[Federal Register Volume 61, Number 190 (Monday, September 30, 1996)]
[Rules and Regulations]
[Pages 50948-50951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24917]


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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: 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 substitutes for 
individual staff interpretations. The revisions to the commentary 
provide guidance on issues that the Board has been asked to clarify, 
including credit scoring and spousal signature rules.

DATES: Effective date. September 30, 1996.
    Compliance date. Compliance is optional until October 31, 1996.

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. Summary of Revisions to the Commentary

    In December 1995 (60 FR 67097, December 28, 1995), the Board 
proposed amendments to the staff commentary to Regulation B. The Board 
received approximately 70 comments on the proposal. The majority of the 
comments were from financial institutions and their attorneys. Overall, 
commenters generally favored the proposed amendments, although they 
raised a number of technical issues. Opposition to the proposal mostly 
addressed the comment pertaining to the use of age scorecards. After 
reviewing the comment letters, and upon further analysis, the Board has 
modified its interpretation regarding scorecards and some other 
portions of the update, as discussed below.

Section 202.2--Definitions

2(p) Empirically Derived and Other Credit Scoring Systems
    Comment 2(p)-2, as proposed, clarified that the performance of a 
credit scoring system should be monitored to ensure its predictive 
ability. Commenters were concerned that, by use of the term 
``monitor,'' the proposal required a continuous analysis, which would 
be costly and disruptive to their operations. The comment, as adopted, 
provides that creditors must periodically review their systems to 
ensure predictive ability, but are not required to review their systems 
on a continuous basis. The Board believes the required frequency 
depends upon a variety of factors such as changes in the local economy, 
and shifts in the lender's customer base. However, creditors must 
review their systems when evidence suggests that the systems are no 
longer predicting risk as intended.
    Commenters also asked the Board to clarify the responsibility for 
revalidation if the creditor did not develop the system. A creditor is 
responsible for any system that it uses, including its revalidation, 
but may use a third party to perform the revalidation. In accordance 
with section 202.2(p)(2), if the system is developed using borrowed 
credit experience, the initial validation and any subsequent 
revalidation must be based on the creditor's own data when it becomes 
available.

Section 202.5--Rules Concerning Taking of Applications

5(e)  Written Applications
    Comment 5(e)-3 is adopted as proposed.

Section 202.6--Rules Concerning Evaluation of Applications

6(b) Specific Rules Concerning Use of Information
6(b)(2)
    Comment 6(b)(2)-2 is revised to address the use of age in a credit 
scoring system. Under the ECOA and Regulation B, if a creditor chooses 
to consider age by assigning a value to an applicant's age, the age of 
elderly applicants must not be assigned a negative value. Thus, a 
credit scoring system must ensure that the age of applicants 62 or 
older is assigned a factor, value, or weight that is at least as 
favorable as the factor, value, or weight assigned to the age of any 
other class of applicants.
Proposed Commentary
    In December 1995, the Board proposed adding a comment which 
specified that, in an age-based scorecard system, creditors could 
satisfy the requirement of not assigning a negative factor or value by 
scoring an elderly applicant under the applicable scorecard and, if the 
applicant did not qualify, by rescoring the applicant under scorecards 
for other age-based groups. The proposal was consistent with informal 
opinions given by the Board's staff regarding the need for creditors 
using age scorecards to comply with the ``negative factor or value'' 
limitation established by the ECOA.
    Commenters raised numerous questions about the Board's proposal. 
For example, some commenters noted that the regulation addresses the 
treatment of the elderly as a class in a credit scoring system, rather 
than the treatment of a single elderly applicant who is declined under 
the applicable scorecard but might be approved when rescored under a 
card developed for another age class. Other commenters expressed 
concern that rescoring an elderly applicant on models that were not 
developed using data for elderly persons would invalidate an otherwise 
``empirically derived, demonstrably and statistically sound'' credit 
scoring system. Some commenters noted that implementing the proposed 
requirement would be costly because of the systems and procedural 
changes that would be required, and that increased costs would not be 
balanced by commensurate benefits to the elderly. Numerous commenters 
believed the proposed

[[Page 50949]]

revisions would discourage the use of age-based systems, because 
creditors would have to choose between taking additional risk on 
elderly applicants or qualifying fewer younger applicants. In addition, 
commenters stated that the proposed rescoring would likely result in 
few additional elderly applicants receiving credit. Upon further 
analysis, the Board has modified the final interpretation. The 
modification reflects the Board's interpretation that the ECOA and 
Regulation B require creditors that score age in a credit scoring 
system to treat elderly applicants as a class as favorably as all other 
classes of applicants on the basis of age.
Direct Scoring of Age
    If a creditor directly scores age by assigning points to an 
applicant's age category, elderly applicants must receive at least the 
same number of points as the most favored class of nonelderly 
applicants. For example, if a system assigns 10 points for ages 18-20, 
20 points for ages 21-27, 15 points for ages 28-39, 18 points for ages 
40 to 51, and 22 points for ages 52 to 61, then applicants who are 62 
and older must receive at least 22 points.
    The Board believes that similarly, if a system assigns points to 
some other variable based on the applicant's age, applicants who are 62 
and older must receive at least the same number of points as the most 
favored class of nonelderly applicants. For example, a system could 
score an applicant's type of residence based on the age of the 
applicant and assign points to applicants who rent their dwellings 
(such as 20 points for ages 18-28, 10 points for ages 29-45, and 8 
points for ages 46-61). In such a system, elderly applicants who rent 
their dwellings must receive at least the same number of points as the 
most favored age class; in this example, applicants 62 and older who 
rent their dwellings must receive at least 20 points. This rule applies 
whether a creditor uses a single scorecard or more than one scorecard.
Use of Age-split Scorecards
    Commenters raised questions about, and the Board has considered, 
the applicability of Regulation B to two different types of age-split 
scorecard systems. Specifically, the Board has considered whether a 
creditor could segment the applicant population and develop one card 
for a narrow range of applicants under a certain age (sometimes called 
a ``youth'' card) and a second card for the general population. 
Applicants on the youth card--typically in their late twenties or 
younger--would be evaluated using attributes that are predictive for 
that age class, while applicants on the second card would be evaluated 
using attributes predictive for the general population. The Board 
believes that when a system uses a standard card for the general 
population with a wide age range that includes the elderly, the system 
does not score age. Accordingly, in this type of system, there is no 
issue of assigning a negative factor or value to the age of elderly 
applicants.
    On the other hand, the Board has considered whether a creditor 
could segment the applicant population using scorecards with narrower 
age ranges. Such scorecards assign value based on characteristics 
predictive for that narrow age class. Unlike the use of a standard card 
for the general population with a wide range that includes the elderly, 
the Board believes that inclusion of the elderly in scorecards with 
narrower age ranges does score age. Since the elderly would not be 
evaluated using attributes for the general population, creditors may 
not assign a negative factor or value to the age of elderly applicants.
Negative Factor or Value
    Commenters suggested alternative ways that a creditor could satisfy 
the ECOA's requirement that a negative factor or value not be assigned 
to the age of elderly applicants. For example, it was suggested that 
creditors could be required to establish, at the time scorecards are 
developed, that elderly applicants as a class would not have been 
treated more favorably if scored using cards developed for other age 
categories. While the final comment does not address this issue, the 
Board believes one approach would be to demonstrate that no more than 
one-half of elderly applicants rejected under the scorecard including 
their age group would have been approved if scored under another card 
in the system.
    Comment 6(b)(2)-4 addresses the use of age in a reverse mortgage 
transaction. The comment is adopted generally as proposed. The comment 
now includes a reference to default, to parallel the definition of a 
reverse mortgage in Regulation Z (Truth in Lending), 12 CFR 226. The 
comment also clarifies that a reverse mortgage program that requires 
applicants to be at least 62 years of age is permissible under 
Sec. 202.6(b)(2)(iv), which allows creditors to favor the elderly by 
offering products to applicants 62 and older that are not available to 
other customers.
    The comment also clarifies that using age in a reverse mortgage 
transaction to determine factors such as the amount of the credit, the 
monthly payment that the borrower will receive, or the estimated 
repayment date is permissible under Sec. 202.6(b)(2)(iii) as long as 
the determination is made on a case-by-case basis.
6(b)(6)
    Proposed comment 6(b)(6)-1 is withdrawn. The comment would have 
specified 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 of the type the creditor normally considers on 
a credit report. Also, the comment would have specified that when one 
spouse is applying for individual credit, the creditor must consider 
information presented by the applicant that would tend to show that a 
credit history appearing in the names of both spouses is not reflective 
of the applicant's individual creditworthiness.
    Some commenters welcomed the additional guidance; others believed 
that the existing comment was sufficiently clear, and that the proposal 
raised a number of issues without resolving them. Specifically, many 
commenters voiced concern about how the comment would apply to 
creditors that rely exclusively on credit scoring to make credit 
decisions. The Board is withdrawing the comment because it believes the 
issues raised by the commenters warrant further study, and that section 
202.6(b)(6) and the existing commentary provide adequate guidance at 
this time.

Section 202.7--Rules Concerning Extensions of Credit

7(d) Signature of Spouse or Other Person
7(d)(2)
    Comment 7(d)(2)-1 addresses unsecured credit and the treatment of 
joint property. The comment clarifies that when determining the value 
of an applicant's interest in jointly owned property, a creditor must 
look to the actual form of ownership of the property prior to or at 
consummation. Several commenters asked whether in making such 
determinations, creditors may consider the possibility of subsequent 
changes to property ownership. The comment makes clear that the 
possibility of a subsequent change in the form of ownership may not be 
considered. For example, when a married applicant applies for 
individual credit, and qualifies based on separate property, a creditor 
may not consider the possibility that the separate property may later 
be transferred into joint ownership. Similarly, in valuing a married 
applicant's interest in property,

[[Page 50950]]

a creditor may not consider the possibility that the couple may one day 
divorce. Therefore, a creditor may not require the signature of the 
nonapplicant spouse in these or similar circumstances.
    The proposed revisions to comment 7(d)(2)-1(ii) included examples 
of instruments that creditors might ask a joint owner of property to 
sign to support the applicant's request for unsecured credit--
mentioning, among other things, a security agreement, mortgage, and 
deed of trust. Because these examples are appropriate only for secured 
credit, they have been deleted. The comment retains the limitation that 
where, under state law, the creditor may use other instruments to reach 
joint property, a creditor may not routinely ask nonapplicants to sign 
any instrument requiring that they forfeit their interest in jointly 
owned property as a condition of the credit extension. Some commenters 
expressed concern that creditors will be prevented from reaching joint 
property in the event of an applicant's death or default. The comment 
is not intended to prevent access to jointly owned property in these 
circumstances, but to clarify that if state law gives a creditor access 
to the property by some other means--for example, through a limited 
guarantee--requiring nonapplicants to forfeit their interest in jointly 
owned property is prohibited by the regulation.
7(d)(6)
    Comment 7(d)(6)-1 clarifies that a creditor may require that 
partners, officers or directors personally guarantee an extension of 
credit to a business, even if the business is creditworthy, as long as 
a guarantee is not required on a prohibited basis.
    Commenters asked the Board to clarify that shareholders may be 
required to guarantee an extension of credit to a closely held 
corporation, even if creditworthy, given that in most instances these 
shareholders have interests that are analogous to the interests of 
partners, officers, or directors of other businesses. The comment has 
been revised accordingly.
    Comment 7(d)(6)-2 is generally adopted as proposed. A cross-
reference to section 202.7(d)(2) is added.

Section 202.13--Information for Monitoring Purposes

13(a) Information to be Requested
    Comment 13(a)-6 clarifies that, except as provided, monitoring 
information must be collected by any creditor that satisfies and 
replaces the existing obligation.
13(b) Obtaining of Information
    Comments 13(b)-4 and 13(b)-5 are generally adopted as proposed, 
including adding two new paragraphs and redesignating original 
paragraphs 4 and 5.

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.

    For the reasons set forth in the preamble, the Board amends 12 CFR 
part 202 as follows:

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., four 
new sentences are 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, 
creditors must periodically review the performance of the system. 
This could be done, for example, by analyzing the loan portfolio to 
determine the delinquency rate for each score interval, or by 
analyzing population stability over time to detect deviations of 
recent applications from the applicant population used to validate 
the system. If this analysis indicates that the system no longer 
predicts risk with statistical soundness, the system must be 
adjusted as necessary to reestablish its predictive ability. A 
creditor is responsible for ensuring its system is validated and 
revalidated based on the creditor's own data when it becomes 
available.
* * * * *
    3. In Supplement I to Part 202, under Section 202.5 Rules 
Concerning Taking of Applications, under 5(e) Written applications., 
paragraph 3. is 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 
video.)
* * * * *
    4. In Supplement I to Part 202, under Section 202.6 Rules 
Concerning Evaluation of Applications, under paragraph 6(b)(2), 
paragraph 2. is revised; paragraphs 4. and 5. are redesignated as 
paragraphs 5. and 6., respectively; and new paragraph 4. is added to 
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 section 
202.2(p), with one limitation: applicants 62 years or older must be 
treated at least as favorably as applicants who are under 62. If age 
is scored by assigning points to an applicant's age category, 
elderly applicants must receive the same or a greater number of 
points as the most favored class of nonelderly applicants.
    i. Age-split scorecards. A creditor may segment the population 
into scorecards based on the age of an applicant. In such a system, 
one card covers a narrow age range (for example, applicants in their 
twenties or younger) who are evaluated under attributes predictive 
for that age group. A second card covers all other applicants who 
are evaluated under the attributes predictive for that broad class. 
When a system uses a card covering a wide age range that encompasses 
elderly applicants, the credit scoring system does not score age. 
Thus, the system does not raise the issue of assigning a negative 
factor or value to the age of elderly applicants. But if a system 
segments the population by age into multiple scorecards, and 
includes elderly applicants in a narrower age range, the credit 
scoring system does score age. To comply with the act and regulation 
in such a case, the creditor must ensure that the system does not 
assign a negative factor or value to the age of elderly applicants 
as a class.
* * * * *
    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 (other than in the case of default) until the borrower 
dies, moves permanently from the home or transfers title to the 
home, or upon a specified maturity date. 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. A reverse mortgage program 
that requires borrowers to be age 62 or older is

[[Page 50951]]

permissible under section 202.6(b)(2)(iv). In addition, under 
section 202.6(b)(2)(iii), a creditor may consider a borrower's age 
to evaluate a pertinent element of creditworthiness, such as the 
amount of the credit or monthly payments that the borrower will 
receive, or the estimated repayment date.
* * * * *
    5. In Supplement I to Part 202, Section 202.7--Rules Concerning 
Extensions of Credit, is amended as follows:
    a. Under Paragraph 7(d)(2), paragraph 1. is revised; and
    b. Paragraph 7(d)(6) is revised.
    The revisions read as follows:
* * * * *

Section 202.7  Rules Concerning Extensions of Credit

* * * * *

Paragraph 7(d)(2)

    1. Jointly owned property. If an applicant requests unsecured 
credit, does not own sufficient separate property, and relies on 
joint property to establish creditworthiness, the creditor must 
value the applicant's interest in the jointly owned property. A 
creditor may not request that a nonapplicant joint owner sign any 
instrument as a condition of the credit extension unless the 
applicant's interest does not support the amount and terms of the 
credit sought.
    i. Valuation of applicant's interest. In determining the value 
of 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; 
the value of the applicant's interest after such action; and the 
cost associated with the action. This determination must be based on 
the form of ownership prior to or at consummation, and not on the 
possibility of a subsequent change. For example, in determining 
whether a married applicant's interest in jointly owned property is 
sufficient to satisfy the creditor's standards of creditworthiness 
for individual credit, a creditor may not consider that the 
applicant's separate property may be transferred into tenancy by the 
entirety after consummation. Similarly, a creditor may not consider 
the possibility that the couple may divorce. Accordingly, a creditor 
may not require the signature of the nonapplicant spouse in these or 
similar circumstances.
    ii. Other options to support credit. If the applicant's interest 
in jointly owned property does not support the amount and terms of 
credit sought, the creditor may offer the applicant other options to 
provide additional support for the extension of credit. For 
example--
    A. Requesting an additional party (see Sec. 202.7(d)(5));
    B. Offering to grant the applicant's request on a secured basis 
(see Sec. 202.7(d)(4)); or
    C. Asking for the signature of the joint owner on an instrument 
that ensures access to the property in the event of the applicant's 
death or default, but does not impose personal liability unless 
necessary under state law (e.g., a limited guarantee). A creditor 
may not routinely require, however, that a joint owner sign an 
instrument (such as a quitclaim deed) that would result in the 
forfeiture of the joint owner's interest in the property.
* * * * *

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, and the shareholders of a 
closely held corporation, even if the business or corporation is 
creditworthy. The requirement must be based on the guarantor's 
relationship with the business or corporation, however, and not on a 
prohibited basis. For example, a creditor may not require guarantees 
only for women-owned or minority-owned businesses. Similarly, a 
creditor may not require guarantees only from the married officers 
of a business or married shareholders of a closely held corporation.
    2. Spousal guarantees. The rules in Sec. 202.7(d) bar a creditor 
from requiring a 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 in accordance with 
Sec. 202.7(d)(2).
* * * * *
    6. In Supplement I to Part 202, Section 202.13--Information for 
Monitoring purposes, is amended as follows:
    a. Under 13(a) Information to be requested., paragraph 6. is 
revised; and
    b. Under 13(b) Obtaining of information., paragraphs 4. and 5. are 
redesignated as paragraphs 6. and 7., respectively, and new paragraphs 
4. and 5. are added.
    The revisions and additions are to 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 
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, the Internet or a 
facsimile) without video capability that allows the creditor to see 
the applicant, the creditor may treat the application as if it were 
received by mail or telephone.
    5. Applications through video. If a creditor takes an 
application through a medium that allows the creditor to see the 
applicant, the creditor treats the application as taken in person 
and must note the monitoring information on the basis of visual 
observation or surname, if the applicant chooses not to provide the 
information.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, acting through the Secretary of the Board under delegated 
authority, September 24, 1996.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 96-24917 Filed 9-27-96; 8:45 am]
BILLING CODE 6210-01-P