[Federal Register Volume 63, Number 48 (Thursday, March 12, 1998)]
[Proposed Rules]
[Pages 12326-12329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6325]
[[Page 12325]]
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Part V
Federal Reserve System
_______________________________________________________________________
12 CFR Parts 202 and 203
Equal Credit Opportunity and Home Mortgage Disclosure; Proposed Rules
Federal Register / Vol. 63, No. 48 / Thursday, March 12, 1998 /
Proposed Rules
[[Page 12326]]
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: Advance notice of proposed rulemaking.
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SUMMARY: Pursuant to its Regulatory Planning and Review Program, the
Federal Reserve Board (the ``Board'') is undertaking a review of
Regulation B, which carries out the provisions of the Equal Credit
Opportunity Act (the ``ECOA''). The ECOA makes it unlawful for
creditors to discriminate against an applicant in any aspect of a
credit transaction on the basis of race, color, religion, national
origin, sex, marital status, age, and other specified bases. The review
will determine whether Regulation B should be revised to address
technological and other developments; identify areas in the regulation
that could be revised to better balance consumer protections and
industry burden; and delete obsolete provisions. To gather information
necessary for this review and to ensure the participation of interested
parties, the Board is soliciting comment on several specific issues,
while also soliciting comment generally on potential revisions to the
regulation.
DATES: Comments must be received by May 29, 1998.
ADDRESSES: Comments should refer to Docket No. R-1008, 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, DC 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) any time. Comments may be
inspected 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 section 261.12 of the
Board's Rules Regarding Availability of Information.
FOR FURTHER INFORMATION CONTACT: Natalie E. Taylor or Sheilah Goodman,
Staff Attorneys, or Jane Jensen Gell, Senior Attorney, Division of
Consumer and Community Affairs, Board of Governors of the Federal
Reserve System, Washington, DC 20551, at (202) 452-2412 or 452-3667;
for the hearing impaired only, contact Diane Jenkins,
Telecommunications Device for the Deaf (TDD), at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background on ECOA and Regulation B
The Equal Credit Opportunity Act, 15 U.S.C. 1691, enacted in 1974,
makes it unlawful for a creditor to discriminate against an applicant
in any aspect of a credit transaction on the basis of sex or marital
status. In 1975, pursuant to section 703 of the ECOA, the Board issued
Regulation B to implement the ECOA. The Congress amended the ECOA in
1976 to prohibit discrimination on the additional bases of race, color,
religion, national origin, age (provided the applicant has the capacity
to contract), receipt of public assistance benefits, and good faith
exercise of a right under the Consumer Credit Protection Act. The Board
issued an amended Regulation B in 1976 to reflect the amendments.
Under the Board's Regulatory Planning and Review Program, which
requires periodic review of the Board's regulations, the Board reviewed
Regulation B and revised it in 1985 (50 FR 48018, November 20, 1985).
In 1989, the Board modified Regulation B to implement amendments to the
ECOA contained in the Women's Business Ownership Act of 1988. Those
amendments required that creditors give written notice to business
applicants of the right to a written statement of reasons for a credit
denial, and imposed a record retention requirement for records relating
to business credit applications (54 FR 50482, December 7, 1989). The
Board further modified the regulation in 1993 to implement amendments
to the ECOA contained in the Federal Deposit Insurance Corporation
Improvement Act of 1991. The amendments provided applicants with a
right to obtain a copy of the appraisal report used in an application
secured by residential real property, and expanded the enforcement
responsibilities of the federal financial supervisory agencies when
information about possible violations of the ECOA becomes known (58 FR
65657, December 16, 1993). The Board also modified the regulation in
1997 to implement amendments to the ECOA contained in the Economic
Growth and Regulatory Paperwork Reduction Act of 1996. The amendments
created a privilege for information developed by creditors as a result
of ``self-tests'' they conduct (62 FR 66412, December 18, 1997).
II. Review of Regulation B
The Board will review Regulation B with three goals in mind: (1) To
determine whether regulatory amendments are needed to address
technological and other developments; (2) to identify areas in the
regulation that could be revised to better balance consumer protections
and industry burden; and (3) to delete obsolete provisions.
This Advance Notice of Proposed Rulemaking is intended to gather
information about broad policy issues that could be addressed by
revisions to the regulation. The Board is soliciting comment on several
specific issues, but also requests suggestions generally on other
issues that commenters believe should be addressed or clarified. The
Board will publish a proposed rule after evaluating the comments and
further analysis.
Concurrently, the Board is undertaking a review of Regulation C
(Home Mortgage Disclosure); an advance notice of proposed rulemaking is
published elsewhere in today's Federal Register.
Comment is specifically solicited on the following issues:
1. Preapplication Marketing Practices
The ECOA and Regulation B prohibit 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. Credit
transaction is defined in the regulation as every aspect of an
applicant's dealings with a creditor beginning with information
requirements. Thus, the coverage of the ECOA is generally limited to a
person who has, at a minimum, sought credit information. However, the
Board recognizes that a person could be discouraged from seeking credit
or credit information. Accordingly, the regulation expressly prohibits
a creditor from engaging in any practice that would discourage a
reasonable person (on a prohibited basis) from applying for credit. The
official staff commentary provides that a creditor is prohibited from
using words, symbols, or other forms of communication in advertising
that express, imply, or suggest a discriminatory preference or a policy
of exclusion, although a creditor is permitted to engage in affirmative
advertising to solicit or encourage traditionally disadvantaged groups
to apply for credit.
Aside from the prohibition against discouragement, the ECOA has not
been interpreted to apply to a creditor's preapplication marketing
practices--
[[Page 12327]]
such as the selection of persons solicited for a credit
card.1 Creditors use a number of techniques to decide to
whom solicitations will be sent. For instance, creditors will often
specify criteria to credit bureaus, which then utilize credit reports
to compile mailing lists that identify potential applicants who meet
those criteria. This marketing technique--involving prescreened
solicitations--is usually carried out through mailed solicitations as
well as by telemarketing. Because individuals selected through the
prescreening process have not requested credit, they are not deemed to
be applicants for purposes of Regulation B when the prescreening
occurs. It is only after the individuals respond to a creditor's
invitation that the regulation applies.
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\1\ The Fair Housing Act (FHA), which bars discrimination in
housing-related transactions, differs in its treatment of
prescreened solicitations. The FHA has been interpreted to prohibit
persons from prescreening on a prohibited basis, whereas the ECOA
permits any prescreening since only ``applicants'' receive the
protections of the act.
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During the 1985 review of Regulation B, the Board considered
whether prescreened solicitations should be covered by the regulation.
It was generally recognized that prescreened solicitations could result
in a greater availability of credit for consumers. Also, there was no
evidence at that time that creditors were improperly making use of
prohibited characteristics. Therefore, the Board deemed it unnecessary
to modify the regulation.
The Board recognizes that prescreening on a prohibited basis may
facilitate the identification of potential customers and provide
greater access to credit for some consumers. For example, some
creditors have used age to target ``older'' individuals for credit
solicitations and related financial services. However, the Board and
the other banking agencies have also found instances in which
creditors, primarily in the credit card industry, have used age to
exclude youth and elderly persons from receiving solicitations for
preapproved credit. Given the potential for using prohibited bases in
prescreening to improperly exclude certain categories of individuals,
the Board seeks to gain a better understanding of current practices,
and solicits comment on how and to what extent creditors are using any
prohibited bases in preapplication marketing.
2. Inquiry v. Application
Regulation B allows creditors to establish their own application
procedures, including what and how much information to provide to
consumers who request information before applying for credit. Creditors
and others have expressed concern that the current distinction under
Regulation B between an inquiry and an application is difficult to
apply. The rule distinguishes between an inquiry and an application
based on what the creditor communicates to the consumer. When a
consumer requests credit information, this inquiry may entail a
discussion of the consumer's credit characteristics. Creditors have
suggested that under the regulation it is unclear when a creditor is
simply providing information rather than communicating a credit
decision--for example, when the creditor explains its underwriting
standards in the context of the applicant's credit characteristics. A
creditor is required to notify a consumer of action taken (including,
as appropriate, a notice of adverse action) if in response to a
consumer's request for credit information the creditor communicates a
decision not to extend credit.
Creditors say that it is burdensome to provide an adverse action
notice to every consumer who is provided with negative information in
the information-gathering process. Also, they suggest that some
consumers might be concerned about receiving adverse action notices
when they are merely in the process of gathering information to shop
for a loan.
Most questions that the Board receives regarding the distinction
between an inquiry and an application arise in mortgage processes. With
the increased use of prequalifications, preapprovals, and interactive
loan-calculation tools provided over the Internet, creditors have had
difficulty determining whether a notice is required. Sometimes, what
begins with a creditor providing information turns into an evaluation
of creditworthiness.
With prequalifications or preapprovals, consumers begin their loan-
shopping by approaching a lender to determine the price of a home they
could afford. In this process, creditors often obtain and review the
consumer's credit report for a more accurate picture of the consumer's
debt obligations and credit history. In most cases, the consumer has
not identified a specific property, nor is the consumer necessarily
ready to seek a loan from a particular creditor.
Some creditors provide loan-calculation tools on their home page on
the Internet; and consumers are able to calculate the price of a home
they could afford by entering information about income and other data.
Some programs will calculate the maximum amount for which the consumer
could qualify. Other programs encourage the consumer to call the
financial institution when information has been entered and it appears
from the calculation that the consumer would not qualify for a mortgage
due to, for example, low income and high debt. Some creditors' home
pages enable the consumer to take the next step of applying to the
financial institution for a home loan.
In determining whether it is possible to provide additional
guidance to clarify the distinction between an inquiry and application,
the Board believes it is important to encourage creditors to provide
information, counseling, and assistance to consumers seeking credit
information. The sharing of information through counseling programs,
such as home-ownership counseling, is a prime example. In home-
ownership counseling, a third-party organization and financial
institution may partner to counsel potential home buyers--typically
first-time home buyers and, often but not necessarily, low-income home
buyers--on how to obtain a mortgage. A credit report is often obtained
to determine the consumer's financial position and to assist in an
ongoing counseling process that could span a year or longer. In some
programs, the third-party organization may not only provide counseling
services, but also may prescreen applicants for the lender. The Board
solicits comment on whether the more formal the process becomes in
providing information, counseling, and assisting potential applicants--
for example, verifying credit information, or prescreening applicants--
the more the process should be treated as an application. The Board
also solicits comment on the following:
(1) Should the Board devise a different test for determining when
an informal discussion becomes an application? If yes, what should be
the test?
(2) Should the Board seek to establish a ``bright-line'' test? For
example, should an inquiry become an application when a creditor
evaluates or verifies credit information through third-party
information (such as by obtaining a credit report or credit score)?
(3) When, if at all, would the use of an interactive loan-
calculation tool constitute an application?
(4) Is it possible or desirable to apply the current notification
rules to home-ownership counseling programs? If not, how should the
rules be designed to distinguish education-oriented counseling from
advice offered by a lender, for example, to a consumer requesting a
prequalification decision?
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(5) Are there some home-ownership counseling programs that have
elements of both counseling and applications such that they should be
distinguished from education-oriented counseling?
(6) Does the issue of distinguishing an inquiry from an application
also arise in nonmortgage processes? If so, what are some of the
distinguishing characteristics of such processes? Would a test
developed for mortgage processes be effective for nonmortgage
processes?
3. Voluntary Data Collection
Regulation B generally prohibits creditors from inquiring about an
applicant's sex, marital status, race, color, religion, and national
origin. This provision was included in the regulation in the belief
that if creditors did not have this information, they could not use it
to discriminate against applicants. At the same time, exceptions to
this prohibition were also included in Regulation B. The regulation
requires creditors to collect ``monitoring information'' (age, sex,
marital status, and race or national origin) for mortgage loan
applicants. This requirement was added because of the specific concern
that the data was needed to help detect mortgage lending
discrimination.
The regulation also allows creditors to collect data if required by
another regulation, order, or agreement of a court or enforcement
agency to monitor or enforce compliance with the ECOA, Regulation B, or
any other federal or state statute or regulation. This exception was
included in the regulation so that lenders would not have to choose
between competing regulations or statutes. For example, creditors can
collect data pursuant to the Home Mortgage Disclosure Act without
concerns about violating Regulation B.
In April 1995, the Board published for comment a proposed amendment
to Regulation B that would have allowed, but not required, creditors to
collect information about an applicant's sex, marital status, race,
color, and national origin for nonmortgage credit products. The
regulation would have continued to bar creditors from considering this
information in a credit decision. In December 1996, the Board withdrew
the proposed amendment, noting that this issue might be more
appropriate for the Congress to consider.
Since issuance of the final action, the Board has received requests
from the other federal financial regulatory agencies, creditors, and
community groups asking for further consideration of this matter. The
Board believes that in light of the overall review of Regulation B it
is appropriate to evaluate whether the prohibition on data collection
should be changed. The Board solicits comment on whether to consider
amending Regulation B to remove the prohibition barring creditors from
collecting certain information about applicants for nonmortgage credit
products.
4. Definition of Creditor
The ECOA and Regulation B prohibit a creditor from discriminating
against an applicant on a prohibited basis regarding any aspect of a
credit transaction. The ECOA's definition of creditor includes anyone
who ``regularly extends'' or ``regularly arranges for'' the extension
of credit. Regulation B combines the concepts and defines a creditor as
a person who, in the ordinary course of business, regularly
participates in the decision of whether or not to extend credit,
including persons such as a potential purchaser of an obligation who
influences the decision of whether or not to extend credit. For
purposes of Secs. 202.4 and 202.5(a) (the prohibitions against
discrimination and discouragement), brokers or others who regularly
refer applicants to creditors (or who select or offer to select
creditors to whom applications can be made) are also deemed creditors.
As creditors expand their distribution systems for lending services
and products, they have increasingly asked for guidance about how the
definition of ``creditor'' applies when a lender acts in conjunction
with other parties and discrimination occurs. The question could arise
in the context of transactions in which a mortgage broker discriminates
in originating loans that are funded by or closed in the name of the
lender, for example, and also could arise in other types of lending,
such as automobile financing.
Regulation B provides that a person (who may otherwise be a
creditor) is not a creditor regarding a violation of the ECOA or the
regulation committed by another creditor unless the person knew or had
reasonable notice of the act, practice, or policy that constituted the
violation before becoming involved in the credit transaction. The Board
solicits comment on whether it is desirable or feasible to provide
further guidance in this area, such as the circumstances under which a
creditor is deemed to have knowledge of the acts of other parties when
the creditor has participated in the decision to extend credit or set
the credit terms.
Comment is solicited on the following:
(1) Is it feasible for the regulation to provide more specific
guidance given that most issues will depend on the facts of a
particular case?
(2) Should the current test--which relies on whether a person knew
or had reasonable notice of an act of discrimination--be modified? If
so, in what way?
(3) Should the regulation address whether, and under what
circumstances, a creditor must monitor the pricing or other credit
terms when another creditor (for example, a broker) participates in the
transactions?
5. Documentation for Business Credit
Currently, Regulation B requires written applications if the credit
is primarily for the purchase or refinancing of an applicant's
principal dwelling. This rule does not apply to business credit. Many
requests for business credit are made orally or without a formal
written application. In such cases, a creditor usually requests that
the applicant submit a financial statement for evaluation. As a general
rule, Regulation B prohibits creditors from requiring the signature of
a person other than the applicant on any credit instrument where the
applicant is individually creditworthy. Where the financial statement
offered to support the business credit lists jointly held property and
is signed by both owners, some creditors are treating the financial
statement as a joint application. Accordingly, both owners often are
required to sign the note--even where the request for credit is being
made by only one of the property owners. The Board does not believe
that a joint property owner's signature on a financial statement to
attest to the accuracy or veracity of information is definitive
evidence of a joint application.
Without documentation in the files other than the financial
statement, institutions may be required to spend considerable time and
expense establishing that an application was for joint, rather than
individual, credit. In addition, agencies that examine for compliance
with Regulation B may impose costs and other burdens on institutions
when it is difficult to determine whether a joint property owner
actually intended to be a joint applicant. Accordingly, the Board has
been asked to revise the regulation to provide guidance on what
mechanisms may be used by creditors to establish a joint property
owner's intent to apply for joint business credit.
The Board solicits comment on the following:
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(1) What are some mechanisms through which evidence of an
application for joint credit can be established?
(2) Should the Board provide guidance to clarify the mechanisms
through which an application for joint credit can be evidenced? If not,
how can creditors ensure that their practices do not violate the
regulation?
6. Business Credit Exemptions
The ECOA authorizes the Board to exempt a class of transactions, or
a particular type of transaction within a class, if the Board
determines that the application of all or part of the regulation to
such transactions would not contribute substantially to effectuating
the purposes of the regulation. Pursuant to Section 703 of the ECOA,
the Board has exercised its authority to exempt business credit from
certain notification and record retention requirements for consumer
credit if the business had gross revenues in excess of $1 million in
its preceding fiscal year, or if the business requested an extension of
trade credit, credit incident to a factoring agreement, or other
similar types of business credit.
Amendments to the ECOA contained in the Women's Business Ownership
Act of 1988 require the Board to review exemptions after five years to
determine whether an additional extension is appropriate. While the
exemptions for certain business credit do not affect the basic
prohibition against discrimination in credit transactions, the
exemptions do reduce burden for creditors by modifying the notice
requirements of the regulation under Sec. 202.9(a)(3) and the record
retention rules under Sec. 202.12(b)(5). The Board solicits comment on
whether these exemptions are still appropriate.
7. Other Issues
The Board solicits comments on any other broad policy issues that
should be addressed in the regulation.
By order of the Board of Governors of the Federal Reserve
System, March 6, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-6325 Filed 3-11-98; 8:45 am]
BILLING CODE 6210-01-P
