[Federal Register Volume 60, Number 109 (Wednesday, June 7, 1995)]
[Rules and Regulations]
[Pages 29965-29969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13862]



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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: Final rule; official staff interpretation.

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SUMMARY: The Board is revising 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 revisions to the commentary 
provide guidance on several issues including disparate treatment, 
special purpose credit programs, credit scoring systems, and marital 
status discrimination.

EFFECTIVE DATE: June 5, 1995.

FOR FURTHER INFORMATION CONTACT: Jane Jensen Gell, Sheilah Goodman, 
Natalie E. Taylor, or Manley Williams, 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 sex, marital status, age, race, 
national origin, color, religion, receipt of public assistance, or the 
exercise of rights under the Consumer Credit Protection Act. The 
Board's Regulation B (12 CFR Part 202) implements this statute. In 
addition, the Board's official staff commentary (12 CFR Part 202 (Supp. 
I)) interprets the regulation. The commentary provides general guidance 
in applying the regulation to various credit transactions and is 
updated periodically. [[Page 29966]] 

II. Summary of Revisions to the Commentary

    In December 1994 (59 FR 67235, December 29, 1994), the Board 
proposed amendments to the staff commentary to Regulation B. The Board 
received nearly 100 letters on the proposal. After reviewing the 
comment letters and upon further analysis, the Board is adopting final 
amendments to the staff commentary.

Section 202.2--Definitions

2(c)(1)(i) Application for Extension of Credit
    The Board proposed a new comment 2(c)(2)(iii)-2 to address court 
decisions that misapplied portions of that section. Commenters 
suggested that to the extent the comment defined types of adverse 
action, it more clearly fit under section 202.2(c)(1)(i). The Board 
agrees. The Board is adopting comment 2(c)(1)(i)-1 to clarify that the 
refusal to refinance or extend the term of a business or other loan is 
adverse action if the applicant applied in accordance with the 
creditor's procedures.
2(c)(2)(iii) Application for Increase in Available Credit
    The Board proposed comment 2(c)(2)(iii)-2 to clarify that a denial 
of an application to increase available credit or for a change in terms 
is adverse action. Many commenters expressed concern that the phrase 
``change in terms'' was overly broad, requiring a creditor to provide 
an adverse action notice in a variety of situations in which it is not 
now required. The Board has changed the comment heading and has 
narrowed its scope to refer only to applications to increase credit.
2(p) Empirically Derived and Other Credit Scoring Systems
    The Board has adopted comment 2(p)-3, regarding pooled data scoring 
systems, as proposed.
    The proposed comment 2(p)-4 clarified that a credit scoring 
system--even if ``empirically derived, demonstrably and statistically 
sound''--is subject to review under the ECOA and Regulation B. When a 
scoring system is used in conjunction with individual discretion, 
disparate treatment could still occur. In addition, a system could have 
a disparate impact on a prohibited basis, and could be challenged. 
Whether such a challenge would be successful depends on a variety of 
factors, as commenters noted.
    More generally, commenters questioned how the standards set out in 
the proposed comment related to the discussion of disparate impact in 
comment 6(a)-2. Commenters believed that the proposal's reference to 
disparate impact was attempting to describe a highly complex area of 
law in a condensed manner. The Board has deleted the proposed reference 
to the standards of proof and burdens of persuasion the parties must 
meet, and instead has added a reference to comment 6(a)-2.

Section 202.4--General Rule Prohibiting Discrimination

    Comment 4-1 addresses the legal concept known as ``disparate 
treatment,'' which is a particular type of discrimination. The proposed 
amendment clarified that disparate treatment might be found even absent 
a conscious will to discriminate. Some commenters expressed concern 
that the proposal meant that ``intent,'' as that term has been 
interpreted by courts in discrimination cases, is not an element of 
disparate treatment. The Board has revised the comment to clarify that 
treating individuals differently is not unlawful per se. However, 
treating individuals differently on a prohibited basis is unlawful 
discrimination (``disparate treatment'') if there is no credible, 
nondiscriminatory reason that explains the difference in treatment. In 
the examples given, the differential treatment would constitute 
disparate treatment if the creditor lacked a legitimate 
nondiscriminatory reason for its action, or if the asserted reason was 
found to be a pretext for discrimination.

Section 202.5a--Rules on Providing Appraisal Reports

5a(a) Providing Appraisals
    The Board proposed comment 5a(a)-1 to clarify that section 202.5a 
applies to applications for credit to be secured by a dwelling, whether 
the credit is for a business or a consumer purpose. Commenters 
generally supported the proposed comment. It was suggested that the 
Board should eliminate a reference to the ``consumer's'' dwelling, 
given the definition of ``dwelling'' used in sections 202.5a(a) and 
(c). It was noted that ``consumer's dwelling'' could be read as both 
more limited than ``dwelling'' (including only transactions that 
involve a consumer's dwelling, as ``consumer'' is defined elsewhere) 
and more expansive (any dwelling, not limited to one-to-four family 
dwellings). The Board has revised the comment accordingly.
    The Board proposed comment 5a(a)-2 to clarify that section 202.5a 
applies to a request for renewal of an existing extension of credit 
secured by a dwelling if the creditor obtains and uses a new appraisal 
report in evaluating the request.
    Section 202.5a does not apply if a consumer requests renewal of 
existing credit and the creditor does not obtain a new appraisal. 
Commenters supported this clarification.
5a(a)(2)(i) Notice
    The Board proposed comment 5a(a)(2)(i)-1 to clarify the rule for 
credit involving more than one applicant, which parallels the rule in 
section 202.9 concerning notices of action taken where there is more 
than one applicant. Commenters supported this clarification.
5a(a)(2)(ii) Delivery
    The Board proposed a new comment 5a(a)(2)(ii)-1 to clarify that in 
all cases creditors may seek reimbursement for photocopy and postage 
costs incurred in providing the copy of the appraisal report unless 
prohibited by state or other law, or unless the consumer has already 
paid for the report.
    The proposal provided that if the creditor does not otherwise 
charge for the report, as in ``no closing cost'' loans, the creditor 
may not require payment solely from those consumers who request a copy 
of the report. Commenters were divided on this issue. Some noted that 
these loans benefit consumers by reducing the upfront costs of applying 
for credit. Several commenters believed that a prohibition on 
reimbursement for an appraisal report for ``no closing cost'' loans 
would have a chilling effect on creditors' willingness to offer these 
products. Commenters said that for no-cost loans that close, creditors 
who waive closing costs (including the cost of an appraisal) recover 
those costs over the term of the loan; they do not recover the cost of 
the appraisal for no-cost loans that are denied or withdrawn. 
Commenters requested that in such cases, the Board allow creditors to 
charge for the cost of the appraisal when applicants ask for a copy of 
the report.
    The statute gives a creditor the right to require an applicant to 
reimburse the creditor for the cost of the appraisal. Upon further 
analysis, the Board believes that creditors may collect the costs of an 
appraisal unless the consumer has already paid for the report.
5a(c) Definitions
    New comments 5a(c)-1 and 5a(c)-2 address the scope of the term 
``appraisal report.'' Under the proposal, publicly available listings 
of valuations for dwellings, such as published home sales prices or 
mortgage amounts, are not [[Page 29967]] covered. The appraisal rules 
guard against discriminatory evaluations of a dwelling's value. The 
Board believes that publicly available 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.
    Commenters generally supported the clarifications to the 
definitions. The Board has adopted the comments as proposed.

Section 202.6--Rules Concerning Evaluation of Applications

6(a) General Rule Concerning Use of Information
    The Board did not propose commentary under this section. In 
addressing the issue of disparate impact under proposed comment 2(p)-4, 
however, many commenters discussed comment 2 to this section. The 
commenters uniformly expressed concern, in regard to this comment and 
comment 2(p)-4, about the Board's articulation of the standards of 
proof and burdens of persuasion under a disparate impact analysis 
(sometimes referred to as the effects test). The Board recognizes that 
this is an evolving area of law, one in which creditors and consumers 
alike would benefit from more specificity. However, given that the 
Board did not propose any amendments to this section of the commentary, 
the only change to the existing commentary is the addition of a 
reference to the Civil Rights Act of 1991, which codifies the standards 
used for disparate impact under Title VII. The Board will consider 
addressing these issues further in future commentary proposals.
6(b)(1) Prohibited Basis--Marital Status
    The Board proposed to revise comment 6(b)(1)-1 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, 
except to the extent necessary for determining rights and remedies 
under state law. Commenters generally supported this clarification.
    A few commenters requested clarification on how the commentary 
applied to other parties such as cosigners or guarantors. Creditors are 
not required to combine the debts and incomes of two parties when one 
of them is a cosigner or guarantor for the other. (Comment 7(d)(5)-1 
provides guidance on standards that creditors may use in requesting 
additional parties.)

Section 202.8--Special-Purpose Credit Programs

8(a) Standards for Programs
    The Board proposed comments 8(a)-5 and -6 to clarify the 
requirements that for-profit organizations must meet to establish 
special-purpose credit programs under section 202.8(a).
    Commenters generally supported both comments. In response to some 
commenters' concerns, the Board has added language to comment 8(a)-5 
clarifying that the program can be designed to benefit a class of 
people who would otherwise receive credit on less favorable terms, as 
well as those who would be denied credit.
    Two issues have been clarified in comment 8(a)-6. First, some 
commenters were concerned about the statement that the plan should 
specify the length of time that it will be in effect and that it be 
reevaluated after that time. Some commenters said that this added 
regulatory burden. The Board believes that because special purpose 
credit programs are designed to fulfill a particular need, they must be 
reevaluated periodically to determine if there is a continuing need for 
the program. The comment has been amended to reflect this position. 
Second, the reference to avoiding a negative effect on individuals who 
are not in the class the program was designed to benefit, by denying 
them rights or opportunities they might otherwise have, has been 
deleted because it is not clear precisely how this condition applies in 
the credit context.

Section 202.9--Notifications

    The Board proposed comment 9-5 to address when a creditor must send 
a notice of action taken under prequalification, preapproval, and 
similar programs. The comment clarified 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 Sec. 202.9. Commenters generally 
supported the guidance provided in the proposal.

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

    The Board proposed a comment to Appendix C to provide examples of 
additions that may be made to Model Form C-9. The commenters supported 
the comment and the Board has adopted it as proposed.

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 is amending 12 
CFR part 202 as set forth below:

PART 202--EQUAL CREDIT OPPORTUNITY (REGULATION B)

    1. The authority citation for part 202 continues 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 2(c) Adverse action., preceding 1. Move from service 
area., a new paragraph heading 2(c)(1)(i), a new paragraph 1., and a 
new paragraph heading 2(c)(1)(ii) are added;
    b. Under Paragraph (2)(c)(2)(iii), a new paragraph 2. is added; and
    c. Under 2(p), the paragraph heading for 2(p) is revised and new 
paragraphs 3. and 4. are added.
    The additions and revision read as follow:
Supplement I to Part 202--Official Staff Interpretations

* * * * *

Section 202.2  Definitions

    2(c) Adverse action.

Paragraph 2(c)(1)(i)

    1. Application for credit. A refusal to refinance or extend the 
term of a business or other loan is adverse action if the applicant 
applied in accordance with the creditor's procedures.

Paragraph 2(c)(1)(ii)

    1. Move from service area. * * *
* * * * *

Paragraph 2(c)(2)(iii)

* * * * *
    2. Application for increase in available credit. A refusal or 
failure to authorize an account transaction at the point of sale or 
loan is not adverse action, except when the refusal is a denial of 
an application, submitted in accordance with the creditor's 
procedures, for an increase in the amount of credit.
* * * * * [[Page 29968]] 
    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 provided the criteria set 
forth in paragraph (p)(1) (i) through (iv) of this section are met.
    4. Effects test and disparate treatment. 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). 
Besides age, 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 individual 
discretion, disparate treatment could conceivably occur in the 
evaluation process. In addition, neutral factors used in credit 
scoring systems could nonetheless be subject to challenge under the 
effects test. (See comment 6(a)-2 for a discussion of the effects 
test).
* * * * *
    3. In Supplement I to part 202, under Section 202.4--General Rule 
Prohibiting Discrimination, four 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, 
where a creditor requires a minority applicant to provide greater 
documentation to obtain a loan than a similarly situated nonminority 
applicant. Disparate treatment also would be found where a creditor 
waives or relaxes credit standards for a nonminority applicant but 
not for a similarly situated minority applicant. Treating applicants 
differently on a prohibited basis is unlawful if the creditor lacks 
a legitimate nondiscriminatory reason for its action, or if the 
asserted reason is found to be a pretext for discrimination.
* * * * *
    4. In Supplement I to part 202, a new Section 202.5a, is added in 
numerical order 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 dwelling, as that term is defined in 
Sec. 202.5a(c), whether the credit is for a business purpose (for 
example, a loan to start a 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 previously 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 for the appraisal (other 
than photocopy and postage costs).
    5a(c) Definitions.
    1. Appraisal reports. Examples of appraisal reports are:
    i. A report prepared by an appraiser (whether or not licensed or 
certified), 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. An internal review document reflecting that the creditor's 
valuation is different from a valuation in a third party's appraisal 
report (or different from valuations that are publicly available or 
valuations such as manufacturers' invoices for mobile homes).
    2. Other reports. The term ``appraisal report'' does not cover 
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, Section 202.6--Rules Concerning 
Evaluation of Applications, is amended as follows:
    a. Under 6(a) General rule concerning use of information., the 
first sentence in paragraph 2. is revised; and
    b. Under Paragraph 6(b)(1), three new sentences are added at the 
end of paragraph 1.
    The additions and revision read as follow:
* * * * *

Section 202.6--Rules Concerning Evaluation of Applications

    6(a) General rule concerning use of information.
* * * * *
    2. Effects test. The effects test is a judicial doctrine that 
was developed in a series of employment cases decided by the Supreme 
Court under Title VII of the Civil Rights Act of 1964 (42 U.S.C. 
2000e et seq.), and the burdens of proof for such employment cases 
were codified by Congress in the Civil Rights Act of 1991 (42 U.S.C. 
2000e-2). * * *
* * * * *

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, 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 Sec. 202.8(a), a for-profit organization must determine that 
the program will benefit a class of people who would otherwise be 
denied credit or would receive it on less favorable terms. 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 
Home Mortgage Disclosure Act data along with demographic data for 
its assessment area 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 the need for the particular program. The 
plan also must either state a specific period of time for which the 
program will last, or contain a statement regarding when the program 
will be reevaluated to determine if there is a continuing need for 
it.
* * * * *
    7. In Supplement I to Part 202, Section 202.9--Notifications, a new 
paragraph 5. is added to read as follows:
* * * * *

Section 202.9--Notifications

* * * * * [[Page 29969]] 
    5. Prequalification and preapproval programs. Whether a creditor 
must provide a notice of action taken 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 request as an application, and is subject to the adverse 
action notice requirements of Sec. 202.9 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--Sample 
Notification Forms is added at the end to read as follows:
* * * * *

Appendix C--Sample Notification Forms

    Form C-9. Creditors may design their own form, 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, acting through the Secretary of the Board under delegated 
authority, June 1, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-13862 Filed 6-6-95; 8:45 am]
BILLING CODE 6210-01-P