[Federal Register Volume 60, Number 249 (Thursday, December 28, 1995)]
[Proposed Rules]
[Pages 67097-67100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31363]
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FEDERAL RESERVE SYSTEM
12 CFR Part 202
[Regulation B; Docket No. R-0910]
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 proposed revisions to its
official staff commentary to Regulation B (Equal Credit Opportunity).
The commentary applies and interprets the requirements of Regulation B
and substitutes for individual staff interpretations. The proposed
revisions to the commentary provide guidance on issues that the Board
has been asked to clarify, including credit scoring and spousal
signature rules.
DATES: Comments must be received on or before February 28, 1996.
ADDRESSES: Comments should refer to Docket No. R-0910, 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 A. 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 users of the Telecommunications Device
for the Deaf, contact Dorothea Thompson at (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 race, color, religion, national
origin, sex, marital status, or age (provided the applicant has the
capacity to contract), because all or part of an applicant's income
derives from public assistance, or because the applicant has in good
faith exercised any right 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 Regulation B to various
credit transactions, and is updated periodically to address significant
questions that arise.
II. Explanation of Proposed Commentary
Section 202.2--Definitions
2(p) Empirically Derived and Other Credit Scoring Systems
Comment 2(p)-2 would be revised to provide guidance on revalidation
requirements for credit scoring systems.
Section 202.5--Rules Concerning Taking of Applications
5(e) Written Applications
Comment 5(e)-3 would be revised to cross-reference the proposed
comments to section 202.13(b), which address applications submitted
through an electronic medium.
Section 202.6--Rules Concerning Evaluation of Applications
6(b) Specific Rules Concerning Use of Information
6(b)(2)
Comment 6(b)(2)-2 would be revised to address the use of age in
credit scoring systems that use scorecards for different age groups
based on characteristics that are predictive for each group. Each
scorecard considers the correlation among the predictive variables
(representing characteristics such as income, length of residence, and
credit history) for the age group. Each predictive variable is assigned
the appropriate weight given the impact of the other predictive
variables in that age group, so that comparable scores for each group
reflect the same level of risk.
Under the ECOA and Regulation B, if a creditor considers age--
whether by directly assigning a value to age or by some other means
such as establishing scorecards for different age groups--the age of an
elderly applicant must not be assigned a negative value. The Board
believes that, to ensure that the treatment accorded applicants age 62
or older complies with the law, elderly applicants who do not qualify
for credit under the factors assigned to the scorecard for their age
group must be rescored under the factors assigned to the scorecards for
all other age groups in the system. Comment 6(b)(2)-2 would be revised
to incorporate this concept.
Proposed comment 6(b)(2)-4 addresses the use of age in a reverse
mortgage transaction. A reverse mortgage is a home-secured loan in
which the borrower receives payments from the creditor, and the
repayment of these amounts does not become due until the borrower dies,
moves permanently from the home, or transfers title to the home. The
proposed comment clarifies that using age, as a proxy for life
expectancy, in a reverse mortgage transaction to determine the line of
credit or monthly payment amount that a borrower will receive does not
violate the regulation.
6(b)(6)
Comment 6(b)(6)-1 would be revised to clarify that if a creditor
considers credit history, it must consider information presented by the
applicant that is not included in the credit report, if it is the type
the creditor normally considers on a credit report. The comment also
clarifies that when one spouse is applying for individual credit, the
creditor must consider information presented by the applicant that
would
[[Page 67098]]
tend to show that a credit history appearing in the name of both
spouses is not reflective of the applicant's individual
creditworthiness.
Section 202.7--Rules Concerning Extensions of Credit
7(d) Signature of Spouse or Other Person
7(d)(2)
Proposed comment 7(d)(2)-1 clarifies that in determining the value
of an applicant's interest in property, a creditor must look to the
actual form of ownership of the property prior to or at consummation.
Regulation B requires that if an applicant is not individually
creditworthy and the creditor seeks the signature of a co-owner of
property relied upon to establish creditworthiness, the signature may
be required only on the documents that are reasonably necessary, under
state law, to make the property available in the event of death or
default of the applicant. In some states, a signature on the debt
instrument itself may be necessary. In other states, a creditor may be
able to protect its interest with a signature on an instrument that
creates a limited obligation--a document allowing the creditor to reach
the nonapplicant signatory's interest only in the property at issue in
the event of default. Examples of such instruments include a security
agreement, mortgage, deed of trust, or limited guarantee. The creditor
could also consider requesting a signature on a document sometimes
referred to as a status statement. This document ascertains the
character of property that will be used in the credit decision; affirms
the purpose of the loan (if a business purpose, affirms or disclaims
any interest or participation in the business); and attests to or
disclaims the non-applicant's desire to be an applicant or guarantor of
the requested credit.
The Board proposes to revise comment 7(d)(2)-1 to clarify that
where an individual applicant jointly owns property in a form and
amount sufficient to establish creditworthiness, a creditor may not
require the nonapplicant joint owner of the property to execute any
instrument that forfeits or conveys that person's interest in the
property to the applicant or other owners as a condition of credit. For
example, a creditor could not require a non-applicant spouse to
quitclaim their interest in jointly owned property relied upon to
establish creditworthiness if the applicant spouse's interest in the
property, and other resources, are sufficient to support the credit
requested.
7(d)(6)
Proposed comment 7(d)(6)-1 clarifies that a creditor may require
that the partners, officers or directors of a creditworthy business
personally guarantee an extension of credit to the business, as long as
a guarantee is not required on a prohibited basis--e.g., only those
businesses owned by women or minorities.
Comment 7(d)(6)-2 would be revised to clarify that when the
circumstances of a business loan require the guarantee of a spouse with
no interest in the business, the creditor could ask the disinterested
spouse to sign a limited guarantee.
Section 202.13--Information for Monitoring Purposes
13(a) Information To Be Requested
Comment 13(a)-6 would be revised to clarify that a refinancing
involves the satisfaction of an existing obligation that is replaced by
a new obligation undertaken by the same borrower. The proposed
clarification is consistent with the definition of ``refinancing'' in
other Board regulations, such as Regulation C (Home Mortgage
Disclosure), 12 CFR 203, and Regulation Z (Truth in Lending), 12 CFR
226.
13(b) Obtaining of Information
Proposed comment 13(b)-4 addresses the collection of monitoring
information for applications submitted through an electronic medium
that does not permit the creditor to view the applicant. In these
instances, the creditor should treat the application as if it were
accepted by mail or telephone.
Proposed comment 13(b)-5 addresses the collection of monitoring
information for applications submitted through an interactive video
process. Regulation B requires a creditor to ask home mortgage loan
applicants for monitoring information and, if the applicant chooses not
to provide the information, requires the creditor to note the
information on the application on the basis of visual observation or
surname. There is an exception for telephone or mail applications.
Where the creditor has the capability to view the applicant during the
process, however, such as with an interactive video, the Board believes
the application is like an in-person application. Thus, a creditor must
ask the applicant for monitoring information and enter the information
provided on the application form. If the applicant does not provide the
information, the creditor must note the information to the extent the
video display makes it possible to do so.
III. Form of Comment Letters
Comment letters should refer to Docket No. R-0910. 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 paper version.
List of Subjects in 12 CFR Part 202
Aged, Banks, banking, Civil rights, Consumer protection, 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
changes to the staff commentary. New language is shown inside bold-
faced arrows, while language that would be removed is set off with
brackets.
For the reasons set forth in the preamble, the Board proposes to
amend 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, under Section 202.2 Definitions,
under 2(p) Empirically derived and other credit scoring systems., three
new sentences would be added at the end of paragraph 2 to read as
follows:
Supplement I to Part 202--Official Staff Interpretations
* * * * *
Section 202.2 Definitions
* * * * *
2(p) Empirically derived and other credit scoring systems.
* * * * *
2. * * * To ensure that predictive ability is being
maintained, the performance of the system should be monitored. This
could be done, for example, by analyzing the loan portfolio to
determine the delinquency rate for each score interval. If these
data indicate that the system is no longer identifying risk as
predicted, the system must
[[Page 67099]]
be revalidated and the variables for each score interval adjusted
accordingly.
* * * * *
3. In Supplement I to Part 202, under Section 202.5 Rules
Concerning Taking of Applications, under 5(e) Written applications.,
paragraph 3. would be revised to read as follows:
* * * * *
Section 202.5 Rules Concerning Taking of Applications
* * * * *
5(e) Written applications.
* * * * *
3. Computerized entry. Information entered directly into and
retained by a computerized system qualifies as a written application
under this paragraph. (See the commentary to section 202.13(b)
, Applications through electronic media and Applications
through interactive video.)
* * * * *
4. In Supplement I to Part 202, Section 202.6 Rules Concerning
Evaluation of Applications would be amended as follows:
a. Under Paragraph 6(b)(2), paragraph 2. would be revised;
paragraphs 4. and 5. would be redesignated as paragraphs 5. and 6.,
respectively; and new paragraph 4. would be added; and
b. Paragraph 6(b)(6) would be revised.
The additions and revisions would read as follows:
* * * * *
Section 202.6--Rules Concerning Evaluation of Applications
* * * * *
Paragraph 6(b)(2)
* * * * *
2. Consideration of age in a credit scoring system. Age may be
taken directly into account in a credit scoring system that is
``demonstrably and statistically sound,'' as defined in
Sec. 202.2(p), with one limitation: an applicant who is 62 years or
older must be treated at least as favorably as anyone who is under
62. For example, an applicant who is 62 years or older
may not be denied credit if an applicant under age 62 with the same
characteristics would be approved for credit under the scoring
system. Thus, a creditor using an age-based credit scoring system
must ensure that elderly applicants who do not qualify under the
factors assigned to elderly age groups are rescored using the
factors or weights assigned to all other age groups in the
system.
* * * * *
4. Consideration of age in a reverse mortgage. A
reverse mortgage is a home-secured loan in which the borrower
receives payments from the creditor, and does not become obligated
to repay these amounts until the expiration of a term or when the
borrower dies, moves permanently from the home, or transfers title
to the home. Disbursements to the borrower under a reverse mortgage
typically are determined by considering the value of the borrower's
home, the current interest rate, and the borrower's life expectancy.
Age may be directly taken into account in setting the terms of a
reverse mortgage without violating the regulation B.
* * * * *
Paragraph 6(b)(6)
1. [Types of credit references.] Evaluating credit
history. A creditor may restrict the types of credit
history and credit references that it will consider, provided that
the restrictions are applied to all credit applicants without regard
to sex, marital status, or any other prohibited basis. However, on
the applicant's request, a creditor must consider credit information
not reported through a credit bureau when the information relates to
the same types of credit references and history that the creditor
would consider if reported through a credit bureau.
i. At the applicant's request, a creditor must
consider credit information of the same type that the creditor would
consider if reported through a credit bureau. For example, if a
creditor normally considers car loan payments, and the consumer
presents credible information (such as cancelled checks or money-
order receipts) about payment history on a car loan from a finance
company that did not report to a credit bureau, the creditor must
consider this information in its evaluation of credit history.
ii. At the applicant's request, a creditor must consider
information that a credit history reported in both spouses' names
does not accurately reflect the applicant's ability or willingness
to repay. For example, assume an applicant applies for individual
credit and the credit bureau report shows late payments on a
mortgage obligation held jointly with a former spouse. If the
applicant can demonstrate that the former spouse alone was
responsible for the late payments (such as by a transfer of title to
the former spouse and a document from the mortgage creditor that
released the applicant from liability for the debt) the creditor
must disregard both the mortgage debt and the late payments in
determining the applicant's creditworthiness.
* * * * *
5. In Supplement I to Part 202, Section 202.7--Rules Concerning
Extensions of Credit, would be amended as follows:
a. Under Paragraph 7(d)(2), paragraph 1. would be revised; and
b. Paragraph 7(d)(6) would be revised.
The revisions would read as follows:
* * * * *
Section 202.7--Rules Concerning Extensions of Credit
* * * * *
Paragraph 7(d)(2)
1. Jointly owned property. a. Valuation of
applicant's interest. In determining the value of [the]
an applicant's interest in jointly owned
property, a creditor may consider factors such as the [form of
ownership and the] property's susceptibility to attachment,
execution, severance, or partition and the cost of such action.
This determination must be based on the actual form of
ownership of the property prior to or at consummation, and not on
the possibility of a subsequent change in the form of ownership. For
example, in determining whether a married applicant's interest in
property is sufficient to satisfy the creditor's standards of
creditworthiness for individual credit, a creditor may not obtain
the signature of the nonapplicant spouse based on the possibility
that the applicant's separately-held property may be transferred
into tenancy by the entirety after consummation. Similarly, a
creditor may not routinely require a nonapplicant joint owner to
execute any document (such as a quitclaim deed) that would change
the nonapplicant joint owner's interest in property offered by the
applicant to support the extension of credit.
b. Other options to support credit. If the
applicant's interest in the property does not support the amount and
terms of credit sought, the creditor may give the applicant some
other option of providing additional support for the extension of
credit[, f] . For example[--]:
i. [r]Requiring an additional
party under Sec. 202.7(d)(5);
ii. [o]Offering to grant the
applicant's request on a secured credit basis; or
iii. [a]Asking for the
signature of the co-owner of the property on an instrument that
ensures access to the property but does not impose personal
liability unless necessary under state law (which could
include, for example, a security agreement, deed of trust, mortgage,
limited guarantee, quitclaim deed, or status statement from the
nonapplicant owner).
* * * * *
Paragraph 7(d)(6)
1. Guarantees. A guarantee on an extension of credit is part of
a credit transaction and therefore subject to the regulation.
A creditor may require the personal guarantee of the
partners, directors, or officers of a business even if the business
itself is creditworthy. The guarantee must be based on the
guarantor's relationship with the business, however, and not on a
prohibited basis.
2. Spousal guarantees. The rules in Sec. 202.7(d) bar a creditor
from requiring the signature of a guarantor's spouse just as they
bar the creditor from requiring the signature of an applicant's
spouse. For example, although a creditor may require all officers of
a closely held corporation to personally guarantee a corporate loan,
the creditor may not automatically require that spouses of married
officers also sign the guarantee. If an evaluation of the financial
circumstances of an officer indicates that an additional signature
is necessary, however, the creditor may require the signature of a
spouse in appropriate circumstances--for example, if the property
relied upon to meet the creditor's standards is held jointly. In
such a case, the creditor could ask the spouse to sign an instrument
that provides for liability to the extent of the spouse's interest
in the property relied upon to support the credit (such as a limited
guarantee).
* * * * *
[[Page 67100]]
6. In Supplement I to Part 202, Section 202.13--Information for
Monitoring purposes, would be amended as follows:
a. Under 13(a) Information to be requested., paragraph 6. would be
revised; and
b. Under 13(b) Obtaining of information., paragraphs 4. and 5.
would be redesignated as paragraphs 6. and 7. respectively, and new
paragraphs 4. and 5. would be added.
The revisions and additions would read as follows:
* * * * *
Section 202.13 Information for Monitoring purposes
13(a) Information to be requested.
* * * * *
6. Refinancings. A refinancing occurs when an
existing obligation is satisfied and replaced by a new obligation
undertaken by the same borrower. A creditor that
receives an application to [change the terms and conditions of]
refinance an existing extension of credit made
by that creditor for the purchase of the applicant's dwelling may
request the monitoring information again but is not required to do
so if it was obtained in the earlier transaction.
* * * * *
13(b) Obtaining of information.
* * * * *
4. Applications through electronic media. If an
applicant applies through an electronic medium (for example, via the
Internet or by facsimile) without any face-to-face interactive video
capability, the creditor should treat the application as if it were
accepted by mail or telephone.
5. Applications through interactive video. If a
creditor takes an application through an interactive application
process with video capabilities, and the creditor can see the
applicant, the creditor should treat these applications as taken in
person and collect the monitoring information.
* * * * *
By order of the Secretary of the Board, acting pursuant to
delegated authority for the Board of Governors of the Federal
Reserve System, December 21, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-31363 Filed 12-27-95; 8:45 am]
BILLING CODE 6210-01-P