[Federal Register Volume 59, Number 249 (Thursday, December 29, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31715]
[[Page Unknown]]
[Federal Register: December 29, 1994]
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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: Proposed rule; official staff interpretation.
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SUMMARY: The Board is publishing for comment revisions to 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 proposed
revisions to the commentary provide guidance on several issues
including disparate treatment, special purpose credit programs, credit
scoring systems, and marital status discrimination.
DATES: Comments must be received on or before February 15, 1995.
ADDRESSES: Comments should refer to Docket No. R-0865, and may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551. Comments also may be delivered to Room B-2222
of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to
the guard station in the Eccles Building courtyard on 20th Street, N.W.
(between Constitution Avenue and C Street) at any time. Comments
received will be available for inspection in Room MP-500 of the Martin
Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided
in 12 CFR 261.8 of the Board's rules regarding the availability of
information.
FOR FURTHER INFORMATION CONTACT: Jane Jensen Gell, Sheilah Goodman, or
Natalie E. Taylor, 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 gender, marital status, age, race,
national origin, color, religion, receipt of public assistance, or the
exercise of rights under the Consumer Credit Protection Act. This
statute is implemented by the Board's Regulation B (12 CFR Part 202).
The Board also has an official staff commentary (12 CFR Part 202 (Supp.
I)) that interprets the regulation. The commentary provides general
guidance to creditors in applying the regulation to various credit
transactions, and is updated periodically to address significant
questions that arise.
II. Summary of Proposed Revisions to Commentary
Section 202.2--Definitions
2(c)(2)(iii) Application To Increase Amount of Credit or Change Terms
Proposed comment 2(c)(2)(iii)-2 clarifies that the denial of an
application to increase the amount of credit or change the terms for an
existing account or loan, such as a business line of credit, is adverse
action. As provided in section 202.2(c), however, action or forbearance
taken in connection with inactivity, default, or delinquency for an
account or loan is not adverse action. For example, a ``workout''
arrangement generally is not adverse action, unless the consumer
submits an application that is denied by the creditor.
2(p) Empirically Derived and Other Credit Scoring Systems
Proposed comment 2(p)-3 clarifies that a creditor may acquire an
empirically derived, demonstrably and statistically sound credit
scoring system--or the data from which to develop such a system--from
multiple credit grantors, as long as the creditor validates the
borrowed system on its own data when data become available.
Proposed comment 2(p)-4 clarifies that credit scoring systems--even
if ``empirically derived, demonstrably and statistically sound''--are
subject to review under the ECOA and Regulation B. (A system may
include age as a predictive factor provided that the age of an elderly
applicant is not assigned a negative factor or value, but no other
prohibited basis may be used as a variable.) If a scoring system is
used in conjunction with individual discretion, disparate treatment
could still occur. In addition, a violation of the act and regulation
could occur if there is a disparate impact on a prohibited basis,
unless the practice is justified by a business necessity with no less
discriminatory alternative available.
Section 202.4--General Rule Prohibiting Discrimination
Comment 4-1 would be revised to clarify the concept of disparate
treatment. Creditors have asked for greater guidance about what actions
constitute discriminatory treatment under the regulation.
Section 202.5a--Rules on Providing Appraisal Reports
5a(a) Providing Appraisals
Proposed comment 5a(a)-1 clarifies that section 202.5a applies to
applications for credit to be secured by a consumer's dwelling, whether
the credit is for a business purpose or a consumer purpose.
Proposed comment 5a(a)-2 provides that a request for renewal of an
existing extension of credit secured by a dwelling is covered by the
appraisal rules if the creditor obtains and uses a new appraisal report
in evaluating the request. Section 202.5a applies to appraisal reports
``used in connection with an application for credit.'' Under section
202.2(f), ``application'' includes an oral or written request for an
extension of credit; section 202.2(q), in turn, defines ``extension of
credit'' to include ``the refinancing or other renewal of credit.''
Thus, a request for a renewal of credit is an application and covered
by section 202.5a.
Proposed comment 5a(a)-2 also provides that if a consumer requests
renewal of existing credit and the creditor does not obtain a new
appraisal, section 202.5a does not apply.
5a(a)(2)(i) Notice
Proposed comment 5a(a)(2)(i)-1 provides that for credit involving
more than one applicant, the notice under this section need only be
given to one applicant, but it must be given to the primary applicant
where one is readily apparent. This parallels the rule applicable to
notices of action taken under section 202.9 in cases where there is
more than one applicant.
5a(a)(2)(ii) Delivery
Proposed comment 5a(a)(2)(ii)-1 clarifies that in all cases
creditors may be reimbursed for photocopy and postage costs incurred in
providing the copy of the appraisal report, unless prohibited by state
or other law. The comment further clarifies that if a consumer has
already paid for the report--for example, as part of an application
fee--the creditor may not seek additional fees (other than incidental
photocopy and postage costs) prior to providing a copy of the report
upon the applicant's request. And, if the creditor does not otherwise
charge for the report, the creditor may not require payment solely from
those consumers who request a copy of the report. The statute gives
credit applicants the right to receive copies of appraisal reports upon
request; the Board believes imposing charges on applicants who exercise
this right could have a chilling effect.
5a(c) Definitions
Proposed comments 5a(c)-1 and 5a(c)-2 address the scope of the term
``appraisal report.'' Under the proposal, listings of valuations for
dwellings that are publicly available, such as published home sales
prices or mortgage amounts, are not covered. The appraisal rules guard
against discriminatory evaluations of a dwelling's value. The Board
believes that publicly listed 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. If a creditor used this
information as a factor in determining a value for the property,
however, the document would be part of the appraisal report.
Section 202.6--Rules Concerning Evaluation of Applications
6(b)(1) Prohibited Basis--Marital Status
Comment 6(b)(1)-1 would be revised 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.
Section 202.8--Special-Purpose Credit Programs
8(a) Standards for Programs
Two proposed comments clarify the requirements that for-profit
organizations must meet to establish special-purpose credit programs
under section 202.8(a)(3). Proposed comment 8(a)(3)-1 addresses how
for-profit organizations can determine whether there is a need for a
special-purpose credit program, and the type of information to rely
upon in making that determination. Proposed comment 8(a)(3)-2 addresses
the elements of the written plan that for-profit organizations are
required to have when establishing a special-purpose credit program.
Section 202.9--Notifications
Proposed comment 9-5 addresses questions posed to the Board about
when an adverse action notice is required for prequalification,
preapproval and similar programs. The proposed comment clarifies 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 section 202.9.
Appendix C of Supplement I to Part 202--Sample Notification Forms
Proposed comment Appendix C-1 provides examples of additions that
may be made to Model Form C-9.
III. Form of Comment Letters
Comment letters should refer to Docket No. R-0865. The Board
requests that, when possible, comments be prepared using a standard
courier typeface with a type size of 10 or 12 characters per inch. This
will enable the Board to convert the text into machine-readable form
through electronic scanning, and will facilitate automated retrieval of
comments for review. Comments may also be submitted on computer
diskettes, using either the 3.5'' or 5.25'' size, in any IBM-compatible
DOS-based format. Comments on computer diskettes must be accompanied by
a hard copy version.
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 proposes to
amend 12 CFR part 202 as set forth below:
(Certain conventions have been used to highlight the proposed
changes to the staff commentary. New language is shown inside bold-
faced arrows, while language that would be removed is set off with
brackets.)
PART 202--EQUAL CREDIT OPPORTUNITY (REGULATION B)
1. The authority citation for part 202 would continue 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 Paragraph (2)(c)(2)(iii), a new paragraph 2. is added; and
b. Under 2(p), the paragraph heading for 2(p) is revised and new
paragraphs 3. and 4. are added.
The additions read as follow:
Supplement I to Part 202--Official Staff Interpretations
* * * * *
Section 202.2 Definitions
* * * * *
Paragraph (2)(c)(2)(iii)
* * * * *
2. Application to increase amount of credit or change
terms. The denial of an application for an increase in the amount of
credit (or for a change in the terms) for an existing account or
loan is adverse action.
* * * * *
(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 as long
as the criteria set forth in paragraph (p)(i) through (iv) are met.
4. Disparate impact. 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). 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 judgmental override, disparate treatment could
still occur. In addition, credit scoring systems that employ neutral
factors could violate the act or regulation if there is a disparate
impact on a prohibited basis, unless the practice is justified by
business necessity with no less discriminatory alternative
available.
* * * * *
3. In Supplement I to Part 202, under Section 202.4--General Rule
Prohibiting Discrimination, two 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, if:
i. A minority applicant is required to provide greater
documentation to obtain a loan than is required of a similarly
situated nonminority applicant.
ii. Credit standards are waived or relaxed for a nonminority
applicant but not for a similarly situated minority
applicant.
* * * * *
4. In Supplement I to part 202, a new Section 202.5a is added 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 consumer's dwelling, whether the credit is
for a business purpose (for example, a loan to start a small
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 initially 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 (other than photocopy and
postage costs) for the appraisal. Similarly, if the creditor does
not otherwise impose a fee for appraisal reports, as in the case of
``no closing cost'' loans, the creditor may not require repayment
from those consumers who request a copy of the appraisal report.
5a(c) Definitions.
1. Appraisal reports. Examples of appraisal reports are:
i. A report prepared by an appraiser (whether or not a licensed
or certified appraiser), 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. A document reflecting a creditor's valuation that is
different from a valuation in a third party's appraisal report (or
different from valuations that is publicly available or valuations
such as manufacturers' invoices for a mobile home), such as an
internal review document indicating that the value assigned by the
third-party appraiser (or by the other valuation) is incorrect.
2. Other reports. The term ``appraisal report'' does not apply
to 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, under Section 202.6--Rules
Concerning Evaluation of Applications, under Paragraph 6(b)(1), three
new sentences are added at the end of paragraph 1 to read as follows:
* * * * *
Section 202.6--Rules Concerning Evaluation of Applications
* * * * *
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, under 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 section 202.8(a), a for-profit organization must
determine that the program will benefit a class of people who would
otherwise be denied credit. 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 its Home Mortgage Disclosure Act data
along with demographic data for its delineated community 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 a need for the particular program. In
addition, the plan should specify the period of time that it will be
in effect, at the end of which time the need for the program will be
reevaluated. The plan should be designed to increase access to
credit, but should not have the effect of depriving people who are
not part of the class of rights or opportunities they otherwise
would have.
* * * * *
7. In Supplement I to Part 202, under Section 202.9--Notifications,
a new paragraph 5. is added to read as follows:
* * * * *
Section 202.9--Notifications
* * * * *
5. Prequalification and preapproval programs.
Whether an adverse action notice must be provided 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 consumer's request for prequalification as an
application for credit 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 is added at the
end to read as follows:
* * * * *
Appendix C--Sample Notification Forms
Form C-9. Creditors may design their own form, or 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, December 20, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-31715 Filed 12-28-94; 8:45 am]
BILLING CODE 6210-01-P
