[Federal Register Volume 59, Number 249 (Thursday, December 29, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31715]


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[Federal Register: December 29, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 202

[Regulation B; Docket No. R-0865]

 

Equal Credit Opportunity

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; official staff interpretation.

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SUMMARY: The Board is publishing for comment revisions to its official 
staff commentary to Regulation B (Equal Credit Opportunity). The 
commentary applies and interprets the requirements of Regulation B and 
is a substitute for individual staff interpretations. The proposed 
revisions to the commentary provide guidance on several issues 
including disparate treatment, special purpose credit programs, credit 
scoring systems, and marital status discrimination.

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

ADDRESSES: Comments should refer to Docket No. R-0865, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments also may be delivered to Room B-2222 
of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to 
the guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments 
received will be available for inspection in Room MP-500 of the Martin 
Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided 
in 12 CFR 261.8 of the Board's rules regarding the availability of 
information.

FOR FURTHER INFORMATION CONTACT: Jane Jensen Gell, Sheilah Goodman, or 
Natalie E. Taylor, Staff Attorneys, Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System, at (202) 
452-3667 or 452-2412; for the hearing impaired only, contact Dorothea 
Thompson, Telecommunications Device for the Deaf, (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691-1691f, 
makes it unlawful for creditors to discriminate in any aspect of a 
credit transaction on the basis of gender, marital status, age, race, 
national origin, color, religion, receipt of public assistance, or the 
exercise of rights under the Consumer Credit Protection Act. This 
statute is implemented by the Board's Regulation B (12 CFR Part 202). 
The Board also has an official staff commentary (12 CFR Part 202 (Supp. 
I)) that interprets the regulation. The commentary provides general 
guidance to creditors in applying the regulation to various credit 
transactions, and is updated periodically to address significant 
questions that arise.

II. Summary of Proposed Revisions to Commentary

Section 202.2--Definitions

2(c)(2)(iii) Application To Increase Amount of Credit or Change Terms
    Proposed comment 2(c)(2)(iii)-2 clarifies that the denial of an 
application to increase the amount of credit or change the terms for an 
existing account or loan, such as a business line of credit, is adverse 
action. As provided in section 202.2(c), however, action or forbearance 
taken in connection with inactivity, default, or delinquency for an 
account or loan is not adverse action. For example, a ``workout'' 
arrangement generally is not adverse action, unless the consumer 
submits an application that is denied by the creditor.
2(p)  Empirically Derived and Other Credit Scoring Systems
    Proposed comment 2(p)-3 clarifies that a creditor may acquire an 
empirically derived, demonstrably and statistically sound credit 
scoring system--or the data from which to develop such a system--from 
multiple credit grantors, as long as the creditor validates the 
borrowed system on its own data when data become available.
    Proposed comment 2(p)-4 clarifies that credit scoring systems--even 
if ``empirically derived, demonstrably and statistically sound''--are 
subject to review under the ECOA and Regulation B. (A system may 
include age as a predictive factor provided that the age of an elderly 
applicant is not assigned a negative factor or value, but no other 
prohibited basis may be used as a variable.) If a scoring system is 
used in conjunction with individual discretion, disparate treatment 
could still occur. In addition, a violation of the act and regulation 
could occur if there is a disparate impact on a prohibited basis, 
unless the practice is justified by a business necessity with no less 
discriminatory alternative available.

Section 202.4--General Rule Prohibiting Discrimination

    Comment 4-1 would be revised to clarify the concept of disparate 
treatment. Creditors have asked for greater guidance about what actions 
constitute discriminatory treatment under the regulation.

Section 202.5a--Rules on Providing Appraisal Reports

5a(a)  Providing Appraisals
    Proposed comment 5a(a)-1 clarifies that section 202.5a applies to 
applications for credit to be secured by a consumer's dwelling, whether 
the credit is for a business purpose or a consumer purpose.
    Proposed comment 5a(a)-2 provides that a request for renewal of an 
existing extension of credit secured by a dwelling is covered by the 
appraisal rules if the creditor obtains and uses a new appraisal report 
in evaluating the request. Section 202.5a applies to appraisal reports 
``used in connection with an application for credit.'' Under section 
202.2(f), ``application'' includes an oral or written request for an 
extension of credit; section 202.2(q), in turn, defines ``extension of 
credit'' to include ``the refinancing or other renewal of credit.'' 
Thus, a request for a renewal of credit is an application and covered 
by section 202.5a.
    Proposed comment 5a(a)-2 also provides that if a consumer requests 
renewal of existing credit and the creditor does not obtain a new 
appraisal, section 202.5a does not apply.
5a(a)(2)(i)  Notice
    Proposed comment 5a(a)(2)(i)-1 provides that for credit involving 
more than one applicant, the notice under this section need only be 
given to one applicant, but it must be given to the primary applicant 
where one is readily apparent. This parallels the rule applicable to 
notices of action taken under section 202.9 in cases where there is 
more than one applicant.
5a(a)(2)(ii)  Delivery
    Proposed comment 5a(a)(2)(ii)-1 clarifies that in all cases 
creditors may be reimbursed for photocopy and postage costs incurred in 
providing the copy of the appraisal report, unless prohibited by state 
or other law. The comment further clarifies that if a consumer has 
already paid for the report--for example, as part of an application 
fee--the creditor may not seek additional fees (other than incidental 
photocopy and postage costs) prior to providing a copy of the report 
upon the applicant's request. And, if the creditor does not otherwise 
charge for the report, the creditor may not require payment solely from 
those consumers who request a copy of the report. The statute gives 
credit applicants the right to receive copies of appraisal reports upon 
request; the Board believes imposing charges on applicants who exercise 
this right could have a chilling effect.
5a(c)  Definitions
    Proposed comments 5a(c)-1 and 5a(c)-2 address the scope of the term 
``appraisal report.'' Under the proposal, listings of valuations for 
dwellings that are publicly available, such as published home sales 
prices or mortgage amounts, are not covered. The appraisal rules guard 
against discriminatory evaluations of a dwelling's value. The Board 
believes that publicly listed reports of home sales prices or tax 
assessments, among others, are unlikely to be influenced by the type of 
subjectivity the law is intended to eliminate. If a creditor used this 
information as a factor in determining a value for the property, 
however, the document would be part of the appraisal report.

Section 202.6--Rules Concerning Evaluation of Applications

6(b)(1)  Prohibited Basis--Marital Status
    Comment 6(b)(1)-1 would be revised to clarify that if a creditor 
chooses to offer joint credit, the creditor generally may not take the 
applicants' marital status into account in credit evaluations.

Section 202.8--Special-Purpose Credit Programs

8(a)  Standards for Programs
    Two proposed comments clarify the requirements that for-profit 
organizations must meet to establish special-purpose credit programs 
under section 202.8(a)(3). Proposed comment 8(a)(3)-1 addresses how 
for-profit organizations can determine whether there is a need for a 
special-purpose credit program, and the type of information to rely 
upon in making that determination. Proposed comment 8(a)(3)-2 addresses 
the elements of the written plan that for-profit organizations are 
required to have when establishing a special-purpose credit program.

Section 202.9--Notifications

    Proposed comment 9-5 addresses questions posed to the Board about 
when an adverse action notice is required for prequalification, 
preapproval and similar programs. The proposed comment clarifies that 
the guidance provided in the commentary to section 202.2(f) (addressing 
applications and inquiries) applies to all types of inquiries, 
including prequalification and preapproval programs. Thus, if a 
creditor--in giving information to a consumer about a prequalification 
or preapproval program--decides it will not grant credit, and 
communicates this to the consumer, the creditor has treated the inquiry 
as an application (by virtue of having made a credit decision) and must 
comply with the notification rules in section 202.9.

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

    Proposed comment Appendix C-1 provides examples of additions that 
may be made to Model Form C-9.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-0865. The Board 
requests that, when possible, comments be prepared using a standard 
courier typeface with a type size of 10 or 12 characters per inch. This 
will enable the Board to convert the text into machine-readable form 
through electronic scanning, and will facilitate automated retrieval of 
comments for review. Comments may also be submitted on computer 
diskettes, using either the 3.5'' or 5.25'' size, in any IBM-compatible 
DOS-based format. Comments on computer diskettes must be accompanied by 
a hard copy version.

List of Subjects in 12 CFR Part 202

    Aged, Banks, banking, Civil rights, Credit, Federal Reserve System, 
Marital status discrimination, Penalties, Religious discrimination, 
Reporting and recordkeeping requirements, Sex discrimination.
    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 202 as set forth below:
    (Certain conventions have been used to highlight the proposed 
changes to the staff commentary. New language is shown inside bold-
faced arrows, while language that would be removed is set off with 
brackets.)

PART 202--EQUAL CREDIT OPPORTUNITY (REGULATION B)

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

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

    2. In Supplement I to Part 202, Section 202.2 Definitions, is 
amended as follows:
    a. Under Paragraph (2)(c)(2)(iii), a new paragraph 2. is added; and
    b. Under 2(p), the paragraph heading for 2(p) is revised and new 
paragraphs 3. and 4. are added.
    The additions read as follow:

Supplement I to Part 202--Official Staff Interpretations

* * * * *

Section 202.2  Definitions

* * * * *

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

* * * * *
    2. Application to increase amount of credit or change 
terms. The denial of an application for an increase in the amount of 
credit (or for a change in the terms) for an existing account or 
loan is adverse action.
* * * * *
    (2)(p) Empirically derived and other credit 
scoring systems.
* * * * *
    3. Pooled data scoring systems. A scoring system or 
the data from which to develop such a system may be obtained from 
either a single credit grantor or multiple credit grantors. The 
resulting system will qualify as an empirically derived, 
demonstrably and statistically sound credit scoring system as long 
as the criteria set forth in paragraph (p)(i) through (iv) are met.
    4. Disparate impact. An empirically derived, demonstrably and 
statistically sound credit scoring system may include age as a 
predictive factor (provided that the age of an elderly applicant is 
not assigned a negative factor or value). No other prohibited basis 
may be used as a variable. Generally, credit scoring systems treat 
all applicants objectively and thus avoid problems of disparate 
treatment. In cases where a credit scoring system is used in 
conjunction with judgmental override, disparate treatment could 
still occur. In addition, credit scoring systems that employ neutral 
factors could violate the act or regulation if there is a disparate 
impact on a prohibited basis, unless the practice is justified by 
business necessity with no less discriminatory alternative 
available.
* * * * *
    3. In Supplement I to Part 202, under Section 202.4--General Rule 
Prohibiting Discrimination, two new sentences are added at the end of 
paragraph 1. to read as follows:
* * * * *

Section 202.4--General Rule Prohibiting Discrimination

    1. Scope of section.* * * Disparate treatment on a 
prohibited basis is illegal whether or not it results from a 
conscious intent to discriminate. Disparate treatment would be 
found, for example, if:
    i. A minority applicant is required to provide greater 
documentation to obtain a loan than is required of a similarly 
situated nonminority applicant.
    ii. Credit standards are waived or relaxed for a nonminority 
applicant but not for a similarly situated minority 
applicant.
* * * * *
    4. In Supplement I to part 202, a new Section 202.5a is added to 
read as follows:
* * * * *

Section 202.5a--Rules on Providing Appraisal Reports

    5a(a)  Providing appraisals.
    1. Coverage. This section covers applications for credit to be 
secured by a lien on a consumer's dwelling, whether the credit is 
for a business purpose (for example, a loan to start a small 
business) or a consumer purpose (for example, a loan to finance a 
child's education).
    2. Renewals. If an applicant requests that a creditor renew an 
existing extension of credit, and the creditor obtains a new 
appraisal report to evaluate the request, this section applies. This 
section does not apply to a renewal request if the creditor uses the 
appraisal report initially obtained in connection with the decision 
to grant credit.
    5a(a)(2)(i)  Notice.
    1. Multiple applicants. When an application that is subject to 
this section involves more than one applicant, the notice about the 
appraisal report need only be given to one applicant, but it must be 
given to the primary applicant where one is readily apparent.
    5a(a)(2)(ii)  Delivery.
    1. Reimbursement. Creditors may charge for photocopy and postage 
costs incurred in providing a copy of the appraisal report, unless 
prohibited by state or other law. If the consumer has already paid 
for the report--for example, as part of an application fee--the 
creditor may not require additional fees (other than photocopy and 
postage costs) for the appraisal. Similarly, if the creditor does 
not otherwise impose a fee for appraisal reports, as in the case of 
``no closing cost'' loans, the creditor may not require repayment 
from those consumers who request a copy of the appraisal report.
    5a(c)  Definitions.
    1. Appraisal reports. Examples of appraisal reports are:
    i. A report prepared by an appraiser (whether or not a licensed 
or certified appraiser), including written comments and other 
documents submitted to the creditor in support of the appraiser's 
estimate or opinion of value.
    ii. A document prepared by the creditor's staff which assigns 
value to the property, if a third-party appraisal report has not 
been used.
    iii. A document reflecting a creditor's valuation that is 
different from a valuation in a third party's appraisal report (or 
different from valuations that is publicly available or valuations 
such as manufacturers' invoices for a mobile home), such as an 
internal review document indicating that the value assigned by the 
third-party appraiser (or by the other valuation) is incorrect.
    2. Other reports. The term ``appraisal report'' does not apply 
to all documents relating to the value of the applicant's property. 
Examples of reports not covered are:
    i. Internal documents, if a third-party appraisal report was 
used to establish the value of the property.
    ii. Governmental agency statements of appraised value.
    iii. Valuations lists that are publicly available (such as 
published sales prices or mortgage amounts, tax assessments, and 
retail price ranges) and valuations such as manufacturers' invoices 
for mobile homes.
* * * * *
    5. In Supplement I to Part 202, under Section 202.6--Rules 
Concerning Evaluation of Applications, under Paragraph 6(b)(1), three 
new sentences are added at the end of paragraph 1 to read as follows:
* * * * *

Section 202.6--Rules Concerning Evaluation of Applications

* * * * *

Paragraph 6(b)(1)

    1. Prohibited basis--marital status.* * *  Except to 
the extent necessary to determine rights and remedies for a specific 
credit transaction, a creditor that offers joint credit may not take 
the applicants' marital status into account in credit evaluations. 
Because it is unlawful for creditors to take marital status into 
account, creditors are barred from applying different standards in 
evaluating married and unmarried applicants. In making credit 
decisions, creditors may not treat joint applicants differently 
based on the existence, the absence, or the likelihood of a marital 
relationship between the parties.
* * * * *
    6. In Supplement I to Part 202, under Section 202.8--Special 
Purpose Credit Programs, under 8(a) Standards for programs., new 
paragraphs 5. and 6. are added to read as follows:
* * * * *

Section 202.8--Special Purpose Credit Programs

    (8)(a)  Standards for programs.
* * * * *
     5. Determining need. In designing a special-purpose 
program under section 202.8(a), a for-profit organization must 
determine that the program will benefit a class of people who would 
otherwise be denied credit. This determination can be based on a 
broad analysis using the organization's own research or data from 
outside sources including governmental reports and studies. For 
example, a bank could review its Home Mortgage Disclosure Act data 
along with demographic data for its delineated community and 
conclude that there is a need for a special-purpose credit program 
for low-income minority borrowers.
    6. Elements of the program. The written plan must contain 
information that supports a need for the particular program. In 
addition, the plan should specify the period of time that it will be 
in effect, at the end of which time the need for the program will be 
reevaluated. The plan should be designed to increase access to 
credit, but should not have the effect of depriving people who are 
not part of the class of rights or opportunities they otherwise 
would have.
* * * * *
    7. In Supplement I to Part 202, under Section 202.9--Notifications, 
a new paragraph 5. is added to read as follows:
* * * * *

Section 202.9--Notifications

* * * * *
     5. Prequalification and preapproval programs. 
Whether an adverse action notice must be provided for a 
prequalification or preapproval request depends on the creditor's 
response to the request, as discussed in the commentary to section 
202.2(f). For instance, a creditor may treat the request as an 
inquiry if the creditor provides general information such as loan 
terms and the maximum amount a consumer could borrow under various 
loan programs, explaining the process the consumer must follow to 
submit a mortgage application and the information the creditor will 
analyze in reaching a credit decision. On the other hand, a creditor 
has treated a consumer's request for prequalification as an 
application for credit if, after evaluating information, the 
creditor decides that it will not approve the request and 
communicates that decision to the consumer. For example, if in 
reviewing a request for prequalification, a creditor tells the 
consumer that it would not approve an application for a mortgage 
because of a bankruptcy in the consumer's record, the creditor has 
denied an application for credit.
* * * * *
    8. In Supplement I to Part 202, a new Appendix C is added at the 
end to read as follows:
* * * * *

  Appendix C--Sample Notification Forms

    Form C-9. Creditors may design their own form, or add to or 
modify the model form, to reflect their individual policies and 
procedures. For example, a creditor may want to add:
    i. A telephone number that applicants may call to leave their 
name and the address to which an appraisal report should be sent.
    ii. A notice of the cost the applicant will be required to pay 
the creditor for the appraisal or a copy of the report.

    By order of the Board of Governors of the Federal Reserve 
System, December 20, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-31715 Filed 12-28-94; 8:45 am]
BILLING CODE 6210-01-P