Equal Credit Opportunity

FEDERAL RESERVE SYSTEM

12 CFR Part 202

[Regulation B; Docket No. R-0865]

Equal Credit Opportunity

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; official staff interpretation.

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SUMMARY: The Board is publishing for comment revisions to its official

staff commentary to Regulation B (Equal Credit Opportunity). The

commentary applies and interprets the requirements of Regulation B and

is a substitute for individual staff interpretations. The proposed

revisions to the commentary provide guidance on several issues

including disparate treatment, special purpose credit programs, credit

scoring systems, and marital status discrimination.

DATES: Comments must be received on or before February 15, 1995.

ADDRESSES: Comments should refer to Docket No. R-0865, and may be

mailed to William W. Wiles, Secretary, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue, N.W.,

Washington, D.C. 20551. Comments also may be delivered to Room B-2222

of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to

the guard station in the Eccles Building courtyard on 20th Street, N.W.

(between Constitution Avenue and C Street) at any time. Comments

received will be available for inspection in Room MP-500 of the Martin

Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided

in 12 CFR 261.8 of the Board's rules regarding the availability of

information.

FOR FURTHER INFORMATION CONTACT: Jane Jensen Gell, Sheilah Goodman, or

Natalie E. Taylor, Staff Attorneys, Division of Consumer and Community

Affairs, Board of Governors of the Federal Reserve System, at (202)

452-3667 or 452-2412; for the hearing impaired only, contact Dorothea

Thompson, Telecommunications Device for the Deaf, (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691-1691f,

makes it unlawful for creditors to discriminate in any aspect of a

credit transaction on the basis of gender, marital status, age, race,

national origin, color, religion, receipt of public assistance, or the

exercise of rights under the Consumer Credit Protection Act. This

statute is implemented by the Board's Regulation B (12 CFR Part 202).

The Board also has an official staff commentary (12 CFR Part 202 (Supp.

I)) that interprets the regulation. The commentary provides general

guidance to creditors in applying the regulation to various credit

transactions, and is updated periodically to address significant

questions that arise.

II. Summary of Proposed Revisions to Commentary

Section 202.2--Definitions

2(c)(2)(iii) Application To Increase Amount of Credit or Change Terms

Proposed comment 2(c)(2)(iii)-2 clarifies that the denial of an

application to increase the amount of credit or change the terms for an

existing account or loan, such as a business line of credit, is adverse

action. As provided in section 202.2(c), however, action or forbearance

taken in connection with inactivity, default, or delinquency for an

account or loan is not adverse action. For example, a ``workout''

arrangement generally is not adverse action, unless the consumer

submits an application that is denied by the creditor.

2(p) Empirically Derived and Other Credit Scoring Systems

Proposed comment 2(p)-3 clarifies that a creditor may acquire an

empirically derived, demonstrably and statistically sound credit

scoring system--or the data from which to develop such a system--from

multiple credit grantors, as long as the creditor validates the

borrowed system on its own data when data become available.

Proposed comment 2(p)-4 clarifies that credit scoring systems--even

if ``empirically derived, demonstrably and statistically sound''--are

subject to review under the ECOA and Regulation B. (A system may

include age as a predictive factor provided that the age of an elderly

applicant is not assigned a negative factor or value, but no other

prohibited basis may be used as a variable.) If a scoring system is

used in conjunction with individual discretion, disparate treatment

could still occur. In addition, a violation of the act and regulation

could occur if there is a disparate impact on a prohibited basis,

unless the practice is justified by a business necessity with no less

discriminatory alternative available.

Section 202.4--General Rule Prohibiting Discrimination

Comment 4-1 would be revised to clarify the concept of disparate

treatment. Creditors have asked for greater guidance about what actions

constitute discriminatory treatment under the regulation.

Section 202.5a--Rules on Providing Appraisal Reports

5a(a) Providing Appraisals

Proposed comment 5a(a)-1 clarifies that section 202.5a applies to

applications for credit to be secured by a consumer's dwelling, whether

the credit is for a business purpose or a consumer purpose.

Proposed comment 5a(a)-2 provides that a request for renewal of an

existing extension of credit secured by a dwelling is covered by the

appraisal rules if the creditor obtains and uses a new appraisal report

in evaluating the request. Section 202.5a applies to appraisal reports

``used in connection with an application for credit.'' Under section

202.2(f), ``application'' includes an oral or written request for an

extension of credit; section 202.2(q), in turn, defines ``extension of

credit'' to include ``the refinancing or other renewal of credit.''

Thus, a request for a renewal of credit is an application and covered

by section 202.5a.

Proposed comment 5a(a)-2 also provides that if a consumer requests

renewal of existing credit and the creditor does not obtain a new

appraisal, section 202.5a does not apply.

5a(a)(2)(i) Notice

Proposed comment 5a(a)(2)(i)-1 provides that for credit involving

more than one applicant, the notice under this section need only be

given to one applicant, but it must be given to the primary applicant

where one is readily apparent. This parallels the rule applicable to

notices of action taken under section 202.9 in cases where there is

more than one applicant.

5a(a)(2)(ii) Delivery

Proposed comment 5a(a)(2)(ii)-1 clarifies that in all cases

creditors may be reimbursed for photocopy and postage costs incurred in

providing the copy of the appraisal report, unless prohibited by state

or other law. The comment further clarifies that if a consumer has

already paid for the report--for example, as part of an application

fee--the creditor may not seek additional fees (other than incidental

photocopy and postage costs) prior to providing a copy of the report

upon the applicant's request. And, if the creditor does not otherwise

charge for the report, the creditor may not require payment solely from

those consumers who request a copy of the report. The statute gives

credit applicants the right to receive copies of appraisal reports upon

request; the Board believes imposing charges on applicants who exercise

this right could have a chilling effect.

5a(c) Definitions

Proposed comments 5a(c)-1 and 5a(c)-2 address the scope of the term

``appraisal report.'' Under the proposal, listings of valuations for

dwellings that are publicly available, such as published home sales

prices or mortgage amounts, are not covered. The appraisal rules guard

against discriminatory evaluations of a dwelling's value. The Board

believes that publicly listed reports of home sales prices or tax

assessments, among others, are unlikely to be influenced by the type of

subjectivity the law is intended to eliminate. If a creditor used this

information as a factor in determining a value for the property,

however, the document would be part of the appraisal report.

Section 202.6--Rules Concerning Evaluation of Applications

6(b)(1) Prohibited Basis--Marital Status

Comment 6(b)(1)-1 would be revised to clarify that if a creditor

chooses to offer joint credit, the creditor generally may not take the

applicants' marital status into account in credit evaluations.

Section 202.8--Special-Purpose Credit Programs

8(a) Standards for Programs

Two proposed comments clarify the requirements that for-profit

organizations must meet to establish special-purpose credit programs

under section 202.8(a)(3). Proposed comment 8(a)(3)-1 addresses how

for-profit organizations can determine whether there is a need for a

special-purpose credit program, and the type of information to rely

upon in making that determination. Proposed comment 8(a)(3)-2 addresses

the elements of the written plan that for-profit organizations are

required to have when establishing a special-purpose credit program.

Section 202.9--Notifications

Proposed comment 9-5 addresses questions posed to the Board about

when an adverse action notice is required for prequalification,

preapproval and similar programs. The proposed comment clarifies that

the guidance provided in the commentary to section 202.2(f) (addressing

applications and inquiries) applies to all types of inquiries,

including prequalification and preapproval programs. Thus, if a

creditor--in giving information to a consumer about a prequalification

or preapproval program--decides it will not grant credit, and

communicates this to the consumer, the creditor has treated the inquiry

as an application (by virtue of having made a credit decision) and must

comply with the notification rules in section 202.9.

Appendix C of Supplement I to Part 202--Sample Notification Forms

Proposed comment Appendix C-1 provides examples of additions that

may be made to Model Form C-9.

III. Form of Comment Letters

Comment letters should refer to Docket No. R-0865. The Board

requests that, when possible, comments be prepared using a standard

courier typeface with a type size of 10 or 12 characters per inch. This

will enable the Board to convert the text into machine-readable form

through electronic scanning, and will facilitate automated retrieval of

comments for review. Comments may also be submitted on computer

diskettes, using either the 3.5'' or 5.25'' size, in any IBM-compatible

DOS-based format. Comments on computer diskettes must be accompanied by

a hard copy version.

List of Subjects in 12 CFR Part 202

Aged, Banks, banking, Civil rights, Credit, Federal Reserve System,

Marital status discrimination, Penalties, Religious discrimination,

Reporting and recordkeeping requirements, Sex discrimination.

For the reasons set forth in the preamble, the Board proposes to

amend 12 CFR part 202 as set forth below:

(Certain conventions have been used to highlight the proposed

changes to the staff commentary. New language is shown inside bold-

faced arrows, while language that would be removed is set off with

brackets.)

PART 202--EQUAL CREDIT OPPORTUNITY (REGULATION B)

1. The authority citation for part 202 would continue to read as

follows:

Authority: 15 U.S.C. 1691-1691f.

2. In Supplement I to Part 202, Section 202.2 Definitions, is

amended as follows:

a. Under Paragraph (2)(c)(2)(iii), a new paragraph 2. is added; and

b. Under 2(p), the paragraph heading for 2(p) is revised and new

paragraphs 3. and 4. are added.

The additions read as follow:

Supplement I to Part 202--Official Staff Interpretations

* * * * *

Section 202.2 Definitions

* * * * *

Paragraph (2)(c)(2)(iii)

* * * * *

2. Application to increase amount of credit or change

terms. The denial of an application for an increase in the amount of

credit (or for a change in the terms) for an existing account or

loan is adverse action.

* * * * *

(2)(p) Empirically derived and other credit

scoring systems.

* * * * *

3. Pooled data scoring systems. A scoring system or

the data from which to develop such a system may be obtained from

either a single credit grantor or multiple credit grantors. The

resulting system will qualify as an empirically derived,

demonstrably and statistically sound credit scoring system as long

as the criteria set forth in paragraph (p)(i) through (iv) are met.

4. Disparate impact. An empirically derived, demonstrably and

statistically sound credit scoring system may include age as a

predictive factor (provided that the age of an elderly applicant is

not assigned a negative factor or value). No other prohibited basis

may be used as a variable. Generally, credit scoring systems treat

all applicants objectively and thus avoid problems of disparate

treatment. In cases where a credit scoring system is used in

conjunction with judgmental override, disparate treatment could

still occur. In addition, credit scoring systems that employ neutral

factors could violate the act or regulation if there is a disparate

impact on a prohibited basis, unless the practice is justified by

business necessity with no less discriminatory alternative

available.

* * * * *

3. In Supplement I to Part 202, under Section 202.4--General Rule

Prohibiting Discrimination, two new sentences are added at the end of

paragraph 1. to read as follows:

* * * * *

Section 202.4--General Rule Prohibiting Discrimination

1. Scope of section.* * * Disparate treatment on a

prohibited basis is illegal whether or not it results from a

conscious intent to discriminate. Disparate treatment would be

found, for example, if:

i. A minority applicant is required to provide greater

documentation to obtain a loan than is required of a similarly

situated nonminority applicant.

ii. Credit standards are waived or relaxed for a nonminority

applicant but not for a similarly situated minority

applicant.

* * * * *

4. In Supplement I to part 202, a new Section 202.5a is added to

read as follows:

* * * * *

Section 202.5a--Rules on Providing Appraisal Reports

5a(a) Providing appraisals.

1. Coverage. This section covers applications for credit to be

secured by a lien on a consumer's dwelling, whether the credit is

for a business purpose (for example, a loan to start a small

business) or a consumer purpose (for example, a loan to finance a

child's education).

2. Renewals. If an applicant requests that a creditor renew an

existing extension of credit, and the creditor obtains a new

appraisal report to evaluate the request, this section applies. This

section does not apply to a renewal request if the creditor uses the

appraisal report initially obtained in connection with the decision

to grant credit.

5a(a)(2)(i) Notice.

1. Multiple applicants. When an application that is subject to

this section involves more than one applicant, the notice about the

appraisal report need only be given to one applicant, but it must be

given to the primary applicant where one is readily apparent.

5a(a)(2)(ii) Delivery.

1. Reimbursement. Creditors may charge for photocopy and postage

costs incurred in providing a copy of the appraisal report, unless

prohibited by state or other law. If the consumer has already paid

for the report--for example, as part of an application fee--the

creditor may not require additional fees (other than photocopy and

postage costs) for the appraisal. Similarly, if the creditor does

not otherwise impose a fee for appraisal reports, as in the case of

``no closing cost'' loans, the creditor may not require repayment

from those consumers who request a copy of the appraisal report.

5a(c) Definitions.

1. Appraisal reports. Examples of appraisal reports are:

i. A report prepared by an appraiser (whether or not a licensed

or certified appraiser), including written comments and other

documents submitted to the creditor in support of the appraiser's

estimate or opinion of value.

ii. A document prepared by the creditor's staff which assigns

value to the property, if a third-party appraisal report has not

been used.

iii. A document reflecting a creditor's valuation that is

different from a valuation in a third party's appraisal report (or

different from valuations that is publicly available or valuations

such as manufacturers' invoices for a mobile home), such as an

internal review document indicating that the value assigned by the

third-party appraiser (or by the other valuation) is incorrect.

2. Other reports. The term ``appraisal report'' does not apply

to all documents relating to the value of the applicant's property.

Examples of reports not covered are:

i. Internal documents, if a third-party appraisal report was

used to establish the value of the property.

ii. Governmental agency statements of appraised value.

iii. Valuations lists that are publicly available (such as

published sales prices or mortgage amounts, tax assessments, and

retail price ranges) and valuations such as manufacturers' invoices

for mobile homes.

* * * * *

5. In Supplement I to Part 202, under Section 202.6--Rules

Concerning Evaluation of Applications, under Paragraph 6(b)(1), three

new sentences are added at the end of paragraph 1 to read as follows:

* * * * *

Section 202.6--Rules Concerning Evaluation of Applications

* * * * *

Paragraph 6(b)(1)

1. Prohibited basis--marital status.* * * Except to

the extent necessary to determine rights and remedies for a specific

credit transaction, a creditor that offers joint credit may not take

the applicants' marital status into account in credit evaluations.

Because it is unlawful for creditors to take marital status into

account, creditors are barred from applying different standards in

evaluating married and unmarried applicants. In making credit

decisions, creditors may not treat joint applicants differently

based on the existence, the absence, or the likelihood of a marital

relationship between the parties.

* * * * *

6. In Supplement I to Part 202, under Section 202.8--Special

Purpose Credit Programs, under 8(a) Standards for programs., new

paragraphs 5. and 6. are added to read as follows:

* * * * *

Section 202.8--Special Purpose Credit Programs

(8)(a) Standards for programs.

* * * * *

5. Determining need. In designing a special-purpose

program under section 202.8(a), a for-profit organization must

determine that the program will benefit a class of people who would

otherwise be denied credit. This determination can be based on a

broad analysis using the organization's own research or data from

outside sources including governmental reports and studies. For

example, a bank could review its Home Mortgage Disclosure Act data

along with demographic data for its delineated community and

conclude that there is a need for a special-purpose credit program

for low-income minority borrowers.

6. Elements of the program. The written plan must contain

information that supports a need for the particular program. In

addition, the plan should specify the period of time that it will be

in effect, at the end of which time the need for the program will be

reevaluated. The plan should be designed to increase access to

credit, but should not have the effect of depriving people who are

not part of the class of rights or opportunities they otherwise

would have.

* * * * *

7. In Supplement I to Part 202, under Section 202.9--Notifications,

a new paragraph 5. is added to read as follows:

* * * * *

Section 202.9--Notifications

* * * * *

5. Prequalification and preapproval programs.

Whether an adverse action notice must be provided for a

prequalification or preapproval request depends on the creditor's

response to the request, as discussed in the commentary to section

202.2(f). For instance, a creditor may treat the request as an

inquiry if the creditor provides general information such as loan

terms and the maximum amount a consumer could borrow under various

loan programs, explaining the process the consumer must follow to

submit a mortgage application and the information the creditor will

analyze in reaching a credit decision. On the other hand, a creditor

has treated a consumer's request for prequalification as an

application for credit if, after evaluating information, the

creditor decides that it will not approve the request and

communicates that decision to the consumer. For example, if in

reviewing a request for prequalification, a creditor tells the

consumer that it would not approve an application for a mortgage

because of a bankruptcy in the consumer's record, the creditor has

denied an application for credit.

* * * * *

8. In Supplement I to Part 202, a new Appendix C is added at the

end to read as follows:

* * * * *

Appendix C--Sample Notification Forms

Form C-9. Creditors may design their own form, or add to or

modify the model form, to reflect their individual policies and

procedures. For example, a creditor may want to add:

i. A telephone number that applicants may call to leave their

name and the address to which an appraisal report should be sent.

ii. A notice of the cost the applicant will be required to pay

the creditor for the appraisal or a copy of the report.

By order of the Board of Governors of the Federal Reserve

System, December 20, 1994.

William W. Wiles,

Secretary of the Board.

[FR Doc. 94-31715 Filed 12-28-94; 8:45 am]

BILLING CODE 6210-01-P