[Federal Register Volume 60, Number 109 (Wednesday, June 7, 1995)]
[Rules and Regulations]
[Pages 29965-29969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13862]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 202
[Regulation B; Docket No. R-0865]
Equal Credit Opportunity
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff interpretation.
-----------------------------------------------------------------------
SUMMARY: The Board is revising its official staff commentary to
Regulation B (Equal Credit Opportunity). The commentary applies and
interprets the requirements of Regulation B and is a substitute for
individual staff interpretations. The revisions to the commentary
provide guidance on several issues including disparate treatment,
special purpose credit programs, credit scoring systems, and marital
status discrimination.
EFFECTIVE DATE: June 5, 1995.
FOR FURTHER INFORMATION CONTACT: Jane Jensen Gell, Sheilah Goodman,
Natalie E. Taylor, or Manley Williams, Staff Attorneys, Division of
Consumer and Community Affairs, Board of Governors of the Federal
Reserve System, at (202) 452-3667 or 452-2412; for the hearing impaired
only, contact Dorothea Thompson, Telecommunications Device for the
Deaf, (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691-1691f,
makes it unlawful for creditors to discriminate in any aspect of a
credit transaction on the basis of sex, marital status, age, race,
national origin, color, religion, receipt of public assistance, or the
exercise of rights under the Consumer Credit Protection Act. The
Board's Regulation B (12 CFR Part 202) implements this statute. In
addition, the Board's official staff commentary (12 CFR Part 202 (Supp.
I)) interprets the regulation. The commentary provides general guidance
in applying the regulation to various credit transactions and is
updated periodically. [[Page 29966]]
II. Summary of Revisions to the Commentary
In December 1994 (59 FR 67235, December 29, 1994), the Board
proposed amendments to the staff commentary to Regulation B. The Board
received nearly 100 letters on the proposal. After reviewing the
comment letters and upon further analysis, the Board is adopting final
amendments to the staff commentary.
Section 202.2--Definitions
2(c)(1)(i) Application for Extension of Credit
The Board proposed a new comment 2(c)(2)(iii)-2 to address court
decisions that misapplied portions of that section. Commenters
suggested that to the extent the comment defined types of adverse
action, it more clearly fit under section 202.2(c)(1)(i). The Board
agrees. The Board is adopting comment 2(c)(1)(i)-1 to clarify that the
refusal to refinance or extend the term of a business or other loan is
adverse action if the applicant applied in accordance with the
creditor's procedures.
2(c)(2)(iii) Application for Increase in Available Credit
The Board proposed comment 2(c)(2)(iii)-2 to clarify that a denial
of an application to increase available credit or for a change in terms
is adverse action. Many commenters expressed concern that the phrase
``change in terms'' was overly broad, requiring a creditor to provide
an adverse action notice in a variety of situations in which it is not
now required. The Board has changed the comment heading and has
narrowed its scope to refer only to applications to increase credit.
2(p) Empirically Derived and Other Credit Scoring Systems
The Board has adopted comment 2(p)-3, regarding pooled data scoring
systems, as proposed.
The proposed comment 2(p)-4 clarified that a credit scoring
system--even if ``empirically derived, demonstrably and statistically
sound''--is subject to review under the ECOA and Regulation B. When a
scoring system is used in conjunction with individual discretion,
disparate treatment could still occur. In addition, a system could have
a disparate impact on a prohibited basis, and could be challenged.
Whether such a challenge would be successful depends on a variety of
factors, as commenters noted.
More generally, commenters questioned how the standards set out in
the proposed comment related to the discussion of disparate impact in
comment 6(a)-2. Commenters believed that the proposal's reference to
disparate impact was attempting to describe a highly complex area of
law in a condensed manner. The Board has deleted the proposed reference
to the standards of proof and burdens of persuasion the parties must
meet, and instead has added a reference to comment 6(a)-2.
Section 202.4--General Rule Prohibiting Discrimination
Comment 4-1 addresses the legal concept known as ``disparate
treatment,'' which is a particular type of discrimination. The proposed
amendment clarified that disparate treatment might be found even absent
a conscious will to discriminate. Some commenters expressed concern
that the proposal meant that ``intent,'' as that term has been
interpreted by courts in discrimination cases, is not an element of
disparate treatment. The Board has revised the comment to clarify that
treating individuals differently is not unlawful per se. However,
treating individuals differently on a prohibited basis is unlawful
discrimination (``disparate treatment'') if there is no credible,
nondiscriminatory reason that explains the difference in treatment. In
the examples given, the differential treatment would constitute
disparate treatment if the creditor lacked a legitimate
nondiscriminatory reason for its action, or if the asserted reason was
found to be a pretext for discrimination.
Section 202.5a--Rules on Providing Appraisal Reports
5a(a) Providing Appraisals
The Board proposed comment 5a(a)-1 to clarify that section 202.5a
applies to applications for credit to be secured by a dwelling, whether
the credit is for a business or a consumer purpose. Commenters
generally supported the proposed comment. It was suggested that the
Board should eliminate a reference to the ``consumer's'' dwelling,
given the definition of ``dwelling'' used in sections 202.5a(a) and
(c). It was noted that ``consumer's dwelling'' could be read as both
more limited than ``dwelling'' (including only transactions that
involve a consumer's dwelling, as ``consumer'' is defined elsewhere)
and more expansive (any dwelling, not limited to one-to-four family
dwellings). The Board has revised the comment accordingly.
The Board proposed comment 5a(a)-2 to clarify that section 202.5a
applies to a request for renewal of an existing extension of credit
secured by a dwelling if the creditor obtains and uses a new appraisal
report in evaluating the request.
Section 202.5a does not apply if a consumer requests renewal of
existing credit and the creditor does not obtain a new appraisal.
Commenters supported this clarification.
5a(a)(2)(i) Notice
The Board proposed comment 5a(a)(2)(i)-1 to clarify the rule for
credit involving more than one applicant, which parallels the rule in
section 202.9 concerning notices of action taken where there is more
than one applicant. Commenters supported this clarification.
5a(a)(2)(ii) Delivery
The Board proposed a new comment 5a(a)(2)(ii)-1 to clarify that in
all cases creditors may seek reimbursement for photocopy and postage
costs incurred in providing the copy of the appraisal report unless
prohibited by state or other law, or unless the consumer has already
paid for the report.
The proposal provided that if the creditor does not otherwise
charge for the report, as in ``no closing cost'' loans, the creditor
may not require payment solely from those consumers who request a copy
of the report. Commenters were divided on this issue. Some noted that
these loans benefit consumers by reducing the upfront costs of applying
for credit. Several commenters believed that a prohibition on
reimbursement for an appraisal report for ``no closing cost'' loans
would have a chilling effect on creditors' willingness to offer these
products. Commenters said that for no-cost loans that close, creditors
who waive closing costs (including the cost of an appraisal) recover
those costs over the term of the loan; they do not recover the cost of
the appraisal for no-cost loans that are denied or withdrawn.
Commenters requested that in such cases, the Board allow creditors to
charge for the cost of the appraisal when applicants ask for a copy of
the report.
The statute gives a creditor the right to require an applicant to
reimburse the creditor for the cost of the appraisal. Upon further
analysis, the Board believes that creditors may collect the costs of an
appraisal unless the consumer has already paid for the report.
5a(c) Definitions
New comments 5a(c)-1 and 5a(c)-2 address the scope of the term
``appraisal report.'' Under the proposal, publicly available listings
of valuations for dwellings, such as published home sales prices or
mortgage amounts, are not [[Page 29967]] covered. The appraisal rules
guard against discriminatory evaluations of a dwelling's value. The
Board believes that publicly available reports of home sales prices or
tax assessments, among others, are unlikely to be influenced by the
type of subjectivity the law is intended to eliminate.
Commenters generally supported the clarifications to the
definitions. The Board has adopted the comments as proposed.
Section 202.6--Rules Concerning Evaluation of Applications
6(a) General Rule Concerning Use of Information
The Board did not propose commentary under this section. In
addressing the issue of disparate impact under proposed comment 2(p)-4,
however, many commenters discussed comment 2 to this section. The
commenters uniformly expressed concern, in regard to this comment and
comment 2(p)-4, about the Board's articulation of the standards of
proof and burdens of persuasion under a disparate impact analysis
(sometimes referred to as the effects test). The Board recognizes that
this is an evolving area of law, one in which creditors and consumers
alike would benefit from more specificity. However, given that the
Board did not propose any amendments to this section of the commentary,
the only change to the existing commentary is the addition of a
reference to the Civil Rights Act of 1991, which codifies the standards
used for disparate impact under Title VII. The Board will consider
addressing these issues further in future commentary proposals.
6(b)(1) Prohibited Basis--Marital Status
The Board proposed to revise comment 6(b)(1)-1 to clarify that if a
creditor chooses to offer joint credit, the creditor generally may not
take the applicants' marital status into account in credit evaluations,
except to the extent necessary for determining rights and remedies
under state law. Commenters generally supported this clarification.
A few commenters requested clarification on how the commentary
applied to other parties such as cosigners or guarantors. Creditors are
not required to combine the debts and incomes of two parties when one
of them is a cosigner or guarantor for the other. (Comment 7(d)(5)-1
provides guidance on standards that creditors may use in requesting
additional parties.)
Section 202.8--Special-Purpose Credit Programs
8(a) Standards for Programs
The Board proposed comments 8(a)-5 and -6 to clarify the
requirements that for-profit organizations must meet to establish
special-purpose credit programs under section 202.8(a).
Commenters generally supported both comments. In response to some
commenters' concerns, the Board has added language to comment 8(a)-5
clarifying that the program can be designed to benefit a class of
people who would otherwise receive credit on less favorable terms, as
well as those who would be denied credit.
Two issues have been clarified in comment 8(a)-6. First, some
commenters were concerned about the statement that the plan should
specify the length of time that it will be in effect and that it be
reevaluated after that time. Some commenters said that this added
regulatory burden. The Board believes that because special purpose
credit programs are designed to fulfill a particular need, they must be
reevaluated periodically to determine if there is a continuing need for
the program. The comment has been amended to reflect this position.
Second, the reference to avoiding a negative effect on individuals who
are not in the class the program was designed to benefit, by denying
them rights or opportunities they might otherwise have, has been
deleted because it is not clear precisely how this condition applies in
the credit context.
Section 202.9--Notifications
The Board proposed comment 9-5 to address when a creditor must send
a notice of action taken under prequalification, preapproval, and
similar programs. The comment clarified that the guidance provided in
the commentary to section 202.2(f), addressing applications and
inquiries, applies to all types of inquiries, including
prequalification and preapproval programs. Thus, if a creditor--in
giving information to a consumer about a prequalification or
preapproval program--decides it will not grant credit, and communicates
this to the consumer, the creditor has treated the inquiry as an
application (by virtue of having made a credit decision) and must
comply with the notification rules in Sec. 202.9. Commenters generally
supported the guidance provided in the proposal.
Appendix C of Supplement I to Part 202--Sample Notification Forms
The Board proposed a comment to Appendix C to provide examples of
additions that may be made to Model Form C-9. The commenters supported
the comment and the Board has adopted it as proposed.
List of Subjects in 12 CFR Part 202
Aged, Banks, banking, Civil rights, Credit, Federal Reserve System,
Marital status discrimination, Penalties, Religious discrimination,
Reporting and recordkeeping requirements, Sex discrimination.
For the reasons set forth in the preamble, the Board is amending 12
CFR part 202 as set forth below:
PART 202--EQUAL CREDIT OPPORTUNITY (REGULATION B)
1. The authority citation for part 202 continues to read as
follows:
Authority: 15 U.S.C. 1691-1691f.
2. In Supplement I to Part 202, Section 202.2--Definitions, is
amended as follows:
a. Under 2(c) Adverse action., preceding 1. Move from service
area., a new paragraph heading 2(c)(1)(i), a new paragraph 1., and a
new paragraph heading 2(c)(1)(ii) are added;
b. Under Paragraph (2)(c)(2)(iii), a new paragraph 2. is added; and
c. Under 2(p), the paragraph heading for 2(p) is revised and new
paragraphs 3. and 4. are added.
The additions and revision read as follow:
Supplement I to Part 202--Official Staff Interpretations
* * * * *
Section 202.2 Definitions
2(c) Adverse action.
Paragraph 2(c)(1)(i)
1. Application for credit. A refusal to refinance or extend the
term of a business or other loan is adverse action if the applicant
applied in accordance with the creditor's procedures.
Paragraph 2(c)(1)(ii)
1. Move from service area. * * *
* * * * *
Paragraph 2(c)(2)(iii)
* * * * *
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.
* * * * * [[Page 29968]]
2(p) Empirically derived and other credit scoring systems.
* * * * *
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.
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).
* * * * *
3. In Supplement I to part 202, under Section 202.4--General Rule
Prohibiting Discrimination, four new sentences are added at the end of
paragraph 1. To read as follows:
* * * * *
Section 202.4--General Rule Prohibiting Discrimination
1. Scope of section. * * * Disparate treatment on a prohibited
basis is illegal whether or not it results from a conscious intent
to discriminate. Disparate treatment would be found, for example,
where a creditor requires a minority applicant to provide greater
documentation to obtain a loan than a similarly situated nonminority
applicant. Disparate treatment also would be found where a creditor
waives or relaxes credit standards for a nonminority applicant but
not for a similarly situated minority applicant. 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.
* * * * *
4. In Supplement I to part 202, a new Section 202.5a, is added in
numerical order to read as follows:
* * * * *
Section 202.5a--Rules on Providing Appraisal Reports
5a(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. 202.5a(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. If an applicant requests that a creditor renew an
existing extension of credit, and the creditor obtains a new
appraisal report to evaluate the request, this section applies. This
section does not apply to a renewal request if the creditor uses the
appraisal report previously obtained in connection with the decision
to grant credit.
5a(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.
5a(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).
5a(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
value.
ii. A document prepared by the creditor's staff which 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.
* * * * *
5. In Supplement I to Part 202, Section 202.6--Rules Concerning
Evaluation of Applications, is amended as follows:
a. Under 6(a) General rule concerning use of information., the
first sentence in paragraph 2. is revised; and
b. Under Paragraph 6(b)(1), three new sentences are added at the
end of paragraph 1.
The additions and revision read as follow:
* * * * *
Section 202.6--Rules Concerning Evaluation of Applications
6(a) General rule concerning use of information.
* * * * *
2. Effects test. The effects test is a judicial doctrine that
was developed in a series of employment cases decided by the 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). * * *
* * * * *
Paragraph 6(b)(1)
1. Prohibited basis--marital status. * * * Except to the extent
necessary to determine rights and remedies for a specific credit
transaction, a creditor that offers joint credit may not take the
applicants' marital status into account in credit evaluations.
Because it is unlawful for creditors to take marital status into
account, creditors are barred from applying different standards in
evaluating married and unmarried applicants. In making credit
decisions, creditors may not treat joint applicants differently
based on the existence, the absence, or the likelihood of a marital
relationship between the parties.
* * * * *
6. In Supplement I to Part 202, Section 202.8--Special Purpose
Credit Programs, under 8(a) Standards for programs., new paragraphs 5.
and 6. are added to read as follows:
* * * * *
Section 202.8--Special Purpose Credit Programs
(8)(a) Standards for Programs
* * * * *
5. Determining need. In designing a special-purpose 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 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.
* * * * *
7. In Supplement I to Part 202, Section 202.9--Notifications, a new
paragraph 5. is added to read as follows:
* * * * *
Section 202.9--Notifications
* * * * * [[Page 29969]]
5. Prequalification and preapproval programs. Whether a creditor
must provide a notice of action taken for a prequalification or
preapproval request depends on the creditor's response to the
request, as discussed in the commentary to section 202.2(f). For
instance, a creditor may treat the request as an inquiry if the
creditor provides general information such as loan terms and the
maximum amount a consumer could borrow 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 in reviewing a request for prequalification, a 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.
* * * * *
8. In Supplement I to Part 202, a new Appendix C--Sample
Notification Forms is added at the end to read as follows:
* * * * *
Appendix C--Sample Notification Forms
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, acting through the Secretary of the Board under delegated
authority, June 1, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-13862 Filed 6-6-95; 8:45 am]
BILLING CODE 6210-01-P
