[Federal Register Volume 63, Number 48 (Thursday, March 12, 1998)]
[Proposed Rules]
[Pages 12326-12329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6325]



[[Page 12325]]

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Part V





Federal Reserve System





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12 CFR Parts 202 and 203



Equal Credit Opportunity and Home Mortgage Disclosure; Proposed Rules

  Federal Register / Vol. 63, No. 48 / Thursday, March 12, 1998 / 
Proposed Rules  

[[Page 12326]]



FEDERAL RESERVE SYSTEM

12 CFR Part 202

[Regulation B; Docket No. R-1008]


Equal Credit Opportunity

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: Pursuant to its Regulatory Planning and Review Program, the 
Federal Reserve Board (the ``Board'') is undertaking a review of 
Regulation B, which carries out the provisions of the Equal Credit 
Opportunity Act (the ``ECOA''). The ECOA makes it unlawful for 
creditors to discriminate against an applicant in any aspect of a 
credit transaction on the basis of race, color, religion, national 
origin, sex, marital status, age, and other specified bases. The review 
will determine whether Regulation B should be revised to address 
technological and other developments; identify areas in the regulation 
that could be revised to better balance consumer protections and 
industry burden; and delete obsolete provisions. To gather information 
necessary for this review and to ensure the participation of interested 
parties, the Board is soliciting comment on several specific issues, 
while also soliciting comment generally on potential revisions to the 
regulation.

DATES: Comments must be received by May 29, 1998.

ADDRESSES: Comments should refer to Docket No. R-1008, 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, DC 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) any time. Comments may be 
inspected 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 section 261.12 of the 
Board's Rules Regarding Availability of Information.

FOR FURTHER INFORMATION CONTACT: Natalie E. Taylor or Sheilah Goodman, 
Staff Attorneys, or Jane Jensen Gell, Senior Attorney, Division of 
Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, Washington, DC 20551, at (202) 452-2412 or 452-3667; 
for the hearing impaired only, contact Diane Jenkins, 
Telecommunications Device for the Deaf (TDD), at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background on ECOA and Regulation B

    The Equal Credit Opportunity Act, 15 U.S.C. 1691, enacted in 1974, 
makes it unlawful for a creditor to discriminate against an applicant 
in any aspect of a credit transaction on the basis of sex or marital 
status. In 1975, pursuant to section 703 of the ECOA, the Board issued 
Regulation B to implement the ECOA. The Congress amended the ECOA in 
1976 to prohibit discrimination on the additional bases of race, color, 
religion, national origin, age (provided the applicant has the capacity 
to contract), receipt of public assistance benefits, and good faith 
exercise of a right under the Consumer Credit Protection Act. The Board 
issued an amended Regulation B in 1976 to reflect the amendments.
    Under the Board's Regulatory Planning and Review Program, which 
requires periodic review of the Board's regulations, the Board reviewed 
Regulation B and revised it in 1985 (50 FR 48018, November 20, 1985). 
In 1989, the Board modified Regulation B to implement amendments to the 
ECOA contained in the Women's Business Ownership Act of 1988. Those 
amendments required that creditors give written notice to business 
applicants of the right to a written statement of reasons for a credit 
denial, and imposed a record retention requirement for records relating 
to business credit applications (54 FR 50482, December 7, 1989). The 
Board further modified the regulation in 1993 to implement amendments 
to the ECOA contained in the Federal Deposit Insurance Corporation 
Improvement Act of 1991. The amendments provided applicants with a 
right to obtain a copy of the appraisal report used in an application 
secured by residential real property, and expanded the enforcement 
responsibilities of the federal financial supervisory agencies when 
information about possible violations of the ECOA becomes known (58 FR 
65657, December 16, 1993). The Board also modified the regulation in 
1997 to implement amendments to the ECOA contained in the Economic 
Growth and Regulatory Paperwork Reduction Act of 1996. The amendments 
created a privilege for information developed by creditors as a result 
of ``self-tests'' they conduct (62 FR 66412, December 18, 1997).

II. Review of Regulation B

    The Board will review Regulation B with three goals in mind: (1) To 
determine whether regulatory amendments are needed to address 
technological and other developments; (2) to identify areas in the 
regulation that could be revised to better balance consumer protections 
and industry burden; and (3) to delete obsolete provisions.
    This Advance Notice of Proposed Rulemaking is intended to gather 
information about broad policy issues that could be addressed by 
revisions to the regulation. The Board is soliciting comment on several 
specific issues, but also requests suggestions generally on other 
issues that commenters believe should be addressed or clarified. The 
Board will publish a proposed rule after evaluating the comments and 
further analysis.
    Concurrently, the Board is undertaking a review of Regulation C 
(Home Mortgage Disclosure); an advance notice of proposed rulemaking is 
published elsewhere in today's Federal Register.
    Comment is specifically solicited on the following issues:

1. Preapplication Marketing Practices

    The ECOA and Regulation B prohibit discrimination by a creditor 
against an applicant--a person who has requested or received credit--on 
a prohibited basis regarding any aspect of a credit transaction. Credit 
transaction is defined in the regulation as every aspect of an 
applicant's dealings with a creditor beginning with information 
requirements. Thus, the coverage of the ECOA is generally limited to a 
person who has, at a minimum, sought credit information. However, the 
Board recognizes that a person could be discouraged from seeking credit 
or credit information. Accordingly, the regulation expressly prohibits 
a creditor from engaging in any practice that would discourage a 
reasonable person (on a prohibited basis) from applying for credit. The 
official staff commentary provides that a creditor is prohibited from 
using words, symbols, or other forms of communication in advertising 
that express, imply, or suggest a discriminatory preference or a policy 
of exclusion, although a creditor is permitted to engage in affirmative 
advertising to solicit or encourage traditionally disadvantaged groups 
to apply for credit.
    Aside from the prohibition against discouragement, the ECOA has not 
been interpreted to apply to a creditor's preapplication marketing 
practices--

[[Page 12327]]

such as the selection of persons solicited for a credit 
card.1 Creditors use a number of techniques to decide to 
whom solicitations will be sent. For instance, creditors will often 
specify criteria to credit bureaus, which then utilize credit reports 
to compile mailing lists that identify potential applicants who meet 
those criteria. This marketing technique--involving prescreened 
solicitations--is usually carried out through mailed solicitations as 
well as by telemarketing. Because individuals selected through the 
prescreening process have not requested credit, they are not deemed to 
be applicants for purposes of Regulation B when the prescreening 
occurs. It is only after the individuals respond to a creditor's 
invitation that the regulation applies.
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    \1\ The Fair Housing Act (FHA), which bars discrimination in 
housing-related transactions, differs in its treatment of 
prescreened solicitations. The FHA has been interpreted to prohibit 
persons from prescreening on a prohibited basis, whereas the ECOA 
permits any prescreening since only ``applicants'' receive the 
protections of the act.
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    During the 1985 review of Regulation B, the Board considered 
whether prescreened solicitations should be covered by the regulation. 
It was generally recognized that prescreened solicitations could result 
in a greater availability of credit for consumers. Also, there was no 
evidence at that time that creditors were improperly making use of 
prohibited characteristics. Therefore, the Board deemed it unnecessary 
to modify the regulation.
    The Board recognizes that prescreening on a prohibited basis may 
facilitate the identification of potential customers and provide 
greater access to credit for some consumers. For example, some 
creditors have used age to target ``older'' individuals for credit 
solicitations and related financial services. However, the Board and 
the other banking agencies have also found instances in which 
creditors, primarily in the credit card industry, have used age to 
exclude youth and elderly persons from receiving solicitations for 
preapproved credit. Given the potential for using prohibited bases in 
prescreening to improperly exclude certain categories of individuals, 
the Board seeks to gain a better understanding of current practices, 
and solicits comment on how and to what extent creditors are using any 
prohibited bases in preapplication marketing.

2. Inquiry v. Application

    Regulation B allows creditors to establish their own application 
procedures, including what and how much information to provide to 
consumers who request information before applying for credit. Creditors 
and others have expressed concern that the current distinction under 
Regulation B between an inquiry and an application is difficult to 
apply. The rule distinguishes between an inquiry and an application 
based on what the creditor communicates to the consumer. When a 
consumer requests credit information, this inquiry may entail a 
discussion of the consumer's credit characteristics. Creditors have 
suggested that under the regulation it is unclear when a creditor is 
simply providing information rather than communicating a credit 
decision--for example, when the creditor explains its underwriting 
standards in the context of the applicant's credit characteristics. A 
creditor is required to notify a consumer of action taken (including, 
as appropriate, a notice of adverse action) if in response to a 
consumer's request for credit information the creditor communicates a 
decision not to extend credit.
    Creditors say that it is burdensome to provide an adverse action 
notice to every consumer who is provided with negative information in 
the information-gathering process. Also, they suggest that some 
consumers might be concerned about receiving adverse action notices 
when they are merely in the process of gathering information to shop 
for a loan.
    Most questions that the Board receives regarding the distinction 
between an inquiry and an application arise in mortgage processes. With 
the increased use of prequalifications, preapprovals, and interactive 
loan-calculation tools provided over the Internet, creditors have had 
difficulty determining whether a notice is required. Sometimes, what 
begins with a creditor providing information turns into an evaluation 
of creditworthiness.
    With prequalifications or preapprovals, consumers begin their loan-
shopping by approaching a lender to determine the price of a home they 
could afford. In this process, creditors often obtain and review the 
consumer's credit report for a more accurate picture of the consumer's 
debt obligations and credit history. In most cases, the consumer has 
not identified a specific property, nor is the consumer necessarily 
ready to seek a loan from a particular creditor.
    Some creditors provide loan-calculation tools on their home page on 
the Internet; and consumers are able to calculate the price of a home 
they could afford by entering information about income and other data. 
Some programs will calculate the maximum amount for which the consumer 
could qualify. Other programs encourage the consumer to call the 
financial institution when information has been entered and it appears 
from the calculation that the consumer would not qualify for a mortgage 
due to, for example, low income and high debt. Some creditors' home 
pages enable the consumer to take the next step of applying to the 
financial institution for a home loan.
    In determining whether it is possible to provide additional 
guidance to clarify the distinction between an inquiry and application, 
the Board believes it is important to encourage creditors to provide 
information, counseling, and assistance to consumers seeking credit 
information. The sharing of information through counseling programs, 
such as home-ownership counseling, is a prime example. In home-
ownership counseling, a third-party organization and financial 
institution may partner to counsel potential home buyers--typically 
first-time home buyers and, often but not necessarily, low-income home 
buyers--on how to obtain a mortgage. A credit report is often obtained 
to determine the consumer's financial position and to assist in an 
ongoing counseling process that could span a year or longer. In some 
programs, the third-party organization may not only provide counseling 
services, but also may prescreen applicants for the lender. The Board 
solicits comment on whether the more formal the process becomes in 
providing information, counseling, and assisting potential applicants--
for example, verifying credit information, or prescreening applicants--
the more the process should be treated as an application. The Board 
also solicits comment on the following:
    (1) Should the Board devise a different test for determining when 
an informal discussion becomes an application? If yes, what should be 
the test?
    (2) Should the Board seek to establish a ``bright-line'' test? For 
example, should an inquiry become an application when a creditor 
evaluates or verifies credit information through third-party 
information (such as by obtaining a credit report or credit score)?
    (3) When, if at all, would the use of an interactive loan-
calculation tool constitute an application?
    (4) Is it possible or desirable to apply the current notification 
rules to home-ownership counseling programs? If not, how should the 
rules be designed to distinguish education-oriented counseling from 
advice offered by a lender, for example, to a consumer requesting a 
prequalification decision?

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    (5) Are there some home-ownership counseling programs that have 
elements of both counseling and applications such that they should be 
distinguished from education-oriented counseling?
    (6) Does the issue of distinguishing an inquiry from an application 
also arise in nonmortgage processes? If so, what are some of the 
distinguishing characteristics of such processes? Would a test 
developed for mortgage processes be effective for nonmortgage 
processes?

3. Voluntary Data Collection

    Regulation B generally prohibits creditors from inquiring about an 
applicant's sex, marital status, race, color, religion, and national 
origin. This provision was included in the regulation in the belief 
that if creditors did not have this information, they could not use it 
to discriminate against applicants. At the same time, exceptions to 
this prohibition were also included in Regulation B. The regulation 
requires creditors to collect ``monitoring information'' (age, sex, 
marital status, and race or national origin) for mortgage loan 
applicants. This requirement was added because of the specific concern 
that the data was needed to help detect mortgage lending 
discrimination.
    The regulation also allows creditors to collect data if required by 
another regulation, order, or agreement of a court or enforcement 
agency to monitor or enforce compliance with the ECOA, Regulation B, or 
any other federal or state statute or regulation. This exception was 
included in the regulation so that lenders would not have to choose 
between competing regulations or statutes. For example, creditors can 
collect data pursuant to the Home Mortgage Disclosure Act without 
concerns about violating Regulation B.
    In April 1995, the Board published for comment a proposed amendment 
to Regulation B that would have allowed, but not required, creditors to 
collect information about an applicant's sex, marital status, race, 
color, and national origin for nonmortgage credit products. The 
regulation would have continued to bar creditors from considering this 
information in a credit decision. In December 1996, the Board withdrew 
the proposed amendment, noting that this issue might be more 
appropriate for the Congress to consider.
    Since issuance of the final action, the Board has received requests 
from the other federal financial regulatory agencies, creditors, and 
community groups asking for further consideration of this matter. The 
Board believes that in light of the overall review of Regulation B it 
is appropriate to evaluate whether the prohibition on data collection 
should be changed. The Board solicits comment on whether to consider 
amending Regulation B to remove the prohibition barring creditors from 
collecting certain information about applicants for nonmortgage credit 
products.

4. Definition of Creditor

    The ECOA and Regulation B prohibit a creditor from discriminating 
against an applicant on a prohibited basis regarding any aspect of a 
credit transaction. The ECOA's definition of creditor includes anyone 
who ``regularly extends'' or ``regularly arranges for'' the extension 
of credit. Regulation B combines the concepts and defines a creditor as 
a person who, in the ordinary course of business, regularly 
participates in the decision of whether or not to extend credit, 
including persons such as a potential purchaser of an obligation who 
influences the decision of whether or not to extend credit. For 
purposes of Secs. 202.4 and 202.5(a) (the prohibitions against 
discrimination and discouragement), brokers or others who regularly 
refer applicants to creditors (or who select or offer to select 
creditors to whom applications can be made) are also deemed creditors.
    As creditors expand their distribution systems for lending services 
and products, they have increasingly asked for guidance about how the 
definition of ``creditor'' applies when a lender acts in conjunction 
with other parties and discrimination occurs. The question could arise 
in the context of transactions in which a mortgage broker discriminates 
in originating loans that are funded by or closed in the name of the 
lender, for example, and also could arise in other types of lending, 
such as automobile financing.
    Regulation B provides that a person (who may otherwise be a 
creditor) is not a creditor regarding a violation of the ECOA or the 
regulation committed by another creditor unless the person knew or had 
reasonable notice of the act, practice, or policy that constituted the 
violation before becoming involved in the credit transaction. The Board 
solicits comment on whether it is desirable or feasible to provide 
further guidance in this area, such as the circumstances under which a 
creditor is deemed to have knowledge of the acts of other parties when 
the creditor has participated in the decision to extend credit or set 
the credit terms.
    Comment is solicited on the following:
    (1) Is it feasible for the regulation to provide more specific 
guidance given that most issues will depend on the facts of a 
particular case?
    (2) Should the current test--which relies on whether a person knew 
or had reasonable notice of an act of discrimination--be modified? If 
so, in what way?
    (3) Should the regulation address whether, and under what 
circumstances, a creditor must monitor the pricing or other credit 
terms when another creditor (for example, a broker) participates in the 
transactions?

5. Documentation for Business Credit

    Currently, Regulation B requires written applications if the credit 
is primarily for the purchase or refinancing of an applicant's 
principal dwelling. This rule does not apply to business credit. Many 
requests for business credit are made orally or without a formal 
written application. In such cases, a creditor usually requests that 
the applicant submit a financial statement for evaluation. As a general 
rule, Regulation B prohibits creditors from requiring the signature of 
a person other than the applicant on any credit instrument where the 
applicant is individually creditworthy. Where the financial statement 
offered to support the business credit lists jointly held property and 
is signed by both owners, some creditors are treating the financial 
statement as a joint application. Accordingly, both owners often are 
required to sign the note--even where the request for credit is being 
made by only one of the property owners. The Board does not believe 
that a joint property owner's signature on a financial statement to 
attest to the accuracy or veracity of information is definitive 
evidence of a joint application.
    Without documentation in the files other than the financial 
statement, institutions may be required to spend considerable time and 
expense establishing that an application was for joint, rather than 
individual, credit. In addition, agencies that examine for compliance 
with Regulation B may impose costs and other burdens on institutions 
when it is difficult to determine whether a joint property owner 
actually intended to be a joint applicant. Accordingly, the Board has 
been asked to revise the regulation to provide guidance on what 
mechanisms may be used by creditors to establish a joint property 
owner's intent to apply for joint business credit.
    The Board solicits comment on the following:

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    (1) What are some mechanisms through which evidence of an 
application for joint credit can be established?
    (2) Should the Board provide guidance to clarify the mechanisms 
through which an application for joint credit can be evidenced? If not, 
how can creditors ensure that their practices do not violate the 
regulation?

6. Business Credit Exemptions

    The ECOA authorizes the Board to exempt a class of transactions, or 
a particular type of transaction within a class, if the Board 
determines that the application of all or part of the regulation to 
such transactions would not contribute substantially to effectuating 
the purposes of the regulation. Pursuant to Section 703 of the ECOA, 
the Board has exercised its authority to exempt business credit from 
certain notification and record retention requirements for consumer 
credit if the business had gross revenues in excess of $1 million in 
its preceding fiscal year, or if the business requested an extension of 
trade credit, credit incident to a factoring agreement, or other 
similar types of business credit.
    Amendments to the ECOA contained in the Women's Business Ownership 
Act of 1988 require the Board to review exemptions after five years to 
determine whether an additional extension is appropriate. While the 
exemptions for certain business credit do not affect the basic 
prohibition against discrimination in credit transactions, the 
exemptions do reduce burden for creditors by modifying the notice 
requirements of the regulation under Sec. 202.9(a)(3) and the record 
retention rules under Sec. 202.12(b)(5). The Board solicits comment on 
whether these exemptions are still appropriate.

7. Other Issues

    The Board solicits comments on any other broad policy issues that 
should be addressed in the regulation.

    By order of the Board of Governors of the Federal Reserve 
System, March 6, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-6325 Filed 3-11-98; 8:45 am]
BILLING CODE 6210-01-P