Equal Credit Opportunity

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.

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

exceptions for public utilities credit (§ 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 (§ 202.5(b)(1)); and require record retention for prescreened credit solicitations (§ 202.12(b)(7)). Other amendments clarify the definitions of “adverse action” (§ 202.2(c)) and “creditor” (§ 202.2(l)); the rules for evaluating married and unmarried credit applicants (§ 202.6(b)(8)); and certain rules about obtaining signatures of nonapplicants (§ 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 § 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 § 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 § 202.2(c)(1)(ii).

2(f) Application

The Board proposed to revise § 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

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 § 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 § 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 § 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 § 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 § 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, § 202.4(a) contains the general rule against discrimination; § 202.4(b) (former § 202.5(a)) contains the general rule against discouraging applications; and § 202.4(c) (former § 202.5(e)) contains the requirement for written applications in mortgage transactions covered by § 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 (§§ 202.5, 202.5a (now § 202.14), 202.9, and 202.13(c)) are required to be given in writing. While certain disclosures under §§ 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 §§ 202.5 and 202.13. These disclosures relate, for example, to the option not to

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 §§ 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 § 202.4(b) was added in that rulemaking to provide rules on foreign-language disclosures. The present rulemaking re-designates that revision as § 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 § 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

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 § 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

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 § 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, § 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 § 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 § 202.5(a) have been revised for clarity. Former §§ 202.5(a) and (e) have been moved to § 202.4 to facilitate compliance with the regulation.

New § 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 § 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 § 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 § 202.15, and must provide the disclosures required by § 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 § 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 § 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

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 § 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 § 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 § 202.5(d)(1), (d)(2), and (d)(4) without substantive change.

New § 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 § 202.5(d)(5). The exception for inquiries about the permanent residence and immigration status has been conformed to the general rule in § 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 § 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 §§ 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 § 202.5 (against collecting applicants' personal characteristics) except for the purpose of conducting a self-test under § 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 § 202.8(a)(3) have not been adopted.

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 § 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 § 202.9(a)(3)(i)(B). The proposed revision to § 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 § 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 § 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 § 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 § 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 § 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 § 202.12(b)(1)-(4) have not been adopted. New § 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

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.

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 § 202.13 is issued by Fannie Mae and Freddie

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 § 202.14, Enforcement, Penalties, and Liabilities, have been moved to § 202.17. Section 202.14 now contains the rules from former § 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 § 202.15(d)(1).

Section 202.16—Requirements for Electronic Communication

Section 202.16 now contains the rules from former § 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 § 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 § 202.14. Technical revisions have been made to § 202.17(a) and (b). Proposed revisions to § 202.17(c) have not been adopted.

17(c) Failure of Compliance

The Board proposed to delete the third sentence of § 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 § 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 § 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 § 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 (§ 202.2(f)); providing an exception from the requirement to provide a notice of incompleteness for preapprovals that constitute applications (§ 202.9(c)(1)); and clarifying the record retention requirements for prescreened solicitations (§ 202.12(b)(7)). The commentary also clarifies when an inquiry about credit becomes an application for credit (§§ 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 § 202.2(f) concerning the definition of application; and § 202.2(l) concerning the definition of creditor. A technical revision has been made to a comment in § 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 § 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 § 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

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 § 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

§ 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 §§ 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 §§ 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 § 202.5a is now § 202.14.

Section 202.6—Rules Concerning Evaluation of Applications

Comments to §§ 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 § 202.6(b)(8) of the regulation and other portions have been moved to § 202.6(b)(8) of the commentary for clarity. Comment 6(b)(1)-2 has been re-designated as 6(b)(1)-1.

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 § 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 § 202.8(a). Proposed revisions to comments in § 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 § 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 § 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 §§ 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.

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 § 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 § 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 § 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 § 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 § 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 § 202.12(b)(7) of the regulation.)

Section 202.13—Information for Monitoring Purposes

The proposed revision to a comment in § 202.13(a) has not been adopted. A technical revision has been made for clarity. Comments in § 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 § 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 § 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 § 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 § 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 § 202.5(b)(1) and the supplementary information to that section.

Section 202.16—Requirements for Electronic Communication

Section 202.16 is former § 202.17. The comments in § 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 § 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 § 202.14. There are no revisions to comments in this section.

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.

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

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, § 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 § 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 (§ 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 § 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

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.

§ 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 § 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.

§ 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

become contractually liable regarding an extension of credit. For purposes of § 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 § 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 § 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

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.

§ 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 § 202.4(a), the general rule against discrimination on a prohibited basis, the requirements of this regulation do not apply to government credit.

§ 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 § 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 §§ 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.

§ 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 § 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 § 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

conducting a self-test that meets the requirements of § 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.

§ 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

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;

(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.

§ 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.

§ 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

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.

§ 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 § 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

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

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