Equal Credit Opportunity

SUMMARY: The Board is issuing this proposal to revise Regulation B,

which implements the Equal Credit Opportunity Act (ECOA or Act),

pursuant to the Board's policy of periodically reviewing its

regulations. The Act makes it unlawful for creditors to discriminate

against an applicant in any aspect of a credit transaction on the basis

of race, color, religion, national origin, marital status, sex, age,

and other specified bases. Major proposed revisions include removing

the general prohibition against noting information about applicant

characteristics such as national origin or sex, although such

information still generally may not be considered in extending credit;

requiring creditors to retain records for certain prescreened credit

solicitations; and extending the record retention period for most

business credit applications. Proposed revisions to the Official Staff

Commentary are also included.

DATES: Comments must be received by November 10, 1999.

ADDRESSES: Comments, which should refer to Docket No. R-1008, may be

mailed to Jennifer J. Johnson, Secretary, Board of Governors of the

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

Washington, D.C. 20551. Comments addressed to Ms. Johnson may be

delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and

to the security control room at all other times. The mail room and the

security control room, both in the Board's Eccles Building, are

accessible from the courtyard entrance on 20th Street between

Constitution Avenue and C Street, N.W. Comments may be inspected in

room MP-500 between 9:00 a.m. and 5:00 p.m., pursuant to Sec. 261.12,

except as provided in Sec. 261.14 of the Board's Rules Regarding the

Availability of Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: Natalie E. Taylor or Kathleen C. Ryan,

Staff Attorneys, Jane Jensen Gell, Senior Attorney, or Jane E. Ahrens,

Senior Counsel, Division of Consumer and Community Affairs, Board of

Governors of the Federal Reserve System, Washington, DC 20551, at (202)

452-3667 or 452-2412; for the hearing impaired only, Diane Jenkins,

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

SUPPLEMENTARY INFORMATION:

I. Background on ECOA and Regulation B

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

prohibits a creditor from discriminating against an applicant in any

aspect of a credit transaction on the basis of the applicant's race,

color, religion, national origin, sex, marital status, 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.

When enacted in 1974, the ECOA prohibited discrimination on the

basis of marital status and sex. In 1976, the Act was amended to add

all of the other prohibited bases of discrimination. Over the years,

several significant amendments have been made to the ECOA, including

the following. In 1989, the ECOA was amended by the Women's Business

Ownership Act of 1988 (Pub. L. No. 100-533, 102 Stat. 2692) to require

that creditors give written notice to business applicants 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 a 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 expanded the

enforcement responsibilities of the federal financial supervisory

agencies when information about possible violations of the ECOA becomes

known. The Economic Growth and Regulatory Paperwork Reduction Act of

1996 (Pub. L. 104-208, 110 Stat. 3009) amended the ECOA to create a

privilege for information developed by creditors as a result of ``self-

tests'' they conduct.

II. The 1998 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 is reviewing Regulation B. The Board's last comprehensive review

of Regulation B occurred in 1985. The Board began the current review of

Regulation B in March 1998 by publishing an Advance Notice of Proposed

Rulemaking (Advance Notice) (63 FR 12326, March 12, 1998). In addition

to soliciting general comment on revisions to the regulation, the Board

identified specific issues for comment involving: (1) Preapplication

marketing practices, (2) the distinction between an inquiry about

credit and an application for credit, (3) data notation for nonmortgage

products, (4) the definition of creditor, (5) documentation for

business credit, and (6) exceptions for business credit.

The Board received 330 comment letters on the Advance Notice. Most

commenters addressed only the six issues identified in the Advance

Notice. Based on its review and on the comments received, the Board now

proposes revisions to Regulation B and the official staff commentary.

In addition to comments on the proposed revisions, the Board requests

specific suggestions for other revisions that would facilitate

compliance with, or improve, the regulation.

III. Discussion of Proposed Revisions to the Regulation

Major proposed revisions include rules that remove the general

prohibition against the notation--but not the use--of certain

prohibited basis information (Sec. 202.5); extend the record retention

period for certain business credit applications (Sec. 202.12); and

require record retention for preapproved credit solicitations

(Sec. 202.12). The following discussion covers the proposed revisions

to the regulation section-by-section. A section-by-section discussion

of proposed revisions to the commentary appears in Part IV.

Section 202.1--Authority, Scope and Purpose

No revisions are proposed in this section.

Section 202.2--Definitions

Revisions are proposed in the definitions of adverse action,

application, and creditor in Secs. 202.2(c)(1) and (c)(2), 202.2(f),

and 202.2(l).

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

[[Page 44583]]

substantial portion of a class of the creditor's accounts.'' Commenters

asked the Board to clarify the exception--namely, the meaning of

``class of accounts'' and ``substantial portion'' of a class of

accounts. Section 202.2(c)(1)(ii) would be revised to clarify the

exception by changing the language from ``substantial portion'' to

substantially all'' so 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.

The ECOA and Regulation B require creditors to give consumers

reasons for an adverse credit decision. The notice requirement enables

some recipients to identify and remedy credit problems, and may also

help detect unlawful credit discrimination. The exception in

Sec. 202.2(c)(1)(ii) is intended to address the circumstance where a

creditor takes action that affects all or most of a type of its

accounts, rather than targeting specific customers, and an adverse

action notice seems unnecessary. For example, if a creditor terminates

its secured credit card program entirely, adverse action notices will

not likely serve the intended educational or anti-discrimination goals.

2(c)(2)

Section 202.2(c)(2)(iii) would be revised to conform to changes

proposed under Sec. 202.2(c)(1)(ii).

2(f) Application

The Board believes that 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--is an

application. A ``preapproval'' without procedures involving a written

commitment would be treated as a prequalification for purposes of the

regulation. Section 202.2(f) of the regulation would be revised

accordingly. In addition, technical revisions would be made to the

definition of application for clarity.

2(l) Creditor

Section 202.2(l) would be revised to clarify that the definition of

``creditor'' applies to a person who regularly participates in making a

credit decision, including setting terms--not just the decision of

whether to extend or deny credit. (See detailed discussion of the

definition of ``creditor'' in ``Part IV. Discussion of Proposed

Revisions to the Official Staff Commentary'' under Sec. 202.2(l).)

Section 202.3--Limited Exceptions for Certain Classes of Transactions

Revisions are proposed in Secs. 202.3(a)(2), 202.3(b)(2), and

Secs. 202.3(c)(1) and (2) relating to public-utilities, securities, and

incidental credit.

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 on discrimination;

the exceptions generally cover issues such as record retention,

inquiries about marital status and spousal information, and furnishing

credit information. Credit that does not meet the definitions is

subject to the full coverage of Regulation B.

The Board is required periodically to review the exceptions to

determine whether they should be retained. The Act provides that the

Board may extend an exception for a class of transactions 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. After analysis, the Board believes that extending some

of the 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 subject to all of the regulatory

requirements except those relating to collecting information about

marital status, furnishing credit information to consumer reporting

agencies, and retaining records. The proposed rule would retain the

relief from the record retention requirements only. Regulation B

permits inquiries into an applicant's marital status only in limited

circumstances. The exception from this provision permits creditors

offering public-utilities credit to request information concerning

marital status in all instances. The Board believes this exception is

no longer needed and is proposing to remove the exception. Specific

comment is solicited on this change.

The proposed rule also would remove the exception relating to the

furnishing of credit information under Sec. 202.10 (concerning accounts

held or used by spouses). The requirements of Sec. 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. Creditors are considering public-utilities payments more

frequently as a source of repayment history for underwriting purposes.

Thus, the Board believes that it would be helpful to consumers if

public-utility companies that furnish credit payment information were

subject to the same reporting requirements as other creditors subject

to the ECOA. The Board seeks comment on this approach.

The regulation requires creditors to retain certain records.

Public-utilities credit is not subject to the record retention

requirements. The Board would retain the exception regarding 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. The Board believes that extending

this exception is appropriate because requiring record retention 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 regulation under section 7

of the Securities Exchange Act of 1934 or extensions of credit by a

broker or dealer subject to regulation under that act. 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, signature rule requirements, rules relating to record

retention, and requesting information about the sex of an applicant.

Given that the Board proposes to remove the prohibition against the

collection of information about certain applicant characteristics, the

current exception in Sec. 202.3(b)(2)(iii) would be redundant. The

Board believes that it is appropriate to extend the other exceptions

related to information concerning a spouse or former spouse, marital

status, name designations, open-end accounts, spousal signature

[[Page 44584]]

requirements, the furnishing of credit information, and record

retention. Securities credit is subject to an extensive regulatory

scheme, and applying those provisions of Regulation B would not

contribute substantially to effectuating the purposes of the ECOA.

Technical revisions would be 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, for example, by a local merchant that does

not normally extend credit, to a long-standing customer; or by a doctor

or lawyer, as an accommodation to a patient or a client.

The proposed rule would expand the exception for incidental credit

to include incidental business credit, as the Board believes that full

regulatory coverage of such credit does not contribute substantially to

effectuating the purposes of the Act. Incidental business credit would

be defined as business credit that is not made pursuant to the terms of

a credit card account, is not subject to interest charges or fees, and

is not payable by agreement in more than four installments. The Board

solicits specific comment on this proposed change.

3(c)(2) Exceptions

Incidental credit is excepted from a number of provisions in the

regulation including requesting information about an applicant's

marital status, spouse or former spouse, and certain sources of an

applicant's income. The proposed rule would eliminate the exception for

requesting information about the sex of an applicant, in light of the

Board's proposal to remove the prohibition against the collection of

information related to a prohibited basis. The proposed rule would

extend the other exceptions concerning information about an applicant's

spouse or former spouse, marital status, income sources, signatures,

notifications, the furnishing of credit information, and record

retention. The Board believes that, given the nature of the credit

extension, applying these rules would not contribute substantially to

effectuating the purposes of the Act.

3(d) Government Credit

With regard to government credit, the exceptions apply to

extensions of credit made to governments or governmental subdivisions,

agencies or instrumentalities. The Board believes that extending these

exceptions remains appropriate, as applying the rules would not

contribute substantially to effectuating the purposes of the Act.

Section 202.4--General Rule Prohibiting Discrimination

Revisions are proposed in Sec. 202.4. In the Advance Notice, the

Board solicited comment on how and to what extent creditors are using

prohibited bases in preapplication marketing--specifically, prescreened

solicitations--to determine whether the coverage of the regulation

should be expanded to such practices. Although this section includes a

discussion of the issue, the proposed rule does not recommend expanding

the regulation's coverage to prescreened solicitations; however,

Sec. 202.12(b)(7) would require creditors to retain certain records

related to preapproved credit solicitations.

General Rules

Section 202.4 would be revised to incorporate general rules that

apply under the regulation, some of which are currently in other

sections of the regulation and official staff commentary. The Board

believes this approach would facilitate compliance with the regulation.

Section 202.4(a) would provide the general rule against discrimination.

Section 202.4(b) would provide the general rule against discouraging

applications. Section 202.4(c) would provide the rule for when written

applications are required.

Section 202.4(d) would contain new clear and conspicuous and

retainability standards that the Board is proposing to apply to the

disclosures and other information required to be in writing. In March

1998, the Board requested public comment on a proposal to permit the

electronic delivery of disclosures for four of its consumer protection

regulations: Regulation B; Regulation M, Consumer Leasing; Regulation

Z, Truth in Lending; and Regulation DD, Truth in Savings (63 FR 14533-

14552, March 25, 1998). Except for Regulation B, each of those

regulations expressly provides that creditors must present required

information in a clear and conspicuous manner, in a form the consumer

may keep. Accordingly, the Board proposed that the clear and

conspicuous and retainability standards be applied to information

required under Regulation B (63 FR 14552, March 25, 1998). Their

inclusion in Sec. 202.4 is consistent with that proposal.

Prescreened Solicitations

The ECOA prohibits discrimination by a creditor against an

applicant on a prohibited basis regarding any aspect of a credit

transaction. Regulation B defines an applicant as a person who has

requested or received credit. 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 is generally limited to a person who has, at a minimum,

sought credit information. The law does not generally extend to a

creditor's preapplication marketing practices--such as the selection of

persons solicited for a credit card. The regulation applies only after

individuals respond to a creditor's offer of 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 that would discourage a reasonable person (on a prohibited

basis) from applying for credit. The regulation also applies to

advertising.

Creditors use a number of techniques to identify potential

recipients of credit. For instance, creditors will often specify

criteria to consumer reporting agencies, which then draw on information

from credit files to compile mailing 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.

There has been concern through the years that Regulation B

generally does not apply to preapplication marketing. During the 1985

review of Regulation B, the staff presented to the Board the issue of

whether prescreened solicitations should be made subject to the

regulation, but recommended against coverage. While recognizing the

potential for unfair treatment in such practices, available evidence

did not support a finding that creditors were improperly making use of

prohibited characteristics. Moreover, it was thought that prescreened

solicitations could result in a greater availability of credit to many

consumers. Accordingly, the Board did not propose to expand the

regulation's coverage to such practices.

Over the past several years, the Board has become aware (through

its own observations and those of other federal financial regulatory

agencies) of instances in which creditors, primarily in the credit card

industry, use age to identify potential recipients of

[[Page 44585]]

preapproved credit. In some instances, creditors have used zip codes to

exclude credit solicitations in low-income areas that represent

predominantly minority neighborhoods. In other cases, creditors have

used ethnicity or gender to target potential customers in affirmative-

outreach programs.

The Board raised the issue of prescreened solicitations for public

comment in its Advance Notice. Specifically, the Board requested

comment on how and to what extent creditors are using a prohibited

basis in preapplication marketing. Of the industry commenters who

addressed preapplication marketing, only a few discussed the extent to

which the selection criteria include a prohibited basis. These

commenters indicated that except for using age to identify consumers

too young to be approved for credit, or to identify potential customers

for unique products such as reverse mortgages, they do not directly use

prohibited bases in preapplication marketing.

The majority of commenters--primarily creditors and their trade

associations--addressed the more general issue of whether the Board

should expand the regulation's coverage to preapplication marketing

practices. Most of these commenters opposed any expansion. These

commenters were concerned that an expansion of Regulation B would

prevent creditors from marketing their products to those most likely to

respond. They stated, for example, that a creditor offering products

that are used predominantly by women might be prohibited from targeting

consumers on a mailing list for a magazine geared toward women. Some

commenters believed that the regulation's protections need not apply to

prescreened solicitations because they are only one aspect of a

creditor's overall marketing program, and that consumers who are not

solicited may nevertheless obtain credit from the creditor. A few

questioned the Board's legal authority to expand the regulation's

coverage beyond ``applicants.''

Others--including most of the federal financial enforcement

agencies and consumer advocates that commented--favored expanding the

coverage of Regulation B to preapplication marketing practices. Some of

these commenters expressed concern that currently a creditor is

permitted to use a prohibited basis to limit or avoid extending credit

by target marketing to certain groups. Other commenters believed that

regulatory coverage of solicitations is necessary to fulfill the Act's

purpose, arguing that those not solicited are denied information that

could lead them to apply for credit. Some commenters expressed concern

about the inconsistent approaches between the Fair Housing Act, which

extends coverage to preapplication marketing, and the ECOA, which does

not.

Prescreened credit solicitations are not new, particularly credit

card solicitations. The use of prescreened solicitations has become

more commonplace beyond credit cards, however, and in some instances

may be the primary vehicle for offering credit. In the marketing of

some credit cards, prescreened solicitations often offer discounted

introductory rates, attractive terms, and enhancements (such as

purchase discounts) to those solicited that may not be available

through other application channels. Prescreened solicitations can be

used to target consumers most likely to use a particular credit

product, or to target segments of the population that in the creditor's

experience are most likely to respond to the offer of credit.

Conversely, prescreened solicitations can be used to exclude some

consumers from offers of credit. They can also be used to target

consumers in certain neighborhoods for less favorable credit products

or less favorable terms.

Covering credit solicitations without providing many exceptions

could have unintended consequences. For example, it could result in

prohibiting practices that increase credit availability. Targeted

marketing through prescreened solicitations can effectively increase

access to credit for consumers. Moreover, while there is anecdotal

evidence that creditors do target potential applicants on the basis of

age and geographic location, such evidence is somewhat limited; it does

not suggest that the application of Regulation B rules is warranted at

this time. Because of concerns about the potential impact on some

segments of the population, however, the Board believes that taking

other steps would enable the Board and the other enforcement agencies

to monitor solicitation practices in a more systematic way than has

been possible to date.

The ECOA directs the Board to prescribe regulations to carry out

the purposes of the Act. Further, section 703(a)(1) of the Act

authorizes the Board to make ``such classifications * * * adjustments

and exceptions * * * as in the judgment of the Board are necessary or

proper to effectuate the purposes of [the law] * * * or to prevent

circumvention or evasion * * * .'' 15 U.S.C. 1691b. The Board proposes

to use this exception authority to require creditors to keep records

related to certain prescreened solicitations--namely, preapproved

credit solicitations. The Board's proposal adds a new

Sec. 202.12(b)(7).

For purposes of the proposed rule, a preapproved credit

solicitation is defined as the ``firm offer of credit'' described in 15

U.S.C. 1681a(l) of the Fair Credit Reporting Act (FCRA). Under the

FCRA, a person that receives a list of consumers from a consumer

reporting agency in connection with credit transactions not initiated

by the consumers must generally offer credit to the consumers on the

list, subject to certain exceptions. 15 U.S.C. 1681b(c)(1)(B). A

creditor must maintain the criteria used to select the consumers for

three years after the date the credit offer is made. 15 U.S.C.

1681m(d)(3). The Board's draft rule would require creditors to retain

(for 25 months after a creditor solicits potential applicants for

credit) certain information related to preapproved credit

solicitations: the list of criteria used to select potential customers,

the text of the solicitation mailing, correspondence (to and from

selected potential customers) related to complaints--whether formal or

informal--about the solicitation, and the portion of the marketing plan

(including any response model) to which the solicitation relates.

The draft rule would require creditors to retain information that

the Board believes they already retain for business and other reasons.

The Board solicits comment on the incremental burden associated with

retaining information beyond the records creditors already retain under

the FCRA or for business purposes.

The information required by the proposed rule--the criteria for

selection, the solicitation, correspondence, and the marketing plan to

which the solicitation relates--should allow for an effective review

and analysis of creditors' possible use of prohibited bases in

preapproved credit solicitations. For entities that are regularly

examined, the Board believes that the most effective way to review and

evaluate creditor practices would be through the use of the examination

process.

Section 202.5--Rules Concerning Taking of Applications

Section 202.5 of the regulation would be revised.

Because the ECOA makes it unlawful for creditors to consider any of

the prohibited bases of discrimination in a credit transaction,

Regulation B generally has prohibited creditors from inquiring about,

or noting, those

[[Page 44586]]

applicant characteristics in any aspect of a credit transaction. This

general prohibition was intended to discourage discrimination, based on

the premise that if creditors cannot inquire about or note such

information, they are less likely to unlawfully consider the

information. For home mortgage lending (given frequent allegations and

concerns about unlawful discrimination) the regulation has required

creditors, since 1977, to note the applicant's national origin or race,

marital status, sex, and age in applications for home purchase loans,

so that enforcement agencies can better monitor home mortgage lenders'

compliance with the ECOA. The Home Mortgage Disclosure Act, 12 U.S.C.

2801 et seq. (implemented by Regulation C), imposed a similar data

collection requirement in 1989 that applies to mortgage loans more

broadly, encompassing home improvement loans in addition to home

purchase loans.

In 1995, the Board proposed to remove the prohibition against

noting an applicant's race, color, religion, national origin, and sex

for nonmortgage credit products. The proposed revision was published at

the time the banking agencies were revising regulations that implement

the Community Reinvestment Act; the proposal responded to concerns

about whether creditors were meeting the needs of their communities,

particularly for small business and small farm lending. The majority of

the comments received on the 1995 proposal opposed removal of the

prohibition, generally expressing concern that voluntary data notation

would lead to mandatory data collection and result in substantially

increased costs and burden. In addition, many commenters raised

concerns about the quality of the data that would be obtained, given

that supplying information would be voluntary and not all applicants

would choose to provide it. Commenters who supported removal of the

prohibition believed that the data would allow creditors to better

identify underserved groups and design programs to address unmet credit

needs; they also believed that it would provide useful data for

evaluating creditors' compliance with fair lending laws. After

extensive deliberation, the Board withdrew the proposal in December

1996, and stated that, given the political sensitivity of the issues

involved, the matter was better left to the Congress.

The Board's 1998 Advance Notice solicited comment on whether the

Board should again consider removing the prohibition for nonmortgage

credit products, in its review of Regulation B. The Advance Notice

raised the issue in response to concerns that continue to be expressed

by the Department of Justice and some of the federal financial

enforcement agencies, pointing to anecdotal evidence of discrimination

in connection with small business and other types of credit. These

agencies believe that the ability to obtain and analyze data about race

and ethnicity (such as creditors might collect on a voluntary basis)

would aid fair lending enforcement. In addition, some creditors

continue to express interest in being able to note--on a voluntary

basis--information about the ethnicity, sex, and race of their

applicants and borrowers to evaluate compliance with fair lending laws,

as well as for marketing and outreach initiatives. Small-business

owners and community groups also continue to strongly support data

notation, particularly for small business lending.

More than 300 commenters addressed the issue in response to the

Advance Notice. Many commenters--primarily banks and banking trade

associations--urged the Board not to remove the prohibition. These

commenters believed that, if the prohibition were to be removed,

examiners and others would pressure depository institutions to collect

data. They feared that a requirement to collect data would soon follow,

which would impose a substantial burden on institutions. These

commenters expressed concern that creditors that obtained data about

race, ethnicity, and other applicant characteristics would be subjected

to greater scrutiny by enforcement agencies. They also stated that data

notation is intrusive of consumers' privacy, and would encourage a

perception of creditors' using the data to discriminate. Some

commenters stated that data noted on a voluntary basis would be

unreliable and that the lack of standards for notation could render the

quality of data questionable. (In some cases, commenters used this

criticism to argue against lifting the prohibition; in other cases,

they used it to argue for mandatory data collection.) Commenters also

suggested that the current rule effectively discourages discrimination

because loan officers often do not have access to information that

would enable them to discriminate on a prohibited basis.

Many other commenters--including most of the federal financial

enforcement agencies, the Department of Justice, the Department of

Housing and Urban Development, small businesses and their trade

associations, consumer advocates, community organizations, and some

banks--favored removing the prohibition. A number of commenters favored

removing it for all nonmortgage credit products, but most of those who

favored lifting the ban were focused on small business lending. Some of

these commenters believed that the most effective way to monitor and

enforce fair lending compliance on small business loans is with

mandatory collection, although they see voluntary notation for such

loans as an important first step. They 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 for small business or other lending. Some

commenters suggested 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.

The Board proposes to remove the prohibition against noting

information about an applicant's race, color, religion, national

origin, and sex for all credit products. Consideration of such

information in evaluating creditworthiness, except as permitted by law,

would continue to be prohibited by the ECOA and Regulation B. The Board

recognizes that removing the prohibition would allow loan officers to

have access to information on applicant characteristics that might not

otherwise be available and, thus, could provide the opportunity for

unlawful discrimination. Also, the Board recognizes that the usefulness

of the data for fair lending enforcement purposes would depend on

whether creditors implement standards for uniform collection of the

data--such as by product, for all applicants, for all borrowers, etc.

On balance, however, removing the prohibition for all nonmortgage

credit may allow issues of credit discrimination to be better

addressed. Because notation would be on a voluntary basis, creditors

could target those products where particular concern exists about

potential discrimination.

The proposed rule provides that applicants may not be required to

provide information about their race, color, religion, national origin,

or sex. It also requires creditors who request information on applicant

characteristics to disclose--at the time they request the information--

that providing it is optional, and that the creditor will not take the

information (or the applicant's decision not to provide the

information) into account in any aspect of the credit transaction. (See

proposed Sec. 202.5(a)(4).) (A proposed model notice is included in

Appendix C.) The Board seeks comment on this approach.

[[Page 44587]]

Section 202.5(a) would be moved to Sec. 202.4. Sections 202.5(b)-

(d) would be redesignated as Secs. 202.5(a)-(c), and the rules in those

sections barring information requests about sex, race, color, religion

and national origin would be removed. The proposed removal does not

extend to substantive rules relating to marital status that effectuate

the antidiscrimination provisions of the Act. Some technical edits

would be made to newly-designated Secs. 202.5(a)(1), (a)(2), and

(a)(3), and to newly-designated Secs. 202.5(b)(2) and (b)(3). Part of

existing Sec. 202.5(d)(5) concerning inquiries about permanent

residency and immigration status would be moved to newly-designated

Sec. 202.5(c)(5). Also, Sec. 202.5(e) would be moved to Sec. 202.4 to

facilitate compliance with the regulation.

Section 202.5a--Rules on Providing Appraisal Reports

No revisions are proposed in this section.

Section 202.6--Rules Concerning Evaluation of Applications

Revisions are proposed in Sec. 202.6(b).

6(b) Specific Rules Concerning Use of Information

6(b)(8)

Section 202.6(b)(8) would be added to clarify that a creditor may

not evaluate married and unmarried applicants by different standards.

The Board believes that this guidance-- currently in the commentary--is

more appropriately placed in the regulation.

6(b)(9)

A new paragraph 202.6(b)(9) would be added to make clear that a

creditor may not consider race, color, religion, national origin, or

sex to determine an applicant's creditworthiness, except as permitted

by law; nor may the creditor consider the applicant's decision not to

provide the information.

Section 202.7--Rules Concerning Extensions of Credit

Revisions are proposed in Sec. 202.7(d)(1).

7(d) Signature of Spouse or Other Person

Section 202.7(d)(1) would be revised to clarify the rule concerning

joint applications for credit. Regulation B does not require written

applications for business credit. Often, requests are made orally or

without a formal written application. In such cases, a creditor usually

requests that the applicant submit a financial statement for

evaluation. As a general rule, Regulation B prohibits creditors from

requiring the signature of a person other than the applicant on any

credit instrument if the applicant is individually creditworthy. Where

the financial statement submitted by the applicant lists jointly held

property and is signed by both property owners (attesting to the

accuracy of the data), some creditors are treating the financial

statement as an indication that the owners are making a joint

application for credit. In those cases, both owners often are being

required to sign the promissory note--even where the request for credit

has been made only by the property owner engaged in operating the

business. The Board believes that a joint property owner's signature on

a financial statement (to attest to the accuracy of information) alone

does not represent definitive evidence of a joint application.

In the Advance Notice of Proposed Rulemaking, the Board asked

whether additional guidance should clarify the mechanisms through which

an application for joint credit can be evidenced. Although some

commenters stated that a written application is the best mechanism to

establish an application for joint credit, other commenters believed

the Board should provide additional guidance on the issue.

The Board does not propose to require written applications for

business credit. Section 202.7(d)(1), however, would be revised to

clarify that the submission of joint financial information or other

evidence of jointly held assets does not of itself constitute an

application for joint credit. The rule would apply to both consumer and

business credit. In addition, the official staff commentary would be

amended to suggest ways in which a creditor may obtain a clear

indication of a joint application. (See proposed comment 7(d)(1)-3.)

Section 202.8--Special-Purpose Credit Programs

Technical revisions are proposed in Sec. 202.8(a)(3).

8(a) Standards for Programs

Section 202.8(a)(3) of the regulation, which addresses special-

purpose credit programs offered by for-profit organizations, would be

revised. The Board believes that paragraphs (a)(3)(i) and (ii) set

forth the criteria; the phrase regarding ``special social needs'' would

be deleted to eliminate confusion.

Section 202.9--Notifications

Revisions are proposed in Secs. 202.9(a)(3) and 202.9(b)(2).

9(a) Notification of Action Taken, ECOA Notice, and Statement of

Specific Reasons

9(a)(3) Notification to Business Credit Applicants

The regulation provides for exceptions from certain notification

and record retention requirements for business credit if the business

had gross revenues in excess of $1 million in its preceding fiscal

year, or if the business requested an extension of trade credit, credit

incident to a factoring agreement, or other similar types of business

credit. The Board is required periodically to review the exceptions to

determine whether they should be retained. The Act provides that the

Board may extend an exception if the Board determines, after making an

express finding, ``that the application of [the Act] or any provision

of [the Act] of such transaction would not contribute substantially to

effecting the purposes of [the Act].'' (See 15 U.S.C. 1691b.)

The Advance Notice of Proposed Rulemaking requested comment on

whether the limited exceptions are still appropriate. Some commenters

stated that the exceptions should be eliminated; they believe business

applicants, like consumer applicants, need adverse action notices to

ensure that they have been treated fairly and not denied credit on a

prohibited basis. Most commenters, however, favored retaining the

current exceptions. These commenters stated that business applicants

tend to be more sophisticated than consumer applicants and, therefore,

generally do not need the same protections as consumers. Some

commenters suggested changing the test for when the exceptions apply;

some commenters suggested lowering the $1 million threshold. Others

suggested using the amount of the credit request rather than the size

of the business.

The Board believes that applying the rules in full or changing the

current test, which is based on a $1 million gross revenue threshold,

would not contribute substantially to effectuating the purposes of the

ECOA. Accordingly, the Board believes the exceptions based on the

current threshold are still appropriate and should be extended. 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. Retaining the $1

[[Page 44588]]

million threshold would provide nearly the same percentage of all

businesses (currently 85 percent) with the additional protections. In

addition, the Board believes that a gross revenue test is easier for

creditors to administer than other suggested tests, such as basing the

exceptions on the sophistication of the applicant.

Section 202.9(a)(3)(ii) would be revised 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 adverse action. Currently, 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. Requiring

disclosure of the right should not significantly increase burden for

creditors, and will benefit applicants who may not be aware of their

right to the written statement of reasons.

9(b) Form of ECOA Notice and Statement of Specific Reasons

9(b)(2) Statement of Specific Reasons

Section 202.9(b)(2) would be revised to clarify 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

joint applicant did not meet the creditor's standards of

creditworthiness'' is insufficient.

Section 202.10--Furnishing of Credit Information

No revisions are proposed in this section.

Section 202.11--Relation to State Law

Technical revisions would be made in this section.

Section 202.12--Record Retention

Revisions are proposed in Sec. 202.12(b). Proposed

Sec. 202.12(b)(7) provides the record retention requirements for

preapproved credit solicitations. (See detailed discussion in

Sec. 202.4.)

12(b) Preservation of Records

Section 703(a)(4) of the Act 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 no

less than one year, unless otherwise excepted. Currently,

Sec. 202.12(b) requires creditors to retain credit applications and

other records for 12 months for business credit. Under the proposal, a

25-month record retention period would apply to credit applications

involving businesses with gross revenues of $1 million or less; the

rule would remain unchanged for credit applications involving other

businesses.

The Board believes that increasing the record retention period

would assist the federal financial regulatory agencies, in particular,

in monitoring and enforcing compliance with the Act, given the

relatively low volume of business loans on a yearly basis for some

institutions, and given the agencies' reduction of examination

frequency (from 18 to 24 months, and in some instances to 36 months).

Sections 202.12(b)(1), (2), (3), and (4) would be revised accordingly.

In 1989, the Board proposed to establish a 25-month record retention

period. Creditors expressed concern about the space required to store

documents and the costs associated with longer storage, and the Board

adopted the 12-month record retention period. The Board believes these

concerns may no longer be compelling given technological advances and

the use of electronic storage. The Board seeks specific comment on the

potential burden associated with retaining information for the

additional period.

12(b)(7) Preapplication Marketing Information

A new paragraph 202.12(b)(7) would be added to the regulation to

include the record retention requirements for certain preapplication

marketing information.

Section 202.13--Information for Monitoring Purposes

No revisions are proposed in this section.

Section 202.14--Enforcement, Penalties and Liabilities

Revisions are proposed in Sec. 202.14(c). Technical revisions would

be made in Sec. 202.14(b).

14(c) Failure of Compliance

Section 202.14(c) would be revised to reflect the Board's proposal

to remove the prohibition in Regulation B against the collection of

certain information.

Section 202.15--Incentives for Self-Testing and Self-Correction

Minor revisions are proposed in Sec. 202.15(d)(1).

15(d)(1) Scope of Privilege

Section 202.15(d)(1)(ii) would be revised, consistent with proposed

changes to Secs. 202.4 and 202.5(a).

Appendix A to Part 202--Federal Enforcement Agencies

Revisions are proposed in Appendix A to reflect changes in the

names and addresses of some agencies.

Appendix B to Part 202--Model Application Forms

Appendix B would be revised to reflect proposed revisions to

Sec. 202.5. Technical revisions would also be made for clarity.

The ``Residential loan application'' model form would be replaced

with an updated ``Uniform residential loan application'' form (FHLMC

65/FNMA 1003). The Board solicits specific comment on whether revisions

should be made to the other model application forms.

Appendix C--Sample Notification Forms

Appendix C would be revised to reflect proposed revisions to

Sec. 202.5. A new model form C-10 would be added to provide the

disclosure requirements for creditors who request information

voluntarily on applicant characteristics. Also, the Board solicits

specific comment on whether revisions should be made to the existing

sample notification forms.

IV. Discussion of Proposed Revisions to the Official Staff

Commentary

The following discussion covers the proposed revisions to the

official staff commentary section-by-section. Such revisions include

clarifying: the definition of adverse action (Sec. 202.2(c)); the

definition of application in regard to certain preapprovals

(Sec. 202.2(f)); the disclosure requirement if a creditor asks for

applicant characteristics (Sec. 202.5(a)); and the nonapplicability of

the self-testing privilege to information requested voluntarily about

applicant characteristics (Sec. 202.15(b)).

Section 202.1--Authority, Scope, and Purpose

No revisions are proposed in this section of the commentary.

Section 202.2--Definitions

Revisions are proposed in comments to Secs. 202.2(c)(1) and (c)(2),

202.2(f), 202.2(l), and 202.2(z).

2(c) Adverse Action

2(c)(1)

Counteroffers in connection with credit solicitations--Proposed

comment 2(c)(1)(i)-2 addresses credit solicitations. The comment would

clarify that where a consumer who receives a solicitation requests a

specific

[[Page 44589]]

amount of credit and the creditor offers a different amount, the

creditor's action constitutes a counteroffer.

Adverse action on a class of accounts--Proposed comment

2(c)(1)(ii)-1 would clarify the terms ``substantially all'' and ``class

of accounts.'' Existing comments 2(c)(1)(ii)-1 and -2 would be

renumbered.

2(c)(2)

Express agreement--Proposed comment 2(c)(2)(i)-1 would clarify when

an adverse action notice is required for a change in the terms of an

account. This comment solely addresses when a creditor is required to

provide an adverse action notice; it does not affect a creditor's

ability to change the terms under its agreement with the consumer.

Current delinquency or default--An adverse action notice is not

required if a creditor takes action on an account due to a current

delinquency or default on that account. Comment 2(c)(2)(ii)-2 would be

revised, and an example would be added, to clarify this interpretation.

Activity on a different account--Proposed comment 2(c)(2)(ii)-3

would clarify that an adverse action notice is required if a creditor

treats an account as delinquent or in default due to activity on

another account. This comment solely addresses when a creditor is

required to provide an adverse action notice; it does not address what

activity constitutes a delinquency or default under the agreement

between the parties.

2(f) Application

Inquiries about or applications for credit

In the Advance Notice, the Board solicited comment on whether it

should provide additional guidance to further clarify the current

distinction between an inquiry about credit and an application for

credit. Specifically, the Board asked whether it should devise a

different test for determining when a discussion becomes an application

and, if so, what should be the test.

The ECOA requires creditors to provide notice of action taken

within certain time frames following the creditor's receipt of a

completed application. Regulation B defines an application as ``an oral

or written request for an extension of credit that is made in

accordance with procedures established by the creditor for the type of

credit requested.'' This enables the creditor to establish as formal or

informal a process as it wishes.

The official staff commentary, through examples, encourages

creditors to provide consumers with information that will assist them

in the credit shopping process. The flexibility provided allows

creditors to give information without entering into a formal

application process, and thus to avoid triggering the notice and

recordkeeping rules. To deter creditors from discouraging prospective

applicants on a prohibited basis, however, the rule deems a creditor's

negative response to an inquiry to represent the denial of an

application for credit. That is, a credit inquiry can be deemed an

application if, in giving credit information to a potential applicant,

the creditor evaluates information about the individual, decides that

the individual does not meet the creditor's criteria for

creditworthiness, and informs the individual accordingly. In that case,

an adverse action notice is required and records are retained.

Many industry commenters expressed concern that the current test is

difficult to apply because when a creditor has ``declined'' a request

is not always clear. According to these commenters, it is often unclear

when a creditor's discussion of negative factors, such as a person's

poor payment history on loans, triggers an adverse action notice. Some

commenters noted that, due to this lack of clarity, they often provide

an adverse action notice to consumers to whom they give negative

information--a procedure they view as burdensome and not necessarily

helpful to many consumers. They believe the notice may discourage some

consumers from later applying for credit, especially if those consumers

initially were only seeking information.

Other commenters supported the current test; they believe that the

test provides the flexibility they need. These commenters expressed

reservations about changing a rule that creditors are already familiar

with. They also expressed concern that a change in the rule could

require creditors to change the way they conduct business. Some

commenters, including industry and consumer representatives, stated

that adverse action notices should be given whenever consumers are

informed that they are ineligible or lack the qualifications for

credit, regardless of the stage in the credit process.

In response to commenters' concerns about when an adverse action

notice is required, the Board considered whether a different test is

appropriate. The Board focused on creditors' use of new delivery

channels for loan products and information (such as the Internet), and

growth in credit counseling and prequalification programs. Many of

these developments result in consumers asking for and receiving

information about credit products--and about their own

creditworthiness--prior to submitting an application for credit.

The Board solicited comment on a number of issues concerning the

definition of ``application.'' The Board asked whether a ``bright-

line'' test would best distinguish between an inquiry and an

application (for example, whether obtaining a credit report should

always trigger an application). Some commenters believed that such a

test could eliminate confusion and inconsistent treatment among

lenders. Others opposed a bright-line test, stating that any proposed

test needs to have sufficient flexibility to accommodate evolving

approaches to lending (such as prequalification requests) and

homeownership and small business loan counseling. Commenters noted that

given rapid changes in lending practices and technology, today's

bright-line test might not be appropriate in the future.

The Board also asked whether it would be desirable or possible to

apply the current notification rules to homeownership counseling

programs that engage in credit evaluations; often, a credit report is

obtained to determine the consumer's financial circumstances and to

assist in an ongoing counseling process. Most commenters did not

believe the current rules should be applied to such programs. They

generally supported a rule that would encourage counseling without

imposing burdensome notification requirements.

Finally, the Board solicited comment on whether the issue of

distinguishing an inquiry from an application also arises in

nonmortgage credit, such as credit card, automobile, and small business

lending. Most commenters believed the issues were similar, and that

there was nothing unique about nonmortgage credit that requires a

different test; they generally believed that, for purposes of

consistency, all credit should be subject to the same test.

Given changes in technology, and creditors' use of varying

procedures and mechanisms to deliver their credit products, on balance

the Board believes that retaining the flexibility of the current test

is appropriate. Comment 2(f)-3 would clarify that prequalifications are

subject to the test currently applicable to inquiries. Under that test,

a creditor provides an adverse action notice if the creditor

communicates a denial. Proposed comment 2(f)-5 gives an example of

preapprovals that are treated as applications, in keeping with the

[[Page 44590]]

proposed addition to Sec. 202.2(f) of the regulation. Existing comment

2(f)-5 would be redesignated.

2(l) Creditor

The ECOA and Regulation B prohibit a creditor from discriminating

against an applicant on a prohibited basis regarding any aspect of a

credit transaction. The ECOA's definition of creditor includes anyone

who ``regularly extends'' or ``regularly arranges for'' the extension

of credit, as well as any assignee of an original creditor who

``participates in the decision'' to extend credit. Regulation B

combines these concepts and defines a creditor as a person who, in the

ordinary course of business, regularly participates in the decision of

whether or not to extend credit, including persons such as a potential

purchaser of an obligation who influences the creditor's decision.

Brokers or others who regularly refer applicants to creditors (or who

select or offer to select creditors to whom applications can be made)

are creditors for purposes of Secs. 202.4 and 202.5(a) (the

prohibitions against discrimination and discouragement) which are

Secs. 202.4(a) and (b), respectively, under the proposed rule.

Regulation B also provides that a person (who may otherwise be a

creditor) is not a ``creditor'' with respect to a violation of the ECOA

or the regulation committed by another creditor unless the creditor

``knew or had reasonable notice of'' the act, practice, or policy that

constituted the violation before becoming involved in the credit

transaction.

In the Advance Notice of Proposed Rulemaking, the Board requested

comment on the definition of the term ``creditor.'' The Board noted

that creditors'' distribution systems for lending services and products

have expanded over the years, and that creditors have increasingly

asked for guidance about how the term applies when a lender acts in

conjunction with other creditors and discrimination occurs.

Specifically, the Board solicited comment on whether it is feasible for

the regulation to provide more specific guidance given that most issues

will depend on the facts of a particular case. A slight majority of

commenters asked the Board to provide more specific guidance. Some of

these commenters requested that the Board provide a clearer description

of the conduct that triggers liability. Other commenters requested that

the Board expressly state the types of persons that are considered to

be creditors under the regulation. Some commenters opposed more

specific guidance on the belief that whether the definition applies

must be determined on a case-by-case basis.

The Board also solicited comment on whether the current test--which

relies on whether a person knew or had reasonable notice of an act of

discrimination--should be modified. Some commenters believed that the

test should be modified to clarify that a creditor is not responsible

for the acts of another creditor where the creditor does not have

control over the other creditor's activities. Some commenters stated

that the Board should change the test to ``actual'' notice. Other

commenters were concerned that the Board may change the test to impose

a stricter standard; these commenters believed that a stricter standard

could force creditors to discontinue many types of credit programs.

Some consumer advocates expressed concern that the current test

encourages creditors to pass on the ultimate underwriting

responsibilities to avoid knowledge of another creditor's activities.

Most commenters believed the current test should not be modified. Some

of these commenters stated that the Board should clarify through the

staff commentary what constitutes ``reasonable notice.''

Finally, comment was solicited on whether the regulation should

address under what circumstances a creditor must monitor the pricing or

other credit terms when another creditor (for example, a loan broker)

participates in the transactions and sets the terms. Some commenters

believed the regulation should address monitoring to explicitly state

that there is no such requirement. Some of these commenters stated that

creditors would not have sufficient information to evaluate another

creditor's practices and policies. Other commenters stated that

monitoring could force creditors to restrict the third parties with

whom they do business based on the size and capability of their

monitoring systems. Some commenters believed that the regulation should

explicitly state that there is a monitoring requirement implicit in the

``reasonable notice'' test. A slight majority of commenters opposed the

regulation's addressing whether a creditor must monitor the acts of

other creditors.

The Board considered whether, given the wide variety of ways that

creditors conduct business involving more than one creditor, a new test

could provide clearer guidance. While the application of the current

test is subject to interpretation, the Board believes that it is not

possible to specify with particularity by regulation the circumstances

under which a creditor may--or may not--be liable for a violation

committed by another creditor. Accordingly, Regulation B retains the

``reasonable notice'' standard for when a creditor may be responsible

for the discriminatory acts of other creditors.

The Board believes that, depending on the circumstances, the

``reasonable notice'' standard may carry with it the need for a

creditor to exercise some degree of diligence with respect to third-

parties' involvement in credit transactions, such as brokers or the

originators of loans. The Board also believes, however, that it is not

feasible to specify by regulatory interpretation the degree of care

that a court of law may find to be required in specific cases.

Comment 2(l)-2 would be revised to clarify the type of creditors

subject only to the general prohibitions against discrimination and

discouragement.

2(z) Prohibited Basis

A technical revision would be made to comment 2(z)-1 for clarity.

Comment 2(z)-3 reflects 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 would be made to comment 3-1 for clarity.

Section 202.4--General Rule Prohibiting Discrimination

Substantial revisions are proposed in comments to Sec. 202.4.

Former comment 4(a)-1 would be divided into two comments 4(a)-1 and

2. Additional examples of disparate treatment would be included in

comment 4(a)-2. Proposed comments 4(b)-1 and 2 are existing comments

5(a)-1 and 2, respectively, with minor revisions. References to

``potential'' applicants in existing comment 5(a)-1, which is comment

4(b)-1 under the proposal, would be changed to ``prospective''

applicants with no substantive change intended. Proposed comments 4(c)-

1, 2, and 3 are existing comments 5(e)-1, 2, and 3, respectively.

Proposed comment 4(d)-1 is new and would clarify the clear and

conspicuous requirement.

Section 202.5--Rules Concerning Taking of Applications

Substantial revisions are proposed in comments to Sec. 202.5.

Comments 5(a)-1 and 2 would be moved to proposed comments 4(b)-1

and 2, respectively, consistent with proposed changes to the

regulation. Comments 5(b)(2)-1, 2, and 3 would be removed, consistent

with proposed

[[Page 44591]]

changes to the regulation. Comments 5(d)(1)-1 and 5(d)(2)-1, 2, and 3

would be redesignated. Comments 5(e)-1, 2, and 3 would be removed and

transferred to Sec. 202.4(c) of the commentary.

Section 202.5a--Rules on Providing Appraisal Reports

No revisions are proposed in this section of the commentary.

Section 202.6--Rules Concerning Evaluation of Applications

Revisions are proposed in comments to Secs. 202.6(b)(1), (b)(2),

(b)(5), and (b)(8).

6(b)(1)

Comment 6(b)(1)-1 would be removed. The portion of the comment

related to the consideration of marital status for the purpose of

ascertaining the creditor's rights and remedies would be moved to

comment 6(b)(8)-1 in light of proposed changes to the regulation. Other

portions of comment 6(b)(1)-1 related to evaluating married and

unmarried applicants by the same standards would be moved to

Sec. 202.6(b)(8) of the regulation. Comment 6(b)(1)-2 would be

renumbered.

6(b)(2)

Technical revisions would be made to comment 6(b)(2)-3 with no

substantive change intended. Also, 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 and 6(b)(5)-4 would be revised for further

clarity and to remove references to ``protected income.'' No

substantive change is intended.

6(b)(8)

The Board is proposing to add a new Sec. 202.6(b)(8) to the

regulation to clarify that a creditor may not evaluate married and

unmarried applicants by different standards. New comment 6(b)(8)-1

would be added to incorporate part of the language from existing

comment 6(b)(1)-1 related to the consideration of marital status for

the purpose of ascertaining the creditor's rights and remedies.

Section 202.7--Rules Concerning Extensions of Credit

Revisions are proposed in comments to Sec. 202.7(d)(1).

7(d) Signature of Spouse or Other Person

A new comment 7(d)(1)-1 would clarify that when an applicant is

individually creditworthy, a creditor may not require the signature of

any person besides the applicant on a credit instrument. Existing

comment 7(d)(1)-1 would be redesignated as comment 7(d)(1)-2. Comment

7(d)(1)-3 would be added to provide guidance on how creditors may

document that applicants have requested joint credit.

Section 202.8--Special Purpose Credit Programs

Minor revisions are proposed in comments to Secs. 202.8(a),

202.8(c), and 202.8(d).

8(a) Standards for Programs

Comment 8(a)-5 would be revised to clarify how creditors can

determine the need for a special-purpose credit program.

8(c) Special Rule Concerning Requests and Use of Information

Comments 8(c)-1 and 2 would be revised to conform with the Board's

proposal to remove the prohibition in Regulation B against the

collection of certain information; no substantive change is intended.

8(d) Special Rule in the Case of Financial Need

Comment 8(d)-1 would be revised to conform with the Board's

proposal to remove the prohibition in Regulation B against the

collection of certain information; no substantive change is intended.

Section 202.9--Notifications

Revisions are proposed in comments to Secs. 202.9, 202.9(b)(2), and

202.9(g). Minor revisions would be made to comment 9-5 concerning

prequalifications. Also, the discussion of preapprovals would be

removed. Certain preapprovals are included in the proposed definition

of ``application'' in Sec. 202.2(f) of the regulation.

9(b) Form of ECOA Notice and Statement of Specific Reasons

9(b)(2)

Comment 9(b)(2)-7 would clarify the rules on providing reasons for

adverse action in a combined credit scoring and judgmental system.

9(g) Applications Submitted Through a Third Party

Comment 9(g)-1 would be revised to clarify the information that

must be included in an adverse action notice provided on behalf of more

than one creditor, with minor revisions made for clarity.

Section 202.10--Furnishing of Credit Information

No revisions are proposed in comments to Sec. 202.10.

Section 202.11--Relation to State Law

No revisions are proposed in comments to Sec. 202.11.

Section 202.12--Record Retention

Revisions are proposed in comments to Sec. 202.12(b), consistent

with a proposed change to the regulation concerning retention of

certain preapplication marketing information.

12(b)(7) Preapplication Marketing Information

Three new comments to proposed Sec. 202.12(b)(7) would be added to

clarify the record retention requirements for certain preapplication

marketing information. (See detailed discussion in ``Part III.

Discussion of Proposed Revisions to the Regulation'' under Sec. 202.4.)

Section 202.13--Information for Monitoring Purposes

Revisions are proposed in comments to Secs. 202.13(a) and (b).

13(a) Information To Be Requested

Comment 13(a)-7 would be removed, consistent with proposed

revisions to the regulation.

13(b) Obtaining of Information

Comment 13(b)-4 would be revised to make the treatment of

applications received electronically consistent with comment

203.4(a)(7)-5 of Regulation C (Home Mortgage Disclosure), 12 CFR part

203, for the purpose of collecting monitoring information.

Comment 13(b)-7 would be deleted to reflect the Board's proposal to

remove the prohibition in Regulation B against the collection of

certain information.

Section 202.14--Enforcement, Penalties, and Liabilities

No revisions are proposed in comments to Sec. 202.14.

Section 202.15--Incentives for self-testing and self-correction

Revisions are proposed in comments to Sec. 202.15(b)(3).

15(b)(3)

As discussed earlier, the Board proposes to remove the prohibition

in Regulation B against the notation of information about an

applicant's race, national origin, religion, color, or sex in

connection with nonmortgage credit products. The Board has received

questions about whether the self-testing

[[Page 44592]]

provisions of Sec. 202.15 would apply to the voluntary collection of

this information.

A self-test is defined as a program, practice, or study that is

designed and used specifically to determine compliance with the ECOA

and Regulation B, and creates data or factual information that is not

available and cannot be derived from loan application files or other

records related to credit transactions. If a self-test meets this

definition, the results are privileged and cannot be obtained by a

government agency in any examination or investigation, or by an agency

or an applicant in any proceeding or civil action alleging a violation

of Regulation B. The privilege may be lost or waived, however, under

certain circumstances.

Creditors that elect to collect information about credit

applicants' race or ethnicity, for example, will likely do so on the

application form or in the application process. The Board believes that

such collection of data in connection with nonmortgage credit, even

though voluntary on the part of the creditor, is not a self-test

privileged under the ECOA. The collection of information about an

applicant's characteristics, standing alone or in combination with

other information obtained or derived from loan application files or

other records, does not qualify for the privilege. Comment

15(b)(3)(ii)-2 would be added to clarify this point.

Appendix B to Part 202--Model Application Forms

Comments 1 and 2 to Appendix B would be revised to reflect the

Board's proposal to remove the prohibition in Regulation B against the

collection of certain information.

Appendix C--Sample Notification Forms

No revisions are proposed in comments to Appendix C.

V. Form of Comment Letters

Comment letters should refer to Docket No. R-1008, and, when

possible, should use a standard typeface with a type size of 10 or 12

characters per inch. This will enable the Board to convert the text to

machine-readable form through electronic scanning, and will facilitate

automated retrieval of comments for review. Also, if accompanied by an

original document in paper form, comments may be submitted on 3\1/2\

inch computer diskettes in any IBM-compatible DOS- or Windows-based

format.

VI. Paperwork Reduction Act

In accordance with section 3506 of the Paperwork Reduction Act of

1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed

the proposed revisions under the authority delegated to the Board by

the Office of Management and Budget.

The collections of information that are proposed for revision by

this rulemaking are found in 12 CFR Part 202. This information is

mandatory to evidence compliance with the requirements of 15 U.S.C.

1691b(a)(1) and Public Law 104-208, Sec. 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, 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.). The respondent/recordkeepers

are for-profit financial institutions, including small businesses.

Creditors are required to retain records for twelve to twenty-five

months as evidence of compliance.

The Federal Reserve may not conduct or sponsor, and an organization

is not required to respond to, this information collection unless it

displays a currently valid OMB number. The OMB control number is 7100-

0201.

The current estimated total burden for this information collection

is 123,892 hours; about 95 percent of this burden arises from

disclosures to credit applicants, both consumers and businesses, and 5

percent arises from recordkeeping requirements. This amount reflects

the burden estimate of the Federal Reserve System for the 988 state

member banks under its supervision. This regulation applies to all

types of creditors, not just state member banks. Under Paperwork

Reduction Act regulations, however, the Federal Reserve accounts for

the burden of the paperwork associated with the regulation only for

state member banks. Other agencies account for the paperwork burden for

the institutions they supervise.

It is believed that the paperwork burden will increase slightly due

to the three proposed additions to the recordkeeping requirements:

retaining certain information related to preapproved credit

solicitations; keeping records associated with the proposal removing

the general prohibition against obtaining information about

characteristics of applicants for nonmortgage credit; and extending the

retention period for most business credit applications from twelve to

twenty-five months. In particular, the Federal Reserve solicits comment

on (1) the incremental burden associated with retaining certain

information on preapproved credit solicitations beyond the records

creditors already retain under the FCRA or for business purposes, and

(2) the number of institutions that will collect the proposed

permissible information on characteristics of applicants for

nonmortgage credit and the amount of burden this voluntary information

collection will impose.

The Federal Reserve estimates that there will be no additional

burden imposed by the requirement to disclose to credit applicants that

providing applicant characteristic information is optional and that

creditors will not take the information into account in any aspect of

the credit transaction; the Federal Reserve has provided a proposed

model notice to help alleviate the burden on creditors. The Federal

Reserve also estimates that there will be no additional burden imposed

by the requirement to notify businesses with gross revenues in excess

of $1 million of their right to a written statement of reasons for

adverse action.

Since the Federal Reserve does not collect any information, no

issue of confidentiality normally arises. Any information collected by

the respondents, however, 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 adverse action disclosure is confidential between

the institution and the consumer involved.

Comments are invited on: (a) whether the proposed revised

collection of information is necessary for the proper performance of

the Federal Reserve's functions, including whether the information has

practical utility; (b) the accuracy of the Federal Reserve's estimate

of the burden of the proposed revised information collection, including

the cost of compliance; (c) ways to enhance the quality, utility, and

clarity of the information to be collected; and (d) ways to minimize

the burden of information collection on respondents, including through

the use of automated collection techniques or other forms of

information technology. Comments on the collection of information

should be sent to the Office of Management and Budget, Paperwork

Reduction Project (7100-0201), Washington, DC 20503, with copies of

such comments to be sent to Mary M. West, Chief, Financial Reports

Section, Division of Research and Statistics, Mail

[[Page 44593]]

Stop 97, Board of Governors of the Federal Reserve System, Washington,

DC 20551.

VII. Initial Regulatory Flexibility Analysis

The Regulatory Flexibility Act (5 U.S.C. 603) requires an agency to

publish an initial regulatory flexibility analysis with any notice of

proposed rulemaking. Two of the requirements of an initial regulatory

flexibility analysis--a description of the reasons why action by the

agency is being considered and a statement of the objectives of, and

legal basis for, the proposed rule--are addressed in the supplementary

material above.

Some provisions in the proposal should reduce burden. For example,

creditors are not required to provide a notice of action taken for

incidental credit. By broadening the definition of incidental credit to

cover incidental business credit, fewer notices would be required.

The proposal to lift the prohibition against data notation for

nonmortgage products should not impose any burden on institutions,

because data notation would be voluntary. However, to the extent

creditors collect this data, the proposal would require a disclosure to

be given to applicants. This would impose a new requirement for

creditors that request data. The Board has sought to minimize burden by

proposing a model form.

Creditors would be required to retain certain records in connection

with preapproved credit solicitations. This would impose a new

requirement. However, the Board has sought to minimize burden by

tracking existing legal requirements and current business practices.

For example, users of consumer reports are required to retain some

prescreening information under the Fair Credit Reporting Act. The

proposal parallels this requirement. In addition, many lenders retain

part or much of the solicitation information for business purposes,

such as to evaluate marketing plans.

Creditors would be required to retain records for a longer period

of time for certain types of business credit. Creditors would be

required to retain records for 25 months rather than 12 months. This

approach would track the record retention rules for consumer credit and

could simplify compliance. Burden should be minimized in light of the

variety of methods that could be used to retain these records.

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; and therefore, except as discussed above,

alternatives for small creditors are not provided. A final regulatory

flexibility analysis will be conducted after consideration of comments

received during the public comment period.

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.

Certain conventions have been used to highlight the proposed

revisions to the text of the regulation and the staff commentary. New

language is shown inside bold-faced arrows, while language that would

be deleted is set off with bold-faced brackets. Paragraphs are numbered

to comply with Federal Register publication rules.

For the reasons set forth in the preamble, 12 CFR part 202 is

proposed to be 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 [rule] rules [prohibiting

discrimination].

202.5 Rules concerning [taking of applications] requests

for information.

202.5a Rules on providing appraisal reports.

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.

202.13Information for monitoring purposes.

202.14 Enforcement, penalties and liabilities.

202.15 Incentives for self-testing and self-correction.

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.

Sec. 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,

the regulation applies to all persons who are creditors, as defined in

Sec. 202.2(l). 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.

Sec. 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 [a

[[Page 44594]]

substantial portion] 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] account;

(iii) A refusal or failure to authorize an account transaction at a

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 [a substantial portion] 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.

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 Sec. 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 [established]

used by a creditor for the type of credit

requested. The term includes a request for a preapproval

under procedures in which a creditor will issue to creditworthy persons

a written commitment for credit up to a specified amount that is valid

for a designated period of time, even if the commitment is

conditional. 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 Secs. 202.3(a), (b), and

(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 [the decision of whether or not to

extend credit] a credit decision. The term

includes a creditor's assignee, transferee, or subrogee who so

participates. For purposes of Secs. 202.4(a) and

(b) [202.5(a)], the term 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

[[Page 44595]]

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 under 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.

Sec. 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]

Section 202.12(b) relating to record retention

[do]does not apply to public-utilities

credit[:].

[(i) Section 202.5(d)(1) concerning information about marital

status;

(ii) Section 202.10 relating to furnishing of credit information;

and

(iii) 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) [202.5(c)] concerning

information about a spouse or former spouse;

(ii) Section 202.5(c)(1) [202.5(d)(1)]

concerning information about marital status;

[(iii) Section 202.5(d)(3) concerning information about the sex of

an applicant;]

[(vi)](iii) Section 202.7(b) relating to

designation of name[, but only] to the extent necessary to [prevent

violation of] comply with rules regarding an

account in which a broker or dealer has an interest, or rules

[necessitating] regarding the aggregation of

accounts of spouses [for the purpose of determining] to

determine controlling interests, beneficial interests,

beneficial ownership, or purchase limitations and restrictions;

[(v)](iv) Section 202.7(c) relating to action

concerning open-end accounts, [but only] to the extent the action taken

is on the basis of a change of name or marital status;

[(vi)] (v) Section 202.7(d) relating to the

signature of a spouse or other person;

[(vii)] (vi) Section 202.10 relating to

furnishing of credit information; and [(viii)]

(vii) Section 202.12(b) relating to record

retention.

(c) Incidental credit[.]--(1) Definition.

Incidental credit refers to extensions of consumer and

business credit other than [credit of] 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) for consumer credit, or not

subject to interest charges or fees for business credit; 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) [202.5(c)] concerning

information about a spouse or former spouse;

(ii) Section 202.5(c)(1) [202.5(d)(1)]

concerning information about marital status;

(iii) Section 202.5(c)(2) [202.5(d)(2)]

concerning information about income derived from alimony, child

support, or separate maintenance payments;

[(iv) Section 202.5(d)(3) concerning information about the sex of

an applicant, but only to the extent necessary for medical records or

similar purposes;]

[(v)] (iv) Section 202.7(d) relating to the

signature of a spouse or other person;

[(vi)] (v) Section 202.9 relating to

notifications;

[(vii)] (vi) Section 202.10 relating to

furnishing of credit information; and

[(viii)] (vii) 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

Sec. 202.4(a), the general rule prohibiting

discrimination on a prohibited basis, the requirements of this

regulation do not apply to government credit.

Sec. 202.4 General rules [prohibiting

discrimination].

(a) Discrimination. A creditor shall not

discriminate against an applicant on a prohibited basis regarding any

aspect of a credit transaction.

[[Page 44596]]

(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

Sec. 202.13(a).

(d) Disclosures and other required information. A creditor shall

provide the disclosures and information required to be in writing by

Secs. 202.5, 202.5a, 202.9, and 202.13(c), in a clear and conspicuous

manner and in a form the person may retain.

Sec. 202.5 Rules concerning [taking of applications]

requests for information.

[(a) Discouraging applications. 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.]

[(b)] (a) General rules concerning requests

for information[.]--(1) Except as provided in

paragraphs (b) and (c) [and (d)] of this section,

a creditor may request any information in connection with an

application.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) and (c) [and (d)] of this section, a creditor

shall request information for monitoring purposes as required by

Sec. 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 statute or regulation.

(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 Sec. 202.8(b),

(c), and (d).

(4) Obtaining information. Except as otherwise permitted

or required by law, a creditor shall not require an applicant to supply

information about race, color, religion, national origin, or sex in

connection with a credit transaction. A creditor that requests

information on applicant characteristics shall disclose, orally or in

writing, at the time the information is requested, that:

(i) Providing the information is optional; and

(ii) That the information (or the applicant's decision not to

provide the information) will not be taken into account in any aspect

of the credit transaction.

[(c)] (b) Information about a spouse or

former spouse[.] (1) 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

(b)(2)(v) [(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

property on which the applicant is relying as a basis for repayment of

the credit requested is located in such a state; 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 an

applicant to list any account [upon] on which the

applicant is liable and to provide the name and address [in which]

of the person in whose name the account is

[carried] held. A creditor may also ask

an applicant to list the names in which [an]

the applicant has previously received credit.

[(d)] (c) 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) Sex. [A creditor shall not inquire about the sex of an

applicant.] 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.

(4) 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.

[(5) Race, color, religion, national origin. A creditor shall not

inquire about the race, color, religion, or national origin of an

applicant or any other person in connection with a credit transaction.

A creditor may inquire about an applicant's permanent residency and

immigration status.]

(5) Permanent residency, immigration status. A creditor

may inquire about an applicant's permanent residency and immigration

status in connection with a credit transaction.

[(e) Written applications. A creditor shall take written

applications for the types of credit covered by Sec. 202.13(a) but need

not take written applications for other types of credit.]

Sec. 202.5a Rules on providing appraisal reports.

(a) Providing appraisals. A creditor shall provide a copy of the

appraisal report used in connection with an application for credit that

is to be secured by a lien on a dwelling. A creditor shall comply with

either paragraph (a)(1) or (a)(2) of this section.

(1) Routine delivery. A creditor may routinely provide a copy of

the appraisal report to an applicant (whether credit is granted or

denied or the application is withdrawn).

(2) Upon request. A creditor that does not routinely provide

appraisal reports shall provide a copy upon an applicant's written

request.

(i) Notice. A creditor that provides appraisal reports only upon

request

[[Page 44597]]

shall notify an applicant in writing of the right to receive a copy of

an appraisal report. The notice may be given at any time during the

application process but no later than when the creditor provides notice

of action taken under Sec. 202.9 of this part. The notice shall specify

that the applicant's request must be in writing, give the creditor's

mailing address, and state the time for making the request as provided

in paragraph (a)(2)(ii) of this section.

(ii) Delivery. A creditor shall mail or deliver a copy of the

appraisal report promptly (generally within 30 days) after the creditor

receives an applicant's request, receives the report, or receives

reimbursement from the applicant for the report, whichever is last to

occur. A creditor need not provide a copy when the applicant's request

is received more than 90 days after the creditor has provided notice of

action taken on the application under Sec. 202.9 of this part or 90

days after the application is withdrawn.

(b) Credit unions. A creditor that is subject to the regulations of

the National Credit Union Administration on making copies of appraisals

available is not subject to this section.

(c) Definitions. For purposes of paragraph (a) of this section, the

term dwelling means a residential structure that contains one to four

units whether or not that structure is attached to real property. The

term includes, but is not limited to, an individual condominium or

cooperative unit, and a mobile or other manufactured home. The term

appraisal report means the document(s) relied upon by a creditor in

evaluating the value of the dwelling.

Sec. 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 (b)(2), 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 use assumptions or aggregate statistics relating to

the likelihood that any group 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 that 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 whether an

applicant is a permanent resident of the United States, the applicant's

immigration status, 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

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.

Sec. 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

[[Page 44598]]

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 property upon which the applicant is relying is

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 amount of

credit requested under the creditor's standards of creditworthiness;

and

(ii) The applicant does not have sufficient separate property to

qualify for the amount of 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 extension of the credit requested, a creditor

may request a cosigner, guarantor, or the like. 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.

Sec. 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 of the provisions of this regulation apply to each

of the special purpose credit programs described in paragraph (a) of

this section unless 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 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 program if the signature is required by federal or

state law.

Sec. 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:

[[Page 44599]]

(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 of 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

section 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 a written request for confirmation from the applicant.

(3) Notification to business credit applicants. For business

credit, a creditor shall comply with the requirements of this paragraph

in the following manner:

(i) With regard to a business that had gross revenues of $1,000,000

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), 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 is in a form the applicant may retain

and 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 solely by telephone, a creditor

satisfies the requirements of this paragraph 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

$1,000,000 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) Within a reasonable time of the action

taken, [Notify] notify the applicant,

orally or in writing, [within a reasonable time] of the action taken

and of the applicant's right to a written statement of

reasons; 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

being notified of the adverse action.

(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 the 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; but

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. The requirements

of this section (including statements of specific reasons) are

satisfied by oral notifications in the case of any creditor that did

not receive more than 150 applications during the preceding calendar

year.

(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 no credit is offered or if the applicant

does not expressly accept or use any credit offered, each creditor

taking adverse action must comply with this section,

[[Page 44600]]

directly or through a third party. A notice given by a third party

shall disclose the identity of each creditor on whose behalf the notice

is given.

Sec. 202.10 Furnishing of credit information.

(a) Designation of accounts. A creditor that furnishes credit

information shall designate:

(1) Any new account to reflect the participation of both spouses if

the applicant's spouse is permitted to use or is contractually liable

on the account (other than as a guarantor, surety, endorser, or similar

party); and

(2) Any existing account to reflect such participation, within 90

days after receiving a written request to do so from one of the

spouses.

(b) Routine reports to consumer reporting agency. If a creditor

furnishes credit information to a consumer reporting agency concerning

an account designated to reflect the participation of both spouses, the

creditor shall furnish the information in a manner that will enable the

agency to provide access to the information in the name of each spouse.

(c) Reporting in response to inquiry. If a creditor furnishes

credit information in response to an inquiry concerning an account

designated to reflect the participation of both spouses, the creditor

shall furnish the information in the name of the spouse about whom the

information is requested.

Sec. 202.11 Relation to state law.

(a) Inconsistent state laws. Except as otherwise provided in this

section, this regulation alters, affects, or preempts only those state

laws that are inconsistent with the Act and this regulation and then

only to the extent of the inconsistency. A state law is not

inconsistent if it is more protective of an applicant.

(b) Preempted provisions of state law. (1) A state law is deemed to

be inconsistent with the requirements of the Act and this regulation

and less protective of an applicant within the meaning of section

705(f) of the Act to the extent that the law:

(i) Requires or permits a practice or act prohibited by the Act or

this regulation;

(ii) Prohibits the individual extension of consumer credit to both

parties to a marriage if each spouse individually and voluntarily

applies for such credit;

(iii) Prohibits inquiries or collection of data required to comply

with the Act or this regulation;

(iv) Prohibits asking about or considering

age in an empirically derived, demonstrably and statistically sound,

credit scoring system to determine a pertinent element of

creditworthiness, or to favor an elderly applicant; or

(v) Prohibits inquiries necessary to establish or administer

a [as] special purpose credit program as defined

by Sec. 202.8.

(2) A creditor, state, or other interested party may request the

Board to determine whether a state law is inconsistent with the

requirements of the Act and this regulation.

(c) Laws on finance charges, loan ceilings. If married applicants

voluntarily apply for and obtain [obtained]

individual accounts with the same creditor, the accounts shall not be

aggregated or otherwise combined for purposes of determining

permissible finance charges or loan ceilings under any federal or state

law. Permissible loan ceiling laws shall be construed to permit each

spouse to become individually liable up to the amount of the loan

ceilings, less the amount for which the applicant is jointly liable.

(d) State and federal laws not affected. This section does not

alter or annul any provision of state property laws, laws relating to

the disposition of decedents' estates, or federal or state banking

regulations directed only toward insuring the solvency of financial

institutions.

(e) Exemption for state-regulated transactions--(1) Applications. A

state may apply to the Board for an exemption from the requirements of

the Act and this regulation for any class of credit transactions within

the state. The Board will grant such an exemption if the Board

determines that:

(i) The class of credit transactions is subject to state law

requirements substantially similar to the Act and this regulation or

that applicants are afforded greater protection under state law; and

(ii) There is adequate provision for state enforcement.

(2) Liability and enforcement. (i) No exemption will extend to the

civil-liability provisions of section 706 or the administrative-

enforcement provisions of section 704 of the Act.

(ii) After an exemption has been granted, the requirements of the

applicable state law (except for additional requirements not imposed by

federal law) will constitute the requirements of the Act and this

regulation.

Sec. 202.12 Record retention.

(a) Retention of prohibited information. A creditor may retain in

its files information that is prohibited by the Act or this regulation

in evaluating applications, without violating the Act or this

regulation, if the information was obtained:

(1) From any source prior to March 23, 1977;

(2) From consumer reporting agencies, an applicant, or others

without the specific request of the creditor; or

(3) As required to monitor compliance with the Act and this

regulation or other federal or state statutes or regulations.

(b) Preservation of records--(1) Applications. For 25 months [(12

months for business credit)] after the date that a creditor notifies an

applicant of action taken on an application or of incompleteness

(except as provided in paragraph (b)(5) of this

section), the creditor shall retain in original form or a

copy thereof:

(i) Any application that it receives, any information required to

be obtained concerning characteristics of the applicant to monitor

compliance with the Act and this regulation or other similar law, and

any other written or recorded information used in evaluating the

application and not returned to the applicant at the applicant's

request;

(ii) A copy of the following documents if furnished to the

applicant in written form (or, if furnished orally, any notation or

memorandum made by the creditor):

(A) The notification of action taken; and

(B) The statement of specific reasons for adverse action; and

(iii) Any written statement submitted by the applicant alleging a

violation of the Act or this regulation.

(2) Existing accounts. For 25 months [(12 months for business

credit)] after the date that a creditor notifies an applicant of

adverse action regarding an existing account (except as

provided in paragraph (b)(5) of this section), the creditor

shall retain as to that account, in original form or a copy thereof:

(i) Any written or recorded information concerning the adverse

action; and

(ii) Any written statement submitted by the applicant alleging a

violation of the Act or this regulation.

(3) Other applications. For 25 months [(12 months for business

credit)] after the date that a creditor receives an application for

which the creditor is not required to comply with the notification

requirements of Sec. 202.9 (except as provided in paragraph

(b)(5) of this section), the creditor shall retain all

written or recorded information in its possession concerning the

applicant, including any notation of action taken.

(4) Enforcement proceedings and investigations. A creditor shall

retain the information beyond 25 months [(12

[[Page 44601]]

months for business credit)] (except as provided in

paragraph (b)(5) of this section) if [it] the

creditor has actual notice that it is under investigation or

is subject to an enforcement proceeding for an alleged violation of the

Act or this regulation by the Attorney General of the United States or

by an enforcement agency charged with monitoring that creditor's

compliance with the Act and this regulation, or if it has been served

with notice of an action filed pursuant to section 706 of the Act and

Sec. 202.14 of this regulation. The creditor shall retain the

information until final disposition of the matter, unless an earlier

time is allowed by order of the agency or court.

(5) Special rule for certain business credit applications. With

regard to a business with gross revenues in excess of $1,000,000 in its

preceding fiscal year, or an extension of trade credit, credit incident

to a factoring agreement or other similar types of business credit, the

creditor shall retain records for at least 60 days after notifying the

applicant of the action taken. If within that time period the applicant

requests in writing the reasons for adverse action or that records be

retained, the creditor shall retain records for 12 months.

(6) Self-tests. For 25 months after a self-test (as defined in

Sec. 202.15) has been completed, the creditor shall retain all written

or recorded information about the self-test. A creditor shall retain

information beyond 25 months if it has actual notice that it is under

investigation or is subject to an enforcement proceeding for an alleged

violation, or if it has been served with notice of a civil action. In

such cases, the creditor shall retain the information until final

disposition of the matter, unless an earlier time is allowed by the

appropriate agency or court order.

(7) Preapplication marketing information. For 25 months

after the date that a creditor solicits potential customers for credit

(12 months for business credit subject to paragraph (b)(5) of this

section), the creditor shall retain in original form or a copy thereof:

(i) Any preapproved credit solicitation, the list of criteria the

creditor used to select potential recipients of the solicitation, any

correspondence (to and from the selected recipients) related to

complaints about the solicitation; and

(ii) Any component of a marketing plan to which such solicitation

relates.

Sec. 202.13 Information for monitoring purposes.

(a) Information to be requested. (1) A

creditor that receives an application for credit primarily for the

purchase or refinancing of a dwelling occupied or to be occupied by the

applicant as a principal residence, where the extension of credit will

be secured by the dwelling, shall request as part of the application

the following information regarding the applicant(s):

[(1)] i. Race or national origin, using the

categories American Indian or Alaskan Native; Asian or Pacific

Islander; Black; White; Hispanic; Other (Specify);

[(2)] ii. Sex;

[(3)] iii. Marital status, using the

categories married, unmarried, and separated; and

[(4)] iv. Age.

(2) Dwelling means a residential structure

that contains one to four units, whether or not that structure is

attached to real property. The term includes, but is not limited to, an

individual condominium or cooperative unit, and a mobile or other

manufactured home.

(b) Obtaining [of] information. Questions regarding race or

national origin, sex, marital status, and age may be listed, at the

creditor's option, on the application form or on a separate form that

refers to the application. The applicant(s) shall be asked but not

required to supply the requested information. If the applicant(s)

chooses not to provide the information or any part of it, that fact

shall be noted on the form. The creditor shall then also note on the

form, to the extent possible, the race or national origin and sex of

the applicant(s) on the basis of visual observation or surname.

(c) Disclosure to applicant(s). The creditor shall inform the

applicant(s) that the information regarding race or national origin,

sex, marital status, and age is being requested by the federal

government for the purpose of monitoring compliance with federal

statutes that prohibit creditors from discriminating against applicants

on those bases. The creditor shall also inform the applicant(s) that if

the applicant(s) chooses not to provide the information, the creditor

is required to note the race or national origin and sex on the basis of

visual observation or surname.

(d) Substitute monitoring program. A monitoring program required by

an agency charged with administrative enforcement under section 704 of

the Act may be substituted for the requirements contained in paragraphs

(a), (b), and (c) of this section.

Sec. 202.14 Enforcement, penalties and liabilities.

(a) Administrative enforcement[.] (1) As set forth more fully in

section 704 of the Act, administrative enforcement of the Act and this

regulation regarding certain creditors is assigned to the Comptroller

of the Currency, Board of Governors of the Federal Reserve System,

Board of Directors of the Federal Deposit Insurance Corporation, Office

of Thrift Supervision, National Credit Union Administration, Interstate

Commerce Commission, Secretary of Agriculture, Farm Credit

Administration, Securities and Exchange Commission, Small Business

Administration, and Secretary of Transportation.

(2) Except to the extent that administrative enforcement is

specifically assigned to other authorities, compliance with the

requirements imposed under the Act and this regulation is enforced by

the Federal Trade Commission.

(b) Penalties and liabilities[.] (1) Sections 706(a) and (b) and

702(g) of the Act provide that any creditor that fails to comply with a

requirement imposed by the Act or this regulation is subject to civil

liability for actual and punitive damages in individual or class

actions. Pursuant to sections 704(b), (c), and (d) and 702(g) of the

Act, violations of the Act or this regulation

[regulations] also constitute violations of other federal laws.

Liability for punitive damages is restricted to nongovernmental

entities and is limited to $10,000 in individual actions and the lesser

of $500,000 or 1 percent of the creditor's net worth in class actions.

Section 706(c) provides for equitable and declaratory relief and

section 706(d) authorizes the awarding of costs and reasonable

attorney's fees to an aggrieved applicant in a successful action.

(2) As provided in section 706(f), a civil action under the Act or

this regulation may be brought in the appropriate United States

district court without regard to the amount in controversy or in any

other court of competent jurisdiction within two years after the date

of the occurrence of the violation, or within one year after the

commencement of an administrative enforcement proceeding or of a civil

action brought by the Attorney General of the United States within two

years after the alleged violation.

(3) If an agency responsible for administrative enforcement is

unable to obtain compliance with the Act or this

regulation [part], it may refer the matter to the

Attorney General of the United States. In addition, if the Board, the

Comptroller of the Currency, the Federal Deposit Insurance Corporation,

the Office of Thrift Supervision, or the National Credit Union

Administration

[[Page 44602]]

has reason to believe that one or more creditors engaged in a pattern

or practice of discouraging or denying applications in violation of the

Act or this regulation, the agency shall refer the matter to the

Attorney General. Furthermore, the agency may refer a matter to the

Attorney General if the agency has reason to believe that one or more

creditors violated section 701(a) of the Act.

(4) On referral, or whenever the Attorney General has reason to

believe that one or more creditors engaged in a pattern or practice in

violation of the Act or this regulation [part],

the Attorney General may bring a civil action for such relief as may be

appropriate, including actual and punitive damages and injunctive

relief.

(5) If the Board, the Comptroller of the Currency, the Federal

Deposit Insurance Corporation, the Office of Thrift Supervision, or the

National Credit Union Administration has reason to believe (as a result

of a consumer complaint, conducting a consumer compliance examination,

or otherwise) that a violation of the Act or this regulation has

occurred which is also a violation of the Fair Housing Act, and the

matter is not referred to the Attorney General, the agency shall

notify:

(i) The Secretary of Housing and Urban Development; and

(ii) The applicant that the Secretary of Housing and Urban

Development has been notified and that remedies for the violation may

be available under the Fair Housing Act.

(c) Failure of compliance. A creditor's failure to comply with

Secs. 202.6(b)(6), 202.9, 202.10, 202.12 or 202.13 is not a violation

if it results from an inadvertent error. On discovering an error under

Secs. 202.9 and 202.10, the creditor shall correct it as soon as

possible. [If a creditor inadvertently obtains the monitoring

information regarding the race or national origin and sex of the

applicant in a dwelling-related transaction not covered by Sec. 202.13,

the creditor may act on and retain the application without violating

the regulation.]

Sec. 202.15 Incentives for self-testing and self-correction.

(a) General rules--(1) Voluntary self-testing and correction. The

report or results of the self-test that a creditor voluntarily conducts

(or authorizes) are privileged as provided in this section. Data

collection required by law or by any governmental authority is not a

voluntary self-test.

(2) Corrective action required. The privilege in this section

applies only if the creditor has taken or is taking appropriate

corrective action.

(3) Other privileges. The privilege created by this section does

not preclude the assertion of any other privilege that may also apply.

(b) Self-test defined--(1) Definition. A self-test is any program,

practice, or study that:

(i) Is designed and used specifically to determine the extent or

effectiveness of a creditor's compliance with the Act or this

regulation; and

(ii) 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.

(2) Types of information privileged. The privilege under this

section applies to the report or results of the self-test, data or

factual information created by the self-test, and any analysis,

opinions, and conclusions pertaining to the self-test report or

results. The privilege covers workpapers or draft documents as well as

final documents.

(3) Types of information not privileged. The privilege under this

section does not apply to:

(i) Information about whether a creditor conducted a self-test, the

methodology used or the scope of the self-test, the time period covered

by the self-test, or the dates it was conducted; or

(ii) Loan and application files or other business records related

to credit transactions, and information derived from such files and

records, even if it has been aggregated, summarized, or reorganized to

facilitate analysis.

(c) Appropriate corrective action--(1) General requirement. For the

privilege in this section to apply, appropriate corrective action is

required when the self-test shows that it is more likely than not that

a violation occurred, even though no violation has been formally

adjudicated.

(2) Determining the scope of appropriate corrective action. A

creditor must take corrective action that is reasonably likely to

remedy the cause and effect of a likely violation by:

(i) Identifying the policies or practices that are the likely cause

of the violation; and

(ii) Assessing the extent and scope of any violation.

(3) Types of relief. Appropriate corrective action may include both

prospective and remedial relief, except that to establish a privilege

under this section:

(i) A creditor is not required to provide remedial relief to a

tester used in a self-test;

(ii) A creditor is only required to provide remedial relief to an

applicant identified by the self-test as one whose rights were more

likely than not violated; and

(iii) A creditor is not required to provide remedial relief to a

particular applicant if the statute of limitations applicable to the

violation expired before the creditor obtained the results of the self-

test or the applicant is otherwise ineligible for such relief.

(4) No admission of violation. Taking corrective action is not an

admission that a violation occurred.

(d)[(1)] Scope of privilege[.]--(1) Use of privileged

self-test. The report or results of a privileged self-test

may not be obtained or used:

(i) By a government agency in any examination or investigation

relating to compliance with the Act or this regulation; or

(ii) By a government agency or an applicant (including a

prospective applicant who alleges a violation of

Sec. 202.4(b) [202.5(a)]) in any proceeding or

civil action in which a violation of the Act or this regulation is

alleged.

(2) Loss of privilege. The report or results of a self-test are not

privileged under paragraph (d)(1) of this section if the creditor or a

person with lawful access to the report or results:

(i) Voluntarily discloses any part of the report or results, or any

other information privileged under this section, to an applicant or

government agency or to the public;

(ii) Discloses any part of the report or results, or any other

information privileged under this section, as a defense to charges that

the creditor has violated the Act or regulation; or

(iii) Fails or is unable to produce written or recorded information

about the self-test that is required to be retained under

Sec. 202.12(b)(6) when the information is needed to determine whether

the privilege applies. This paragraph does not limit any other penalty

or remedy that may be available for a violation of Sec. 202.12.

(3) Limited use of privileged information. Notwithstanding

paragraph (d)(1) of this section, the self-test report or results and

any other information privileged under this section may be obtained and

used by an applicant or government agency solely to determine a penalty

or remedy after a violation of the Act or this regulation has been

adjudicated or admitted. Disclosures for this limited purpose may be

used only for the particular proceeding in which the adjudication or

admission was made. Information disclosed under this

[[Page 44603]]

paragraph (d)(3) remains privileged under paragraph (d)(1) of this

section.

Appendix A to Part 202--Federal Enforcement Agencies

The following list indicates the federal agencies that enforce

Regulation B for particular classes of creditors. Any questions

concerning a particular creditor should be directed to its enforcement

agency. Terms that are not defined in the Federal Deposit Insurance Act

(12 U.S.C. 1813(s)) shall have the meaning given to them in the

International Banking Act of 1978 (12 U.S.C. 3101).

National Banks, and Federal Branches and Federal Agencies of

Foreign Banks

Office of the Comptroller of the Currency, Customer Assistance

Unit, 1301 McKinney Avenue, Suite 3710, Houston, Texas 77010.

State Member Banks, 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

Federal Reserve Bank serving the district in which the

institution is located.

Nonmember Insured Banks and Insured State Branches of Foreign Banks

Federal Deposit Insurance Corporation Regional Director for the

region in which the institution is located.

Savings institutions insured under the Savings Association

Insurance Fund of the FDIC and federally chartered

savings banks insured under the Bank

Insurance Fund of the FDIC (but not including state-chartered

savings banks insured under the Bank Insurance Fund)

Office of Thrift Supervision Regional Director for the region in

which the institution is located.

Federal Credit Unions

Regional office of the National Credit Union Administration

serving the area in which the federal credit union is located.

Air Carriers

Assistant General Counsel for Aviation Enforcement and

Proceedings, Department of Transportation, 400 Seventh Street, SW,

Washington, DC 20590.

Creditors Subject to Surface Transportation

Board [Interstate Commerce Commission]

Office of Proceedings, [Interstate Commerce Commission,

Washington, DC 20523] Surface Transportation Board,

Department of Transportation, 1925 K Street NW, Washington, DC

20423

Creditors Subject to Packers and Stockyards Act

Nearest Packers and Stockyards Administration area supervisor.

Small Business Investment Companies

U.S. Small Business Administration, 409 Third Street,

SW, [1441 L Street, NW,] Washington, DC 20416.

Brokers and Dealers

Securities and Exchange Commission, Washington, DC 20549.

Federal Land Banks, Federal Land Bank Associations, Federal

Intermediate Credit Banks, and Production Credit Associations

Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA

22102-5090.

Retailers, Finance Companies, and All Other Creditors Not Listed

Above

FTC Regional Office for region in which the creditor operates or

Federal Trade Commission, Equal Credit Opportunity, Washington, DC

20580.

Appendix B to Part 202--Model Application Forms

1. This appendix contains five model

credit application forms, each designated for use in a particular

type of consumer credit transaction as indicated by the bracketed

caption on each form. The first sample form is intended for use in

open-end, unsecured transactions; the second for closed-end, secured

transactions; the third for closed-end transactions, whether

unsecured or secured; the fourth in transactions involving community

property or occurring in community property states; and the fifth in

residential mortgage transactions[. The appendix also]

which contains a model disclosure for use in

complying with Sec. 202.13 for certain dwelling-related loans. All

forms contained in this appendix are models; their use by creditors

is optional.

2. The use or modification of these forms

is governed by the following instructions. A creditor may change the

forms: by asking for additional information not prohibited by

Sec. 202.5; by deleting any information request; or by rearranging

the format without modifying the substance of the inquiries. In any

of these three instances, however, the appropriate notices regarding

the optional nature of courtesy titles, the option to disclose

alimony, child support, or separate maintenance, and the limitation

concerning marital status inquiries must be included in the

appropriate places if the items to which they relate appear on the

creditor's form.

3. If a creditor uses an appropriate

Appendix B model form, or modifies a form in accordance with the

above instructions, that creditor shall be deemed to be acting in

compliance with the provisions of paragraphs (b)

and (c) [and (d)] of Sec. 202.5 [of this regulation].

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Appendix C to Part 202--Sample Notification Forms

1. This appendix contains nine sample

notification forms. Forms C-1 through C-4 are intended for use in

notifying an applicant that adverse action has been taken on an

application or account under Secs. 202.9(a) (1) and (2)(i) [of this

regulation]. Form C-5 is a notice of disclosure of the right to

request specific reasons for adverse action under Secs. 202.9(a) (1)

and (2)(ii). Form C-6 is designed for use in notifying an applicant,

under Sec. 202.9(c)(2), that an application is incomplete. Forms C-7

and C-8 are intended for use in connection with applications for

business credit under Sec. 202.9(a)(3). Form C-9 is designed for use

in notifying an applicant of the right to receive a copy of an

appraisal under Sec. 202.5a.

2. Form C-1 contains the Fair Credit

Reporting Act disclosure as required by sections 615 (a) and (b) of

that act. Forms C-2 through C-5 contain only the section 615(a)

disclosure (that a creditor obtained information from a consumer

reporting agency that played a part in the credit decision). A

creditor must provide the 615(a) disclosure when adverse action is

taken against a consumer based on information from a consumer

reporting agency. A creditor must provide the 615(b) disclosure when

adverse action is taken based on information from an outside source

other than a consumer reporting agency. In addition, a creditor must

provide the 615(b) disclosure if the creditor obtained information

from an affiliate other than information in a consumer report or

other than information concerning the affiliate's own transactions

or experiences with the consumer. Creditors may comply with the

disclosure requirements for adverse action based on information in a

consumer report obtained from an affiliate by providing either the

615(a) or 615(b) disclosure.

3. The sample forms are illustrative and

may not be appropriate for all creditors. They were designed to

include some of the factors that creditors most commonly consider.

If a creditor chooses to use the checklist of reasons provided in

one of the sample forms in this appendix and if reasons commonly

used by the creditor are not provided on the form, the creditor

should modify the checklist by substituting or adding other reasons.

For example, if ``inadequate down payment'' or ``no deposit

relationship with us'' are common reasons for taking adverse action

on an application, the creditor ought to add or substitute such

reasons for those presently contained on the sample forms.

4. If the reasons listed on the forms are

not the factors actually used, a creditor will not satisfy the

notice requirement by simply checking the closest identifiable

factor listed. For example, some creditors consider only references

from banks or other depository institutions and disregard finance

company references altogether; their statement of reasons should

disclose ``insufficient bank references,'' not ``insufficient credit

references.'' Similarly, a creditor that considers bank references

and other credit references as distinct factors should treat the two

factors separately and discl

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