
corrective action on a timely basis after the results of the self-
test are known.
3. A creditor's determination about the type of corrective
action needed, or a finding that no corrective action is required,
is not conclusive in determining whether the requirements of this
paragraph have been satisfied. If a creditor's claim of privilege is
challenged, an assessment of the need for corrective action or the
type of corrective action that is appropriate must be based on a
review of the self-testing results, which may require an in camera
inspection of the privileged documents.
15(a)(3) Other privileges.
1. A creditor may assert the privilege established under this
section in addition to asserting any other privilege that may apply,
such as the attorney-client privilege or the work-product privilege.
Self-testing data may be privileged under this section whether or
not the creditor's assertion of another privilege is upheld.
15(b) Self-test defined.
15(b)(1) Definition.
Paragraph 15(b)(1)(i)
1. To qualify for the privilege, a self-test must be sufficient
to constitute a determination of the extent or effectiveness of the
creditor's compliance with the Act and Regulation B. Accordingly, a
self-test is only privileged if it was designed and used for that
purpose. A self-test that is designed or used to determine
compliance with other laws or regulations or for other purposes is
not privileged under this rule. For example, a self-test designed to
evaluate employee efficiency or customers' satisfaction with the
level of service provided by the creditor is not privileged even if
evidence of discrimination is uncovered incidentally. If a self-test
is designed for multiple purposes, only the portion designed to
determine compliance with the ECOA is eligible for the privilege.
Paragraph 15(b)(1)(ii)
1. The principal attribute of self-testing is that it
constitutes a voluntary undertaking by the creditor to produce new
data or factual information that otherwise would not be available
and could not be derived from loan or application files or other
records related to credit transactions. Self-testing includes, but
is not limited to, the practice of using fictitious applicants for
credit (testers), either with or without the use of matched pairs. A
creditor may elect to test a defined segment of its business, for
example, loan applications processed by a specific branch or loan
officer, or applications made for a particular type of credit or
loan program. A creditor also may use other methods of generating
information that is not available in loan and application files,
such as surveying mortgage loan applicants. To the extent permitted
by law, creditors might also develop new methods that go beyond
traditional pre-application testing, such as hiring testers to
submit fictitious loan applications for processing.
2. The privilege does not protect a creditor's analysis
performed as part of processing or underwriting a credit
application. A creditor's evaluation or analysis of its loan files,
Home Mortgage Disclosure Act data, or similar types of records (such
as broker or loan officer compensation records) does not produce new
information about a creditor's compliance and is not a self-test for
purposes of this section. Similarly, a statistical analysis of data
derived from existing loan files is not privileged.
15(b)(3) Types of information not privileged.
[[Page 13197]]
Paragraph 15(b)(3)(i)
1. The information listed in this paragraph is not privileged
and may be used to determine whether the prerequisites for the
privilege have been satisfied. Accordingly, a creditor might be
asked to identify the self-testing method, for example, whether
preapplication testers were used or data were compiled by surveying
loan applicants. Information about the scope of the self-test (such
as the types of credit transactions examined, or the geographic area
covered by the test) also is not privileged.
Paragraph 15(b)(3)(ii)
1. Property appraisal reports, minutes of loan committee
meetings or other documents reflecting the basis for a decision to
approve or deny an application, loan policies or procedures,
underwriting standards, and broker compensation records are examples
of the types of records that are not privileged. If a creditor
arranges for testers to submit loan applications for processing, the
records are not related to actual credit transactions for purposes
of this paragraph and may be privileged self-testing records.
15(c) Appropriate corrective action.
1. The rule only addresses the corrective actions required for a
creditor to take advantage of the privilege in this section. A
creditor may be required to take other actions or provide additional
relief if a formal finding of discrimination is made.
15(c)(1) General requirement.
1. Appropriate corrective action is required even though no
violation has been formally adjudicated or admitted by the creditor.
In determining whether it is more likely than not that a violation
occurred, a creditor must treat testers as if they are actual
applicants for credit. A creditor may not refuse to take appropriate
corrective action under this section because the self-test used
fictitious loan applicants. The fact that a tester's agreement with
the creditor waives the tester's legal right to assert a violation
does not eliminate the requirement for the creditor to take
corrective action, although no remedial relief for the tester is
required under paragraph 15(c)(3).
15(c)(2) Determining the scope of appropriate corrective action.
1. Whether a creditor has taken or is taking corrective action
that is appropriate will be determined on a case-by-case basis.
Generally, the scope of the corrective action that is needed to
preserve the privilege is governed by the scope of the self-test.
For example, a creditor that self-tests mortgage loans and discovers
evidence of discrimination may focus its corrective actions on
mortgage loans, and is not required to expand its testing to other
types of loans.
2. In identifying the policies or practices that are a likely
cause of the violation, a creditor might identify inadequate or
improper lending policies, failure to implement established
policies, employee conduct, or other causes. The extent and scope of
a likely violation may be assessed by determining which areas of
operations are likely to be affected by those policies and
practices, for example, by determining the types of loans and stages
of the application process involved and the branches or offices
where the violations may have occurred.
3. Depending on the method and scope of the self-test and the
results of the test, appropriate corrective action may include one
or more of the following:
i. If the self-test identifies individuals whose applications
were inappropriately processed, offering to extend credit if the
application was improperly denied and compensating such persons for
out-of-pocket costs and other compensatory damages;
ii. Correcting institutional policies or procedures that may
have contributed to the likely violation, and adopting new policies
as appropriate;
iii. Identifying and then training and/or disciplining the
employees involved;
iv. Developing outreach programs, marketing strategies, or loan
products to serve more effectively segments of the lender's markets
that may have been affected by the likely discrimination; and
v. Improving audit and oversight systems to avoid a recurrence
of the likely violations.
15(c)(3) Types of relief.
Paragraph 15(c)(3)(ii)
1. The use of pre-application testers to identify policies and
practices that illegally discriminate does not require creditors to
review existing loan files for the purpose of identifying and
compensating applicants who might have been adversely affected.
2. If a self-test identifies a specific applicant who was
discriminated against on a prohibited basis, to qualify for the
privilege in this section the creditor must provide appropriate
remedial relief to that applicant; the creditor is not required to
identify other applicants who might also have been adversely
affected.
Paragraph 15(c)(3)(iii)
1. A creditor is not required to provide remedial relief to an
applicant that would not be available by law. An applicant might
also be ineligible for certain types of relief due to changed
circumstances. For example, a creditor is not required to offer
credit to a denied applicant if the applicant no longer qualifies
for the credit due to a change in financial circumstances, although
some other type of relief might be appropriate.
15(d)(1) Scope of privilege.
1. The privilege applies with respect to any examination,
investigation or proceeding by federal, state, or local government
agencies relating to compliance with the Act or this regulation.
Accordingly, in a case brought under the ECOA, the privilege
established under this section preempts any inconsistent laws or
court rules to the extent they might require disclosure of
privileged self-testing data. The privilege does not apply in other
cases (such as in litigation filed solely under a state's fair
lending statute). In such cases, if a court orders a creditor to
disclose self-test results, the disclosure is not a voluntary
disclosure or waiver of the privilege for purposes of paragraph
15(d)(2); a creditor may protect the information by seeking a
protective order to limit availability and use of the self-testing
data and prevent dissemination beyond what is necessary in that
case. Paragraph 15(d)(1) precludes a party who has obtained
privileged information from using it in a case brought under the
ECOA, provided the creditor has not lost the privilege through
voluntary disclosure under paragraph 15(d)(2).
15(d)(2) Loss of privilege.
Paragraph 15(d)(2)(i)
1. A creditor's corrective action, by itself, is not considered
a voluntary disclosure of the self-test report or results. For
example, a creditor does not disclose the results of a self-test
merely by offering to extend credit to a denied applicant or by
inviting the applicant to reapply for credit. Voluntary disclosure
could occur under this paragraph, however, if the creditor disclosed
the self-test results in connection with a new offer of credit.
2. The disclosure of self-testing results to an independent
contractor acting as an auditor or consultant for the creditor on
compliance matters does not result in loss of the privilege.
Paragraph 15(d)(2)(ii)
1. The privilege is lost if the creditor discloses privileged
information, such as the results of the self-test. The privilege is
not lost if the creditor merely reveals or refers to the existence
of the self-test.
Paragraph 15(d)(2)(iii)
1. A creditor's claim of privilege may be challenged in a court
or administrative law proceeding with appropriate jurisdiction. In
resolving the issue, the presiding officer may require the creditor
to produce privileged information about the self-test.
Paragraph 15(d)(3) Limited use of privileged information
1. A creditor may be required to produce privileged documents
for the purpose of determining a penalty or remedy after a violation
of the ECOA or Regulation B has been formally adjudicated or
admitted. A creditor's compliance with such a requirement does not
evidence the creditor's intent to forfeit the privilege.
Section 202.16--Requirements for Electronic Communication.
16(b) General Rule.
1. Relationship to the E-Sign Act. The E-Sign Act authorizes the
use of electronic disclosures. It does not affect any requirement
imposed under this part other than a provision that requires
disclosures to be in paper form, and it does not affect the content
or timing of disclosures. Electronic disclosures are subject to the
regulation's format, timing, and retainability rules and the clear
and conspicuous standard. For example, to satisfy the clear and
conspicuous standard for disclosures, electronic disclosures must
use visual text. The clear and conspicuous standard and
retainability requirements apply to all disclosures provided
electronically--those expressly required by the Act and regulation
to be in writing, and those provided in writing where the creditor
has the option to give the disclosure orally or in writing.
2. Clear and conspicuous standard. A creditor must provide
electronic disclosures using a clear and conspicuous format. Also,
in accordance with the E-Sign Act:
i. The creditor must disclose the requirements for accessing and
retaining disclosures in that format;
[[Page 13198]]
ii. The applicant must demonstrate the ability to access the
information electronically and affirmatively consent to electronic
delivery; and
iii. The creditor must provide the disclosures in accordance
with the specified requirements.
3. Timing and effective delivery. i. When an applicant applies
for credit on-line. When a creditor permits an applicant to apply
for credit on-line, the applicant must be required to access the
disclosures required at application before submitting the
application. A link to the disclosures satisfies the timing rule if
the applicant cannot bypass the disclosures before submitting the
application. Or the disclosures must automatically appear on the
screen, even if multiple screens are required to view all of the
information. The creditor is not required to confirm that the
applicant has read the disclosures.
ii. Appraisals and adverse action. Disclosures provided by e-
mail are timely based on when the disclosures are sent. Disclosures
posted at an Internet Web site, such as adverse action notices or
copies of appraisals, are timely when the creditor has both made the
disclosures available and sent a notice alerting the applicant that
the disclosures have been posted. For example, under Sec. 202.9, a
creditor must provide a notice of action taken within 30 days of
receiving a completed application. For an adverse action notice
posted on the Internet, a creditor must post the notice and notify
the applicant of its availability within 30 days of receiving the
applicant's completed application.
4. Retainability of disclosures. Creditors satisfy the
requirement that disclosures be in a form that the applicant may
keep if electronic disclosures are delivered in a format that is
capable of being retained (such as by printing or storing
electronically). The format must also be consistent with the
information required to be provided under section 101(c)(1)(C)(i) of
the E-Sign Act (15 U.S.C. 7001(c)(1)(C)(i)) about the hardware and
software requirements for accessing and retaining electronic
disclosures.
5. Disclosures provided on creditor's equipment. A creditor that
controls the equipment providing electronic disclosures to
applicants (for example, a computer terminal in a creditor's lobby
or an automated loan machine at a public kiosk) must ensure that the
equipment satisfies the regulation's requirements to provide timely
disclosures in a clear and conspicuous format and in a form that the
applicant may keep. For example, if disclosures are required at the
time of an on-line application, the disclosures must be sent to the
applicant's e-mail address or must be made available at another
location such as the creditor's Internet Web site, unless the
creditor provides a printer that automatically prints the
disclosures.
16(d) Address or Location to Receive Electronic Communication.
Paragraph 16(d)(1)
1. Electronic address. An applicant's electronic address is an
e-mail address that is not limited to receiving communication
transmitted solely by the creditor.
Paragraph 16(d)(2)
1. Identifying account involved. A creditor may identify a
specific account in a variety of ways and is not required to
identify an account by reference to the account number. For example,
where the applicant has only one credit card account, and no
confusion would result, the creditor may refer to ``your credit card
account.'' If the applicant has two credit card accounts, the
creditor may, for example, differentiate accounts based on the card
program or by using a truncated account number.
2. 90-day rule. The actual disclosures provided to an applicant
must be available for at least 90 days, but the creditor has
discretion to determine whether they should be available at the same
location for the entire period.
16(e) Redelivery.
1. E-mail returned as undeliverable. If an e-mail to the
applicant (containing an alert notice or other disclosure) is
returned as undeliverable, the redelivery requirement is satisfied
if, for example, the creditor sends the disclosure to a different e-
mail address or postal address that the creditor has on file for the
applicant. Sending the disclosures a second time to the same
electronic address is not sufficient if the creditor has a different
address for the applicant on file.
16(f) Electronic Signatures.
1. Relationship to the E-Sign Act. The E-Sign Act provides that
electronic signatures have the same validity as handwritten
signatures. Section 106 of the E-Sign Act (15 U.S.C. 7006) defines
an electronic signature. To comply with the E-Sign Act, an
electronic signature must be executed or adopted by an applicant
with the intent to sign the record. Accordingly, regardless of the
technology used to meet this requirement, the process must evidence
the applicant's identity.
Section 202.17--Enforcement, Penalties, and Liabilities
17(c) Failure of compliance.
1. Inadvertent errors. Inadvertent errors include, but are not
limited to, clerical mistake, calculation error, computer
malfunction, and printing error. An error of legal judgment is not
an inadvertent error under the regulation.
2. Correction of error. For inadvertent errors that occur under
Sec. Sec. 202.12 and 202.13, this section requires that they be
corrected prospectively.
Appendix B--Model Application Forms
1. Freddie Mac/Fannie Mae form--residential loan application.
The uniform residential loan application form (Freddie Mac 65/Fannie
Mae 1003), including supplemental form (Freddie Mac 65A/Fannie Mae
1003A), prepared by the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association and dated October 1992 may
be used by creditors without violating this regulation. Creditors
that are governed by the monitoring requirements of this regulation
(which limits collection to applications primarily for the purchase
or refinancing of the applicant's principal residence) should
delete, strike, or modify the data-collection section on the form
when using it for transactions not covered by Sec. 202.13(a) to
ensure that they do not collect the information. Creditors that are
subject to more extensive collection requirements by a substitute
monitoring program under Sec. 202.13(d) or by the Home Mortgage
Disclosure Act (HMDA) may use the form as issued, in compliance with
the substitute program or HMDA.
2. FHLMC/FNMA form--home improvement loan application. The home-
improvement and energy loan application form (FHLMC 703/FNMA 1012),
prepared by the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association and dated October 1986,
complies with the requirements of the regulation for some creditors
but not others because of the form's section ``Information for
Government Monitoring Purposes.'' Creditors that are governed by
Sec. 202.13(a) of the regulation (which limits collection to
applications primarily for the purchase or refinancing of the
applicant's principal residence) should delete, strike, or modify
the data-collection section on the form when using it for
transactions not covered by Sec. 202.13(a) to ensure that they do
not collect the information. Creditors that are subject to more
extensive collection requirements by a substitute monitoring program
under Sec. 202.13(d) may use the form as issued, in compliance with
that substitute program.
Appendix C--Sample Notification Forms
1. Form C-9. Creditors may design their own form, add to, or
modify the model form to reflect their individual policies and
procedures. For example, a creditor may want to add:
i. A telephone number that applicants may call to leave their
name and the address to which an appraisal report should be sent.
ii. A notice of the cost the applicant will be required to pay
the creditor for the appraisal or a copy of the report.
By order of the Board of Governors of the Federal Reserve
System, March 5, 2003.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 03-5666 Filed 3-17-03; 8:45 am]
BILLING CODE 6210-01-P