[Federal Register Volume 64, Number 157 (Monday, August 16, 1999)]
[Proposed Rules]
[Pages 44582-44631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20598]



[[Page 44581]]

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Part II





Federal Reserve System





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12 CFR Part 202



Equal Credit Opportunity; Proposed Rule

  Federal Register / Vol. 64, No. 157 / Monday, August 16, 1999 / 
Proposed Rules  

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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: Proposed rule.

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SUMMARY: The Board is issuing this proposal to revise Regulation B, 
which implements the Equal Credit Opportunity Act (ECOA or Act), 
pursuant to the Board's policy of periodically reviewing its 
regulations. The Act 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, marital status, sex, age, 
and other specified bases. Major proposed revisions include removing 
the general prohibition against noting information about applicant 
characteristics such as national origin or sex, although such 
information still generally may not be considered in extending credit; 
requiring creditors to retain records for certain prescreened credit 
solicitations; and extending the record retention period for most 
business credit applications. Proposed revisions to the Official Staff 
Commentary are also included.

DATES: Comments must be received by November 10, 1999.

ADDRESSES: Comments, which should refer to Docket No. R-1008, may be 
mailed to Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments addressed to Ms. Johnson may be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and 
to the security control room at all other times. The mail room and the 
security control room, both in the Board's Eccles Building, are 
accessible from the courtyard entrance on 20th Street between 
Constitution Avenue and C Street, N.W. Comments may be inspected in 
room MP-500 between 9:00 a.m. and 5:00 p.m., pursuant to Sec. 261.12, 
except as provided in Sec. 261.14 of the Board's Rules Regarding the 
Availability of Information, 12 CFR 261.12 and 261.14.

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

SUPPLEMENTARY INFORMATION:

I. Background on ECOA and Regulation B

    The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691-1691f, 
prohibits a creditor from discriminating against an applicant in any 
aspect of a credit transaction on the basis of the applicant's race, 
color, religion, national origin, sex, marital status, age (provided 
the applicant has the capacity to contract), receipt of public 
assistance benefits, or the good faith exercise of a right under the 
Consumer Credit Protection Act (15 U.S.C. 1601 et seq.). The ECOA is 
implemented by the Board's Regulation B.
    When enacted in 1974, the ECOA prohibited discrimination on the 
basis of marital status and sex. In 1976, the Act was amended to add 
all of the other prohibited bases of discrimination. Over the years, 
several significant amendments have been made to the ECOA, including 
the following. In 1989, the ECOA was amended by the Women's Business 
Ownership Act of 1988 (Pub. L. No. 100-533, 102 Stat. 2692) to require 
that creditors give written notice to business applicants of the right 
to a written statement of reasons for a credit denial, and to impose a 
record retention requirement for certain business credit applications. 
In 1991, the ECOA was amended by the Federal Deposit Insurance 
Corporation Improvement Act (Pub. L. 102-242, 105 Stat. 2236) to 
provide applicants with a right to obtain a copy of any appraisal 
report used in connection with an application for credit to be secured 
by residential real property; the amendments also expanded the 
enforcement responsibilities of the federal financial supervisory 
agencies when information about possible violations of the ECOA becomes 
known. The Economic Growth and Regulatory Paperwork Reduction Act of 
1996 (Pub. L. 104-208, 110 Stat. 3009) amended the ECOA to create a 
privilege for information developed by creditors as a result of ``self-
tests'' they conduct.

II. The 1998 Review of Regulation B

    Pursuant to requirements of section 303 of the Riegle Community 
Development and Regulatory Improvement Act of 1994, section 610(c) of 
the Regulatory Flexibility Act of 1994, and section 2222 of the 
Economic Growth and Regulatory Paperwork Reduction Act of 1996, the 
Board is reviewing Regulation B. The Board's last comprehensive review 
of Regulation B occurred in 1985. The Board began the current review of 
Regulation B in March 1998 by publishing an Advance Notice of Proposed 
Rulemaking (Advance Notice) (63 FR 12326, March 12, 1998). In addition 
to soliciting general comment on revisions to the regulation, the Board 
identified specific issues for comment involving: (1) Preapplication 
marketing practices, (2) the distinction between an inquiry about 
credit and an application for credit, (3) data notation for nonmortgage 
products, (4) the definition of creditor, (5) documentation for 
business credit, and (6) exceptions for business credit.
    The Board received 330 comment letters on the Advance Notice. Most 
commenters addressed only the six issues identified in the Advance 
Notice. Based on its review and on the comments received, the Board now 
proposes revisions to Regulation B and the official staff commentary. 
In addition to comments on the proposed revisions, the Board requests 
specific suggestions for other revisions that would facilitate 
compliance with, or improve, the regulation.

III. Discussion of Proposed Revisions to the Regulation

    Major proposed revisions include rules that remove the general 
prohibition against the notation--but not the use--of certain 
prohibited basis information (Sec. 202.5); extend the record retention 
period for certain business credit applications (Sec. 202.12); and 
require record retention for preapproved credit solicitations 
(Sec. 202.12). The following discussion covers the proposed revisions 
to the regulation section-by-section. A section-by-section discussion 
of proposed revisions to the commentary appears in Part IV.

Section 202.1--Authority, Scope and Purpose

    No revisions are proposed in this section.

Section 202.2--Definitions

    Revisions are proposed in the definitions of adverse action, 
application, and creditor in Secs. 202.2(c)(1) and (c)(2), 202.2(f), 
and 202.2(l).
2(c) Adverse Action
2(c)(1)
    Adverse action on a class of accounts--Section 202.2(c)(1)(ii) 
provides that adverse action includes a creditor's termination of or 
unfavorable change to the terms of an account, unless the action 
affects ``all or a

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substantial portion of a class of the creditor's accounts.'' Commenters 
asked the Board to clarify the exception--namely, the meaning of 
``class of accounts'' and ``substantial portion'' of a class of 
accounts. Section 202.2(c)(1)(ii) would be revised to clarify the 
exception by changing the language from ``substantial portion'' to 
substantially all'' so that a creditor's action must affect the 
overwhelming majority of accounts in a designated class to be excluded 
from the definition of adverse action.
    The ECOA and Regulation B require creditors to give consumers 
reasons for an adverse credit decision. The notice requirement enables 
some recipients to identify and remedy credit problems, and may also 
help detect unlawful credit discrimination. The exception in 
Sec. 202.2(c)(1)(ii) is intended to address the circumstance where a 
creditor takes action that affects all or most of a type of its 
accounts, rather than targeting specific customers, and an adverse 
action notice seems unnecessary. For example, if a creditor terminates 
its secured credit card program entirely, adverse action notices will 
not likely serve the intended educational or anti-discrimination goals.
2(c)(2)
    Section 202.2(c)(2)(iii) would be revised to conform to changes 
proposed under Sec. 202.2(c)(1)(ii).
2(f) Application
    The Board believes that a request for a preapproved loan under 
procedures in which a creditor issues creditworthy persons a written 
commitment to extend credit up to a designated amount that is valid for 
a designated period of time--even if subject to conditions--is an 
application. A ``preapproval'' without procedures involving a written 
commitment would be treated as a prequalification for purposes of the 
regulation. Section 202.2(f) of the regulation would be revised 
accordingly. In addition, technical revisions would be made to the 
definition of application for clarity.
2(l) Creditor
    Section 202.2(l) would be revised to clarify that the definition of 
``creditor'' applies to a person who regularly participates in making a 
credit decision, including setting terms--not just the decision of 
whether to extend or deny credit. (See detailed discussion of the 
definition of ``creditor'' in ``Part IV. Discussion of Proposed 
Revisions to the Official Staff Commentary'' under Sec. 202.2(l).)

Section 202.3--Limited Exceptions for Certain Classes of Transactions

    Revisions are proposed in Secs. 202.3(a)(2), 202.3(b)(2), and 
Secs. 202.3(c)(1) and (2) relating to public-utilities, securities, and 
incidental credit.
    The regulation provides certain exceptions for public-utilities, 
securities, incidental, and government credit. Each of these types of 
credit remains subject to the general prohibition on discrimination; 
the exceptions generally cover issues such as record retention, 
inquiries about marital status and spousal information, and furnishing 
credit information. Credit that does not meet the definitions is 
subject to the full coverage of Regulation B.
    The Board is required periodically to review the exceptions to 
determine whether they should be retained. The Act provides that the 
Board may extend an exception for a class of transactions if the Board 
determines, after making an express finding, ``that the application of 
[the Act] or of any provision of [the Act] of such transaction would 
not contribute substantially to effecting the purposes of [the Act].'' 
15 U.S.C. 1691b. After analysis, the Board believes that extending some 
of the exceptions is still appropriate, and that applying the rules of 
Regulation B in their entirety would not contribute substantially to 
effectuating the purposes of the Act, as discussed below.
3(a) Public-Utilities Credit
3(a)(2) Exceptions
    Public-utilities credit refers to extensions of credit that involve 
public-utility services if the charges for the service, delayed 
payment, and any discount for prompt payment are filed with or 
regulated by a governmental unit, such as a public-utilities 
commission. Public-utilities credit is subject to all of the regulatory 
requirements except those relating to collecting information about 
marital status, furnishing credit information to consumer reporting 
agencies, and retaining records. The proposed rule would retain the 
relief from the record retention requirements only. Regulation B 
permits inquiries into an applicant's marital status only in limited 
circumstances. The exception from this provision permits creditors 
offering public-utilities credit to request information concerning 
marital status in all instances. The Board believes this exception is 
no longer needed and is proposing to remove the exception. Specific 
comment is solicited on this change.
    The proposed rule also would remove the exception relating to the 
furnishing of credit information under Sec. 202.10 (concerning accounts 
held or used by spouses). The requirements of Sec. 202.10 apply only to 
creditors that furnish credit information to consumer reporting 
agencies or to other creditors. Such creditors are required to furnish 
information that reflects the participation of both spouses if the 
applicant's spouse is permitted to use or is contractually liable on 
the account. Creditors are considering public-utilities payments more 
frequently as a source of repayment history for underwriting purposes. 
Thus, the Board believes that it would be helpful to consumers if 
public-utility companies that furnish credit payment information were 
subject to the same reporting requirements as other creditors subject 
to the ECOA. The Board seeks comment on this approach.
    The regulation requires creditors to retain certain records. 
Public-utilities credit is not subject to the record retention 
requirements. The Board would retain the exception regarding record 
retention because public-utility companies must keep records pursuant 
to regulations of other governmental bodies--often for longer periods 
of time than required by the ECOA. The Board believes that extending 
this exception is appropriate because requiring record retention would 
not contribute substantially to effectuating the purposes of the Act.
3(b) Securities Credit
3(b)(2) Exceptions
    Securities credit is credit subject to regulation under section 7 
of the Securities Exchange Act of 1934 or extensions of credit by a 
broker or dealer subject to regulation under that act. Brokers and 
dealers are required to inquire about the financial activities of 
spouses to comply with the rules of the Securities Exchange Act and the 
National Association of Securities Dealers. For this reason, Regulation 
B excepts securities credit from several provisions including, among 
others, signature rule requirements, rules relating to record 
retention, and requesting information about the sex of an applicant. 
Given that the Board proposes to remove the prohibition against the 
collection of information about certain applicant characteristics, the 
current exception in Sec. 202.3(b)(2)(iii) would be redundant. The 
Board believes that it is appropriate to extend the other exceptions 
related to information concerning a spouse or former spouse, marital 
status, name designations, open-end accounts, spousal signature

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requirements, the furnishing of credit information, and record 
retention. Securities credit is subject to an extensive regulatory 
scheme, and applying those provisions of Regulation B would not 
contribute substantially to effectuating the purposes of the ECOA. 
Technical revisions would be made for clarity, with no substantive 
change intended.
3(c) Incidental Credit
3(c)(1) Definition
    Currently, incidental credit is limited to consumer credit that is 
not: (1) Made pursuant to the terms of a credit card account, (2) 
subject to a finance charge under Regulation Z (Truth in Lending), or 
(3) payable by agreement in more than four installments. This type of 
credit might be extended, for example, by a local merchant that does 
not normally extend credit, to a long-standing customer; or by a doctor 
or lawyer, as an accommodation to a patient or a client.
    The proposed rule would expand the exception for incidental credit 
to include incidental business credit, as the Board believes that full 
regulatory coverage of such credit does not contribute substantially to 
effectuating the purposes of the Act. Incidental business credit would 
be defined as business credit that is not made pursuant to the terms of 
a credit card account, is not subject to interest charges or fees, and 
is not payable by agreement in more than four installments. The Board 
solicits specific comment on this proposed change.
3(c)(2) Exceptions
    Incidental credit is excepted from a number of provisions in the 
regulation including requesting information about an applicant's 
marital status, spouse or former spouse, and certain sources of an 
applicant's income. The proposed rule would eliminate the exception for 
requesting information about the sex of an applicant, in light of the 
Board's proposal to remove the prohibition against the collection of 
information related to a prohibited basis. The proposed rule would 
extend the other exceptions concerning information about an applicant's 
spouse or former spouse, marital status, income sources, signatures, 
notifications, the furnishing of credit information, and record 
retention. The Board believes that, given the nature of the credit 
extension, applying these rules would not contribute substantially to 
effectuating the purposes of the Act.
3(d) Government Credit
    With regard to government credit, the exceptions apply to 
extensions of credit made to governments or governmental subdivisions, 
agencies or instrumentalities. The Board believes that extending these 
exceptions remains appropriate, as applying the rules would not 
contribute substantially to effectuating the purposes of the Act.

Section 202.4--General Rule Prohibiting Discrimination

    Revisions are proposed in Sec. 202.4. In the Advance Notice, the 
Board solicited comment on how and to what extent creditors are using 
prohibited bases in preapplication marketing--specifically, prescreened 
solicitations--to determine whether the coverage of the regulation 
should be expanded to such practices. Although this section includes a 
discussion of the issue, the proposed rule does not recommend expanding 
the regulation's coverage to prescreened solicitations; however, 
Sec. 202.12(b)(7) would require creditors to retain certain records 
related to preapproved credit solicitations.
General Rules
    Section 202.4 would be revised to incorporate general rules that 
apply under the regulation, some of which are currently in other 
sections of the regulation and official staff commentary. The Board 
believes this approach would facilitate compliance with the regulation. 
Section 202.4(a) would provide the general rule against discrimination. 
Section 202.4(b) would provide the general rule against discouraging 
applications. Section 202.4(c) would provide the rule for when written 
applications are required.
    Section 202.4(d) would contain new clear and conspicuous and 
retainability standards that the Board is proposing to apply to the 
disclosures and other information required to be in writing. In March 
1998, the Board requested public comment on a proposal to permit the 
electronic delivery of disclosures for four of its consumer protection 
regulations: Regulation B; Regulation M, Consumer Leasing; Regulation 
Z, Truth in Lending; and Regulation DD, Truth in Savings (63 FR 14533-
14552, March 25, 1998). Except for Regulation B, each of those 
regulations expressly provides that creditors must present required 
information in a clear and conspicuous manner, in a form the consumer 
may keep. Accordingly, the Board proposed that the clear and 
conspicuous and retainability standards be applied to information 
required under Regulation B (63 FR 14552, March 25, 1998). Their 
inclusion in Sec. 202.4 is consistent with that proposal.
Prescreened Solicitations
    The ECOA prohibits discrimination by a creditor against an 
applicant on a prohibited basis regarding any aspect of a credit 
transaction. Regulation B defines an applicant as a person who has 
requested or received credit. A credit transaction is defined by 
Regulation B as covering every aspect of an applicant's dealings with a 
creditor, beginning with requests for information. Thus, the coverage 
of the ECOA is generally limited to a person who has, at a minimum, 
sought credit information. The law does not generally extend to a 
creditor's preapplication marketing practices--such as the selection of 
persons solicited for a credit card. The regulation applies only after 
individuals respond to a creditor's offer of credit. But because a 
person could be discouraged from seeking credit or credit information, 
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 regulation also applies to 
advertising.
    Creditors use a number of techniques to identify potential 
recipients of credit. For instance, creditors will often specify 
criteria to consumer reporting agencies, which then draw on information 
from credit files to compile mailing lists of persons who meet those 
criteria. This marketing technique--involving prescreened 
solicitations--is typically carried out through mailed solicitations as 
well as by telemarketing.
    There has been concern through the years that Regulation B 
generally does not apply to preapplication marketing. During the 1985 
review of Regulation B, the staff presented to the Board the issue of 
whether prescreened solicitations should be made subject to the 
regulation, but recommended against coverage. While recognizing the 
potential for unfair treatment in such practices, available evidence 
did not support a finding that creditors were improperly making use of 
prohibited characteristics. Moreover, it was thought that prescreened 
solicitations could result in a greater availability of credit to many 
consumers. Accordingly, the Board did not propose to expand the 
regulation's coverage to such practices.
    Over the past several years, the Board has become aware (through 
its own observations and those of other federal financial regulatory 
agencies) of instances in which creditors, primarily in the credit card 
industry, use age to identify potential recipients of

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preapproved credit. In some instances, creditors have used zip codes to 
exclude credit solicitations in low-income areas that represent 
predominantly minority neighborhoods. In other cases, creditors have 
used ethnicity or gender to target potential customers in affirmative-
outreach programs.
    The Board raised the issue of prescreened solicitations for public 
comment in its Advance Notice. Specifically, the Board requested 
comment on how and to what extent creditors are using a prohibited 
basis in preapplication marketing. Of the industry commenters who 
addressed preapplication marketing, only a few discussed the extent to 
which the selection criteria include a prohibited basis. These 
commenters indicated that except for using age to identify consumers 
too young to be approved for credit, or to identify potential customers 
for unique products such as reverse mortgages, they do not directly use 
prohibited bases in preapplication marketing.
    The majority of commenters--primarily creditors and their trade 
associations--addressed the more general issue of whether the Board 
should expand the regulation's coverage to preapplication marketing 
practices. Most of these commenters opposed any expansion. These 
commenters were concerned that an expansion of Regulation B would 
prevent creditors from marketing their products to those most likely to 
respond. They stated, for example, that a creditor offering products 
that are used predominantly by women might be prohibited from targeting 
consumers on a mailing list for a magazine geared toward women. Some 
commenters believed that the regulation's protections need not apply to 
prescreened solicitations because they are only one aspect of a 
creditor's overall marketing program, and that consumers who are not 
solicited may nevertheless obtain credit from the creditor. A few 
questioned the Board's legal authority to expand the regulation's 
coverage beyond ``applicants.''
    Others--including most of the federal financial enforcement 
agencies and consumer advocates that commented--favored expanding the 
coverage of Regulation B to preapplication marketing practices. Some of 
these commenters expressed concern that currently a creditor is 
permitted to use a prohibited basis to limit or avoid extending credit 
by target marketing to certain groups. Other commenters believed that 
regulatory coverage of solicitations is necessary to fulfill the Act's 
purpose, arguing that those not solicited are denied information that 
could lead them to apply for credit. Some commenters expressed concern 
about the inconsistent approaches between the Fair Housing Act, which 
extends coverage to preapplication marketing, and the ECOA, which does 
not.
    Prescreened credit solicitations are not new, particularly credit 
card solicitations. The use of prescreened solicitations has become 
more commonplace beyond credit cards, however, and in some instances 
may be the primary vehicle for offering credit. In the marketing of 
some credit cards, prescreened solicitations often offer discounted 
introductory rates, attractive terms, and enhancements (such as 
purchase discounts) to those solicited that may not be available 
through other application channels. Prescreened solicitations can be 
used to target consumers most likely to use a particular credit 
product, or to target segments of the population that in the creditor's 
experience are most likely to respond to the offer of credit. 
Conversely, prescreened solicitations can be used to exclude some 
consumers from offers of credit. They can also be used to target 
consumers in certain neighborhoods for less favorable credit products 
or less favorable terms.
    Covering credit solicitations without providing many exceptions 
could have unintended consequences. For example, it could result in 
prohibiting practices that increase credit availability. Targeted 
marketing through prescreened solicitations can effectively increase 
access to credit for consumers. Moreover, while there is anecdotal 
evidence that creditors do target potential applicants on the basis of 
age and geographic location, such evidence is somewhat limited; it does 
not suggest that the application of Regulation B rules is warranted at 
this time. Because of concerns about the potential impact on some 
segments of the population, however, the Board believes that taking 
other steps would enable the Board and the other enforcement agencies 
to monitor solicitation practices in a more systematic way than has 
been possible to date.
    The ECOA directs the Board to prescribe regulations to carry out 
the purposes of the Act. Further, section 703(a)(1) of the Act 
authorizes the Board to make ``such classifications * * * adjustments 
and exceptions * * * as in the judgment of the Board are necessary or 
proper to effectuate the purposes of [the law] * * * or to prevent 
circumvention or evasion * * * .'' 15 U.S.C. 1691b. The Board proposes 
to use this exception authority to require creditors to keep records 
related to certain prescreened solicitations--namely, preapproved 
credit solicitations. The Board's proposal adds a new 
Sec. 202.12(b)(7).
    For purposes of the proposed rule, a preapproved credit 
solicitation is defined as the ``firm offer of credit'' described in 15 
U.S.C. 1681a(l) of the Fair Credit Reporting Act (FCRA). Under the 
FCRA, a person that receives a list of consumers from a consumer 
reporting agency in connection with credit transactions not initiated 
by the consumers must generally offer credit to the consumers on the 
list, subject to certain exceptions. 15 U.S.C. 1681b(c)(1)(B). A 
creditor must maintain the criteria used to select the consumers for 
three years after the date the credit offer is made. 15 U.S.C. 
1681m(d)(3). The Board's draft rule would require creditors to retain 
(for 25 months after a creditor solicits potential applicants for 
credit) certain information related to preapproved credit 
solicitations: the list of criteria used to select potential customers, 
the text of the solicitation mailing, correspondence (to and from 
selected potential customers) related to complaints--whether formal or 
informal--about the solicitation, and the portion of the marketing plan 
(including any response model) to which the solicitation relates.
    The draft rule would require creditors to retain information that 
the Board believes they already retain for business and other reasons. 
The Board solicits comment on the incremental burden associated with 
retaining information beyond the records creditors already retain under 
the FCRA or for business purposes.
    The information required by the proposed rule--the criteria for 
selection, the solicitation, correspondence, and the marketing plan to 
which the solicitation relates--should allow for an effective review 
and analysis of creditors' possible use of prohibited bases in 
preapproved credit solicitations. For entities that are regularly 
examined, the Board believes that the most effective way to review and 
evaluate creditor practices would be through the use of the examination 
process.

Section 202.5--Rules Concerning Taking of Applications

    Section 202.5 of the regulation would be revised.
    Because the ECOA makes it unlawful for creditors to consider any of 
the prohibited bases of discrimination in a credit transaction, 
Regulation B generally has prohibited creditors from inquiring about, 
or noting, those

[[Page 44586]]

applicant characteristics in any aspect of a credit transaction. This 
general prohibition was intended to discourage discrimination, based on 
the premise that if creditors cannot inquire about or note such 
information, they are less likely to unlawfully consider the 
information. For home mortgage lending (given frequent allegations and 
concerns about unlawful discrimination) the regulation has required 
creditors, since 1977, to note the applicant's national origin or race, 
marital status, sex, and age in applications for home purchase loans, 
so that enforcement agencies can better monitor home mortgage lenders' 
compliance with the ECOA. The Home Mortgage Disclosure Act, 12 U.S.C. 
2801 et seq. (implemented by Regulation C), imposed a similar data 
collection requirement in 1989 that applies to mortgage loans more 
broadly, encompassing home improvement loans in addition to home 
purchase loans.
    In 1995, the Board proposed to remove the prohibition against 
noting an applicant's race, color, religion, national origin, and sex 
for nonmortgage credit products. The proposed revision was published at 
the time the banking agencies were revising regulations that implement 
the Community Reinvestment Act; the proposal responded to concerns 
about whether creditors were meeting the needs of their communities, 
particularly for small business and small farm lending. The majority of 
the comments received on the 1995 proposal opposed removal of the 
prohibition, generally expressing concern that voluntary data notation 
would lead to mandatory data collection and result in substantially 
increased costs and burden. In addition, many commenters raised 
concerns about the quality of the data that would be obtained, given 
that supplying information would be voluntary and not all applicants 
would choose to provide it. Commenters who supported removal of the 
prohibition believed that the data would allow creditors to better 
identify underserved groups and design programs to address unmet credit 
needs; they also believed that it would provide useful data for 
evaluating creditors' compliance with fair lending laws. After 
extensive deliberation, the Board withdrew the proposal in December 
1996, and stated that, given the political sensitivity of the issues 
involved, the matter was better left to the Congress.
    The Board's 1998 Advance Notice solicited comment on whether the 
Board should again consider removing the prohibition for nonmortgage 
credit products, in its review of Regulation B. The Advance Notice 
raised the issue in response to concerns that continue to be expressed 
by the Department of Justice and some of the federal financial 
enforcement agencies, pointing to anecdotal evidence of discrimination 
in connection with small business and other types of credit. These 
agencies believe that the ability to obtain and analyze data about race 
and ethnicity (such as creditors might collect on a voluntary basis) 
would aid fair lending enforcement. In addition, some creditors 
continue to express interest in being able to note--on a voluntary 
basis--information about the ethnicity, sex, and race of their 
applicants and borrowers to evaluate compliance with fair lending laws, 
as well as for marketing and outreach initiatives. Small-business 
owners and community groups also continue to strongly support data 
notation, particularly for small business lending.
    More than 300 commenters addressed the issue in response to the 
Advance Notice. Many commenters--primarily banks and banking trade 
associations--urged the Board not to remove the prohibition. These 
commenters believed that, if the prohibition were to be removed, 
examiners and others would pressure depository institutions to collect 
data. They feared that a requirement to collect data would soon follow, 
which would impose a substantial burden on institutions. These 
commenters expressed concern that creditors that obtained data about 
race, ethnicity, and other applicant characteristics would be subjected 
to greater scrutiny by enforcement agencies. They also stated that data 
notation is intrusive of consumers' privacy, and would encourage a 
perception of creditors' using the data to discriminate. Some 
commenters stated that data noted on a voluntary basis would be 
unreliable and that the lack of standards for notation could render the 
quality of data questionable. (In some cases, commenters used this 
criticism to argue against lifting the prohibition; in other cases, 
they used it to argue for mandatory data collection.) Commenters also 
suggested that the current rule effectively discourages discrimination 
because loan officers often do not have access to information that 
would enable them to discriminate on a prohibited basis.
    Many other commenters--including most of the federal financial 
enforcement agencies, the Department of Justice, the Department of 
Housing and Urban Development, small businesses and their trade 
associations, consumer advocates, community organizations, and some 
banks--favored removing the prohibition. A number of commenters favored 
removing it for all nonmortgage credit products, but most of those who 
favored lifting the ban were focused on small business lending. Some of 
these commenters believed that the most effective way to monitor and 
enforce fair lending compliance on small business loans is with 
mandatory collection, although they see voluntary notation for such 
loans as an important first step. They said that allowing data notation 
would enable creditors and government agencies to monitor for possible 
discriminatory practices, and might enable creditors to better target 
underserved markets for small business or other lending. Some 
commenters suggested that, in the case of home mortgage lending, the 
mandatory collection and disclosure of data have increased access to 
those products for low-income and minority consumers.
    The Board proposes to remove the prohibition against noting 
information about an applicant's race, color, religion, national 
origin, and sex for all credit products. Consideration of such 
information in evaluating creditworthiness, except as permitted by law, 
would continue to be prohibited by the ECOA and Regulation B. The Board 
recognizes that removing the prohibition would allow loan officers to 
have access to information on applicant characteristics that might not 
otherwise be available and, thus, could provide the opportunity for 
unlawful discrimination. Also, the Board recognizes that the usefulness 
of the data for fair lending enforcement purposes would depend on 
whether creditors implement standards for uniform collection of the 
data--such as by product, for all applicants, for all borrowers, etc. 
On balance, however, removing the prohibition for all nonmortgage 
credit may allow issues of credit discrimination to be better 
addressed. Because notation would be on a voluntary basis, creditors 
could target those products where particular concern exists about 
potential discrimination.
    The proposed rule provides that applicants may not be required to 
provide information about their race, color, religion, national origin, 
or sex. It also requires creditors who request information on applicant 
characteristics to disclose--at the time they request the information-- 
that providing it is optional, and that the creditor will not take the 
information (or the applicant's decision not to provide the 
information) into account in any aspect of the credit transaction. (See 
proposed Sec. 202.5(a)(4).) (A proposed model notice is included in 
Appendix C.) The Board seeks comment on this approach.

[[Page 44587]]

    Section 202.5(a) would be moved to Sec. 202.4. Sections 202.5(b)-
(d) would be redesignated as Secs. 202.5(a)-(c), and the rules in those 
sections barring information requests about sex, race, color, religion 
and national origin would be removed. The proposed removal does not 
extend to substantive rules relating to marital status that effectuate 
the antidiscrimination provisions of the Act. Some technical edits 
would be made to newly-designated Secs. 202.5(a)(1), (a)(2), and 
(a)(3), and to newly-designated Secs. 202.5(b)(2) and (b)(3). Part of 
existing Sec. 202.5(d)(5) concerning inquiries about permanent 
residency and immigration status would be moved to newly-designated 
Sec. 202.5(c)(5). Also, Sec. 202.5(e) would be moved to Sec. 202.4 to 
facilitate compliance with the regulation.

Section 202.5a--Rules on Providing Appraisal Reports

    No revisions are proposed in this section.

Section 202.6--Rules Concerning Evaluation of Applications

    Revisions are proposed in Sec. 202.6(b).
6(b) Specific Rules Concerning Use of Information
6(b)(8)
    Section 202.6(b)(8) would be added to clarify that a creditor may 
not evaluate married and unmarried applicants by different standards. 
The Board believes that this guidance-- currently in the commentary--is 
more appropriately placed in the regulation.

6(b)(9)

    A new paragraph 202.6(b)(9) would be added to make clear that a 
creditor may not consider race, color, religion, national origin, or 
sex to determine an applicant's creditworthiness, except as permitted 
by law; nor may the creditor consider the applicant's decision not to 
provide the information.

Section 202.7--Rules Concerning Extensions of Credit

    Revisions are proposed in Sec. 202.7(d)(1).
7(d) Signature of Spouse or Other Person
    Section 202.7(d)(1) would be revised to clarify the rule concerning 
joint applications for credit. Regulation B does not require written 
applications for business credit. Often, requests 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 if the applicant is individually creditworthy. Where 
the financial statement submitted by the applicant lists jointly held 
property and is signed by both property owners (attesting to the 
accuracy of the data), some creditors are treating the financial 
statement as an indication that the owners are making a joint 
application for credit. In those cases, both owners often are being 
required to sign the promissory note--even where the request for credit 
has been made only by the property owner engaged in operating the 
business. The Board believes that a joint property owner's signature on 
a financial statement (to attest to the accuracy of information) alone 
does not represent definitive evidence of a joint application.
    In the Advance Notice of Proposed Rulemaking, the Board asked 
whether additional guidance should clarify the mechanisms through which 
an application for joint credit can be evidenced. Although some 
commenters stated that a written application is the best mechanism to 
establish an application for joint credit, other commenters believed 
the Board should provide additional guidance on the issue.
    The Board does not propose to require written applications for 
business credit. Section 202.7(d)(1), however, would be revised to 
clarify that the submission of joint financial information or other 
evidence of jointly held assets does not of itself constitute an 
application for joint credit. The rule would apply to both consumer and 
business credit. In addition, the official staff commentary would be 
amended to suggest ways in which a creditor may obtain a clear 
indication of a joint application. (See proposed comment 7(d)(1)-3.)

Section 202.8--Special-Purpose Credit Programs

    Technical revisions are proposed in Sec. 202.8(a)(3).
8(a) Standards for Programs
    Section 202.8(a)(3) of the regulation, which addresses special-
purpose credit programs offered by for-profit organizations, would be 
revised. The Board believes that paragraphs (a)(3)(i) and (ii) set 
forth the criteria; the phrase regarding ``special social needs'' would 
be deleted to eliminate confusion.

Section 202.9--Notifications

    Revisions are proposed in Secs. 202.9(a)(3) and 202.9(b)(2).
9(a) Notification of Action Taken, ECOA Notice, and Statement of 
Specific Reasons
9(a)(3) Notification to Business Credit Applicants
    The regulation provides for exceptions from certain notification 
and record retention requirements for business 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. The Board is required periodically to review the exceptions to 
determine whether they should be retained. The Act provides that the 
Board may extend an exception if the Board determines, after making an 
express finding, ``that the application of [the Act] or any provision 
of [the Act] of such transaction would not contribute substantially to 
effecting the purposes of [the Act].'' (See 15 U.S.C. 1691b.)
    The Advance Notice of Proposed Rulemaking requested comment on 
whether the limited exceptions are still appropriate. Some commenters 
stated that the exceptions should be eliminated; they believe business 
applicants, like consumer applicants, need adverse action notices to 
ensure that they have been treated fairly and not denied credit on a 
prohibited basis. Most commenters, however, favored retaining the 
current exceptions. These commenters stated that business applicants 
tend to be more sophisticated than consumer applicants and, therefore, 
generally do not need the same protections as consumers. Some 
commenters suggested changing the test for when the exceptions apply; 
some commenters suggested lowering the $1 million threshold. Others 
suggested using the amount of the credit request rather than the size 
of the business.
    The Board believes that applying the rules in full or changing the 
current test, which is based on a $1 million gross revenue threshold, 
would not contribute substantially to effectuating the purposes of the 
ECOA. Accordingly, the Board believes the exceptions based on the 
current threshold are still appropriate and should be extended. The $1 
million threshold is consistent with the legislative history of the 
Women's Business Ownership Act of 1988 (Pub. L. No. 100-533, 102 Stat. 
2692), which amended the ECOA. That history suggests that the 
amendments were intended primarily to apply to small businesses. When 
the rule was adopted in 1989, 86 percent of all businesses had gross 
revenues of $1 million or less a year. Retaining the $1

[[Page 44588]]

million threshold would provide nearly the same percentage of all 
businesses (currently 85 percent) with the additional protections. In 
addition, the Board believes that a gross revenue test is easier for 
creditors to administer than other suggested tests, such as basing the 
exceptions on the sophistication of the applicant.
    Section 202.9(a)(3)(ii) would be revised to require that creditors 
disclose, to businesses with gross revenues in excess of $1 million in 
the preceding fiscal year, the right to a written statement of reasons 
for adverse action. Currently, creditors must provide a written 
statement of reasons for adverse action if the applicant requests the 
statement within 60 days of being notified of adverse action. Requiring 
disclosure of the right should not significantly increase burden for 
creditors, and will benefit applicants who may not be aware of their 
right to the written statement of reasons.
9(b) Form of ECOA Notice and Statement of Specific Reasons
9(b)(2) Statement of Specific Reasons
    Section 202.9(b)(2) would be revised to clarify that whether a 
creditor's denial of credit is based on the creditworthiness of the 
applicant, a joint applicant, or guarantor, the reasons for adverse 
action must be specific. For example, a general statement that ``the 
joint applicant did not meet the creditor's standards of 
creditworthiness'' is insufficient.

Section 202.10--Furnishing of Credit Information

    No revisions are proposed in this section.

Section 202.11--Relation to State Law

    Technical revisions would be made in this section.

Section 202.12--Record Retention

    Revisions are proposed in Sec. 202.12(b). Proposed 
Sec. 202.12(b)(7) provides the record retention requirements for 
preapproved credit solicitations. (See detailed discussion in 
Sec. 202.4.)
12(b) Preservation of Records
    Section 703(a)(4) of the Act requires creditors to retain records 
or other data related to business loans ``as may be necessary'' to 
evidence compliance with the Act. These records must be retained no 
less than one year, unless otherwise excepted. Currently, 
Sec. 202.12(b) requires creditors to retain credit applications and 
other records for 12 months for business credit. Under the proposal, a 
25-month record retention period would apply to credit applications 
involving businesses with gross revenues of $1 million or less; the 
rule would remain unchanged for credit applications involving other 
businesses.
    The Board believes that increasing the record retention period 
would assist the federal financial regulatory agencies, in particular, 
in monitoring and enforcing compliance with the Act, given the 
relatively low volume of business loans on a yearly basis for some 
institutions, and given the agencies' reduction of examination 
frequency (from 18 to 24 months, and in some instances to 36 months). 
Sections 202.12(b)(1), (2), (3), and (4) would be revised accordingly. 
In 1989, the Board proposed to establish a 25-month record retention 
period. Creditors expressed concern about the space required to store 
documents and the costs associated with longer storage, and the Board 
adopted the 12-month record retention period. The Board believes these 
concerns may no longer be compelling given technological advances and 
the use of electronic storage. The Board seeks specific comment on the 
potential burden associated with retaining information for the 
additional period.
12(b)(7) Preapplication Marketing Information
    A new paragraph 202.12(b)(7) would be added to the regulation to 
include the record retention requirements for certain preapplication 
marketing information.

Section 202.13--Information for Monitoring Purposes

    No revisions are proposed in this section.

Section 202.14--Enforcement, Penalties and Liabilities

    Revisions are proposed in Sec. 202.14(c). Technical revisions would 
be made in Sec. 202.14(b).
14(c) Failure of Compliance
    Section 202.14(c) would be revised to reflect the Board's proposal 
to remove the prohibition in Regulation B against the collection of 
certain information.

Section 202.15--Incentives for Self-Testing and Self-Correction

    Minor revisions are proposed in Sec. 202.15(d)(1).
15(d)(1) Scope of Privilege
    Section 202.15(d)(1)(ii) would be revised, consistent with proposed 
changes to Secs. 202.4 and 202.5(a).

Appendix A to Part 202--Federal Enforcement Agencies

    Revisions are proposed in Appendix A to reflect changes in the 
names and addresses of some agencies.

Appendix B to Part 202--Model Application Forms

    Appendix B would be revised to reflect proposed revisions to 
Sec. 202.5. Technical revisions would also be made for clarity.
    The ``Residential loan application'' model form would be replaced 
with an updated ``Uniform residential loan application'' form (FHLMC 
65/FNMA 1003). The Board solicits specific comment on whether revisions 
should be made to the other model application forms.

Appendix C--Sample Notification Forms

    Appendix C would be revised to reflect proposed revisions to 
Sec. 202.5. A new model form C-10 would be added to provide the 
disclosure requirements for creditors who request information 
voluntarily on applicant characteristics. Also, the Board solicits 
specific comment on whether revisions should be made to the existing 
sample notification forms.

IV. Discussion of Proposed Revisions to the Official Staff 
Commentary

    The following discussion covers the proposed revisions to the 
official staff commentary section-by-section. Such revisions include 
clarifying: the definition of adverse action (Sec. 202.2(c)); the 
definition of application in regard to certain preapprovals 
(Sec. 202.2(f)); the disclosure requirement if a creditor asks for 
applicant characteristics (Sec. 202.5(a)); and the nonapplicability of 
the self-testing privilege to information requested voluntarily about 
applicant characteristics (Sec. 202.15(b)).

Section 202.1--Authority, Scope, and Purpose

    No revisions are proposed in this section of the commentary.

Section 202.2--Definitions

    Revisions are proposed in comments to Secs. 202.2(c)(1) and (c)(2), 
202.2(f), 202.2(l), and 202.2(z).
2(c) Adverse Action
2(c)(1)
    Counteroffers in connection with credit solicitations--Proposed 
comment 2(c)(1)(i)-2 addresses credit solicitations. The comment would 
clarify that where a consumer who receives a solicitation requests a 
specific

[[Page 44589]]

amount of credit and the creditor offers a different amount, the 
creditor's action constitutes a counteroffer.
    Adverse action on a class of accounts--Proposed comment 
2(c)(1)(ii)-1 would clarify the terms ``substantially all'' and ``class 
of accounts.'' Existing comments 2(c)(1)(ii)-1 and -2 would be 
renumbered.
2(c)(2)
    Express agreement--Proposed comment 2(c)(2)(i)-1 would clarify when 
an adverse action notice is required for a change in the terms of an 
account. This comment solely addresses when a creditor is required to 
provide an adverse action notice; it does not affect a creditor's 
ability to change the terms under its agreement with the consumer.
    Current delinquency or default--An adverse action notice is not 
required if a creditor takes action on an account due to a current 
delinquency or default on that account. Comment 2(c)(2)(ii)-2 would be 
revised, and an example would be added, to clarify this interpretation.
    Activity on a different account--Proposed comment 2(c)(2)(ii)-3 
would clarify that an adverse action notice is required if a creditor 
treats an account as delinquent or in default due to activity on 
another account. This comment solely addresses when a creditor is 
required to provide an adverse action notice; it does not address what 
activity constitutes a delinquency or default under the agreement 
between the parties.
2(f) Application
    Inquiries about or applications for credit
    In the Advance Notice, the Board solicited comment on whether it 
should provide additional guidance to further clarify the current 
distinction between an inquiry about credit and an application for 
credit. Specifically, the Board asked whether it should devise a 
different test for determining when a discussion becomes an application 
and, if so, what should be the test.
    The ECOA requires creditors to provide notice of action taken 
within certain time frames following the creditor's receipt of a 
completed application. Regulation B defines an application as ``an oral 
or written request for an extension of credit that is made in 
accordance with procedures established by the creditor for the type of 
credit requested.'' This enables the creditor to establish as formal or 
informal a process as it wishes.
    The official staff commentary, through examples, encourages 
creditors to provide consumers with information that will assist them 
in the credit shopping process. The flexibility provided allows 
creditors to give information without entering into a formal 
application process, and thus to avoid triggering the notice and 
recordkeeping rules. To deter creditors from discouraging prospective 
applicants on a prohibited basis, however, the rule deems a creditor's 
negative response to an inquiry to represent the denial of an 
application for credit. That is, a credit inquiry can be deemed an 
application if, in giving credit information to a potential applicant, 
the creditor evaluates information about the individual, decides that 
the individual does not meet the creditor's criteria for 
creditworthiness, and informs the individual accordingly. In that case, 
an adverse action notice is required and records are retained.
    Many industry commenters expressed concern that the current test is 
difficult to apply because when a creditor has ``declined'' a request 
is not always clear. According to these commenters, it is often unclear 
when a creditor's discussion of negative factors, such as a person's 
poor payment history on loans, triggers an adverse action notice. Some 
commenters noted that, due to this lack of clarity, they often provide 
an adverse action notice to consumers to whom they give negative 
information--a procedure they view as burdensome and not necessarily 
helpful to many consumers. They believe the notice may discourage some 
consumers from later applying for credit, especially if those consumers 
initially were only seeking information.
    Other commenters supported the current test; they believe that the 
test provides the flexibility they need. These commenters expressed 
reservations about changing a rule that creditors are already familiar 
with. They also expressed concern that a change in the rule could 
require creditors to change the way they conduct business. Some 
commenters, including industry and consumer representatives, stated 
that adverse action notices should be given whenever consumers are 
informed that they are ineligible or lack the qualifications for 
credit, regardless of the stage in the credit process.
    In response to commenters' concerns about when an adverse action 
notice is required, the Board considered whether a different test is 
appropriate. The Board focused on creditors' use of new delivery 
channels for loan products and information (such as the Internet), and 
growth in credit counseling and prequalification programs. Many of 
these developments result in consumers asking for and receiving 
information about credit products--and about their own 
creditworthiness--prior to submitting an application for credit.
    The Board solicited comment on a number of issues concerning the 
definition of ``application.'' The Board asked whether a ``bright-
line'' test would best distinguish between an inquiry and an 
application (for example, whether obtaining a credit report should 
always trigger an application). Some commenters believed that such a 
test could eliminate confusion and inconsistent treatment among 
lenders. Others opposed a bright-line test, stating that any proposed 
test needs to have sufficient flexibility to accommodate evolving 
approaches to lending (such as prequalification requests) and 
homeownership and small business loan counseling. Commenters noted that 
given rapid changes in lending practices and technology, today's 
bright-line test might not be appropriate in the future.
    The Board also asked whether it would be desirable or possible to 
apply the current notification rules to homeownership counseling 
programs that engage in credit evaluations; often, a credit report is 
obtained to determine the consumer's financial circumstances and to 
assist in an ongoing counseling process. Most commenters did not 
believe the current rules should be applied to such programs. They 
generally supported a rule that would encourage counseling without 
imposing burdensome notification requirements.
    Finally, the Board solicited comment on whether the issue of 
distinguishing an inquiry from an application also arises in 
nonmortgage credit, such as credit card, automobile, and small business 
lending. Most commenters believed the issues were similar, and that 
there was nothing unique about nonmortgage credit that requires a 
different test; they generally believed that, for purposes of 
consistency, all credit should be subject to the same test.
    Given changes in technology, and creditors' use of varying 
procedures and mechanisms to deliver their credit products, on balance 
the Board believes that retaining the flexibility of the current test 
is appropriate. Comment 2(f)-3 would clarify that prequalifications are 
subject to the test currently applicable to inquiries. Under that test, 
a creditor provides an adverse action notice if the creditor 
communicates a denial. Proposed comment 2(f)-5 gives an example of 
preapprovals that are treated as applications, in keeping with the

[[Page 44590]]

proposed addition to Sec. 202.2(f) of the regulation. Existing comment 
2(f)-5 would be redesignated.
2(l) 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, as well as any assignee of an original creditor who 
``participates in the decision'' to extend credit. Regulation B 
combines these 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 creditor's decision. 
Brokers or others who regularly refer applicants to creditors (or who 
select or offer to select creditors to whom applications can be made) 
are creditors for purposes of Secs. 202.4 and 202.5(a) (the 
prohibitions against discrimination and discouragement) which are 
Secs. 202.4(a) and (b), respectively, under the proposed rule. 
Regulation B also provides that a person (who may otherwise be a 
creditor) is not a ``creditor'' with respect to a violation of the ECOA 
or the regulation committed by another creditor unless the creditor 
``knew or had reasonable notice of'' the act, practice, or policy that 
constituted the violation before becoming involved in the credit 
transaction.
    In the Advance Notice of Proposed Rulemaking, the Board requested 
comment on the definition of the term ``creditor.'' The Board noted 
that creditors'' distribution systems for lending services and products 
have expanded over the years, and that creditors have increasingly 
asked for guidance about how the term applies when a lender acts in 
conjunction with other creditors and discrimination occurs. 
Specifically, the Board solicited comment on whether it is feasible for 
the regulation to provide more specific guidance given that most issues 
will depend on the facts of a particular case. A slight majority of 
commenters asked the Board to provide more specific guidance. Some of 
these commenters requested that the Board provide a clearer description 
of the conduct that triggers liability. Other commenters requested that 
the Board expressly state the types of persons that are considered to 
be creditors under the regulation. Some commenters opposed more 
specific guidance on the belief that whether the definition applies 
must be determined on a case-by-case basis.
    The Board also solicited comment on whether the current test--which 
relies on whether a person knew or had reasonable notice of an act of 
discrimination--should be modified. Some commenters believed that the 
test should be modified to clarify that a creditor is not responsible 
for the acts of another creditor where the creditor does not have 
control over the other creditor's activities. Some commenters stated 
that the Board should change the test to ``actual'' notice. Other 
commenters were concerned that the Board may change the test to impose 
a stricter standard; these commenters believed that a stricter standard 
could force creditors to discontinue many types of credit programs. 
Some consumer advocates expressed concern that the current test 
encourages creditors to pass on the ultimate underwriting 
responsibilities to avoid knowledge of another creditor's activities. 
Most commenters believed the current test should not be modified. Some 
of these commenters stated that the Board should clarify through the 
staff commentary what constitutes ``reasonable notice.''
    Finally, comment was solicited on whether the regulation should 
address under what circumstances a creditor must monitor the pricing or 
other credit terms when another creditor (for example, a loan broker) 
participates in the transactions and sets the terms. Some commenters 
believed the regulation should address monitoring to explicitly state 
that there is no such requirement. Some of these commenters stated that 
creditors would not have sufficient information to evaluate another 
creditor's practices and policies. Other commenters stated that 
monitoring could force creditors to restrict the third parties with 
whom they do business based on the size and capability of their 
monitoring systems. Some commenters believed that the regulation should 
explicitly state that there is a monitoring requirement implicit in the 
``reasonable notice'' test. A slight majority of commenters opposed the 
regulation's addressing whether a creditor must monitor the acts of 
other creditors.
    The Board considered whether, given the wide variety of ways that 
creditors conduct business involving more than one creditor, a new test 
could provide clearer guidance. While the application of the current 
test is subject to interpretation, the Board believes that it is not 
possible to specify with particularity by regulation the circumstances 
under which a creditor may--or may not--be liable for a violation 
committed by another creditor. Accordingly, Regulation B retains the 
``reasonable notice'' standard for when a creditor may be responsible 
for the discriminatory acts of other creditors.
    The Board believes that, depending on the circumstances, the 
``reasonable notice'' standard may carry with it the need for a 
creditor to exercise some degree of diligence with respect to third-
parties' involvement in credit transactions, such as brokers or the 
originators of loans. The Board also believes, however, that it is not 
feasible to specify by regulatory interpretation the degree of care 
that a court of law may find to be required in specific cases.
    Comment 2(l)-2 would be revised to clarify the type of creditors 
subject only to the general prohibitions against discrimination and 
discouragement.
2(z) Prohibited Basis
    A technical revision would be made to comment 2(z)-1 for clarity. 
Comment 2(z)-3 reflects the change in the name of the Aid to Families 
with Dependent Children program.

Section 202.3--Limited Exceptions for Certain Classes of Transactions

    A technical revision would be made to comment 3-1 for clarity.

Section 202.4--General Rule Prohibiting Discrimination

    Substantial revisions are proposed in comments to Sec. 202.4.
    Former comment 4(a)-1 would be divided into two comments 4(a)-1 and 
2. Additional examples of disparate treatment would be included in 
comment 4(a)-2. Proposed comments 4(b)-1 and 2 are existing comments 
5(a)-1 and 2, respectively, with minor revisions. References to 
``potential'' applicants in existing comment 5(a)-1, which is comment 
4(b)-1 under the proposal, would be changed to ``prospective'' 
applicants with no substantive change intended. Proposed comments 4(c)-
1, 2, and 3 are existing comments 5(e)-1, 2, and 3, respectively. 
Proposed comment 4(d)-1 is new and would clarify the clear and 
conspicuous requirement.

Section 202.5--Rules Concerning Taking of Applications

    Substantial revisions are proposed in comments to Sec. 202.5.
    Comments 5(a)-1 and 2 would be moved to proposed comments 4(b)-1 
and 2, respectively, consistent with proposed changes to the 
regulation. Comments 5(b)(2)-1, 2, and 3 would be removed, consistent 
with proposed

[[Page 44591]]

changes to the regulation. Comments 5(d)(1)-1 and 5(d)(2)-1, 2, and 3 
would be redesignated. Comments 5(e)-1, 2, and 3 would be removed and 
transferred to Sec. 202.4(c) of the commentary.

Section 202.5a--Rules on Providing Appraisal Reports

    No revisions are proposed in this section of the commentary.

Section 202.6--Rules Concerning Evaluation of Applications

    Revisions are proposed in comments to Secs. 202.6(b)(1), (b)(2), 
(b)(5), and (b)(8).
6(b)(1)
    Comment 6(b)(1)-1 would be removed. The portion of the comment 
related to the consideration of marital status for the purpose of 
ascertaining the creditor's rights and remedies would be moved to 
comment 6(b)(8)-1 in light of proposed changes to the regulation. Other 
portions of comment 6(b)(1)-1 related to evaluating married and 
unmarried applicants by the same standards would be moved to 
Sec. 202.6(b)(8) of the regulation. Comment 6(b)(1)-2 would be 
renumbered.
6(b)(2)
    Technical revisions would be made to comment 6(b)(2)-3 with no 
substantive change intended. Also, a technical amendment to comment 
6(b)(2)-6 reflects the change in the name of the Aid to Families with 
Dependent Children program.
6(b)(5)
    Comments 6(b)(5)-1 and 6(b)(5)-4 would be revised for further 
clarity and to remove references to ``protected income.'' No 
substantive change is intended.
6(b)(8)
    The Board is proposing to add a new Sec. 202.6(b)(8) to the 
regulation to clarify that a creditor may not evaluate married and 
unmarried applicants by different standards. New comment 6(b)(8)-1 
would be added to incorporate part of the language from existing 
comment 6(b)(1)-1 related to the consideration of marital status for 
the purpose of ascertaining the creditor's rights and remedies.

Section 202.7--Rules Concerning Extensions of Credit

    Revisions are proposed in comments to Sec. 202.7(d)(1).
7(d) Signature of Spouse or Other Person
    A new comment 7(d)(1)-1 would clarify that when an applicant is 
individually creditworthy, a creditor may not require the signature of 
any person besides the applicant on a credit instrument. Existing 
comment 7(d)(1)-1 would be redesignated as comment 7(d)(1)-2. Comment 
7(d)(1)-3 would be added to provide guidance on how creditors may 
document that applicants have requested joint credit.

Section 202.8--Special Purpose Credit Programs

    Minor revisions are proposed in comments to Secs. 202.8(a), 
202.8(c), and 202.8(d).
8(a) Standards for Programs
    Comment 8(a)-5 would be revised to clarify how creditors can 
determine the need for a special-purpose credit program.
8(c) Special Rule Concerning Requests and Use of Information
    Comments 8(c)-1 and 2 would be revised to conform with the Board's 
proposal to remove the prohibition in Regulation B against the 
collection of certain information; no substantive change is intended.
8(d) Special Rule in the Case of Financial Need
    Comment 8(d)-1 would be revised to conform with the Board's 
proposal to remove the prohibition in Regulation B against the 
collection of certain information; no substantive change is intended.

Section 202.9--Notifications

    Revisions are proposed in comments to Secs. 202.9, 202.9(b)(2), and 
202.9(g). Minor revisions would be made to comment 9-5 concerning 
prequalifications. Also, the discussion of preapprovals would be 
removed. Certain preapprovals are included in the proposed definition 
of ``application'' in Sec. 202.2(f) of the regulation.
9(b) Form of ECOA Notice and Statement of Specific Reasons
9(b)(2)
    Comment 9(b)(2)-7 would clarify the rules on providing reasons for 
adverse action in a combined credit scoring and judgmental system.
9(g) Applications Submitted Through a Third Party
    Comment 9(g)-1 would be revised to clarify the information that 
must be included in an adverse action notice provided on behalf of more 
than one creditor, with minor revisions made for clarity.

Section 202.10--Furnishing of Credit Information

    No revisions are proposed in comments to Sec. 202.10.

Section 202.11--Relation to State Law

    No revisions are proposed in comments to Sec. 202.11.

Section 202.12--Record Retention

    Revisions are proposed in comments to Sec. 202.12(b), consistent 
with a proposed change to the regulation concerning retention of 
certain preapplication marketing information.
12(b)(7) Preapplication Marketing Information
    Three new comments to proposed Sec. 202.12(b)(7) would be added to 
clarify the record retention requirements for certain preapplication 
marketing information. (See detailed discussion in ``Part III. 
Discussion of Proposed Revisions to the Regulation'' under Sec. 202.4.)

Section 202.13--Information for Monitoring Purposes

    Revisions are proposed in comments to Secs. 202.13(a) and (b).
13(a) Information To Be Requested
    Comment 13(a)-7 would be removed, consistent with proposed 
revisions to the regulation.
13(b) Obtaining of Information
    Comment 13(b)-4 would be revised to make the treatment of 
applications received electronically consistent with comment 
203.4(a)(7)-5 of Regulation C (Home Mortgage Disclosure), 12 CFR part 
203, for the purpose of collecting monitoring information.
    Comment 13(b)-7 would be deleted to reflect the Board's proposal to 
remove the prohibition in Regulation B against the collection of 
certain information.

Section 202.14--Enforcement, Penalties, and Liabilities

    No revisions are proposed in comments to Sec. 202.14.

Section 202.15--Incentives for self-testing and self-correction

    Revisions are proposed in comments to Sec. 202.15(b)(3).
15(b)(3)
    As discussed earlier, the Board proposes to remove the prohibition 
in Regulation B against the notation of information about an 
applicant's race, national origin, religion, color, or sex in 
connection with nonmortgage credit products. The Board has received 
questions about whether the self-testing

[[Page 44592]]

provisions of Sec. 202.15 would apply to the voluntary collection of 
this information.
    A self-test is defined as a program, practice, or study that is 
designed and used specifically to determine compliance with the ECOA 
and Regulation B, and creates data or factual information that is not 
available and cannot be derived from loan application files or other 
records related to credit transactions. If a self-test meets this 
definition, the results are privileged and cannot be obtained by a 
government agency in any examination or investigation, or by an agency 
or an applicant in any proceeding or civil action alleging a violation 
of Regulation B. The privilege may be lost or waived, however, under 
certain circumstances.
    Creditors that elect to collect information about credit 
applicants' race or ethnicity, for example, will likely do so on the 
application form or in the application process. The Board believes that 
such collection of data in connection with nonmortgage credit, even 
though voluntary on the part of the creditor, is not a self-test 
privileged under the ECOA. The collection of information about an 
applicant's characteristics, standing alone or in combination with 
other information obtained or derived from loan application files or 
other records, does not qualify for the privilege. Comment 
15(b)(3)(ii)-2 would be added to clarify this point.

Appendix B to Part 202--Model Application Forms

    Comments 1 and 2 to Appendix B would be revised to reflect the 
Board's proposal to remove the prohibition in Regulation B against the 
collection of certain information.

Appendix C--Sample Notification Forms

    No revisions are proposed in comments to Appendix C.

V. Form of Comment Letters

    Comment letters should refer to Docket No. R-1008, and, when 
possible, should use a standard typeface with a type size of 10 or 12 
characters per inch. This will enable the Board to convert the text to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Also, if accompanied by an 
original document in paper form, comments may be submitted on 3\1/2\ 
inch computer diskettes in any IBM-compatible DOS- or Windows-based 
format.

VI. Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed 
the proposed revisions under the authority delegated to the Board by 
the Office of Management and Budget.
    The collections of information that are proposed for revision by 
this rulemaking are found in 12 CFR Part 202. This information is 
mandatory to evidence compliance with the requirements of 15 U.S.C. 
1691b(a)(1) and Public Law 104-208, Sec. 2302(a), and also to ensure 
that credit is made available to all creditworthy customers without 
discrimination on the basis of race, color, religion, national origin, 
sex, marital status, age (provided the applicant has the capacity to 
contract), receipt of public assistance, or the fact that the applicant 
has in good faith exercised any right under the Consumer Credit 
Protection Act (15 U.S.C. 1600 et. seq.). The respondent/recordkeepers 
are for-profit financial institutions, including small businesses. 
Creditors are required to retain records for twelve to twenty-five 
months as evidence of compliance.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, this information collection unless it 
displays a currently valid OMB number. The OMB control number is 7100-
0201.
    The current estimated total burden for this information collection 
is 123,892 hours; about 95 percent of this burden arises from 
disclosures to credit applicants, both consumers and businesses, and 5 
percent arises from recordkeeping requirements. This amount reflects 
the burden estimate of the Federal Reserve System for the 988 state 
member banks under its supervision. This regulation applies to all 
types of creditors, not just state member banks. Under Paperwork 
Reduction Act regulations, however, the Federal Reserve accounts for 
the burden of the paperwork associated with the regulation only for 
state member banks. Other agencies account for the paperwork burden for 
the institutions they supervise.
    It is believed that the paperwork burden will increase slightly due 
to the three proposed additions to the recordkeeping requirements: 
retaining certain information related to preapproved credit 
solicitations; keeping records associated with the proposal removing 
the general prohibition against obtaining information about 
characteristics of applicants for nonmortgage credit; and extending the 
retention period for most business credit applications from twelve to 
twenty-five months. In particular, the Federal Reserve solicits comment 
on (1) the incremental burden associated with retaining certain 
information on preapproved credit solicitations beyond the records 
creditors already retain under the FCRA or for business purposes, and 
(2) the number of institutions that will collect the proposed 
permissible information on characteristics of applicants for 
nonmortgage credit and the amount of burden this voluntary information 
collection will impose.
    The Federal Reserve estimates that there will be no additional 
burden imposed by the requirement to disclose to credit applicants that 
providing applicant characteristic information is optional and that 
creditors will not take the information into account in any aspect of 
the credit transaction; the Federal Reserve has provided a proposed 
model notice to help alleviate the burden on creditors. The Federal 
Reserve also estimates that there will be no additional burden imposed 
by the requirement to notify businesses with gross revenues in excess 
of $1 million of their right to a written statement of reasons for 
adverse action.
    Since the Federal Reserve does not collect any information, no 
issue of confidentiality normally arises. Any information collected by 
the respondents, however, may be protected from disclosure under 
exemptions (b)(4), (6), and (8) of the Freedom of Information Act (5 
U.S.C. 522(b)). The adverse action disclosure is confidential between 
the institution and the consumer involved.
    Comments are invited on: (a) whether the proposed revised 
collection of information is necessary for the proper performance of 
the Federal Reserve's functions, including whether the information has 
practical utility; (b) the accuracy of the Federal Reserve's estimate 
of the burden of the proposed revised information collection, including 
the cost of compliance; (c) ways to enhance the quality, utility, and 
clarity of the information to be collected; and (d) ways to minimize 
the burden of information collection on respondents, including through 
the use of automated collection techniques or other forms of 
information technology. Comments on the collection of information 
should be sent to the Office of Management and Budget, Paperwork 
Reduction Project (7100-0201), Washington, DC 20503, with copies of 
such comments to be sent to Mary M. West, Chief, Financial Reports 
Section, Division of Research and Statistics, Mail

[[Page 44593]]

Stop 97, Board of Governors of the Federal Reserve System, Washington, 
DC 20551.

VII. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 603) requires an agency to 
publish an initial regulatory flexibility analysis with any notice of 
proposed rulemaking. Two of the requirements of an initial regulatory 
flexibility analysis--a description of the reasons why action by the 
agency is being considered and a statement of the objectives of, and 
legal basis for, the proposed rule--are addressed in the supplementary 
material above.
    Some provisions in the proposal should reduce burden. For example, 
creditors are not required to provide a notice of action taken for 
incidental credit. By broadening the definition of incidental credit to 
cover incidental business credit, fewer notices would be required.
    The proposal to lift the prohibition against data notation for 
nonmortgage products should not impose any burden on institutions, 
because data notation would be voluntary. However, to the extent 
creditors collect this data, the proposal would require a disclosure to 
be given to applicants. This would impose a new requirement for 
creditors that request data. The Board has sought to minimize burden by 
proposing a model form.
    Creditors would be required to retain certain records in connection 
with preapproved credit solicitations. This would impose a new 
requirement. However, the Board has sought to minimize burden by 
tracking existing legal requirements and current business practices. 
For example, users of consumer reports are required to retain some 
prescreening information under the Fair Credit Reporting Act. The 
proposal parallels this requirement. In addition, many lenders retain 
part or much of the solicitation information for business purposes, 
such as to evaluate marketing plans.
    Creditors would be required to retain records for a longer period 
of time for certain types of business credit. Creditors would be 
required to retain records for 25 months rather than 12 months. This 
approach would track the record retention rules for consumer credit and 
could simplify compliance. Burden should be minimized in light of the 
variety of methods that could be used to retain these records.
    In light of the purposes of the Equal Credit Opportunity Act, the 
Board believes it is not feasible to create different rules for large 
and small creditors; and therefore, except as discussed above, 
alternatives for small creditors are not provided. A final regulatory 
flexibility analysis will be conducted after consideration of comments 
received during the public comment period.

List of Subjects in 12 CFR Part 202

    Aged, Banks, banking, Civil rights, Consumer protections, 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 
revisions to the text of the regulation and the staff commentary. New 
language is shown inside bold-faced arrows, while language that would 
be deleted is set off with bold-faced brackets. Paragraphs are numbered 
to comply with Federal Register publication rules.
    For the reasons set forth in the preamble, 12 CFR part 202 is 
proposed to be revised as follows:

PART 202--EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)

Regulation B (Equal Credit Opportunity)

Sec.
202.1  Authority, scope and purpose.
202.2  Definitions.
202.3  Limited exceptions for certain classes of transactions.
202.4  General [rule] rules [prohibiting 
discrimination].
202.5  Rules concerning [taking of applications] requests 
for information.
202.5a  Rules on providing appraisal reports.
202.6  Rules concerning evaluation of applications.
202.7  Rules concerning extensions of credit.
202.8  Special purpose credit programs.
202.9  Notifications.
202.10  Furnishing of credit information.
202.11  Relation to state law.
202.12  Record retention.
202.13Information for monitoring purposes.
202.14  Enforcement, penalties and liabilities.
202.15  Incentives for self-testing and self-correction.

Appendix A to Part 202--Federal Enforcement Agencies

Appendix B to Part 202--Model Application Forms

Appendix C to Part 202--Sample Notification Forms

Appendix D to Part 202--Issuance of Staff Interpretations

Supplement I to Part 202--Official Staff Interpretations

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


Sec. 202.1  Authority, scope and purpose.

    (a) Authority and scope. This regulation is issued by the Board of 
Governors of the Federal Reserve System pursuant to title VII (Equal 
Credit Opportunity Act) of the Consumer Credit Protection Act, as 
amended (15 U.S.C. 1601 et seq.). Except as otherwise provided herein, 
the regulation applies to all persons who are creditors, as defined in 
Sec. 202.2(l). Information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
under the provisions of 44 U.S.C. 3501 et seq. and have been assigned 
OMB No. 7100-0201.
    (b) Purpose. The purpose of this regulation is to promote the 
availability of credit to all creditworthy applicants without regard to 
race, color, religion, national origin, sex, marital status, or age 
(provided the applicant has the capacity to contract); to the fact that 
all or part of the applicant's income derives from a public assistance 
program; or to the fact that the applicant has in good faith exercised 
any right under the Consumer Credit Protection Act. The regulation 
prohibits creditor practices that discriminate on the basis of any of 
these factors. The regulation also requires creditors to notify 
applicants of action taken on their applications; to report credit 
history in the names of both spouses on an account; to retain records 
of credit applications; to collect information about the applicant's 
race and other personal characteristics in applications for certain 
dwelling-related loans; and to provide applicants with copies of 
appraisal reports used in connection with credit transactions.


Sec. 202.2  Definitions.

    For the purposes of this regulation, unless the context indicates 
otherwise, the following definitions apply.
    (a) Account means an extension of credit. When employed in relation 
to an account, the word use refers only to open-end credit.
    (b) Act means the Equal Credit Opportunity Act (title VII of the 
Consumer Credit Protection Act).
    (c) Adverse action. (1) The term means:
    (i) A refusal to grant credit in substantially the amount or on 
substantially the terms requested in an application unless the creditor 
makes a counteroffer (to grant credit in a different amount or on other 
terms) and the applicant uses or expressly accepts the credit offered;
    (ii) A termination of an account or an unfavorable change in the 
terms of an account that does not affect all or [a

[[Page 44594]]

substantial portion] substantially all of a class 
of the creditor's accounts; or
    (iii) A refusal to increase the amount of credit available to an 
applicant who has made an application for an increase.
    (2) The term does not include:
    (i) A change in the terms of an account expressly agreed to by an 
applicant.
    (ii) Any action or forbearance relating to an account taken in 
connection with inactivity, default, or delinquency as to that 
[account] account;
    (iii) A refusal or failure to authorize an account transaction at a 
point of sale or loan, except when the refusal is a termination or an 
unfavorable change in the terms of an account that does not affect all 
or [a substantial portion] substantially all of a 
class of the creditor's accounts, or when the refusal is a denial of an 
application for an increase in the amount of credit available under the 
account;
    (iv) A refusal to extend credit because applicable law prohibits 
the creditor from extending the credit requested; or
    (v) A refusal to extend credit because the creditor does not offer 
the type of credit or credit plan requested.
    (3) An action that falls within the definition of both paragraphs 
(c)(1) and (c)(2) of this section is governed by paragraph (c)(2) of 
this section.
    (d) Age refers only to the age of natural persons and means the 
number of fully elapsed years from the date of an applicant's birth.
    Applicant means any person who requests or who has received an 
extension of credit from a creditor, and includes any person who is or 
may become contractually liable regarding an extension of credit. For 
purposes of Sec. 202.7(d), the term includes guarantors, sureties, 
endorsers and similar parties.
    (f) Application means an oral or written request for an extension 
of credit that is made in accordance with procedures [established] 
used by a creditor for the type of credit 
requested. The term includes a request for a preapproval 
under procedures in which a creditor will issue to creditworthy persons 
a written commitment for credit up to a specified amount that is valid 
for a designated period of time, even if the commitment is 
conditional. The term application does 
not include the use of an account or line of credit to obtain an amount 
of credit that is within a previously established credit limit. A 
completed application means an application in connection with which a 
creditor has received all the information that the creditor regularly 
obtains and considers in evaluating applications for the amount and 
type of credit requested (including, but not limited to, credit 
reports, any additional information requested from the applicant, and 
any approvals or reports by governmental agencies or other persons that 
are necessary to guarantee, insure, or provide security for the credit 
or collateral). The creditor shall exercise reasonable diligence in 
obtaining such information.
    (g) Business credit refers to extensions of credit primarily for 
business or commercial (including agricultural) purposes, but excluding 
extensions of credit of the types described in Secs. 202.3(a), (b), and 
(d).
    (h) Consumer credit means credit extended to a natural person 
primarily for personal, family, or household purposes.
    (i) Contractually liable means expressly obligated to repay all 
debts arising on an account by reason of an agreement to that effect.
    (j) Credit means the right granted by a creditor to an applicant to 
defer payment of a debt, incur debt and defer its payment, or purchase 
property or services and defer payment therefor.
    (k) Credit card means any card, plate, coupon book, or other single 
credit device that may be used from time to time to obtain money, 
property, or services on credit.
    (l) Creditor means a person who, in the ordinary course of 
business, regularly participates in [the decision of whether or not to 
extend credit] a credit decision. The term 
includes a creditor's assignee, transferee, or subrogee who so 
participates. For purposes of Secs. 202.4(a) and 
(b) [202.5(a)], the term also includes a person 
who, in the ordinary course of business, regularly refers applicants or 
prospective applicants to creditors, or selects or offers to select 
creditors to whom requests for credit may be made. A person is not a 
creditor regarding any violation of the Act or this regulation 
committed by another creditor unless the person knew or had reasonable 
notice of the act, policy, or practice that constituted the violation 
before becoming involved in the credit transaction. The term does not 
include a person whose only participation in a credit transaction 
involves honoring a credit card.
    (m) Credit transaction means every aspect of an applicant's 
dealings with a creditor regarding an application for credit or an 
existing extension of credit (including, but not limited to, 
information requirements; investigation procedures; standards of 
creditworthiness; terms of credit; furnishing of credit information; 
revocation, alteration, or termination of credit; and collection 
procedures).
    (n) Discriminate against an applicant means to treat an applicant 
less favorably than other applicants.
    (o) Elderly means age 62 or older.
    (p) Empirically derived and other credit scoring systems--(1) A 
credit scoring system is a system that evaluates an applicant's 
creditworthiness mechanically, based on key attributes of the applicant 
and aspects of the transaction, and that determines, alone or in 
conjunction with an evaluation of additional information about the 
applicant, whether an applicant is deemed creditworthy. To qualify as 
an empirically derived, demonstrably and statistically sound, credit 
scoring system, the system must be:
    (i) Based on data that are derived from an empirical comparison of 
sample groups or the population of creditworthy and noncreditworthy 
applicants who applied for credit within a reasonable preceding period 
of time;
    (ii) Developed for the purpose of evaluating the creditworthiness 
of applicants with respect to the legitimate business interests of the 
creditor utilizing the system (including, but not limited to, 
minimizing bad debt losses and operating expenses in accordance with 
the creditor's business judgment);
    (iii) Developed and validated using accepted statistical principles 
and methodology; and
    (iv) Periodically revalidated by the use of appropriate statistical 
principles and methodology and adjusted as necessary to maintain 
predictive ability.
    (2) A creditor may use an empirically derived, demonstrably and 
statistically sound, credit scoring system obtained from another person 
or may obtain credit experience from which to develop such a system. 
Any such system must satisfy the criteria set forth in paragraph 
(p)(1)(i) through (iv) of this section; if the creditor is unable 
during the development process to validate the system based on its own 
credit experience in accordance with paragraph (p)(1) of this section, 
the system must be validated when sufficient credit experience becomes 
available. A system that fails this validity test is no longer an 
empirically derived, demonstrably and statistically sound, credit 
scoring system for that creditor.
    (q) Extend credit and extension of credit mean the granting of 
credit in any form (including, but not limited to, credit granted in 
addition to any existing credit or credit limit; credit granted 
pursuant to an open-end credit plan; the refinancing or other renewal 
of credit, including the issuance of a new

[[Page 44595]]

credit card in place of an expiring credit card or in substitution for 
an existing credit card; the consolidation of two or more obligations; 
or the continuance of existing credit without any special effort to 
collect at or after maturity).
    (r) Good faith means honesty in fact in the conduct or transaction.
    (s) Inadvertent error means a mechanical, electronic, or clerical 
error that a creditor demonstrates was not intentional and occurred 
notwithstanding the maintenance of procedures reasonably adapted to 
avoid such errors.
    (t) Judgmental system of evaluating applicants means any system for 
evaluating the creditworthiness of an applicant other than an 
empirically derived, demonstrably and statistically sound, credit 
scoring system.
    (u) Marital status means the state of being unmarried, married, or 
separated, as defined by applicable state law. The term ``unmarried'' 
includes persons who are single, divorced, or widowed.
    (v) Negative factor or value, in relation to the age of elderly 
applicants, means utilizing a factor, value, or weight that is less 
favorable regarding elderly applicants than the creditor's experience 
warrants or is less favorable than the factor, value, or weight 
assigned to the class of applicants that are not classified as elderly 
and are most favored by a creditor on the basis of age.
    (w) Open-end credit means credit extended under a plan under which 
a creditor may permit an applicant to make purchases or obtain loans 
from time to time directly from the creditor or indirectly by use of a 
credit card, check, or other device.
    (x) Person means a natural person, corporation, government or 
governmental subdivision or agency, trust, estate, partnership, 
cooperative, or association.
    (y) Pertinent element of creditworthiness, in relation to a 
judgmental system of evaluating applicants, means any information about 
applicants that a creditor obtains and considers and that has a 
demonstrable relationship to a determination of creditworthiness.
    (z) Prohibited basis means race, color, religion, national origin, 
sex, marital status, or age (provided that the applicant has the 
capacity to enter into a binding contract); the fact that all or part 
of the applicant's income derives from any public assistance program; 
or the fact that the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act or any state law upon which an 
exemption has been granted by the Board.
    (aa) State means any state, the District of Columbia, the 
Commonwealth of Puerto Rico, or any territory or possession of the 
United States.


Sec. 202.3  Limited exceptions for certain classes of transactions.

    (a) Public-utilities credit--(1) Definition. Public-utilities 
credit refers to extensions of credit that involve public-utility 
services provided through pipe, wire, or other connected facilities, or 
radio or similar transmission (including extensions of such 
facilities), if the charges for service, delayed payment, and any 
discount for prompt payment are filed with or regulated by a government 
unit.
    (2) Exceptions. [The following provisions of this regulation] 
Section 202.12(b) relating to record retention 
[do]does not apply to public-utilities 
credit[:].
    [(i) Section 202.5(d)(1) concerning information about marital 
status;
    (ii) Section 202.10 relating to furnishing of credit information; 
and
    (iii) Section 202.12(b) relating to record retention.]
    (b) Securities credit--(1) Definition. Securities credit refers to 
extensions of credit subject to regulation under section 7 of the 
Securities Exchange Act of 1934 or extensions of credit by a broker or 
dealer subject to regulation as a broker or dealer under the Securities 
Exchange Act of 1934.
    (2) Exceptions. The following provisions of this regulation do not 
apply to securities credit:
    (i) Section 202.5(b) [202.5(c)] concerning 
information about a spouse or former spouse;
    (ii) Section 202.5(c)(1) [202.5(d)(1)] 
concerning information about marital status;
    [(iii) Section 202.5(d)(3) concerning information about the sex of 
an applicant;]
    [(vi)](iii) Section 202.7(b) relating to 
designation of name[, but only] to the extent necessary to [prevent 
violation of] comply with rules regarding an 
account in which a broker or dealer has an interest, or rules 
[necessitating] regarding the aggregation of 
accounts of spouses [for the purpose of determining] to 
determine controlling interests, beneficial interests, 
beneficial ownership, or purchase limitations and restrictions;
    [(v)](iv) Section 202.7(c) relating to action 
concerning open-end accounts, [but only] to the extent the action taken 
is on the basis of a change of name or marital status;
    [(vi)] (v) Section 202.7(d) relating to the 
signature of a spouse or other person;
    [(vii)] (vi) Section 202.10 relating to 
furnishing of credit information; and [(viii)] 
(vii) Section 202.12(b) relating to record 
retention.
    (c) Incidental credit[.]--(1) Definition. 
Incidental credit refers to extensions of consumer and 
business credit other than [credit of] the types described 
in paragraphs (a) and (b) of this section:
    (i) That are not made pursuant to the terms of a credit card 
account;
    (ii) That are not subject to a finance charge (as defined in 
Regulation Z, 12 CFR 226.4) for consumer credit, or not 
subject to interest charges or fees for business credit; and
    (iii) That are not payable by agreement in more than four 
installments.
    (2) Exceptions. The following provisions of this regulation do not 
apply to incidental credit:
    (i) Section 202.5(b) [202.5(c)] concerning 
information about a spouse or former spouse;
    (ii) Section 202.5(c)(1) [202.5(d)(1)] 
concerning information about marital status;
    (iii) Section 202.5(c)(2) [202.5(d)(2)] 
concerning information about income derived from alimony, child 
support, or separate maintenance payments;
    [(iv) Section 202.5(d)(3) concerning information about the sex of 
an applicant, but only to the extent necessary for medical records or 
similar purposes;]
    [(v)] (iv) Section 202.7(d) relating to the 
signature of a spouse or other person;
    [(vi)] (v) Section 202.9 relating to 
notifications;
    [(vii)] (vi) Section 202.10 relating to 
furnishing of credit information; and
    [(viii)] (vii) Section 202.12(b) relating to 
record retention.
    (d) Government credit--(1) Definition. Government credit refers to 
extensions of credit made to governments or governmental subdivisions, 
agencies, or instrumentalities.
    (2) Applicability of regulation. Except for 
Sec. 202.4(a), the general rule prohibiting 
discrimination on a prohibited basis, the requirements of this 
regulation do not apply to government credit.


Sec. 202.4 General rules  [prohibiting 
discrimination].

    (a) Discrimination. A creditor shall not 
discriminate against an applicant on a prohibited basis regarding any 
aspect of a credit transaction.

[[Page 44596]]

    (b) Discouragement. A creditor shall not make any oral 
or written statement, in advertising or otherwise, to applicants or 
prospective applicants that would discourage on a prohibited basis a 
reasonable person from making or pursuing an application.
    (c) Written applications. A creditor shall take written 
applications for the dwelling-related types of credit covered by 
Sec. 202.13(a).
    (d) Disclosures and other required information. A creditor shall 
provide the disclosures and information required to be in writing by 
Secs. 202.5, 202.5a, 202.9, and 202.13(c), in a clear and conspicuous 
manner and in a form the person may retain.


Sec. 202.5  Rules concerning [taking of applications] 
requests for information.

    [(a) Discouraging applications. A creditor shall not make any oral 
or written statement, in advertising or otherwise, to applicants or 
prospective applicants that would discourage on a prohibited basis a 
reasonable person from making or pursuing an application.]
    [(b)] (a) General rules concerning requests 
for information[.]--(1) Except as provided in 
paragraphs (b) and (c) [and (d)] of this section, 
a creditor may request any information in connection with an 
application.1
---------------------------------------------------------------------------

    \1\ This paragraph does not limit or abrogate any federal or 
state law regarding privacy, privileged information, credit 
reporting limitations, or similar restrictions on obtainable 
information.
---------------------------------------------------------------------------

    (2) Required collection of information. Notwithstanding paragraphs 
(b) and (c) [and (d)] of this section, a creditor 
shall request information for monitoring purposes as required by 
Sec. 202.13 for credit secured by the applicant's dwelling. In 
addition, a creditor may obtain information required by a regulation, 
order, or agreement issued by, or entered into with, a court or an 
enforcement agency (including the Attorney General of the United States 
or a similar state official) to monitor or enforce compliance with the 
Act, this regulation, or other federal or state statute or regulation.
    (3) Special-purpose credit. A creditor may obtain information that 
is otherwise restricted to determine eligibility for a special purpose 
credit program, as provided in Sec. 202.8(b), 
(c), and (d).
    (4) Obtaining information. Except as otherwise permitted 
or required by law, a creditor shall not require an applicant to supply 
information about race, color, religion, national origin, or sex in 
connection with a credit transaction. A creditor that requests 
information on applicant characteristics shall disclose, orally or in 
writing, at the time the information is requested, that:
    (i) Providing the information is optional; and
    (ii) That the information (or the applicant's decision not to 
provide the information) will not be taken into account in any aspect 
of the credit transaction.
    [(c)] (b) Information about a spouse or 
former spouse[.] (1) Except as permitted in this paragraph, a creditor 
may not request any information concerning the spouse or former spouse 
of an applicant.
    (2) Permissible inquiries. A creditor may request any information 
concerning an applicant's spouse (or former spouse under paragraph 
(b)(2)(v) [(c)(2)(v)] of this section) that may 
be requested about the applicant if:
    (i) The spouse will be permitted to use the account;
    (ii) The spouse will be contractually liable on the account;
    (iii) The applicant is relying on the spouse's income as a basis 
for repayment of the credit requested;
    (iv) The applicant resides in a community property state or 
property on which the applicant is relying as a basis for repayment of 
the credit requested is located in such a state; or
    (v) The applicant is relying on alimony, child support, or separate 
maintenance payments from a spouse or former spouse as a basis for 
repayment of the credit requested.
    (3) Other accounts of the applicant. A creditor may request an 
applicant to list any account [upon] on which the 
applicant is liable and to provide the name and address [in which] 
of the person in whose name the account is 
[carried] held. A creditor may also ask 
an applicant to list the names in which [an] 
the applicant has previously received credit.
    [(d)] (c) Other limitations on information 
requests--(1) Marital status. If an applicant applies for individual 
unsecured credit, a creditor shall not inquire about the applicant's 
marital status unless the applicant resides in a community property 
state or is relying on property located in such a state as a basis for 
repayment of the credit requested. If an application is for other than 
individual unsecured credit, a creditor may inquire about the 
applicant's marital status, but shall use only the terms married, 
unmarried, and separated. A creditor may explain that the category 
unmarried includes single, divorced, and widowed persons.
    (2) Disclosure about income from alimony, child support, or 
separate maintenance. A creditor shall not inquire whether income 
stated in an application is derived from alimony, child support, or 
separate maintenance payments unless the creditor discloses to the 
applicant that such income need not be revealed if the applicant does 
not want the creditor to consider it in determining the applicant's 
creditworthiness.
    (3) Sex. [A creditor shall not inquire about the sex of an 
applicant.] An applicant may be requested to designate a title on an 
application form (such as Ms., Miss, Mr., or Mrs.) if the form 
discloses that the designation of a title is optional. An application 
form shall otherwise use only terms that are neutral as to sex.
    (4) Childbearing, childrearing. A creditor shall not inquire about 
birth control practices, intentions concerning the bearing or rearing 
of children, or capability to bear children. A creditor may inquire 
about the number and ages of an applicant's dependents or about 
dependent-related financial obligations or expenditures, provided such 
information is requested without regard to sex, marital status, or any 
other prohibited basis.
    [(5) Race, color, religion, national origin. A creditor shall not 
inquire about the race, color, religion, or national origin of an 
applicant or any other person in connection with a credit transaction. 
A creditor may inquire about an applicant's permanent residency and 
immigration status.]
    (5) Permanent residency, immigration status. A creditor 
may inquire about an applicant's permanent residency and immigration 
status in connection with a credit transaction.
    [(e) Written applications. A creditor shall take written 
applications for the types of credit covered by Sec. 202.13(a) but need 
not take written applications for other types of credit.]


Sec. 202.5a  Rules on providing appraisal reports.

    (a) Providing appraisals. A creditor shall provide a copy of the 
appraisal report used in connection with an application for credit that 
is to be secured by a lien on a dwelling. A creditor shall comply with 
either paragraph (a)(1) or (a)(2) of this section.
    (1) Routine delivery. A creditor may routinely provide a copy of 
the appraisal report to an applicant (whether credit is granted or 
denied or the application is withdrawn).
    (2) Upon request. A creditor that does not routinely provide 
appraisal reports shall provide a copy upon an applicant's written 
request.
    (i) Notice. A creditor that provides appraisal reports only upon 
request

[[Page 44597]]

shall notify an applicant in writing of the right to receive a copy of 
an appraisal report. The notice may be given at any time during the 
application process but no later than when the creditor provides notice 
of action taken under Sec. 202.9 of this part. The notice shall specify 
that the applicant's request must be in writing, give the creditor's 
mailing address, and state the time for making the request as provided 
in paragraph (a)(2)(ii) of this section.
    (ii) Delivery. A creditor shall mail or deliver a copy of the 
appraisal report promptly (generally within 30 days) after the creditor 
receives an applicant's request, receives the report, or receives 
reimbursement from the applicant for the report, whichever is last to 
occur. A creditor need not provide a copy when the applicant's request 
is received more than 90 days after the creditor has provided notice of 
action taken on the application under Sec. 202.9 of this part or 90 
days after the application is withdrawn.
    (b) Credit unions. A creditor that is subject to the regulations of 
the National Credit Union Administration on making copies of appraisals 
available is not subject to this section.
    (c) Definitions. For purposes of paragraph (a) of this section, the 
term dwelling means a residential structure that contains one to four 
units whether or not that structure is attached to real property. The 
term includes, but is not limited to, an individual condominium or 
cooperative unit, and a mobile or other manufactured home. The term 
appraisal report means the document(s) relied upon by a creditor in 
evaluating the value of the dwelling.


Sec. 202.6  Rules concerning evaluation of applications.

    (a) General rule concerning use of information. Except as otherwise 
provided in the Act and this regulation, a creditor may consider any 
information obtained, so long as the information is not used to 
discriminate against an applicant on a prohibited basis.2
---------------------------------------------------------------------------

    \2\ The legislative history of the Act indicates that the 
Congress intended an ``effects test'' concept, as outlined in the 
employment field by the Supreme Court in the cases of Griggs v. Duke 
Power Co., 401 U.S. 424 (1971), and Albemarle Paper Co. v. Moody, 
422 U.S. 405 (1975), to be applicable to a creditor's determination 
of creditworthiness.
---------------------------------------------------------------------------

    (b) Specific rules concerning use of information. (1) Except as 
provided in the Act and this regulation, a creditor shall not take a 
prohibited basis into account in any system of evaluating the 
creditworthiness of applicants.
    (2) Age, receipt of public assistance. (i) Except as permitted in 
this paragraph (b)(2), a creditor shall not take into account an 
applicant's age (provided that the applicant has the capacity to enter 
into a binding contract) or whether an applicant's income derives from 
any public assistance program.
    (ii) In an empirically derived, demonstrably and statistically 
sound, credit scoring system, a creditor may use an applicant's age as 
a predictive variable, provided that the age of an elderly applicant is 
not assigned a negative factor or value.
    (iii) In a judgmental system of evaluating creditworthiness, a 
creditor may consider an applicant's age or whether an applicant's 
income derives from any public assistance program only for the purpose 
of determining a pertinent element of creditworthiness.
    (iv) In any system of evaluating creditworthiness, a creditor may 
consider the age of an elderly applicant when such age is used to favor 
the elderly applicant in extending credit.
    (3) Childbearing, childrearing. In evaluating creditworthiness, a 
creditor shall not use assumptions or aggregate statistics relating to 
the likelihood that any group of persons will bear or rear children or 
will, for that reason, receive diminished or interrupted income in the 
future.
    (4) Telephone listing. A creditor shall not take into account 
whether there is a telephone listing in the name of an applicant for 
consumer credit but may take into account whether there is a telephone 
in the applicant's residence.
    (5) Income. A creditor shall not discount or exclude from 
consideration the income of an applicant or the spouse of an applicant 
because of a prohibited basis or because the income is derived from 
part-time employment or is an annuity, pension, or other retirement 
benefit; a creditor may consider the amount and probable continuance of 
any income in evaluating an applicant's creditworthiness. When an 
applicant relies on alimony, child support, or separate maintenance 
payments in applying for credit, the creditor shall consider such 
payments as income to the extent that they are likely to be 
consistently made.
    (6) Credit history. To the extent that a creditor considers credit 
history in evaluating the creditworthiness of similarly qualified 
applicants for a similar type and amount of credit, in evaluating an 
applicant's creditworthiness a creditor shall consider:
    (i) The credit history, when available, of accounts designated as 
accounts that the applicant and the applicant's spouse are permitted to 
use or for which both are contractually liable;
    (ii) On the applicant's request, any information the applicant may 
present that tends to indicate that the credit history being considered 
by the creditor does not accurately reflect the applicant's 
creditworthiness; and
    (iii) On the applicant's request, the credit history, when 
available, of any account reported in the name of the applicant's 
spouse or former spouse that the applicant can demonstrate accurately 
reflects the applicant's creditworthiness.
    (7) Immigration status. A creditor may consider whether an 
applicant is a permanent resident of the United States, the applicant's 
immigration status, and any additional information that may be 
necessary to ascertain the creditor's rights and remedies regarding 
repayment.
    (8) Marital status. Except as otherwise permitted or 
required by law, a creditor shall evaluate married and unmarried 
applicants by the same standards; and in evaluating joint applicants, a 
creditor shall not treat applicants differently based on the existence, 
absence, or likelihood of a marital relationship between the parties.
    (9) Race, color, religion, national origin, sex. Except as 
otherwise permitted or required by law, a creditor shall not consider 
race, color, religion, national origin, or sex (or an applicant's 
decision not to provide the information) in any aspect of a credit 
transaction.
    (c) State property laws. A creditor's consideration or application 
of state property laws directly or indirectly affecting 
creditworthiness does not constitute unlawful discrimination for the 
purposes of the Act or this regulation.


Sec. 202.7  Rules concerning extensions of credit.

    (a) Individual accounts. A creditor shall not refuse to grant an 
individual account to a creditworthy applicant on the basis of sex, 
marital status, or any other prohibited basis.
    (b) Designation of name. A creditor shall not refuse to allow an 
applicant to open or maintain an account in a birth-given first name 
and a surname that is the applicant's birth-given surname, the spouse's 
surname, or a combined surname.
    (c) Action concerning existing open-end accounts--(1) Limitations. 
In the absence of evidence of the applicant's inability or 
unwillingness to repay, a creditor shall not take any of the following 
actions regarding an applicant who is contractually liable on an 
existing open-end account on the basis of the applicant's reaching a 
certain age or retiring or on the basis of a change

[[Page 44598]]

in the applicant's name or marital status:
    (i) Require a reapplication, except as provided in paragraph (c)(2) 
of this section;
    (ii) Change the terms of the account; or
    (iii) Terminate the account.
    (2) Requiring reapplication. A creditor may require a reapplication 
for an open-end account on the basis of a change in the marital status 
of an applicant who is contractually liable if the credit granted was 
based in whole or in part on income of the applicant's spouse and if 
information available to the creditor indicates that the applicant's 
income may not support the amount of credit currently available.
    (d) Signature of spouse or other person--(1) Rule for qualified 
applicant. Except as provided in this paragraph, a creditor shall not 
require the signature of an applicant's spouse or other person, other 
than a joint applicant, on any credit instrument if the applicant 
qualifies under the creditor's standards of creditworthiness for the 
amount and terms of the credit requested. A creditor shall 
not deem the submission of a joint financial statement or other 
evidence of jointly held assets as an application for joint 
credit.
    (2) Unsecured credit. If an applicant requests unsecured credit and 
relies in part upon property that the applicant owns jointly with 
another person to satisfy the creditor's standards of creditworthiness, 
the creditor may require the signature of the other person only on the 
instrument(s) necessary, or reasonably believed by the creditor to be 
necessary, under the law of the state in which the property is located, 
to enable the creditor to reach the property being relied upon in the 
event of the death or default of the applicant.
    (3) Unsecured credit-community property states. If a married 
applicant requests unsecured credit and resides in a community property 
state, or if the property upon which the applicant is relying is 
located in such a state, a creditor may require the signature of the 
spouse on any instrument necessary, or reasonably believed by the 
creditor to be necessary, under applicable state law to make the 
community property available to satisfy the debt in the event of 
default if:
    (i) Applicable state law denies the applicant power to manage or 
control sufficient community property to qualify for the amount of 
credit requested under the creditor's standards of creditworthiness; 
and
    (ii) The applicant does not have sufficient separate property to 
qualify for the amount of credit requested without regard to community 
property.
    (4) Secured credit. If an applicant requests secured credit, a 
creditor may require the signature of the applicant's spouse or other 
person on any instrument necessary, or reasonably believed by the 
creditor to be necessary, under applicable state law to make the 
property being offered as security available to satisfy the debt in the 
event of default, for example, an instrument to create a valid lien, 
pass clear title, waive inchoate rights, or assign earnings.
    (5) Additional parties. If, under a creditor's standards of 
creditworthiness, the personal liability of an additional party is 
necessary to support the extension of the credit requested, a creditor 
may request a cosigner, guarantor, or the like. The applicant's spouse 
may serve as an additional party, but the creditor shall not require 
that the spouse be the additional party.
    (6) Rights of additional parties. A creditor shall not impose 
requirements upon an additional party that the creditor is prohibited 
from imposing upon an applicant under this section.
    (e) Insurance. A creditor shall not refuse to extend credit and 
shall not terminate an account because credit life, health, accident, 
disability, or other credit-related insurance is not available on the 
basis of the applicant's age.


Sec. 202.8  Special purpose credit programs.

    (a) Standards for programs. Subject to the provisions of paragraph 
(b) of this section, the Act and this regulation permit a creditor to 
extend special purpose credit to applicants who meet eligibility 
requirements under the following types of credit programs:
    (1) Any credit assistance program expressly authorized by federal 
or state law for the benefit of an economically disadvantaged class of 
persons;
    (2) Any credit assistance program offered by a not-for-profit 
organization, as defined under section 501(c) of the Internal Revenue 
Code of 1954, as amended, for the benefit of its members or for the 
benefit of an economically disadvantaged class of persons; or
    (3) Any special purpose credit program offered by a for-profit 
organization or in which such an organization participates [to meet 
special social needs], if:
    (i) The program is established and administered pursuant to a 
written plan that identifies the class of persons that the program is 
designed to benefit and sets forth the procedures and standards for 
extending credit pursuant to the program; and
    (ii) The program is established and administered to extend credit 
to a class of persons who, under the organization's customary standards 
of creditworthiness, probably would not receive such credit or would 
receive it on less favorable terms than are ordinarily available to 
other applicants applying to the organization for a similar type and 
amount of credit.
    (b) Rules in other sections[.]--(1) General 
applicability. All of the provisions of this regulation apply to each 
of the special purpose credit programs described in paragraph (a) of 
this section unless modified by this section.
    (2) Common characteristics. A program described in paragraph (a)(2) 
or (a)(3) of this section qualifies as a special purpose credit program 
only if it was established and is administered so as not to 
discriminate against an applicant on any prohibited basis; however, all 
program participants may be required to share one or more common 
characteristics (for example, race, national origin, or sex) so long as 
the program was not established and is not administered with the 
purpose of evading the requirements of the Act or this regulation.
    (c) Special rule concerning requests and use of information. If 
participants in a special purpose credit program described in paragraph 
(a) of this section are required to possess one or more common 
characteristics (for example, race, national origin, or sex) and if the 
program otherwise satisfies the requirements of paragraph (a) of this 
section, a creditor may request and consider information regarding the 
common characteristic(s) in determining the applicant's eligibility for 
the program.
    (d) Special rule in the case of financial need. If financial need 
is one of the criteria under a special purpose program described in 
paragraph (a) of this section, the creditor may request and consider, 
in determining an applicant's eligibility for the program, information 
regarding the applicant's marital status; alimony, child support, and 
separate maintenance income; and the spouse's financial resources. In 
addition, a creditor may obtain the signature of an applicant's spouse 
or other person on an application or credit instrument relating to a 
special purpose program if the signature is required by federal or 
state law.


Sec. 202.9  Notifications.

    (a) Notification of action taken, ECOA notice, and statement of 
specific reasons--(1) When notification is required. A creditor shall 
notify an applicant of action taken within:

[[Page 44599]]

    (i) 30 days after receiving a completed application concerning the 
creditor's approval of, counteroffer to, or adverse action on the 
application;
    (ii) 30 days after taking adverse action on an incomplete 
application, unless notice is provided in accordance with paragraph (c) 
of this section;
    (iii) 30 days after taking adverse action of an existing account; 
or
    (iv) 90 days after notifying the applicant of a counteroffer if the 
applicant does not expressly accept or use the credit offered.
    (2) Content of notification when adverse action is taken. A 
notification given to an applicant when adverse action is taken shall 
be in writing and shall contain: a statement of the action taken; the 
name and address of the creditor; a statement of the provisions of 
section 701(a) of the Act; the name and address of the federal agency 
that administers compliance with respect to the creditor; and either:
    (i) A statement of specific reasons for the action taken; or
    (ii) A disclosure of the applicant's right to a statement of 
specific reasons within 30 days, if the statement is requested within 
60 days of the creditor's notification. The disclosure shall include 
the name, address, and telephone number of the person or office from 
which the statement of reasons can be obtained. If the creditor chooses 
to provide the reasons orally, the creditor shall also disclose the 
applicant's right to have them confirmed in writing within 30 days of 
receiving a written request for confirmation from the applicant.
    (3) Notification to business credit applicants. For business 
credit, a creditor shall comply with the requirements of this paragraph 
in the following manner:
    (i) With regard to a business that had gross revenues of $1,000,000 
or less in its preceding fiscal year (other than an extension of trade 
credit, credit incident to a factoring agreement, or other similar 
types of business credit), a creditor shall comply with paragraphs 
(a)(1) and (2), except that:
    (A) The statement of the action taken may be given orally or in 
writing, when adverse action is taken;
    (B) Disclosure of an applicant's right to a statement of reasons 
may be given at the time of application, instead of when adverse action 
is taken, provided the disclosure is in a form the applicant may retain 
and contains the information required by paragraph (a)(2)(ii) of this 
section and the ECOA notice specified in paragraph (b)(1) of this 
section;
    (C) For an application made solely by telephone, a creditor 
satisfies the requirements of this paragraph by an oral statement of 
the action taken and of the applicant's right to a statement of reasons 
for adverse action.
    (ii) With regard to a business that had gross revenues in excess of 
$1,000,000 in its preceding fiscal year or an extension of trade 
credit, credit incident to a factoring agreement, or other similar 
types of business credit, a creditor shall:
    (A) Within a reasonable time of the action 
taken, [Notify] notify the applicant, 
orally or in writing, [within a reasonable time] of the action taken 
and of the applicant's right to a written statement of 
reasons; and
    (B) Provide a written statement of the reasons for adverse action 
and the ECOA notice specified in paragraph (b)(1) of this section if 
the applicant makes a written request for the reasons within 60 days of 
being notified of the adverse action.
    (b) Form of ECOA notice and statement of specific reasons--(1) ECOA 
notice. To satisfy the disclosure requirements of paragraph (a)(2) of 
this section regarding section 701(a) of the Act, the creditor shall 
provide a notice that is substantially similar to the following: The 
federal Equal Credit Opportunity Act prohibits creditors from 
discriminating against credit applicants on the basis of race, color, 
religion, national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding contract); because 
all or part of the applicant's income derives from any public 
assistance program; or because the applicant has in good faith 
exercised any right under the Consumer Credit Protection Act. The 
federal agency that administers compliance with this law concerning 
this creditor is (name and address as specified by the appropriate 
agency listed in appendix A of this regulation).
    (2) Statement of specific reasons. The statement of reasons for 
adverse action required by paragraph (a)(2)(i) of this section must be 
specific and indicate the principal reason(s) for the adverse action. 
Statements that the adverse action was based on the creditor's internal 
standards or policies or that the applicant, joint 
applicant, or similar party failed to achieve the qualifying 
score on the creditor's credit scoring system are insufficient.
    (c) Incomplete applications--(1) Notice alternatives. Within 30 
days after receiving an application that is incomplete regarding 
matters that an applicant can complete, the creditor shall notify the 
applicant either:
    (i) Of action taken, in accordance with paragraph (a) of this 
section; or
    (ii) Of the incompleteness, in accordance with paragraph (c)(2) of 
this section.
    (2) Notice of incompleteness. If additional information is needed 
from an applicant, the creditor shall send a written notice to the 
applicant specifying the information needed, designating a reasonable 
period of time for the applicant to provide the information, and 
informing the applicant that failure to provide the information 
requested will result in no further consideration being given to the 
application. The creditor shall have no further obligation under this 
section if the applicant fails to respond within the designated time 
period. If the applicant supplies the requested information within the 
designated time period, the creditor shall take action on the 
application and notify the applicant in accordance with paragraph (a) 
of this section.
    (3) Oral request for information. At its option, a creditor may 
inform the applicant orally of the need for additional information; but 
if the application remains incomplete the creditor shall send a notice 
in accordance with paragraph (c)(1) of this section.
    (d) Oral notifications by small-volume creditors. The requirements 
of this section (including statements of specific reasons) are 
satisfied by oral notifications in the case of any creditor that did 
not receive more than 150 applications during the preceding calendar 
year.
    (e) Withdrawal of approved application. When an applicant submits 
an application and the parties contemplate that the applicant will 
inquire about its status, if the creditor approves the application and 
the applicant has not inquired within 30 days after applying, the 
creditor may treat the application as withdrawn and need not comply 
with paragraph (a)(1) of this section.
    (f) Multiple applicants. When an application involves more than one 
applicant, notification need only be given to one of them but must be 
given to the primary applicant where one is readily apparent.
    (g) Applications submitted through a third party. When an 
application is made on behalf of an applicant to more than one creditor 
and the applicant expressly accepts or uses credit offered by one of 
the creditors, notification of action taken by any of the other 
creditors is not required. If no credit is offered or if the applicant 
does not expressly accept or use any credit offered, each creditor 
taking adverse action must comply with this section,

[[Page 44600]]

directly or through a third party. A notice given by a third party 
shall disclose the identity of each creditor on whose behalf the notice 
is given.


Sec. 202.10  Furnishing of credit information.

    (a) Designation of accounts. A creditor that furnishes credit 
information shall designate:
    (1) Any new account to reflect the participation of both spouses if 
the applicant's spouse is permitted to use or is contractually liable 
on the account (other than as a guarantor, surety, endorser, or similar 
party); and
    (2) Any existing account to reflect such participation, within 90 
days after receiving a written request to do so from one of the 
spouses.
    (b) Routine reports to consumer reporting agency. If a creditor 
furnishes credit information to a consumer reporting agency concerning 
an account designated to reflect the participation of both spouses, the 
creditor shall furnish the information in a manner that will enable the 
agency to provide access to the information in the name of each spouse.
    (c) Reporting in response to inquiry. If a creditor furnishes 
credit information in response to an inquiry concerning an account 
designated to reflect the participation of both spouses, the creditor 
shall furnish the information in the name of the spouse about whom the 
information is requested.


Sec. 202.11  Relation to state law.

    (a) Inconsistent state laws. Except as otherwise provided in this 
section, this regulation alters, affects, or preempts only those state 
laws that are inconsistent with the Act and this regulation and then 
only to the extent of the inconsistency. A state law is not 
inconsistent if it is more protective of an applicant.
    (b) Preempted provisions of state law. (1) A state law is deemed to 
be inconsistent with the requirements of the Act and this regulation 
and less protective of an applicant within the meaning of section 
705(f) of the Act to the extent that the law:
    (i) Requires or permits a practice or act prohibited by the Act or 
this regulation;
    (ii) Prohibits the individual extension of consumer credit to both 
parties to a marriage if each spouse individually and voluntarily 
applies for such credit;
    (iii) Prohibits inquiries or collection of data required to comply 
with the Act or this regulation;
    (iv) Prohibits asking about or considering 
age in an empirically derived, demonstrably and statistically sound, 
credit scoring system to determine a pertinent element of 
creditworthiness, or to favor an elderly applicant; or
    (v) Prohibits inquiries necessary to establish or administer 
a [as] special purpose credit program as defined 
by Sec. 202.8.
    (2) A creditor, state, or other interested party may request the 
Board to determine whether a state law is inconsistent with the 
requirements of the Act and this regulation.
    (c) Laws on finance charges, loan ceilings. If married applicants 
voluntarily apply for and obtain [obtained] 
individual accounts with the same creditor, the accounts shall not be 
aggregated or otherwise combined for purposes of determining 
permissible finance charges or loan ceilings under any federal or state 
law. Permissible loan ceiling laws shall be construed to permit each 
spouse to become individually liable up to the amount of the loan 
ceilings, less the amount for which the applicant is jointly liable.
    (d) State and federal laws not affected. This section does not 
alter or annul any provision of state property laws, laws relating to 
the disposition of decedents' estates, or federal or state banking 
regulations directed only toward insuring the solvency of financial 
institutions.
    (e) Exemption for state-regulated transactions--(1) Applications. A 
state may apply to the Board for an exemption from the requirements of 
the Act and this regulation for any class of credit transactions within 
the state. The Board will grant such an exemption if the Board 
determines that:
    (i) The class of credit transactions is subject to state law 
requirements substantially similar to the Act and this regulation or 
that applicants are afforded greater protection under state law; and
    (ii) There is adequate provision for state enforcement.
    (2) Liability and enforcement. (i) No exemption will extend to the 
civil-liability provisions of section 706 or the administrative-
enforcement provisions of section 704 of the Act.
    (ii) After an exemption has been granted, the requirements of the 
applicable state law (except for additional requirements not imposed by 
federal law) will constitute the requirements of the Act and this 
regulation.


Sec. 202.12  Record retention.

    (a) Retention of prohibited information. A creditor may retain in 
its files information that is prohibited by the Act or this regulation 
in evaluating applications, without violating the Act or this 
regulation, if the information was obtained:
    (1) From any source prior to March 23, 1977;
    (2) From consumer reporting agencies, an applicant, or others 
without the specific request of the creditor; or
    (3) As required to monitor compliance with the Act and this 
regulation or other federal or state statutes or regulations.
    (b) Preservation of records--(1) Applications. For 25 months [(12 
months for business credit)] after the date that a creditor notifies an 
applicant of action taken on an application or of incompleteness 
(except as provided in paragraph (b)(5) of this 
section), the creditor shall retain in original form or a 
copy thereof:
    (i) Any application that it receives, any information required to 
be obtained concerning characteristics of the applicant to monitor 
compliance with the Act and this regulation or other similar law, and 
any other written or recorded information used in evaluating the 
application and not returned to the applicant at the applicant's 
request;
    (ii) A copy of the following documents if furnished to the 
applicant in written form (or, if furnished orally, any notation or 
memorandum made by the creditor):
    (A) The notification of action taken; and
    (B) The statement of specific reasons for adverse action; and
    (iii) Any written statement submitted by the applicant alleging a 
violation of the Act or this regulation.
    (2) Existing accounts. For 25 months [(12 months for business 
credit)] after the date that a creditor notifies an applicant of 
adverse action regarding an existing account (except as 
provided in paragraph (b)(5) of this section), the creditor 
shall retain as to that account, in original form or a copy thereof:
    (i) Any written or recorded information concerning the adverse 
action; and
    (ii) Any written statement submitted by the applicant alleging a 
violation of the Act or this regulation.
    (3) Other applications. For 25 months [(12 months for business 
credit)] after the date that a creditor receives an application for 
which the creditor is not required to comply with the notification 
requirements of Sec. 202.9 (except as provided in paragraph 
(b)(5) of this section), the creditor shall retain all 
written or recorded information in its possession concerning the 
applicant, including any notation of action taken.
    (4) Enforcement proceedings and investigations. A creditor shall 
retain the information beyond 25 months [(12

[[Page 44601]]

months for business credit)] (except as provided in 
paragraph (b)(5) of this section) if [it] the 
creditor has actual notice that it is under investigation or 
is subject to an enforcement proceeding for an alleged violation of the 
Act or this regulation by the Attorney General of the United States or 
by an enforcement agency charged with monitoring that creditor's 
compliance with the Act and this regulation, or if it has been served 
with notice of an action filed pursuant to section 706 of the Act and 
Sec. 202.14 of this regulation. The creditor shall retain the 
information until final disposition of the matter, unless an earlier 
time is allowed by order of the agency or court.
    (5) Special rule for certain business credit applications. With 
regard to a business with gross revenues in excess of $1,000,000 in its 
preceding fiscal year, or an extension of trade credit, credit incident 
to a factoring agreement or other similar types of business credit, the 
creditor shall retain records for at least 60 days after notifying the 
applicant of the action taken. If within that time period the applicant 
requests in writing the reasons for adverse action or that records be 
retained, the creditor shall retain records for 12 months.
    (6) Self-tests. For 25 months after a self-test (as defined in 
Sec. 202.15) has been completed, the creditor shall retain all written 
or recorded information about the self-test. A creditor shall retain 
information beyond 25 months if it has actual notice that it is under 
investigation or is subject to an enforcement proceeding for an alleged 
violation, or if it has been served with notice of a civil action. In 
such cases, the creditor shall retain the information until final 
disposition of the matter, unless an earlier time is allowed by the 
appropriate agency or court order.
    (7) Preapplication marketing information. For 25 months 
after the date that a creditor solicits potential customers for credit 
(12 months for business credit subject to paragraph (b)(5) of this 
section), the creditor shall retain in original form or a copy thereof:
    (i) Any preapproved credit solicitation, the list of criteria the 
creditor used to select potential recipients of the solicitation, any 
correspondence (to and from the selected recipients) related to 
complaints about the solicitation; and
    (ii) Any component of a marketing plan to which such solicitation 
relates.


Sec. 202.13  Information for monitoring purposes.

    (a) Information to be requested. (1) A 
creditor that receives an application for credit primarily for the 
purchase or refinancing of a dwelling occupied or to be occupied by the 
applicant as a principal residence, where the extension of credit will 
be secured by the dwelling, shall request as part of the application 
the following information regarding the applicant(s):
    [(1)] i. Race or national origin, using the 
categories American Indian or Alaskan Native; Asian or Pacific 
Islander; Black; White; Hispanic; Other (Specify);
    [(2)] ii. Sex;
    [(3)] iii. Marital status, using the 
categories married, unmarried, and separated; and
    [(4)] iv. Age.
    (2) Dwelling means a residential structure 
that contains one to four units, whether or not that structure is 
attached to real property. The term includes, but is not limited to, an 
individual condominium or cooperative unit, and a mobile or other 
manufactured home.
    (b) Obtaining [of] information. Questions regarding race or 
national origin, sex, marital status, and age may be listed, at the 
creditor's option, on the application form or on a separate form that 
refers to the application. The applicant(s) shall be asked but not 
required to supply the requested information. If the applicant(s) 
chooses not to provide the information or any part of it, that fact 
shall be noted on the form. The creditor shall then also note on the 
form, to the extent possible, the race or national origin and sex of 
the applicant(s) on the basis of visual observation or surname.
    (c) Disclosure to applicant(s). The creditor shall inform the 
applicant(s) that the information regarding race or national origin, 
sex, marital status, and age is being requested by the federal 
government for the purpose of monitoring compliance with federal 
statutes that prohibit creditors from discriminating against applicants 
on those bases. The creditor shall also inform the applicant(s) that if 
the applicant(s) chooses not to provide the information, the creditor 
is required to note the race or national origin and sex on the basis of 
visual observation or surname.
    (d) Substitute monitoring program. A monitoring program required by 
an agency charged with administrative enforcement under section 704 of 
the Act may be substituted for the requirements contained in paragraphs 
(a), (b), and (c) of this section.


Sec. 202.14  Enforcement, penalties and liabilities.

    (a) Administrative enforcement[.] (1) As set forth more fully in 
section 704 of the Act, administrative enforcement of the Act and this 
regulation regarding certain creditors is assigned to the Comptroller 
of the Currency, Board of Governors of the Federal Reserve System, 
Board of Directors of the Federal Deposit Insurance Corporation, Office 
of Thrift Supervision, National Credit Union Administration, Interstate 
Commerce Commission, Secretary of Agriculture, Farm Credit 
Administration, Securities and Exchange Commission, Small Business 
Administration, and Secretary of Transportation.
    (2) Except to the extent that administrative enforcement is 
specifically assigned to other authorities, compliance with the 
requirements imposed under the Act and this regulation is enforced by 
the Federal Trade Commission.
    (b) Penalties and liabilities[.] (1) Sections 706(a) and (b) and 
702(g) of the Act provide that any creditor that fails to comply with a 
requirement imposed by the Act or this regulation is subject to civil 
liability for actual and punitive damages in individual or class 
actions. Pursuant to sections 704(b), (c), and (d) and 702(g) of the 
Act, violations of the Act or this regulation 
[regulations] also constitute violations of other federal laws. 
Liability for punitive damages is restricted to nongovernmental 
entities and is limited to $10,000 in individual actions and the lesser 
of $500,000 or 1 percent of the creditor's net worth in class actions. 
Section 706(c) provides for equitable and declaratory relief and 
section 706(d) authorizes the awarding of costs and reasonable 
attorney's fees to an aggrieved applicant in a successful action.
    (2) As provided in section 706(f), a civil action under the Act or 
this regulation may be brought in the appropriate United States 
district court without regard to the amount in controversy or in any 
other court of competent jurisdiction within two years after the date 
of the occurrence of the violation, or within one year after the 
commencement of an administrative enforcement proceeding or of a civil 
action brought by the Attorney General of the United States within two 
years after the alleged violation.
    (3) If an agency responsible for administrative enforcement is 
unable to obtain compliance with the Act or this 
regulation [part], it may refer the matter to the 
Attorney General of the United States. In addition, if the Board, the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
the Office of Thrift Supervision, or the National Credit Union 
Administration

[[Page 44602]]

has reason to believe that one or more creditors engaged in a pattern 
or practice of discouraging or denying applications in violation of the 
Act or this regulation, the agency shall refer the matter to the 
Attorney General. Furthermore, the agency may refer a matter to the 
Attorney General if the agency has reason to believe that one or more 
creditors violated section 701(a) of the Act.
    (4) On referral, or whenever the Attorney General has reason to 
believe that one or more creditors engaged in a pattern or practice in 
violation of the Act or this regulation [part], 
the Attorney General may bring a civil action for such relief as may be 
appropriate, including actual and punitive damages and injunctive 
relief.
    (5) If the Board, the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, the Office of Thrift Supervision, or the 
National Credit Union Administration has reason to believe (as a result 
of a consumer complaint, conducting a consumer compliance examination, 
or otherwise) that a violation of the Act or this regulation has 
occurred which is also a violation of the Fair Housing Act, and the 
matter is not referred to the Attorney General, the agency shall 
notify:
    (i) The Secretary of Housing and Urban Development; and
    (ii) The applicant that the Secretary of Housing and Urban 
Development has been notified and that remedies for the violation may 
be available under the Fair Housing Act.
    (c) Failure of compliance. A creditor's failure to comply with 
Secs. 202.6(b)(6), 202.9, 202.10, 202.12 or 202.13 is not a violation 
if it results from an inadvertent error. On discovering an error under 
Secs. 202.9 and 202.10, the creditor shall correct it as soon as 
possible. [If a creditor inadvertently obtains the monitoring 
information regarding the race or national origin and sex of the 
applicant in a dwelling-related transaction not covered by Sec. 202.13, 
the creditor may act on and retain the application without violating 
the regulation.]


Sec. 202.15  Incentives for self-testing and self-correction.

    (a) General rules--(1) Voluntary self-testing and correction. The 
report or results of the self-test that a creditor voluntarily conducts 
(or authorizes) are privileged as provided in this section. Data 
collection required by law or by any governmental authority is not a 
voluntary self-test.
    (2) Corrective action required. The privilege in this section 
applies only if the creditor has taken or is taking appropriate 
corrective action.
    (3) Other privileges. The privilege created by this section does 
not preclude the assertion of any other privilege that may also apply.
    (b) Self-test defined--(1) Definition. A self-test is any program, 
practice, or study that:
    (i) Is designed and used specifically to determine the extent or 
effectiveness of a creditor's compliance with the Act or this 
regulation; and
    (ii) Creates data or factual information that is not available and 
cannot be derived from loan or application files or other records 
related to credit transactions.
    (2) Types of information privileged. The privilege under this 
section applies to the report or results of the self-test, data or 
factual information created by the self-test, and any analysis, 
opinions, and conclusions pertaining to the self-test report or 
results. The privilege covers workpapers or draft documents as well as 
final documents.
    (3) Types of information not privileged. The privilege under this 
section does not apply to:
    (i) Information about whether a creditor conducted a self-test, the 
methodology used or the scope of the self-test, the time period covered 
by the self-test, or the dates it was conducted; or
    (ii) Loan and application files or other business records related 
to credit transactions, and information derived from such files and 
records, even if it has been aggregated, summarized, or reorganized to 
facilitate analysis.
    (c) Appropriate corrective action--(1) General requirement. For the 
privilege in this section to apply, appropriate corrective action is 
required when the self-test shows that it is more likely than not that 
a violation occurred, even though no violation has been formally 
adjudicated.
    (2) Determining the scope of appropriate corrective action. A 
creditor must take corrective action that is reasonably likely to 
remedy the cause and effect of a likely violation by:
    (i) Identifying the policies or practices that are the likely cause 
of the violation; and
    (ii) Assessing the extent and scope of any violation.
    (3) Types of relief. Appropriate corrective action may include both 
prospective and remedial relief, except that to establish a privilege 
under this section:
    (i) A creditor is not required to provide remedial relief to a 
tester used in a self-test;
    (ii) A creditor is only required to provide remedial relief to an 
applicant identified by the self-test as one whose rights were more 
likely than not violated; and
    (iii) A creditor is not required to provide remedial relief to a 
particular applicant if the statute of limitations applicable to the 
violation expired before the creditor obtained the results of the self-
test or the applicant is otherwise ineligible for such relief.
    (4) No admission of violation. Taking corrective action is not an 
admission that a violation occurred.
    (d)[(1)] Scope of privilege[.]--(1) Use of privileged 
self-test. The report or results of a privileged self-test 
may not be obtained or used:
    (i) By a government agency in any examination or investigation 
relating to compliance with the Act or this regulation; or
    (ii) By a government agency or an applicant (including a 
prospective applicant who alleges a violation of 
Sec. 202.4(b) [202.5(a)]) in any proceeding or 
civil action in which a violation of the Act or this regulation is 
alleged.
    (2) Loss of privilege. The report or results of a self-test are not 
privileged under paragraph (d)(1) of this section if the creditor or a 
person with lawful access to the report or results:
    (i) Voluntarily discloses any part of the report or results, or any 
other information privileged under this section, to an applicant or 
government agency or to the public;
    (ii) Discloses any part of the report or results, or any other 
information privileged under this section, as a defense to charges that 
the creditor has violated the Act or regulation; or
    (iii) Fails or is unable to produce written or recorded information 
about the self-test that is required to be retained under 
Sec. 202.12(b)(6) when the information is needed to determine whether 
the privilege applies. This paragraph does not limit any other penalty 
or remedy that may be available for a violation of Sec. 202.12.
    (3) Limited use of privileged information. Notwithstanding 
paragraph (d)(1) of this section, the self-test report or results and 
any other information privileged under this section may be obtained and 
used by an applicant or government agency solely to determine a penalty 
or remedy after a violation of the Act or this regulation has been 
adjudicated or admitted. Disclosures for this limited purpose may be 
used only for the particular proceeding in which the adjudication or 
admission was made. Information disclosed under this

[[Page 44603]]

paragraph (d)(3) remains privileged under paragraph (d)(1) of this 
section.

Appendix A to Part 202--Federal Enforcement Agencies

    The following list indicates the federal agencies that enforce 
Regulation B for particular classes of creditors. Any questions 
concerning a particular creditor should be directed to its enforcement 
agency. Terms that are not defined in the Federal Deposit Insurance Act 
(12 U.S.C. 1813(s)) shall have the meaning given to them in the 
International Banking Act of 1978 (12 U.S.C. 3101).

National Banks, and Federal Branches and Federal Agencies of 
Foreign Banks

    Office of the Comptroller of the Currency, Customer Assistance 
Unit, 1301 McKinney Avenue, Suite 3710, Houston, Texas 77010.

State Member Banks, Branches and Agencies of Foreign Banks (other 
than federal branches, federal agencies, and insured state branches 
of foreign banks), Commercial Lending Companies Owned or Controlled 
by Foreign Banks, and Organizations Operating Under Section 25 or 
25A of the Federal Reserve Act

    Federal Reserve Bank serving the district in which the 
institution is located.

Nonmember Insured Banks and Insured State Branches of Foreign Banks

    Federal Deposit Insurance Corporation Regional Director for the 
region in which the institution is located.

Savings institutions insured under the Savings Association 
Insurance Fund of the FDIC and federally chartered 
savings banks insured under the Bank 
Insurance Fund of the FDIC (but not including state-chartered 
savings banks insured under the Bank Insurance Fund)

    Office of Thrift Supervision Regional Director for the region in 
which the institution is located.

Federal Credit Unions

    Regional office of the National Credit Union Administration 
serving the area in which the federal credit union is located.

Air Carriers

    Assistant General Counsel for Aviation Enforcement and 
Proceedings, Department of Transportation, 400 Seventh Street, SW, 
Washington, DC 20590.

Creditors Subject to Surface Transportation 
Board [Interstate Commerce Commission]

    Office of Proceedings, [Interstate Commerce Commission, 
Washington, DC 20523] Surface Transportation Board, 
Department of Transportation, 1925 K Street NW, Washington, DC 
20423

Creditors Subject to Packers and Stockyards Act

    Nearest Packers and Stockyards Administration area supervisor.

Small Business Investment Companies

    U.S. Small Business Administration, 409 Third Street, 
SW, [1441 L Street, NW,] Washington, DC 20416.

Brokers and Dealers

    Securities and Exchange Commission, Washington, DC 20549.

Federal Land Banks, Federal Land Bank Associations, Federal 
Intermediate Credit Banks, and Production Credit Associations

    Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 
22102-5090.

Retailers, Finance Companies, and All Other Creditors Not Listed 
Above

    FTC Regional Office for region in which the creditor operates or 
Federal Trade Commission, Equal Credit Opportunity, Washington, DC 
20580.

Appendix B to Part 202--Model Application Forms

    1. This appendix contains five model 
credit application forms, each designated for use in a particular 
type of consumer credit transaction as indicated by the bracketed 
caption on each form. The first sample form is intended for use in 
open-end, unsecured transactions; the second for closed-end, secured 
transactions; the third for closed-end transactions, whether 
unsecured or secured; the fourth in transactions involving community 
property or occurring in community property states; and the fifth in 
residential mortgage transactions[. The appendix also] 
which contains a model disclosure for use in 
complying with Sec. 202.13 for certain dwelling-related loans. All 
forms contained in this appendix are models; their use by creditors 
is optional.
    2. The use or modification of these forms 
is governed by the following instructions. A creditor may change the 
forms: by asking for additional information not prohibited by 
Sec. 202.5; by deleting any information request; or by rearranging 
the format without modifying the substance of the inquiries. In any 
of these three instances, however, the appropriate notices regarding 
the optional nature of courtesy titles, the option to disclose 
alimony, child support, or separate maintenance, and the limitation 
concerning marital status inquiries must be included in the 
appropriate places if the items to which they relate appear on the 
creditor's form.
    3. If a creditor uses an appropriate 
Appendix B model form, or modifies a form in accordance with the 
above instructions, that creditor shall be deemed to be acting in 
compliance with the provisions of paragraphs (b) 
and (c) [and (d)] of Sec. 202.5 [of this regulation].

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[[Page 44616]]

Appendix C to Part 202--Sample Notification Forms

    1. This appendix contains nine sample 
notification forms. Forms C-1 through C-4 are intended for use in 
notifying an applicant that adverse action has been taken on an 
application or account under Secs. 202.9(a) (1) and (2)(i) [of this 
regulation]. Form C-5 is a notice of disclosure of the right to 
request specific reasons for adverse action under Secs. 202.9(a) (1) 
and (2)(ii). Form C-6 is designed for use in notifying an applicant, 
under Sec. 202.9(c)(2), that an application is incomplete. Forms C-7 
and C-8 are intended for use in connection with applications for 
business credit under Sec. 202.9(a)(3). Form C-9 is designed for use 
in notifying an applicant of the right to receive a copy of an 
appraisal under Sec. 202.5a.
    2. Form C-1 contains the Fair Credit 
Reporting Act disclosure as required by sections 615 (a) and (b) of 
that act. Forms C-2 through C-5 contain only the section 615(a) 
disclosure (that a creditor obtained information from a consumer 
reporting agency that played a part in the credit decision). A 
creditor must provide the 615(a) disclosure when adverse action is 
taken against a consumer based on information from a consumer 
reporting agency. A creditor must provide the 615(b) disclosure when 
adverse action is taken based on information from an outside source 
other than a consumer reporting agency. In addition, a creditor must 
provide the 615(b) disclosure if the creditor obtained information 
from an affiliate other than information in a consumer report or 
other than information concerning the affiliate's own transactions 
or experiences with the consumer. Creditors may comply with the 
disclosure requirements for adverse action based on information in a 
consumer report obtained from an affiliate by providing either the 
615(a) or 615(b) disclosure.
    3. The sample forms are illustrative and 
may not be appropriate for all creditors. They were designed to 
include some of the factors that creditors most commonly consider. 
If a creditor chooses to use the checklist of reasons provided in 
one of the sample forms in this appendix and if reasons commonly 
used by the creditor are not provided on the form, the creditor 
should modify the checklist by substituting or adding other reasons. 
For example, if ``inadequate down payment'' or ``no deposit 
relationship with us'' are common reasons for taking adverse action 
on an application, the creditor ought to add or substitute such 
reasons for those presently contained on the sample forms.
    4. If the reasons listed on the forms are 
not the factors actually used, a creditor will not satisfy the 
notice requirement by simply checking the closest identifiable 
factor listed. For example, some creditors consider only references 
from banks or other depository institutions and disregard finance 
company references altogether; their statement of reasons should 
disclose ``insufficient bank references,'' not ``insufficient credit 
references.'' Similarly, a creditor that considers bank references 
and other credit references as distinct factors should treat the two 
factors separately and disclose them as appropriate. The creditor 
should either add such other factors to the form or check ``other'' 
and include the appropriate explanation. The creditor need not, 
however, describe how or why a factor adversely affected the 
application. For example, the notice may say ``length of residence'' 
rather than ``too short a period of residence.''
    5. A creditor may design its own 
notification forms or use all or a portion of the forms contained in 
this appendix. Proper use of Forms C-1 through C-4 will satisfy the 
requirement of Sec. 202.9(a)(2)(i). Proper use of Forms C-5 and C-6 
constitutes full compliance with Secs. 202.9(a)(2)(ii) and 
202.9(c)(2), respectively. Proper use of Forms C-7 and C-8 will 
satisfy the requirements of Secs. 202.9(a)(2) (i) and (ii), 
respectively, for applications for business credit. Proper use of 
Form C-9 will satisfy the requirements of Sec. 202.5a of this part. 
Proper use of Form C-10 will satisfy the requirements of 
Sec. 202.5(a)(4).

Form C-1--Sample Notice of Action Taken and Statement of Reasons

Statement of Credit Denial, Termination or Change

Date:------------------------------------------------------------------
Applicant's Name:------------------------------------------------------
Applicant's Address:---------------------------------------------------

Description of Account, Transaction, or Requested Credit:

----------------------------------------------------------------------

Description of Action Taken:
----------------------------------------------------------------------
----------------------------------------------------------------------

Part I--Principal Reason(s) for Credit Denial, Termination, or Other 
Action Taken Concerning Credit

    This section must be completed in all instances.
____Credit application incomplete
____Insufficient number of credit references provided
____Unacceptable type of credit references provided
____Unable to verify credit references
____Temporary or irregular employment
____Unable to verify employment
____Length of employment
____Income insufficient for amount of credit requested
____Excessive obligations in relation to income
____Unable to verify income
____Length of residence
____Temporary residence
____Unable to verify residence
____No credit file
____Limited credit experience
____Poor credit performance with us
____Delinquent past or present credit obligations with others
____Garnishment, attachment, foreclosure, repossession, collection 
action, or judgment
____Bankruptcy
____Value or type of collateral not sufficient
____Other, specify: ____________________

Part II--Disclosure of Use of Information Obtained From an Outside 
Source

    This section should be completed if the credit decision was 
based in whole or in part on information that has been obtained from 
an outside source.

____Our credit decision was based in whole or in part on information 
obtained in a report from the consumer reporting agency listed 
below. You have a right under the Fair Credit Reporting Act to know 
the information contained in your credit file at the consumer 
reporting agency. The reporting agency played no part in our 
decision and is unable to supply specific reasons why we have denied 
credit to you. You also have a right to a free copy of your report 
from the reporting agency, if you request it no later than 60 days 
after you receive this notice. In addition, if you find that any 
information contained in the report you receive is inaccurate or 
incomplete, you have the right to dispute the matter with the 
reporting agency.

Name:------------------------------------------------------------------
Address:---------------------------------------------------------------
----------------------------------------------------------------------

[Toll-free] Telephone number: __________________________---------------
____Our credit decision was based in whole or in part on information 
obtained from an affiliate or from an outside source other than a 
consumer reporting agency. Under the Fair Credit Reporting Act, you 
have the right to make a written request, no later than 60 days 
after you receive this notice, for disclosure of the nature of this 
information.

----------------------------------------------------------------------

If you have any questions regarding this notice, you should contact:

Creditor's name:-------------------------------------------------------
Creditor's address:----------------------------------------------------
Creditor's telephone number:-------------------------------------------

Notice

    The federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided 
the applicant has the capacity to enter into a binding contract); 
because all or part of the applicant's income derives from any 
public assistance program; or because the applicant has in good 
faith exercised any right under the Consumer Credit Protection Act. 
The federal agency that administers compliance with this law 
concerning this creditor is (name and address as specified by the 
appropriate agency listed in appendix A).

Form C-2--Sample Notice of Action Taken and Statement of Reasons

Date:
    Dear Applicant: Thank you for your recent application. Your 
request for [a loan/a credit card/an increase in your credit limit] 
was carefully considered, and we regret that we are unable to 
approve your application at this time, for the following reason(s):


[[Page 44617]]


Your Income:

____ is below our minimum requirement.
____ is insufficient to sustain payments on the amount of credit 
requested.
____ could not be verified.

Your Employment:

____ is not of sufficient length to qualify.
____ could not be verified.

Your Credit History:

____ of making payments on time was not satisfactory.
____ could not be verified.

Your Application:

____ lacks a sufficient number of credit references.
____ lacks acceptable types of credit references.
____ reveals that current obligations are excessive in relation to 
income.
Other:-----------------------------------------------------------------

    The consumer reporting agency contacted that provided 
information that influenced our decision in whole or in part was 
[name, address and [toll-free] telephone number of the reporting 
agency]. The reporting agency is unable to supply specific reasons 
why we have denied credit to you. You do, however, have a right 
under the Fair Credit Reporting Act to know the information 
contained in your credit file. You also have a right to a free copy 
of your report from the reporting agency, if you request it no later 
than 60 days after you receive this notice. In addition, if you find 
that any information contained in the report you receive is 
inaccurate or incomplete, you have the right to dispute the matter 
with the reporting agency. Any questions regarding such information 
should be directed to [consumer reporting agency].
    If you have any questions regarding this letter, you should 
contact us at [creditor's name, address and telephone number].
    Notice: The federal Equal Credit Opportunity Act prohibits 
creditors from discriminating against credit applicants on the basis 
of race, color, religion, national origin, sex, marital status, age 
(provided the applicant has the capacity to enter into a binding 
contract); because all or part of the applicant's income derives 
from any public assistance program; or because the applicant has in 
good faith exercised any right under the Consumer Credit Protection 
Act. The federal agency that administers compliance with this law 
concerning this creditor is (name and address as specified by the 
appropriate agency listed in appendix A).

Form C-3--Sample Notice of Action Taken and Statement of Reasons 
(Credit Scoring)

Date:
    Dear Applicant: Thank you for your recent application for 
____________________. We regret that we are unable to approve your 
request.
    Your application was processed by a credit scoring system that 
assigns a numerical value to the various items of information we 
consider in evaluating an application. These numerical values are 
based upon the results of analyses of repayment histories of large 
numbers of customers.
    The information you provided in your application did not score a 
sufficient number of points for approval of the application. The 
reasons you did not score well compared with other applicants were:
     Insufficient bank references
     Type of occupation
     Insufficient credit experience
    In evaluating your application the consumer reporting agency 
listed below provided us with information that in whole or in part 
influenced our decision. The reporting agency played no part in our 
decision other than providing us with credit information about you. 
Under the Fair Credit Reporting Act, you have a right to know the 
information provided to us. It can be obtained by contacting: [name, 
address, and [toll-free] telephone number of the consumer reporting 
agency]. You also have a right to a free copy of your report from 
the reporting agency, if you request it no later than 60 days after 
you receive this notice. In addition, if you find that any 
information contained in the report you receive is inaccurate or 
incomplete, you have the right to dispute the matter with the 
reporting agency.
    If you have any questions regarding this letter, you should 
contact us at:

Creditor's Name:-------------------------------------------------------
Address:---------------------------------------------------------------
----------------------------------------------------------------------
Telephone:-------------------------------------------------------------

        Sincerely,

    Notice: The federal Equal Credit Opportunity Act prohibits 
creditors from discriminating against credit applicants on the basis 
of race, color, religion, national origin, sex, marital status, age 
(with certain limited exceptions); because all or part of the 
applicant's income derives from any public assistance program; or 
because the applicant has in good faith exercised any right under 
the Consumer Credit Protection Act. The federal agency that 
administers compliance with this law concerning this creditor is 
(name and address as specified by the appropriate agency listed in 
appendix A).

Form C-4--Sample Notice of Action Taken, Statement of Reasons and 
Counteroffer

Date:
    Dear Applicant: Thank you for your application for 
____________________. We are unable to offer you credit on the terms 
that you requested for the following reason(s):
----------------------------------------------------------------------
    We can, however, offer you credit on the
following terms:-------------------------------------------------------
----------------------------------------------------------------------
If this offer is acceptable to you, please notify us within [amount 
of time] at the following address: ______________________________.
    Our credit decision on your application was based in whole or in 
part on information obtained in a report from [name, address and 
[toll-free] telephone number of the consumer reporting agency]. You 
have a right under the Fair Credit Reporting Act to know the 
information contained in your credit file at the consumer reporting 
agency. The reporting agency played no part in our decision and is 
unable to supply specific reasons why we have denied credit to you. 
You also have a right to a free copy of your report from the 
reporting agency, if you request it no later than 60 days after you 
receive this notice. In addition, if you find that any information 
contained in the report you receive is inaccurate or incomplete, you 
have the right to dispute the matter with the reporting agency.
    You should know that the federal Equal Credit Opportunity Act 
prohibits creditors, such as ourselves, from discriminating against 
credit applicants on the basis of their race, color, religion, 
national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding 
contract) because they receive income from a public 
assistance program, or because they may have exercised their rights 
under the Consumer Credit Protection Act. If you believe there has 
been discrimination in handling your application you should contact 
the [name and address of the appropriate federal enforcement agency 
listed in appendix A].

        Sincerely,

Form C-5--Sample Disclosure of Right To Request Specific Reasons 
for Credit Denial

Date:
    Dear Applicant: Thank you for applying to us for 
____________________.
    After carefully reviewing your application, we are sorry to 
advise you that we cannot [open an account for you/grant a loan to 
you/increase your credit limit] at this time. If you would like a 
statement of specific reasons why your application was denied, 
please contact [our credit service manager] shown below within 60 
days of the date of this letter. We will provide you with the 
statement of reasons within 30 days after receiving your request.

Creditor's Name
Address
Telephone number

    If we obtained information from a consumer reporting agency as 
part of our consideration of your application, its name, address, 
and [toll-free] telephone number is shown below. The reporting 
agency played no part in our decision and is unable to supply 
specific reasons why we have denied credit to you. [You have a right 
under the Fair Credit Reporting Act to know the information 
contained in your credit file at the consumer reporting agency.] You 
have a right to a free copy of your report from the reporting 
agency, if you request it no later than 60 days after you receive 
this notice. In addition, if you find that any information contained 
in the report you receive is inaccurate or incomplete, you have the 
right to dispute the matter with the reporting agency. You can find 
out about the information contained in your file (if one was used) 
by contacting:

Consumer reporting agency's name
Address [Toll-free]
Telephone number

        Sincerely,

Notice

    The federal Equal Credit Opportunity Act prohibits creditors 
from discriminating

[[Page 44618]]

against credit applicants on the basis of race, color, religion, 
national origin, sex, marital status, age (provided the applicant 
has the capacity to enter into a binding contract); because all or 
part of the applicant's income derives from any public assistance 
program; or because the applicant has in good faith exercised any 
right under the Consumer Credit Protection Act. The federal agency 
that administers compliance with this law concerning this creditor 
is (name and address as specified by the appropriate agency listed 
in appendix A).

Form C-6--Sample Notice of Incomplete Application and Request for 
Additional Information

Creditor's name
Address
Telephone number

Date:
    Dear Applicant: Thank you for your application for credit. The 
following information is needed to make a decision
on your application:---------------------------------------------------
----------------------------------------------------------------------
We need to receive this information by (date). If we do not receive 
it by that date, we will regrettably be unable to give further 
consideration to your credit request.

        Sincerely,

Form C-7--Sample Notice of Action Taken and Statement of Reasons 
(Business Credit)

Creditor's Name
Creditor's address

Date:
    Dear Applicant: Thank you for applying to us for credit. We have 
given your request careful consideration, and regret that we are 
unable to extend credit to you at this time for the following 
reasons:

(Insert appropriate reason, such as: Value or 
type of collateral not sufficient; Lack of 
established earnings record; Slow or past due 
in trade or loan payments)
        Sincerely,

    Notice: The federal Equal Credit Opportunity Act prohibits 
creditors from discriminating against credit applicants on the basis 
of race, color, religion, national origin, sex, marital status, age 
(provided the applicant has the capacity to enter into a binding 
contract); because all or part of the applicant's income derives 
from any public assistance program; or because the applicant has in 
good faith exercised any right under the Consumer Credit Protection 
Act. The federal agency that administers compliance with this law 
concerning this creditor is [name and address as specified by the 
appropriate agency listed in appendix A].

Form C-8--Sample Disclosure of Right To Request Specific Reasons 
for Credit Denial Given at Time of Application (Business Credit)

Creditor's name
Creditor's address

    If your application for business credit is denied, you have the 
right to a written statement of the specific reasons for the denial. 
To obtain the statement, please contact [name, address and telephone 
number of the person or office from which the statement of reasons 
can be obtained] within 60 days from the date you are notified of 
our decision. We will send you a written statement of reasons for 
the denial within 30 days of receiving your request for the 
statement.
    Notice: The federal Equal Credit Opportunity Act prohibits 
creditors from discriminating against credit applicants on the basis 
of race, color, religion, national origin, sex, marital status, age 
(provided the applicant has the capacity to enter into a binding 
contract); because all or part of the applicant's income derives 
from any public assistance program; or because the applicant has in 
good faith exercised any right under the Consumer Credit Protection 
Act. The federal agency that administers compliance with this law 
concerning this creditor is [name and address as specified by the 
appropriate agency listed in appendix A].

Form C-9--Sample Disclosure of Right To Receive a Copy of an 
Appraisal

    You have the right to a copy of the appraisal report used in 
connection with your application for credit. If you wish a copy, 
please write to us at the mailing address we have provided. We must 
hear from you no later than 90 days after we notify you about the 
action taken on your credit application or you withdraw your 
application.
    [In your letter, give us the following information:]

Form C-10--Sample Disclosure About Voluntary Data 
Notation

    We are requesting the following information [to monitor our 
compliance with the federal Equal Credit Opportunity Act]. You are 
not required to provide this information. The law provides that a 
creditor may not discriminate based on this information, or based on 
whether or not you choose to provide it.

Appendix D to Part 202--Issuance of Staff Interpretations

    1. Official Staff Interpretations. 
Officials in the Board's Division of Consumer and Community Affairs 
are authorized to issue official staff interpretations of this 
regulation. These interpretations provide the protection afforded 
under section 706(e) of the Act. Except in unusual circumstances, 
such interpretations will not be issued separately but will be 
incorporated in an official commentary to the regulation, which will 
be amended periodically.
    2. Requests for Issuance of Official Staff 
Interpretations. A request for an official staff interpretation 
should be in writing and addressed to the Director, Division of 
Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, Washington, DC 20551. The request should contain a 
complete statement of all relevant facts concerning the issue, 
including copies of all pertinent documents.
    3. Scope of Interpretations. No staff 
interpretations will be issued approving creditors' forms or 
statements. This restriction does not apply to forms or statements 
whose use is required or sanctioned by a government agency.

Supplement I to Part 202--Official Staff Interpretations

    Following is an official staff interpretation of Regulation B 
(12 CFR part 202) issued under authority 
delegated by the Federal Reserve Board to officials in the Division 
of Consumer and Community Affairs. References are to sections of the 
regulation or the Equal Credit Opportunity Act (15 U.S.C. 1601 et 
seq.).

Introduction

    1. Official status. Section 706(e) of the Equal Credit 
Opportunity Act protects a creditor from civil liability for any act 
done or omitted in good faith in conformity with an interpretation 
issued by a duly authorized official of the Federal Reserve Board. 
This commentary is the means by which the Division of Consumer and 
Community Affairs of the Federal Reserve Board issues official staff 
interpretations of Regulation B. Good-faith compliance with this 
commentary affords a creditor protection under section 706(e) of the 
Act.
    2. Issuance of interpretations. Under appendix D to the 
regulation, any person may request an official staff interpretation. 
Interpretations will be issued at the discretion of designated 
officials and incorporated in this commentary following publication 
for comment in the Federal Register. Except in unusual 
circumstances, official staff interpretations will be issued only by 
means of this commentary.
    3. Status of previous interpretations. Interpretations of 
Regulation B previously issued by the Federal Reserve Board and its 
staff have been incorporated into this commentary as appropriate. 
All other previous Board and staff interpretations, official and 
unofficial, are superseded by this commentary.
    4. Footnotes. Footnotes in the regulation have the same legal 
effect as the text of the regulation, whether they are explanatory 
or illustrative in nature.
    5. Comment designations. The comments are designated with as 
much specificity as possible according to the particular regulatory 
provision addressed. Each comment in the commentary is identified by 
a number and the regulatory section or paragraph that it interprets. 
For example, comments to Sec. 202.2(c) are further divided by 
subparagraph, such as comment 2(c)(1)(ii)-1 and comment 2(c)(2)(ii)-
1.

Section 202.1--Authority, Scope, and Purpose

    1(a) Authority and scope.
    1. Scope. The Equal Credit Opportunity Act and Regulation B 
apply to all credit--commercial as well as personal--without regard 
to the nature or type of the credit or the creditor. If a 
transaction provides for the deferral of the payment of a debt, it 
is credit covered by Regulation B even though it may not be a credit 
transaction covered by Regulation Z (Truth in Lending) 
(12 CFR part 226). Further, the definition of

[[Page 44619]]

creditor is not restricted to the party or person to whom the 
obligation is initially payable, as is the case under Regulation Z. 
Moreover, the Act and regulation apply to all methods of credit 
evaluation, whether performed judgmentally or by use of a credit 
scoring system.
    2. Foreign applicability. Regulation B generally does not apply 
to lending activities that occur outside the United States. The 
regulation does apply to lending activities that take place within 
the United States (as well as the Commonwealth of Puerto Rico and 
any territory or possession of the United States), whether or not 
the applicant is a citizen.
    3. Board. The term Board, as used in this regulation, means the 
Board of Governors of the Federal Reserve System.

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.
    2. Counteroffer. If an applicant responds to a credit 
solicitation by requesting a specific amount of credit and the 
creditor provides a different amount, the creditor's action is a 
counteroffer--even if the solicitation discloses that the consumer 
may not receive the amount of credit requested. An adverse action 
notice is required unless the applicant expressly accepts or uses 
the credit. For example, assume an applicant receives a credit card 
solicitation offering credit ``up to $10,000,'' and responds by 
requesting $8,000 in a balance transfer to pay off an existing 
credit card account; and that the creditor sends a credit card and 
informs the applicant that a $5,000 balance transfer and an 
additional $500 of credit has been approved. An adverse action 
notice is required unless the applicant uses the credit card or 
expressly accepts the credit offered before the balance transfer 
occurs.
    Paragraph 2(c)(1)(ii)
    1. Termination or unfavorable change to substantially 
all of a class of the creditor's accounts. If a creditor terminates 
or makes an unfavorable change to the terms of all but a small 
proportion of a class of accounts, the creditor need not give 
adverse action notices to customers affected by the termination or 
unfavorable change. Class of accounts is a broad category. For 
example, overdraft lines of credit or distinct credit card programs 
such as ``secured'' credit cards represent a class of accounts. But 
a category designated according to characteristics of customers, 
such as by their credit scores, is not a class of 
accounts.
    [1.] 2. Move from service area. If a 
credit card issuer terminates the open-end account of a customer 
because the customer has moved out of the card issuer's service 
area, the termination is adverse action for purposes of the 
regulation unless termination on this ground was explicitly provided 
for in the credit agreement between the parties. In cases where 
termination is adverse action, notification is required under 
Sec. 202.9.
    [2.] 3. Termination based on credit limit. 
If a creditor terminates credit accounts that have low credit limits 
(for example, under $400) but keeps open accounts with higher credit 
limits, the termination is adverse action and notification is 
required under Sec. 202.9.
    Paragraph 2(c)(2)(i)
    1. Express agreement. If a creditor changes the terms of an 
account pursuant to an express agreement, the creditor need not give 
adverse action notices to customers affected by the change. An 
express agreement exists where the specific change and the specific 
circumstance under which the change will occur are stated in the 
agreement. For example, if a credit card agreement provides that the 
rate on a consumer's credit card will be increased if the consumer 
misses two consecutive payments, and the missed payments occur, an 
increase in the rate is not adverse action. However, if a credit 
card agreement provides that the rate on a consumer's credit card 
will be increased if the consumer's financial circumstances change 
or if the creditor deems itself ``insecure,'' imposing a higher rate 
is adverse action subject to the notice requirements of 
Sec. 202.9.
    Paragraph 2(c)(2)(ii)
    1. Default--exercise of due-on-sale clause. If a mortgagor sells 
or transfers mortgaged property without the consent of the 
mortgagee, and the mortgagee exercises its contractual right to 
accelerate the mortgage loan, the mortgagee may treat the mortgagor 
as being in default. An adverse-action notice need not be given to 
the mortgagor or the transferee. (See comment 2(e)-1 for treatment 
of a purchaser who requests to assume the loan.)
    2. Current delinquency or default. The term adverse action does 
not include a creditor's termination of or other action 
on an account when the accountholder is currently in 
default or delinquent on that account. For example, if a 
credit agreement defines default to include the consumer's filing 
for bankruptcy, an adverse action notice is not required if the 
creditor terminates the consumer's account when the consumer files 
for bankruptcy. Notification in accordance with 
Sec. 202.9 of the regulation generally is required, however, if the 
creditor's action is based not on a current 
but on a past delinquency or default on the account.
    3. Performance on a different account. If a creditor 
takes adverse action on an account because of the consumer's 
performance (such as poor payment history) on a different account, 
an adverse action notice is required--even if the performance is 
defined as a default under the terms of the credit 
agreement.
    Paragraph 2(c)(2)(iii)
    1. Point-of-sale transactions. Denial of credit at point of sale 
is not adverse action except under those circumstances specified in 
the regulation. For example, denial at point of sale is not adverse 
action in the following situations:
    []i. A credit cardholder presents 
an expired card or a card that has been reported to the card issuer 
as lost or stolen.
    []ii. The amount of a transaction 
exceeds a cash advance or credit limit.
    []iii. The circumstances (such as 
excessive use of a credit card in a short period of time) 
suggest [suggests] that fraud is involved.
    []iv. The authorization facilities 
are not functioning.
    []v. Billing statements have been 
returned to the creditor for lack of a forwarding address.
    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.
    Paragraph 2(c)(2)(v)
    1. Terms of credit versus type of credit offered. When an 
applicant applies for credit and the creditor does not offer the 
credit terms requested by the applicant (for example, the interest 
rate, length of maturity, collateral, or amount of downpayment), a 
denial of the application for that reason is adverse action (unless 
the creditor makes a counteroffer that is accepted by the applicant) 
and the applicant is entitled to notification under Sec. 202.9.
    2(e) Applicant.
    1. Request to assume loan. If a mortgagor sells or transfers the 
mortgaged property and the buyer makes an application to the 
creditor to assume the mortgage loan, the mortgagee must treat the 
buyer as an applicant unless its policy is not to permit 
assumptions.
    2(f) Application.
    1. General. A creditor has the latitude under the regulation to 
establish its own application process and to decide the type and 
amount of information it will require from credit applicants.
    2. Procedures established. The term refers to the actual 
practices followed by a creditor for making credit decisions as well 
as its stated application procedures. For example, if a creditor's 
stated policy is to require all applications to be in writing on the 
creditor's application form, but the creditor also makes credit 
decisions [decision] based on oral requests, 
the creditor's established procedures are to accept both oral and 
written applications.
    3. When an inquiry or prequalification 
request becomes an application. A creditor is encouraged 
to provide consumers with information about loan terms. However, if 
in giving information to the consumer the creditor also evaluates 
information about the applicant, decides to decline the request, and 
communicates this to the applicant, the creditor has treated the 
inquiry or prequalification request as an 
application and must then comply with the notification requirements 
under Sec. 202.9. Whether the inquiry or prequalification 
request becomes an application depends on how the 
creditor responds to the applicant, not on what the 
applicant [applicant] says or asks.
    4. Examples of inquiries that are not applications. The 
following examples illustrate situations in which only an inquiry 
has taken place:
    []i. When a consumer calls to 
ask [asks] about loan terms and an

[[Page 44620]]

employee explains the creditor's basic loan terms, such as interest 
rates, loan-to-value ratio [ratio], and debt-
to-income ratio.
    []ii. When a consumer calls to ask 
about interest rates for car loans, and, in order to quote the 
appropriate rate, the loan officer asks for the make and 
sales [sale] price of the car and the amount 
of the downpayment [down-payment], then 
gives [given] the consumer the rate.
    []iii. When a consumer asks about 
terms for a loan to purchase a home and tells 
the loan officer her income and intended 
downpayment [down-payment], but the loan 
officer only explains the creditor's loan-to-value ratio policy and 
other basic lending policies, without telling the consumer whether 
she qualifies for the loan.
    []iv. When a consumer calls to ask 
about terms for a loan to purchase vacant land and states his income 
and the sales [sale] price of the property to 
be financed, and asks whether he qualifies for a loan, and the 
employee responds by describing the general lending policies, 
explaining that he would need to look at all of the 
consumer's [applicant's] qualifications before 
making a decision, and offering to send an application form to the 
consumer.
    5. Examples of an application. i. An application for 
credit includes the case in which a person asks a financial 
institution to ``preapprove'' her for a loan (for example, to 
finance a house or a vehicle she plans to buy) and the institution 
evaluates her creditworthiness and issues a letter documenting that 
she has been preapproved (subject to, for example, adequate 
collateral value, a contract for sale, and lack of material change 
in the person's financial circumstances) and stating that the loan 
offer is valid, say, for 30 days.
    ii. Under the same facts as above, if the financial institution 
evaluates the person's creditworthiness and determines that she does 
not qualify for a preapproval, an adverse action notice must be 
provided.
    iii. If the creditor's procedures do not provide for giving 
written commitments, requests for preapprovals are treated as 
prequalification requests for purposes of the regulation.
    [5]6. Completed application--diligence 
requirement. The regulation defines a completed application in terms 
that give a creditor the latitude to establish its own information 
requirements. Nevertheless, the creditor must act with reasonable 
diligence to collect information needed to complete the application. 
For example, the creditor should request information from third 
parties, such as a credit report, promptly after receiving the 
application. If additional information is needed from the applicant, 
such as an address or telephone number needed to verify employment, 
the creditor should contact the applicant promptly. (But see comment 
9(a)(1)-3, which discusses the creditor's option to deny an 
application on the basis of incompleteness.)
    2(g) Business credit.
    1. Definition. The test for deciding whether a transaction 
qualifies as business credit is one of primary purpose. For example, 
an open-end credit account used for both personal and business 
purposes is not business credit unless the primary purpose of the 
account is business-related. A creditor may rely on an applicant's 
statement of the purpose for the credit requested.
    2(j) Credit.
    1. General. Regulation B covers a wider range of credit 
transactions than Regulation Z (Truth in Lending). For purposes of 
Regulation B, a transaction is credit if there 
is a right to defer payment of a debt--regardless of whether the 
credit is for personal or commercial purposes, the number of 
installments required for repayment, or whether the transaction is 
subject to a finance charge.
    2(l) Creditor.
    1. Assignees. The term creditor includes all persons 
participating in the credit decision. This may include an assignee 
or a potential purchaser of the obligation who influences the credit 
decision by indicating whether or not it will purchase the 
obligation if the transaction is consummated.
    2. Referrals to creditors. For certain purposes, the term 
creditor includes persons such as real estate brokers, 
automobile dealers, home builders, and home-improvement 
contractors who do not participate in credit decisions 
but who [regularly] solely accept 
applications, refer applicants to 
creditors, or [who] select or offer to select 
creditors to whom credit requests can be made. These persons must 
comply with Sec. 202.4(a), the general rule 
prohibiting discrimination, and with 
Sec. [202.5(a),]202.4(b), the general rule 
against [on] discouraging applications.
    2(p) Empirically derived and other credit scoring systems.
    1. Purpose of definition. The definition under 
Sec. 202.2(p)(l)(i) through (iv) sets the 
criteria that a credit system must meet in order for the system to 
use age as a predictive factor. Credit systems that do not meet 
these criteria are judgmental systems and may consider age only for 
the purpose of determining a ``pertinent element of 
creditworthiness.'' (Both types of systems may favor an elderly 
applicant. See Sec. 202.6(b)(2).)
    2. Periodic revalidation. The regulation does not specify how 
often credit scoring systems must be revalidated. To meet the 
requirements for statistical soundness, the credit scoring system 
must be revalidated frequently enough to 
ensure [assure] that it continues to meet 
recognized professional statistical standards. 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. 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).
    2(w) Open-end credit.
    1. Open-end real estate mortgages. The term open-end credit does 
not include negotiated advances under an open-end real estate 
mortgage or a letter of credit.
    2(z) Prohibited basis.
    1. Persons associated with applicant. Prohibited basis as used 
in this regulation refers not only to characteristics--the race, 
color, religion, national origin, sex, marital status, or age--of an 
applicant (or officers of an applicant in the case of a corporation) 
but also to the characteristics of individuals with whom an 
applicant is affiliated or with whom the applicant associates. This 
means, for example, that under the general rule stated in 
Sec. 202.4(a), a creditor may not discriminate 
against an applicant because of that person's personal or business 
dealings with members of a certain religion, because of the national 
origin of any persons associated with the extension of credit (such 
as the tenants in the apartment complex being financed), or because 
of the race of other residents in the neighborhood where the 
property offered as collateral is located.
    2. National origin. A creditor may not refuse to grant credit 
because an applicant comes from a particular country but may take 
the applicant's immigration status into account. A creditor may also 
take into account any applicable law, regulation, or executive order 
restricting dealings with citizens (or the government) of a 
particular country or imposing limitations regarding credit extended 
for their use.
    3. Public assistance program. Any federal, state, or local 
governmental assistance program that provides a continuing, periodic 
income supplement, whether premised on entitlement or need, is 
public assistance for purposes of the regulation. The term includes 
(but is not limited to) [Aid to Families with Dependent 
Children]Temporary Aid to Needy Families, food 
stamps, rent and mortgage supplement or assistance programs, Social 
Security and Supplemental Security Income, and unemployment 
compensation. Only physicians, hospitals, and others to whom the 
benefits are payable need consider Medicare and Medicaid as public 
assistance.

[[Page 44621]]

Section 202.3--Limited Exceptions for Certain Classes of 
Transactions

    1. Scope. This section relieves burdens with regard to certain 
types of credit for which full application of the procedural 
requirements of the regulation is not needed. All classes of 
transactions remain subject to the general rule given in 
Sec. 202.4(a), barring discrimination on a 
prohibited basis, and to any other provision not specifically 
excepted.
    3(a) Public- utilities credit.
    1. Definition. This definition applies only to credit for the 
purchase of a utility service, such as electricity, gas, or 
telephone service. Credit provided or offered by a public utility 
for some other purpose--such as for financing the purchase of a gas 
dryer, telephone equipment, or other durable goods, or for 
insulation or other home improvements--is not excepted.
    2. Security deposits. A utility company is a creditor when it 
supplies utility service and bills the user after the service has 
been provided. Thus, any credit term (such as a requirement for a 
security deposit) is subject to the regulation.
    3. Telephone companies. A telephone company's credit 
transactions qualify for the exceptions provided in Sec. 202.3(a)(2) 
only if the company is regulated by a government unit or files the 
charges for service, delayed payment, or any discount for prompt 
payment with a government unit.
    3(c) Incidental credit.
    1. Examples. If a service provider (such as a hospital, doctor, 
lawyer or retailer) allows the client or customer to defer the 
payment of a bill, this deferral of debt is credit for purposes of 
the regulation, even though there is no finance charge and no 
agreement for payment in installments. Because of the exceptions 
provided by this section, however, these particular credit 
extensions are excepted from compliance with certain procedural 
requirements as specified in the regulation.
    3(d) Government credit.
    1. Credit to governments. The exception relates to credit 
extended to (not by) governmental entities. For example, credit 
extended to a local government by a creditor in the private sector 
is covered by this exception, but credit extended to consumers by a 
federal or state housing agency does not qualify for special 
treatment under this category.

Section 202.4--General Rules [Prohibiting 
Discrimination]

    Paragraph 4(a)
    1. Scope of [section] rule. The general 
rule stated in Sec. 202.4(a) covers all 
dealings, without exception, between an applicant and a creditor, 
whether or not addressed by other provisions of the regulation. 
Other sections of the regulation identify specific practices that 
the Board has decided are impermissible because they could result in 
credit discrimination on a basis prohibited by the Act. The general 
rule covers, for example, application procedures, criteria used to 
evaluate creditworthiness, administration of accounts, and treatment 
of delinquent or slow accounts. Thus, whether or not specifically 
prohibited elsewhere in the regulation, a credit practice that 
treats applicants differently on a prohibited basis violates the law 
because it violates the general rule. Disparate treatment on a 
prohibited basis is illegal whether or not it results from a 
conscious intent to discriminate.
    2. Examples. i. Disparate treatment would 
be found, for example,
    A. Where a creditor provides information only on 
``subprime'' and similar products to minority applicants who request 
information about the creditor's mortgage products, but provides 
information on a wider variety of mortgage products to similarly 
situated nonminority applicants.
    B. Where a creditor provides more comprehensive information to 
men than to similarly situated women.
    C. [where] Where a creditor 
requires a minority applicant to provide greater documentation to 
obtain a loan than a similarly situated nonminority applicant.
    D. [Disparate treatment also would be 
found where] Where a creditor waives or 
relaxes credit standards for a nonminority applicant but not for a 
similarly situated minority applicant.
    ii. 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.
    Paragraph 4(b)
    1. Prospective applicants. Generally, the regulation's 
protections apply only to persons who have requested or received an 
extension of credit. In keeping with the purpose of the act--to 
promote the availability of credit on a nondiscriminatory basis--
Sec. 202.4(b) covers acts or practices directed at prospective 
applicants that could discourage a reasonable person, on a 
prohibited basis, from applying for credit. Practices prohibited by 
this section include:
    i. A statement that the applicant should not bother to apply, 
after the applicant states that he is retired.
    ii. The use of words, symbols, models or other forms of 
communication in advertising that express, imply, or suggest a 
discriminatory preference or a policy of exclusion in violation of 
the act.
    iii. The use of interview scripts that discourage applications 
on a prohibited basis.
    2. Affirmative advertising. A creditor may affirmatively solicit 
or encourage members of traditionally disadvantaged groups to apply 
for credit, especially groups that might not normally seek credit 
from that creditor.
    Paragraph 4(c)
    1. Requirement for written applications. Model application forms 
are provided in appendix B to the regulation, although use of a 
printed form is not required. A creditor will satisfy the 
requirement by writing down the information that it normally 
considers in making a credit decision. The creditor may complete the 
application on behalf of an applicant and need not require the 
applicant to sign the application.
    2. Telephone applications. A creditor that accepts applications 
by telephone for dwelling-related credit covered by Sec. 202.13 can 
meet the requirements for written applications by writing down 
pertinent information that is provided by the applicant(s).
    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 Sec. 202.13(b), 
Applications through electronic media and Applications through 
video.)
    Paragraph 4(d)
    1. Clear and conspicuous. This standard requires that 
disclosures be presented in a reasonably understandable format in a 
way that does not obscure the required information. No minimum type 
size is mandated, but the disclosures must be legible, whether 
typewritten, handwritten, or printed by computer.

Section 202.5--Rules Concerning [Taking Applications] 
Information Requests

    [5(a) Discouraging applications.
    1. Potential applicants. Generally, the regulation's protections 
apply only to persons who have requested or received an extension of 
credit. In keeping with the purpose of the act--to promote the 
availability of credit on a nondiscriminatory basis Sec. 202.5(a) 
covers acts or practices directed at potential applicants. Practices 
prohibited by this section include:
     A statement that the applicant should not bother to 
apply, after the applicant states that he is retired.
     Use of words, symbols, models or other forms of 
communication in advertising that express, imply, or suggest a 
discriminatory preference or a policy of exclusion in violation of 
the act.
     Use of interview scripts that discourage applications 
on a prohibited basis.
    2. Affirmative advertising. A creditor may affirmatively solicit 
or encourage members of traditionally disadvantaged groups to apply 
for credit, especially groups that might not normally seek credit 
from that creditor.]
    [5(b)] 5(a) General rules concerning 
requests for information.
    1. Requests for information. This section governs the types of 
information that a creditor may gather. Section 202.6 governs how 
information may be used.
    [Paragraph 5(b)(2)
    1. Local laws. Information that a creditor is allowed to collect 
pursuant to a ``state'' statute or regulation includes information 
required by a local statute, regulation, or ordinance.
    2. Information required by Regulation C. Regulation C generally 
requires creditors covered by the Home Mortgage Disclosure Act 
(HMDA) to collect and report information about the race or national 
origin and sex of applicants for home improvement loans and home 
purchase loans, including some types of loans not covered by 
Sec. 202.13. Certain creditors with assets under $30 million, though 
covered by HMDA, are not required to collect and report these data; 
but they may do so at their option under HMDA, without violating the 
ECOA or Regulation B.
    3. Collecting information on behalf of creditors. Loan brokers, 
correspondents, or other persons do not violate the ECOA or 
Regulation B if they collect information that they are otherwise 
prohibited from

[[Page 44622]]

collecting, where the purpose of collecting the information is to 
provide it to a creditor that is subject to the Home Mortgage 
Disclosure Act or another federal or state statute or regulation 
requiring data collection.]
    [5(d)] 5(c) Other limitations on 
information requests.
    Paragraph [5(d)(1)] 5(c)(1)
    1. Indirect disclosure of prohibited information. The fact that 
certain credit-related information may indirectly disclose marital 
status does not bar a creditor from seeking such information. For 
example, the creditor may ask about:
    []i. The applicant's obligation to 
pay alimony, child support, or separate maintenance.
    []ii. The source of income to be 
used as the basis for repaying the credit requested, which could 
disclose that it is the income of a spouse.
    []iii. Whether any obligation 
disclosed by the applicant has a co-obligor, which could disclose 
that the co-obligor is a spouse or former spouse.
    []iv. The ownership of assets, 
which could disclose the interest of a spouse.
    Paragraph [5(d)(2)] 5(c)(2)
    1. Disclosure about income. The sample application forms in 
appendix B to the regulation illustrate how a creditor may inform an 
applicant of the right not to disclose alimony, child support, or 
separate maintenance income.
    2. General inquiry about source of income. Since a general 
inquiry about the source of income may lead an applicant to disclose 
alimony, child support, or separate maintenance, a creditor may not 
make such an inquiry on an application form without prefacing the 
request with the disclosure required by this paragraph.
    3. Specific inquiry about sources of income. A creditor need not 
give the disclosure if the inquiry about income is specific and 
worded in a way that is unlikely to lead the applicant to disclose 
the fact that income is derived from alimony, child support, or 
separate maintenance payments. For example, an application form that 
asks about specific types of income such as salary, wages, or 
investment income need not include the disclosure.
    [5(e) Written applications.
    1. Requirement for written applications. The requirement of 
written applications for certain types of dwelling-related loans is 
intended to assist the federal supervisory agencies in monitoring 
compliance with the ECOA and the Fair Housing Act. Model application 
forms are provided in appendix B to the regulation, although use of 
a printed form of any kind is not required. A creditor will satisfy 
the requirement by writing down the information that it normally 
considers in making a credit decision. The creditor may complete the 
application on behalf of an applicant and need not require the 
applicant to sign the application.
    2. Telephone applications. A creditor that accepts applications 
by telephone for dwelling-related credit covered by Sec. 202.13 can 
meet the requirements for written applications by writing down 
pertinent information that is provided by the applicant(s).
    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.)

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.

Section 202.6--Rules Concerning Evaluation of Applications

    6(a) General rule concerning use of information.
    1. General. When evaluating an application for credit, a 
creditor generally may consider any information obtained. However, a 
creditor may not consider in its evaluation of creditworthiness any 
information that it is barred by Sec. 202.5 from obtaining.
    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. [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). Congressional intent 
that this doctrine apply to the credit area is documented in the 
Senate Report that accompanied H.R. 6516, No. 94-589, pp. 4-5; and 
in the House Report that accompanied H.R. 6516, No. 94-210, p. 5. 
The act and regulation may prohibit a creditor practice that is 
discriminatory in effect because it has a disproportionately 
negative impact on a prohibited basis, even though the creditor has 
no intent to discriminate and the practice appears neutral on its 
face, unless the creditor practice meets a legitimate business need 
that cannot reasonably be achieved as well by means that are less 
disparate in their impact. For example, requiring that applicants 
have incomes in excess of a certain amount to qualify for an 
overdraft line of credit could mean that women and minority 
applicants will be rejected at a higher rate than men and non-
minority applicants. If there is a demonstrable relationship between 
the income requirement and creditworthiness for the level of credit 
involved, however, use of the income standard would likely be 
permissible.
    6(b) Specific rules concerning use of information.
    Paragraph 6(b)(1)
    [1. Prohibited basis--marital status. A creditor may not use 
marital status as a basis for determining the applicant's 
creditworthiness. However, a creditor may consider an applicant's 
marital status for the purpose of ascertaining the creditor's rights 
and remedies applicable to the particular extension of credit. For 
example, in a secured transaction involving real property, a 
creditor could take into account whether state law gives the 
applicant's spouse an interest in the property being offered as 
collateral. 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.
    2] 1. Prohibited basis--special purpose 
credit. In a special purpose credit

[[Page 44623]]

program, a creditor may consider a prohibited basis to determine 
whether the applicant possesses a characteristic needed for 
eligibility. (See Sec. 202.8.)
    Paragraph 6(b)(2)
    1. Favoring the elderly. Any system of evaluating 
creditworthiness may favor a credit applicant who is age 62 or 
older. A credit program that offers more favorable credit terms to 
applicants age 62 or older is also permissible; a program that 
offers more favorable credit terms to applicants at an age lower 
than 62 is permissible only if it meets the special-purpose credit 
requirements of Sec. 202.8.
    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: applicants 
age 62 years or older must be treated at least 
as favorably as applicants who are under age 
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.
    3. Consideration of age in a judgmental system. In a judgmental 
system, defined in Sec. 202.2(t), a creditor may not 
decide whether or not to extend credit or set the terms 
and conditions of credit based on age or information related 
exclusively to age. Age or age-related information may be considered 
only in evaluating other ``pertinent elements of creditworthiness'' 
that are drawn from the particular facts and circumstances 
concerning the applicant. [take age directly into account 
in any aspect of the credit transaction.] For example, [the] 
a creditor may not reject an application or 
terminate an account because the applicant is 60 years old. But a 
creditor that uses a judgmental system may relate the applicant's 
age to other information about the applicant that the creditor 
considers in evaluating creditworthiness. [For example:] 
As the following examples illustrate, the evaluation must 
be made in an individualized, case-by-case manner:
    []i. A creditor may consider the 
applicant's occupation and length of time to retirement to ascertain 
whether the applicant's income (including retirement income) will 
support the extension of credit to its maturity.
    []ii. A creditor may consider the 
adequacy of any security offered when the term of the credit 
extension exceeds the life expectancy of the applicant and the cost 
of realizing on the collateral could exceed the applicant's equity. 
(An elderly applicant might not qualify for a 5 percent down, 30-
year mortgage loan but might qualify with a larger downpayment or a 
shorter loan maturity.)
    []iii. A creditor may consider the 
applicant's age to assess the significance of the length of the 
applicant's employment (a young applicant may have just entered the 
job market) or length of time at an address (an elderly applicant 
may recently have retired and moved from a long-term residence).
    [As the examples above illustrate, the evaluation must be made 
in an individualized, case-by-case manner; and it is impermissible 
for a creditor, in deciding whether to extend credit or in setting 
the terms and conditions, to base its decision on age or information 
related exclusively to age. Age or age-related information may be 
considered only in evaluating other ``pertinent elements of 
creditworthiness'' that are drawn from the particular facts and 
circumstances concerning the applicant.]
    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 
permissible under Sec. 202.6(b)(2)(iv). In addition, under 
Sec. 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. Consideration of age in a combined system. A creditor using a 
credit scoring system that qualifies as ``empirically derived'' 
under Sec. 202.2(p) may consider other factors (such as 
a credit report or the applicant's cash flow) 
on a judgmental basis. Doing so will not negate the classification 
of the credit scoring component of the combined system as 
``demonstrably and statistically sound.'' While age could be used in 
the credit scoring portion, however, in the judgmental portion age 
may not be considered directly. It may be used only for the purpose 
of determining a ``pertinent element of creditworthiness.'' (See 
comment 6(b)(2)-3.)
    6. Consideration of public assistance. When considering income 
derived from a public assistance program, a creditor may take into 
account, for example:
    []i. The length of time an 
applicant will likely remain eligible to receive such income.
    []ii. Whether the applicant will 
continue to qualify for benefits based on the status of the 
applicant's dependents (such as [Aid to Families with Dependent 
Children] Temporary Aid to Needy Families or 
Social Security payments to a minor).
    []iii. Whether the creditor can 
attach or garnish the income to assure payment of the debt in the 
event of default.
    Paragraph 6(b)(5)
    1. Consideration of an individual applicant. A creditor must 
evaluate income derived from part-time employment, alimony, child 
support, separate maintenance, retirement benefits, or public 
assistance [(all referred to as ``protected income'')] on an 
individual basis, not on the basis of aggregate statistics, and must 
assess its reliability or unreliability by analyzing the applicant's 
actual circumstances, not by analyzing statistical measures derived 
from a group.
    2. Payments consistently made. In determining the likelihood of 
consistent payments of alimony, child support, or separate 
maintenance, a creditor may consider factors such as whether 
payments are received pursuant to a written agreement or court 
decree; the length of time that the payments have been received; 
whether the payments are regularly received by the applicant; the 
availability of court or other procedures to compel payment; and the 
creditworthiness of the payor, including the credit history of the 
payor when it is available to the creditor.
    3. Consideration of income. i. A creditor 
need not consider income at all in evaluating creditworthiness. If a 
creditor does consider income, there are several acceptable methods, 
whether in a credit scoring or a judgmental system:
    []A. A creditor may score or take 
into account the total sum of all income stated by the applicant 
without taking steps to evaluate the income.
    []B. A creditor may evaluate each 
component of the applicant's income, and then score or take into 
account reliable income separately from income that is not reliable, 
or the creditor may disregard that portion of income that is not 
reliable before aggregating it with reliable income.
    []C. A creditor that does not 
evaluate all income components for reliability must treat as 
reliable any component of protected income that is not evaluated.
    ii. In considering the separate components 
of an applicant's income, the creditor may not automatically 
discount or exclude from consideration any protected income. Any 
discounting or exclusion must be based on the applicant's actual 
circumstances.
    4. Part-time employment, sources of income. A creditor may score 
or take into account the fact that an individual applicant has more 
than one source of earned income--a full-time and a part-time job or 
two part-time jobs. A creditor may also score or treat earned income 
from a secondary source differently than earned income from a

[[Page 44624]]

primary source. [However, the] The creditor 
, however, may not score or otherwise take 
into account the number of sources for [protected] income[--for 
example,] such as retirement income, Social 
Security, Supplemental Security Income, and 
alimony. Nor may the creditor treat negatively the fact that an 
applicant's only earned income is derived from , for 
example, a part-time job.
    Paragraph 6(b)(6)
    1. Types of credit references. 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.
    Paragraph 6(b)(7)
    1. National origin--immigration status. The applicant's 
immigration status and ties to the community (such as employment and 
continued residence in the area) could have a bearing on a 
creditor's ability to obtain repayment. Accordingly, the creditor 
may consider and differentiate, for example, between a noncitizen 
who is a long-time resident with permanent resident status and a 
noncitizen who is temporarily in this country on a student visa.
    2. National origin--citizenship. Under the 
regulation, a denial of credit on the ground 
that an applicant is not a United States citizen is not per se 
discrimination based on national origin.
    Paragraph 6(b)(8)
    1. Prohibited basis--marital status. A creditor may consider an 
applicant's or joint applicant's marital status for the purpose of 
ascertaining the creditor's rights and remedies applicable to the 
particular extension of credit. For example, in a secured 
transaction involving real property, a creditor could take into 
account whether state law gives the applicant's spouse an interest 
in the property being offered as collateral.

Section 202.7--Rules Concerning Extensions of Credit

    7(a) Individual accounts.
    1. Open-end credit--authorized user. A creditor may not require 
a creditworthy applicant seeking an individual credit account to 
provide additional signatures. However, the creditor may condition 
the designation of an authorized user by the account holder on the 
authorized user's becoming contractually liable for the account, as 
long as the creditor does not differentiate on any prohibited basis 
in imposing this requirement.
    2. Open-end credit--choice of authorized user. A creditor that 
permits an account holder to designate an authorized user may not 
restrict this designation on a prohibited basis. For example, if the 
creditor allows the designation of spouses as authorized users, the 
creditor may not refuse to accept a nonspouse as an authorized user.
    3. Overdraft authority on transaction accounts. If a transaction 
account (such as a checking account or NOW account) includes an 
overdraft line of credit, the creditor may require that all persons 
authorized to draw on the transaction account assume liability for 
any overdraft.
    7(b) Designation of name.
    1. Single name on account. A creditor may require that joint 
applicants on an account designate a single name for purposes of 
administering the account and that a single name be embossed on any 
credit card(s) issued on the account. But the creditor may not 
require that the name be the husband's name. (See Sec. 202.10 for 
rules [rule] governing the furnishing of 
credit history on accounts held by spouses.)
    7(c) Action concerning existing open-end accounts.
    Paragraph 7(c)(1)
    1. Termination coincidental with marital status change. When an 
account holder's marital status changes, a creditor generally may 
not terminate the account unless it has evidence that the account 
holder is unable or unwilling to repay. But the creditor may 
terminate an account on which both spouses are jointly liable, even 
if the action coincides with a change in marital status, when one or 
both spouses:
    []i. Repudiate responsibility for 
future charges on the joint account.
    []ii. Request separate accounts in 
their own names.
    []iii. Request that the joint 
account be closed.
    2. Updating information. A creditor may periodically request 
updated information from applicants but may not use events related 
to a prohibited basis--such as an applicant's retirement, reaching a 
particular age, or change in name or marital status--to trigger such 
a request.
    Paragraph 7(c)(2)
    1. Procedure pending reapplication. A creditor may require a 
reapplication from a contractually liable party, even when there is 
no evidence of unwillingness or inability to repay, if [(1)] the 
credit was based on the qualifications of a person who is no longer 
available to support the credit and [(2)] the creditor has 
information indicating that the account holder's income by itself 
may be insufficient to support the credit. While a reapplication is 
pending, the creditor must allow the account holder full access to 
the account under the existing contract terms. The creditor may 
specify a reasonable time period within which the account holder 
must submit the required information.
    7(d) Signature of spouse or other person.
    1. Qualified applicant. The signature rules 
ensure [assure] that qualified applicants are 
able to obtain credit in their own names. Thus, when an applicant 
requests individual credit, a creditor generally may not require the 
signature of another person unless the creditor has first determined 
that the applicant alone does not qualify for the credit requested.
    2. Unqualified applicant. When an applicant applies for 
individual credit but does not alone meet a creditor's standards, 
the creditor may require a cosigner, guarantor or the like--but 
cannot require that it be the spouse. (See commentary to 
Sec. 202.7(d)(5) and (6).)
    Paragraph 7(d)(1)
    1. Signature of another person. It is impermissible 
for a creditor to require an applicant who is individually 
creditworthy to provide a cosigner--even if the creditor applies the 
requirement without regard to sex, marital status, or any other 
prohibited basis.
    [1.] 2. Joint applicant. The term joint 
applicant refers to someone who applies contemporaneously with the 
applicant for shared or joint credit. It does not refer to someone 
whose signature is required by the creditor as a condition for 
granting the credit requested.
    3. Evidence of joint application. A creditor must 
document in some manner a person's intent to become jointly liable 
for a credit extension. For example, the creditor may provide a 
check box on an application or on a financial statement for 
indicating whether two individuals intend to apply for joint credit; 
or a place for a signature or initials for affirming their intent to 
apply for joint credit. The method provided must be distinct from 
the means used by an individual to affirm the accuracy of 
information submitted on a financial statement, for 
example.
    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

[[Page 44625]]

    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.
    2. Need for signature--reasonable belief. A creditor's 
reasonable belief as to what instruments need to be signed by a 
person other than the applicant should be supported by a thorough 
review of pertinent statutory and decisional law or an opinion of 
the state attorney general.
    Paragraph 7(d)(3)
    1. Residency. In assessing the creditworthiness of a person who 
applies for credit in a community property state, a creditor may 
assume that the applicant is a resident of the state unless the 
applicant indicates otherwise.
    Paragraph 7(d)(4)
    1. Creation of enforceable lien. Some state laws require that 
both spouses join in executing any instrument by which real property 
is encumbered. If an applicant offers such property as security for 
credit, a creditor may require the applicant's spouse to sign the 
instruments necessary to create a valid security interest in the 
property. The creditor may not require the spouse to sign the note 
evidencing the credit obligation if signing only the mortgage or 
other security agreement is sufficient to make the property 
available to satisfy the debt in the event of default. However, if 
under state law both spouses must sign the note to create an 
enforceable lien, the creditor may require them to do so.
    2. Need for signature--reasonable belief. Generally, a signature 
to make the secured property available will only be needed on a 
security agreement. A creditor's reasonable belief that, to ensure 
access to the property, the spouse's signature is needed on an 
instrument that imposes personal liability should be supported by a 
thorough review of pertinent statutory and decisional law or an 
opinion of the state attorney general.
    3. Integrated instruments. When a creditor uses an integrated 
instrument that combines the note and the security agreement, the 
spouse cannot be required to sign the integrated instrument if the 
signature is only needed to grant a security interest. But the 
spouse could be asked to sign an integrated instrument that makes 
clear--for example, by a legend placed next to the spouse's 
signature--that the spouse's signature is only to grant a security 
interest and that signing the instrument does not impose personal 
liability.
    Paragraph 7(d)(5)
    1. Qualifications of additional parties. In establishing 
guidelines for eligibility of guarantors, cosigners, or similar 
additional parties, a creditor may restrict the applicant's choice 
of additional parties but may not discriminate on the basis of sex, 
marital status or any other prohibited basis. For example, the 
creditor could require that the additional party live in the 
creditor's market area.
    2. Reliance on income of another person--individual credit. An 
applicant who requests individual credit relying on the income of 
another person (including a spouse in a non-community property 
state) may be required to provide the signature of the other person 
to make the income available to pay the debt. In community property 
states, the signature of a spouse may be required if the applicant 
relies on the spouse's separate income. If the applicant relies on 
the spouse's future earnings that as a matter of state law cannot be 
characterized as community property until earned, the creditor may 
require the spouse's signature, but need not do so--even if it is 
the creditor's practice to require the signature when an applicant 
relies on the future earnings of a person other than a spouse. (See 
Sec. 202.6(c) on consideration of state property laws.)
    3. Renewals. If the borrower's creditworthiness is reevaluated 
when a credit obligation is renewed, the creditor must determine 
whether an additional party is still warranted and, if not, release 
the additional party.
    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).
    7(e) Insurance.
    1. Differences in terms. Differences in the availability, rates, 
and other terms on which credit-related casualty insurance or credit 
life, health, accident, or disability insurance is offered or 
provided to an applicant does not violate Regulation B.
    2. Insurance information. A creditor may obtain information 
about an applicant's age, sex, or marital status for insurance 
purposes. The information may only be used, however, for determining 
eligibility and premium rates for insurance, and not in making the 
credit decision.

Section 202.8--Special Purpose Credit Programs

    8(a) Standards for programs.
    1. Determining qualified programs. The Board does not determine 
whether individual programs qualify for special purpose credit 
status, or whether a particular program benefits an ``economically 
disadvantaged class of persons.'' The agency or creditor 
administering or offering the loan program must make these decisions 
regarding the status of its program.
    2. Compliance with a program authorized by federal or state law. 
A creditor does not violate Regulation B when it complies in good 
faith with a regulation promulgated by a government agency 
implementing a special purpose credit program under 
Sec. 202.8(a)(1). It is the agency's responsibility to promulgate a 
regulation that is consistent with federal and state law.
    3. Expressly authorized. Credit programs authorized by federal 
or state law include programs offered pursuant to federal, state, or 
local statute, regulation or ordinance, or by judicial or 
administrative order.
    4. Creditor liability. A refusal to grant credit to an applicant 
is not a violation of the act or regulation if the applicant does 
not meet the eligibility requirements under a special purpose credit 
program.
    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 creditor 
might design new products to reach consumers who would not meet, or 
have not met, its traditional standards of creditworthiness due to 
such factors as credit inexperience or the use of credit sources 
that may not report to consumer reporting agencies. Or, 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.
    8(b) Rules [is] in other sections.
    1. Applicability of rules. A creditor that rejects an 
application because the applicant does not meet the eligibility 
requirements (common characteristic or financial need, for example) 
must nevertheless notify the applicant of action [taker] 
taken as required by Sec. 202.9.
    8(c) Special rule concerning requests and use of information.
    1. Request of prohibited basis 
information. This section permits a creditor to request and consider 
[certain] information such as race or national 
origin [that would otherwise be prohibited by Secs. 202.5

[[Page 44626]]

and 202.6] to determine an applicant's eligibility for a particular 
program.
    2. Examples. Examples of programs under which the creditor can 
ask for and consider [information related to] 
a prohibited basis are:
    []i. Energy conservation programs 
to assist the elderly, for which the creditor must consider the 
applicant's age.
    []ii. Programs under a Minority 
Enterprise Small Business Investment Corporation, for which a 
creditor must consider the applicant's minority status.
    8(d) Special rule in the case of financial need.
    1. Request of prohibited basis 
information. This section permits a creditor to request and consider 
[certain] information such as race or national 
origin [that would otherwise be prohibited by Secs. 202.5 
and 202.6], and to require signatures that would otherwise be 
prohibited by Sec. 202.7(d).
    2. Examples. Examples of programs in which financial need is a 
criterion are:
    [] i. Subsidized housing programs 
for low- to moderate-income households, for which a creditor may 
have to consider the applicant's receipt of alimony or child 
support, the spouse's or parents' income, etc.
    [] ii. Student loan programs based 
on the family's financial need, for which a creditor may have to 
consider the spouse's or parents' financial resources.
    3. Student loans. In a guaranteed student loan program, a 
creditor may obtain the signature of a parent as a guarantor when 
required by federal or state law or agency regulation, or when the 
student does not meet the creditor's standards of creditworthiness. 
(See Sec. 202.7(d)(1) and (5).) The creditor may not require an 
additional signature when a student has a work or credit history 
that satisfies the creditor's standards.

Section 202.9--Notifications

    1. Use of the term adverse action. The regulation does not 
require that a creditor use the term adverse 
action in communicating to an applicant that a 
request for an extension of credit has not been approved. In 
notifying an applicant of adverse action as defined by 
Sec. 202.2(c)(1), a creditor may use any words or phrases that 
describe the action taken on the application.
    2. Expressly withdrawn applications. When an applicant expressly 
withdraws a credit application, the creditor is not required to 
comply with the notification requirements under Sec. 202.9. (The 
creditor must, however, comply with the record retention 
requirements of the regulation. See Sec. 202.12(b)(3).)
    3. When notification occurs. Notification occurs when a creditor 
delivers or mails a notice to the applicant's last known address or, 
in the case of an oral notification, when the creditor communicates 
the credit decision to the applicant.
    4. Location of notice. The notifications required under 
Sec. 202.9 may appear on either or both sides of a form or letter.
    5. Prequalification requests [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)] comment 2(f)-
3. For instance, a creditor may treat the request as an 
inquiry if the creditor [provides general information such as loan 
terms and] evaluates specific information about the 
consumer and tells the consumer the maximum amount [a 
consumer] she could borrow under various loan 
programs, explaining the process [the consumer] 
she 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 the [a] request for 
prequalification, the [a] creditor tells the 
consumer that it would not approve an application for a mortgage 
because of a bankruptcy in her [the 
consumer's] record, the creditor has denied an application for 
credit.
    9(a) Notification of action taken, ECOA notice, and statement of 
specific reasons.
    Paragraph 9(a)(1)
    1. Timing of notice--when an application is complete. Once a 
creditor has obtained all the information it normally considers in 
making a credit decision, the application is complete and the 
creditor has 30 days in which to notify the applicant of the credit 
decision. (See also comment [2(f)-5] 2(f)-6.)
    2. Notification of approval. Notification of approval may be 
express or by implication. For example, the creditor will satisfy 
the notification requirement when it gives the applicant the credit 
card, money, property, or services requested.
    3. Incomplete application--denial for incompleteness. When an 
application is incomplete regarding matters that the applicant can 
complete and the creditor lacks sufficient data for a credit 
decision, the creditor may deny the application giving as the reason 
for denial that the application is incomplete. The creditor has the 
option, alternatively, of providing a notice of incompleteness under 
Sec. 202.9(c).
    4. Incomplete application--denial for reasons other than 
incompleteness. When an application is missing information but 
provides sufficient data for a credit decision, the creditor may 
evaluate the application and notify the applicant under this section 
as appropriate. If credit is denied, the applicant must be given the 
specific reasons for the credit denial (or notice of the right to 
receive the reasons); in this instance the incompleteness of the 
application cannot be given as the reason for the denial.
    5. Length of counteroffer. Section 202.9(a)(1)(iv) does not 
require a creditor to hold a counteroffer open for 90 days or any 
other particular length of time.
    6. Counteroffer combined with adverse action notice. A creditor 
that gives the applicant a combined counteroffer and adverse action 
notice that complies with Sec. 202.9(a)(2) need not send a second 
adverse action notice if the applicant does not accept the 
counteroffer. A sample of a combined notice is contained in form C-4 
of Appendix C to the regulation.
    7. Denial of a telephone application. When an application is 
conveyed by means of telephone and adverse action is taken, the 
creditor must request the applicant's name and address in order to 
provide written notification under this section. If the applicant 
declines to provide that information, then the creditor has no 
further notification responsibility.
    Paragraph 9(a)(3)
    1. Coverage. In determining the rules in this paragraph that 
apply to a given business credit application, a creditor may rely on 
the applicant's assertion about the revenue size of the business. 
(Applications to start a business are governed by the rules in 
Sec. 202.9(a)(3)(i).) If an applicant applies for credit as a sole 
proprietor, the revenues of the sole proprietorship will determine 
which rules in the paragraph govern the application. However, if an 
applicant applies for business purpose credit as an individual, the 
rules in paragraph 9(a)(3)(i) apply unless the application is for 
trade or similar credit.
    2. Trade credit. The term trade credit generally is limited to a 
financing arrangement that involves a buyer and a seller--such as a 
supplier who finances the sale of equipment, supplies, or inventory; 
it does not apply to an extension of credit by a bank or other 
financial institution for the financing of such items.
    3. Factoring. Factoring refers to a purchase of accounts 
receivable, and thus is not subject to the act or regulation. If 
there is a credit extension incident to the factoring arrangement, 
the notification rules in Sec. 202.9(a)(3)(ii) apply, as do other 
relevant sections of the Act and regulation.
    4. Manner of compliance. In complying with the notice provisions 
of the Act and regulation, creditors offering business credit may 
follow the rules governing consumer credit. Similarly, creditors may 
elect to treat all business credit the same (irrespective of revenue 
size) by providing notice in accordance with Sec. 202.9(a)(3)(i).
    5. Timing of notification. A creditor subject to 
Sec. 202.9(a)(3)(ii)(A) is required to notify a business credit 
applicant, orally or in writing, of action taken on an application 
within a reasonable time of receiving a completed application. 
Notice provided in accordance with the timing requirements of 
Sec. 202.9(a)(1) is deemed reasonable in all instances.
    9(b) Form of ECOA notice and statement of 
specific reasons.
    Paragraph 9(b)(1)
    1. Substantially similar notice. The ECOA notice sent with a 
notification of a credit denial or other adverse action will comply 
with the regulation if it is ``substantially similar'' to the notice 
contained in Sec. 202.9(b)(1). For example, a creditor may add a 
reference to the fact that the ECOA permits age to be considered in 
certain credit scoring systems, or add a reference to a similar 
state statute or regulation and to a state enforcement agency.
    Paragraph 9(b)(2)
    1. Number of specific reasons. A creditor must disclose the 
principal reasons for denying an application or taking other

[[Page 44627]]

adverse action. The regulation does not mandate that a specific 
number of reasons be disclosed, but disclosure of more than four 
reasons is not likely to be helpful to the applicant.
    2. Source of specific reasons. The specific reasons disclosed 
under Secs. 202.9(a)(2) and (b)(2) must relate to and accurately 
describe the factors actually considered or scored by a creditor.
    3. Description of reasons. A creditor need not describe how or 
why a factor adversely affected an applicant. For example, the 
notice may say ``length of residence'' rather than ``too short a 
period of residence.''
    4. Credit scoring system. If a creditor bases the denial or 
other adverse action on a credit scoring system, the reasons 
disclosed must relate only to those factors actually scored in the 
system. Moreover, no factor that was a principal reason for adverse 
action may be excluded from disclosure. The creditor must disclose 
the actual reasons for denial (for example, ``age of automobile'') 
even if the relationship of that factor to predicting 
creditworthiness may not be clear to the applicant.
    5. Credit scoring--method for selecting reasons. The regulation 
does not require that any one method be used for selecting reasons 
for a credit denial or other adverse action that is based on a 
credit scoring system. Various methods will meet the requirements of 
the regulation. One method is to identify the factors for which the 
applicant's score fell furthest below the average score for each of 
those factors achieved by applicants whose total score was at or 
slightly above the minimum passing score. Another method is to 
identify the factors for which the applicant's score fell furthest 
below the average score for each of those factors achieved by all 
applicants. These average scores could be calculated during the 
development or use of the system. Any other method that produces 
results substantially similar to either of these methods is also 
acceptable under the regulation.
    6. Judgmental system. If a creditor uses a judgmental system, 
the reasons for the denial or other adverse action must relate to 
those factors in the applicant's record actually reviewed by the 
person making the decision.
    7. Combined credit scoring and judgmental system. If a creditor 
denies an application based on a credit evaluation system that 
employs both credit scoring and judgmental components, the reasons 
for the denial must come from the component of the system that the 
applicant failed. For example, if a creditor initially credit scores 
an application and denies the credit request as a result of that 
scoring, the reasons disclosed to the applicant must relate to the 
factors scored in the system. If the application passes the credit 
scoring stage but the creditor then denies the credit request based 
on a judgmental assessment of the applicant's record, the reasons 
disclosed must relate to the factors reviewed judgmentally, even if 
the factors were also considered in the credit scoring component. 
If the application is not approved or denied as a result 
of the credit scoring, and the creditor performs a judgmental 
assessment and denies the credit after that assessment, the reasons 
disclosed must come from both components of the system. The same 
result applies where a judgmental assessment is the first component 
of the combined system. As provided in comment 9(b)(2)-1, disclosure 
of more than a combined total of four reasons is not likely to be 
helpful to the applicant.
    8. Automatic denial. Some credit decision methods contain 
features that call for automatic denial because of one or more 
negative factors in the applicant's record (such as the applicant's 
previous bad credit history with that creditor, the applicant's 
declaration of bankruptcy, or the fact that the applicant is a 
minor). When a creditor denies the credit request because of an 
automatic-denial factor, the creditor must disclose that specific 
factor.
    9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure 
of the principal reasons for denying or taking other adverse action 
on an application for an extension of credit. The Fair Credit 
Reporting Act (FCRA) requires a creditor to 
disclose when it has based its decision in whole or in part on 
information from a source other than the applicant or from its own 
files. Disclosing that a credit report was obtained and used to deny 
the application, as the FCRA requires, does not satisfy the ECOA 
requirement to disclose specific reasons. For example, if the 
applicant's credit history reveals delinquent credit obligations and 
the application is denied for that reason, to satisfy 
Sec. 202.9(b)(2) the creditor must disclose that the application was 
denied because of the applicant's delinquent 
[delinguent] credit obligations. To satisfy the FCRA requirement, 
the [credit] creditor must also disclose that 
a credit report was obtained and used to deny credit. Sample forms 
C-1 through C-5 of Appendix C of the regulation provide for the two 
disclosures.
    9(c) Incomplete applications.
    Paragraph 9(c)(2)
    1. Reapplication. If information requested by a creditor is 
submitted by an applicant after the expiration of the time period 
designated by the creditor, the creditor may require the applicant 
to make a new application.
    Paragraph 9(c)(3)
    1. Oral inquiries for additional information. If the applicant 
fails to provide the information in response to an oral request, a 
creditor must send a written notice to the applicant within the 30-
day period specified in Secs. 202.9(c)(1) and (c)(2). If the 
applicant does provide the information, the creditor shall take 
action on the application and notify the applicant in accordance 
with Sec. 202.9(a).
    9(g) Applications submitted through a third party.
    1. Third parties. The notification of adverse action may be 
given by one of the creditors to whom an application was 
submitted[.], or by a noncreditor third party. 
[Alternatively, the third party may be a noncreditor.] If 
one notification is provided on behalf of multiple creditors, the 
notice must contain the name and address of each creditor. The 
notice must either disclose the applicant's right to a statement of 
specific reasons within 30 days, or give the primary reasons each 
creditor relied upon in taking the adverse action--clearly 
indicating which reasons relate to which creditor.
    2. Third-party notice--enforcement agency. If a single adverse 
action notice is being provided to an applicant on behalf of several 
creditors and they are under the jurisdiction of different federal 
enforcement agencies, the notice need not name each agency; 
disclosure of any one of them will suffice.
    3. Third-party notice--liability. When a notice is to be 
provided through a third party, a creditor is not liable for an act 
or omission of the third party that constitutes a violation of the 
regulation if the creditor accurately and in a timely manner 
provided the third party with the information necessary for the 
notification and maintains reasonable procedures adapted to prevent 
such violations.

Section 202.10--Furnishing of Credit Information

    1. Scope. The requirements of Sec. 202.10 for designating and 
reporting credit information apply only to consumer credit 
transactions. Moreover, they apply only to creditors that opt to 
furnish credit information to credit bureaus or to other creditors; 
there is no requirement that a creditor furnish credit information 
on its accounts.
    2. Reporting on all accounts. The requirements of Sec. 202.10 
apply only to accounts held or used by spouses. However, a creditor 
has the option to designate all joint accounts (or all accounts with 
an authorized user) to reflect the participation of both parties, 
whether or not the accounts are held by persons married to each 
other.
    3. Designating accounts. In designating accounts and reporting 
credit information, a creditor need not distinguish between accounts 
on which the spouse is an authorized user and accounts on which the 
spouse is a contractually liable party.
    4. File and index systems. The regulation does not require the 
creation or maintenance of separate files in the name of each 
participant on a joint or user account, or require any other 
particular system of recordkeeping or indexing. It requires only 
that a creditor be able to report information in the name of each 
spouse on accounts covered by Sec. 202.10. Thus, if a creditor 
receives a credit inquiry about the wife, it should be able to 
locate her credit file without asking the husband's name.
    10(a) Designation of accounts.
    1. New parties. When new parties who are spouses undertake a 
legal obligation on an account, as in the case of a mortgage loan 
assumption, the creditor should change the designation on the 
account to reflect the new parties and should furnish subsequent 
credit information on the account in the new names.
    2. Request to change designation of account. A request to change 
the manner in which information concerning an account is furnished 
does not alter the legal liability of either spouse upon the account 
and does not require a creditor to change the name in which the 
account is maintained.

Section 202.11--Relation to State Law

    11(a) Inconsistent state laws.

[[Page 44628]]

    1. Preemption determination--New York. Effective November 11, 
1988, the Board has determined that the following provisions in the 
state law of New York are preempted by the federal law:
    [] i. Article 15, section 
296a(1)(b)--Unlawful discriminatory practices in relation to credit 
on the basis of race, creed, color, national origin, age, sex, 
marital status, or disability. This provision is preempted to the 
extent that it bars taking a prohibited basis into account when 
establishing eligibility for certain special-purpose credit 
programs.
    [] ii. Article 15, section 
296a(1)(c)--Unlawful discriminatory practice to make any record or 
inquiry based on race, creed, color, national origin, age, sex, 
marital status, or disability. This provision is preempted to the 
extent that it bars a creditor from requesting and considering 
information regarding the particular characteristics (for example, 
race, national origin, or sex) required for eligibility for special-
purpose credit programs.
    2. Preemption determination--Ohio. Effective July 23, 1990, the 
Board has determined that the following provision in the state law 
of Ohio is preempted by the federal law:
    [] i. Section 4112.021(B)(1)--
Unlawful discriminatory practices in credit transactions. This 
provision is preempted to the extent that it bars asking or 
favorably considering the age of an elderly applicant; prohibits the 
consideration of age in a credit scoring system; permits without 
limitation the consideration of age in real estate transactions; and 
limits the consideration of age in special-purpose credit programs 
to certain government-sponsored programs identified in the state 
law.

Section 202.12--Record Retention

    12(a) Retention of prohibited information.
    1. Receipt of prohibited information. Unless the creditor 
specifically requested such information, a creditor does not violate 
this section when it receives prohibited information from a consumer 
reporting agency.
    2. Use of retained information. Although a creditor may keep in 
its files prohibited information as provided in Sec. 202.12(a), the 
creditor may use the information in evaluating credit applications 
only if permitted to do so by Sec. 202.6.
    12(b) Preservation of records.
    1. Copies. A copy of the original record includes carbon copies, 
photocopies, microfilm or microfiche copies, or copies produced by 
any other accurate retrieval system, such as documents stored and 
reproduced by computer. A creditor that uses a computerized or 
mechanized system need not keep a written copy of a document (for 
example, an adverse action notice) if it can regenerate all 
pertinent information in a timely manner for examination or other 
purposes.
    2. Computerized decisions. A creditor that enters information 
items from a written application into a computerized or mechanized 
system and makes the credit decision mechanically, based only on the 
items of information entered into the system, may comply with 
Sec. 202.12(b) by retaining the information actually entered. It is 
not required to store the complete written application, nor is it 
required to enter the remaining items of information into the 
system. If the transaction is subject to Sec. 202.13, however, the 
creditor is required to enter and retain the data on personal 
characteristics in order to comply with the requirements of that 
section.
    Paragraph 12(b)(3)
    1. Withdrawn and brokered applications. In most cases, the 25-
month retention period for applications runs from the date a 
notification is sent to the applicant granting or denying the credit 
requested. In certain transactions, a creditor is not obligated to 
provide a notice of the action taken. (See, for example, comment 9-
2.) In such cases, the 25-month requirement runs from the date of 
application, as when:
    []i. An application is withdrawn 
by the applicant.
    []ii. An application is submitted 
to more than one creditor on behalf of the applicant, and the 
application is approved by one of the other creditors.
    12(b)(6) Self-tests
    1. The rule requires all written or recorded information about a 
self-test to be retained for 25 months after a self-test has been 
completed. For this purpose, a self-test is completed after the 
creditor has obtained the results and made a determination about 
what corrective action, if any, is appropriate. Creditors are 
required to retain information about the scope of the self-test, the 
methodology used and time period covered by the self-test, the 
report or results of the self-test including any analysis or 
conclusions, and any corrective action taken in response to the 
self-test.
    12(b)(7) Preapplication marketing information.
    1. Preapproved credit solicitations. The rule requires creditors 
to retain copies of preapproved credit solicitations. For purposes 
of this regulation, a preapproved credit solicitation is an ``offer 
of credit'' as described in 15 U.S.C. 1681a(l) of the Fair Credit 
Reporting Act. A creditor complies with this rule if it retains a 
copy of each solicitation mailing that contains different terms, 
such as the amount of credit offered, annual percentage rate, annual 
fee, etc.
    2. List of criteria. A creditor must retain the list of criteria 
used to select potential recipients. This includes the criteria used 
by the creditor both to determine the potential recipients of the 
particular solicitation, as identified by the consumer reporting 
agency, and to determine who will actually be offered credit.
    3. Marketing plan. The marketing plan to which the solicitation 
relates refers to any written plan, including any response model, 
that describes the creditor's goals pertaining to the particular 
solicitation. Thus, if a creditor sends preapproved credit 
solicitations to women business owners as part of its goal to 
increase lending to those persons, the creditor complies with [this 
rule]Sec. 202.12(b)(7) by retaining that part 
of the plan designed to accomplish this goal.

Section 202.13--Information for Monitoring 
Purposes [purposes]

    13(a) Information to be requested.
    1. Natural person. Section 202.13 applies only to applications 
from natural persons.
    2. Principal residence. The requirements of Sec. 202.13 apply 
only if an application relates to a dwelling that is or will be 
occupied by the applicant as the principal residence. A credit 
application related to a vacation home or a rental unit is not 
covered. In the case of a two- to four-unit dwelling, the 
application is covered if the applicant intends to occupy one of the 
units as a principal residence.
    3. Temporary financing. An application for temporary financing 
to construct a dwelling is not subject to Sec. 202.13. But an 
application for both a temporary loan to finance construction of a 
dwelling and a permanent mortgage loan to take effect upon the 
completion of construction is subject to Sec. 202.13.
    4. New principal residence. A person can have only one principal 
residence at a time. However, if a person buys or builds a new 
dwelling that will become that person's principal residence within a 
year or upon completion of construction, the new dwelling is 
considered the principal residence for purposes of Sec. 202.13.
    5. Transactions not covered. The information-collection 
requirements of this section apply to applications for credit 
primarily for the purchase or refinancing of a dwelling that is or 
will become the applicant's principal residence. Therefore, 
applications for credit secured by the applicant's principal 
residence but made primarily for a purpose other than the purchase 
or refinancing of the principal residence (such as loans for home 
improvement and debt consolidation) are not subject to 
the information-collection requirements. An 
application for an open-end home equity line of credit is not 
subject to this section unless it is readily apparent to the 
creditor when the application is taken that the primary purpose of 
the line is for the purchase or refinancing of a principal dwelling.
    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.
    [7. Data collection under Regulation C. See comment 5(b)(2)-2.]
    13(b) Obtaining of information.
    1. Forms for collecting data. A creditor may collect the 
information specified in Sec. 202.13(a) either on an application 
form or on a separate form referring to the application.
    2. Written applications. The regulation requires written 
applications for the types of credit covered by Sec. 202.13. A 
creditor can satisfy this requirement by recording in writing or by 
means of computer the information that the applicant provides orally 
and that the creditor normally considers in a credit decision.

[[Page 44629]]

    3. Telephone, mail applications. i. If an 
applicant does not apply in person for the credit requested, a 
creditor does not have to complete the monitoring information. For 
example:
    [] A.When a creditor accepts an 
application by telephone, it does not have to request the monitoring 
information.
    [] B.When a creditor accepts an 
application by mail, it does not have to make a special request to 
the applicant if the applicant fails to complete the monitoring 
information on the application form sent to the creditor.
    ii.If it is not evident on the face of the 
application that it was received by mail or telephone, the creditor 
should indicate on the form or other application record how the 
application was received.
    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] treats 
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.
    6. Applications through loan-shopping services. When a creditor 
receives an application through an unaffiliated loan-shopping 
service, it does not have to request the monitoring information for 
purposes of the ECOA or Regulation B. Creditors subject to the Home 
Mortgage Disclosure Act should be aware, however, that data 
collection may be called for under Regulation C (12 CFR 
part 203) which generally requires creditors to report, 
among other things, the sex and race or national origin of an 
applicant on brokered applications or applications received through 
a correspondent.
    [7. Inadvertent notation. If a creditor inadvertently obtains 
the monitoring information in a dwelling-related transaction not 
covered by Sec. 202.13, the creditor may process and retain the 
application without violating the regulation.]
    13(c) Disclosure to applicant(s).
    1. Procedures for providing disclosures. The disclosures to an 
applicant regarding the monitoring information may be provided in 
writing. Appendix B contains a sample disclosure. A creditor may 
devise its own disclosure so long as it is substantially similar. 
The creditor need not orally request the applicant to provide the 
monitoring information if it is requested in writing.
    13(d) Substitute monitoring program.
    1. Substitute program. An enforcement agency may adopt, under 
its established rulemaking or enforcement procedures, a program 
requiring creditors under its jurisdiction to collect information in 
addition to that required by this section.

Section 202.14--Enforcement, Penalties, and 
Liabilities [penalties, and liabilities]

    14(c) Failure of compliance.
    1. Inadvertent errors. Inadvertent errors include, but are not 
limited to, clerical mistake, calculation error, computer 
malfunction, and printing error. An error of legal judgment is not 
an inadvertent error under the regulation.
    2. Correction of error. For inadvertent errors that occur under 
Secs. 202.12 and 202.13, this section requires that they be 
corrected prospectively only.

Section 202.15--Incentives for Self-testing and Self-correction

    [15(a) General Rules] 15(a) General rules
    [15(a)(1) Voluntary Self-Testing and Correction] 
15(a)(1) Voluntary self-testing and correction
    1. Activities required by any governmental authority are not 
voluntary self-tests. A governmental authority includes both 
administrative and judicial authorities for federal, state, and 
local governments. [15(a)(2) Corrective Action Required 
15(a)(2) Corrective action required
    1. To qualify for the privilege, appropriate corrective action 
is required when the results of a self-test show that it is more 
likely than not that there has been a violation of the ECOA or this 
regulation. A self-test is also privileged when it identifies no 
violations.
    2. In some cases, the issue of whether certain information is 
privileged may arise before the self-test is complete or corrective 
actions are fully under way. This would not necessarily prevent a 
creditor from asserting the privilege. In situations where the self-
test is not complete, for the privilege to apply the lender must 
satisfy the regulation's requirements within a reasonable period of 
time. To assert the privilege where the self-test shows a likely 
violation, the rule requires, at a minimum, that the creditor 
establish a plan for corrective action and a method to demonstrate 
progress in implementing the plan. Creditors must take appropriate 
corrective action on a timely basis after the results of the self-
test are known.
    3. A creditor's determination about the type of corrective 
action needed, or a finding that no corrective action is required, 
is not conclusive in determining whether the requirements of this 
paragraph have been satisfied. If a creditor's claim of privilege is 
challenged, an assessment of the need for corrective action or the 
type of corrective action that is appropriate must be based on a 
review of the self-testing results, which may require an in camera 
inspection of the privileged documents.
    [15(a)(3) Other privileges] 15(a)(3) Other 
privileges
    1. A creditor may assert the privilege established under this 
section in addition to asserting any other privilege that may apply, 
such as the attorney-client privilege or the work-
product privilege. Self-testing data may still be 
privileged under this section, whether or not the creditor's 
assertion of another privilege is upheld.
    [15(b) Self-test Defined] 15(b) Self-test 
defined
    [15(b)(1) Definition] 15(b)(1) Definition
    [Paragraph 15(b)(1)(i) Paragraph 
15(b)(1)(i)
    1. To qualify for the privilege, a self-test must be sufficient 
to constitute a determination of the extent or effectiveness of the 
creditor's compliance with the Act and Regulation B. Accordingly, a 
self-test is only privileged if it was designed and used for that 
purpose. A self-test that is designed or used to determine 
compliance with other laws or regulations or for other purposes is 
not privileged under this rule. For example, a self-test designed to 
evaluate employee efficiency or customers' satisfaction with the 
level of service provided by the creditor is not privileged even if 
evidence of discrimination is uncovered incidentally. If a self-test 
is designed for multiple purposes, only the portion designed to 
determine compliance with the ECOA is eligible for the privilege.
    [Paragraph 15(b)(1)(ii)] Paragraph 
15(b)(1)(ii)
    1. The principal attribute of self-testing is that it 
constitutes a voluntary undertaking by the creditor to produce new 
data or factual information that otherwise would not be available 
and could not be derived from loan or application files or other 
records related to credit transactions. Self-testing includes, but 
is not limited to, the practice of using fictitious applicants for 
credit (testers), either with or without the use of matched pairs. A 
creditor may elect to test a defined segment of its business, for 
example, loan applications processed by a specific branch or loan 
officer, or applications made for a particular type of credit or 
loan program. A creditor also may use other methods of generating 
information that is not available in loan and application files, 
such as surveying mortgage loan applicants. To the extent permitted 
by law, creditors might also develop new methods that go beyond 
traditional pre-application testing, such as hiring testers to 
submit fictitious loan applications for processing.
    2. The privilege does not protect a creditor's analysis 
performed as part of processing or underwriting a credit 
application. A creditor's evaluation or analysis of its loan files, 
Home Mortgage Disclosure Act data, or similar types of records (such 
as broker or loan officer compensation records) does not produce new 
information about a creditor's compliance and is not a self-test for 
purposes of this section. Similarly, a statistical analysis of data 
derived from existing loan files is not privileged.
    [15(b)(3) Types of Information Not Privileged] 
15(b)(3) Types of information not privileged
    [Paragraph 15(b)(3)(i)] Paragraph 
15(b)(3)(i)
    1. The information listed in this paragraph is not privileged 
and may be used to determine whether the prerequisites for the 
privilege have been satisfied. Accordingly, a creditor might be 
asked to identify the self-testing method, for example, whether pre-
application testers were used or data were compiled by surveying 
loan applicants. Information about the scope of the self-test (such 
as the types of credit transactions examined, or the geographic area 
covered by the test) also is not privileged.
    [Paragraph 15(b)(3)(ii)] Paragraph 
15(b)(3)(ii)

[[Page 44630]]

    1. Property appraisal reports, minutes of loan committee 
meetings or other documents reflecting the basis for a decision to 
approve or deny an application, loan policies or procedures, 
underwriting standards, and broker compensation records are examples 
of the types of records that are not privileged. If a creditor 
arranges for testers to submit loan applications for processing, the 
records are not related to actual credit transactions for purposes 
of this paragraph and may be privileged self-testing records.
    2. Information noted by a creditor in the credit 
application process about an applicant's age, race, color, religion, 
national origin, or sex is not privileged.
    [15(c) Appropriate Corrective Action] 15(c) 
Appropriate corrective action
    1. The rule only addresses what corrective actions are required 
for a creditor to take advantage of the privilege in this section. A 
creditor may still be required to take other actions or provide 
additional relief if a formal finding of discrimination is made.
    [15(c)(1) General Requirement 15(c)(1) 
General requirement
    1. Appropriate corrective action is required even though no 
violation has been formally adjudicated or admitted by the creditor. 
In determining whether it is more likely than not that a violation 
occurred, a creditor must treat testers as if they are actual 
applicants for credit. A creditor may not refuse to take appropriate 
corrective action under this section because the self-test used 
fictitious loan applicants. The fact that a tester's agreement with 
the creditor waives the tester's legal right to assert a violation 
does not eliminate the requirement for the creditor to take 
corrective action, although no remedial relief for the tester is 
required under paragraph 15(c)(3).
    [15(c)(2) Determining the Scope of Appropriate Corrective 
Action] 15(c)(2) Determining the scope of appropriate 
corrective action
    1. Whether a creditor has taken or is taking corrective action 
that is appropriate will be determined on a case-by-case basis. 
Generally, the scope of the corrective action that is needed to 
preserve the privilege is governed by the scope of the self-test. 
For example, a creditor that self-tests mortgage loans and discovers 
evidence of discrimination may focus its corrective actions on 
mortgage loans, and is not required to expand its testing to other 
types of loans.
    2. In identifying the policies or practices that are the likely 
cause of the violation, a creditor might identify inadequate or 
improper lending policies, failure to implement established 
policies, employee conduct, or other causes. The extent and scope of 
a likely violation may be assessed by determining which areas of 
operations are likely to be affected by those policies and 
practices, for example, by determining the types of loans and stages 
of the application process involved and the branches or offices 
where the violations may have occurred.
    3. Depending on the method and scope of the self-test and the 
results of the test, appropriate corrective action may include one 
or more of the following:
    i. If the self-test identifies individuals whose applications 
were inappropriately processed, offering to extend credit if the 
application was improperly denied and compensating such persons for 
out-of-pocket costs and other compensatory damages;
    ii. Correcting institutional policies or procedures that may 
have contributed to the likely violation, and adopting new policies 
as appropriate;
    iii. Identifying and then training and/or disciplining the 
employees involved;
    iv. Developing outreach programs, marketing strategies, or loan 
products to serve more effectively segments of the lender's markets 
that may have been affected by the likely discrimination; and
    v. Improving audit and oversight systems to avoid a recurrence 
of the likely violations.
    [15(c)(3) Types of Relief] 15(c)(3) Types of 
relief
    [Paragraph 15(c)(3)(ii)] Paragraph 
15(c)(3)(ii)
    1. The use of pre-application testers to identify policies and 
practices that illegally discriminate does not require creditors to 
review existing loan files for the purpose of identifying and 
compensating applicants who might have been adversely affected.
    2. If a self-test identifies a specific applicant that was 
subject to discrimination on a prohibited basis, in order to qualify 
for the privilege in this section the creditor must provide 
appropriate remedial relief to that applicant; the creditor would 
not be required under this paragraph to identify other applicants 
who might also have been adversely affected.
    [Paragraph 15(c)(3)(iii)] Paragraph 
15(c)(3)(iii)
    1. A creditor is not required to provide remedial relief to an 
applicant that would not be available by law. An applicant might 
also be ineligible from obtaining certain types of relief due to 
changed circumstances. For example, a creditor is not required to 
offer credit to a denied applicant if the applicant no longer 
qualifies for the credit due to a change in financial circumstances, 
although some other type of relief might be appropriate.
    [15(d)(1) Scope of Privilege] 15(d)(1) Scope of 
privilege
    1. The privilege applies with respect to any examination, 
investigation or proceeding by federal, state, or local government 
agencies relating to compliance with the Act or this regulation. 
Accordingly, in a case brought under the ECOA, the privilege 
established under this section preempts any inconsistent laws or 
court rules to the extent they might require disclosure of 
privileged self-testing data. The privilege does not apply in other 
cases, for example, litigation filed solely under a state's fair 
lending statute. In such cases, if a court orders a creditor to 
disclose self-test results, the disclosure is not a voluntary 
disclosure or waiver of the privilege for purposes of paragraph 
15(d)(2); creditors may protect the information by seeking a 
protective order to limit availability and use of the self-testing 
data and prevent dissemination beyond what is necessary in that 
case. Paragraph 15(d)(1) precludes a party who has obtained 
privileged information from using it in a case brought under the 
ECOA, provided the creditor has not lost the privilege through 
voluntary disclosure under paragraph 15(d)(2).
    [15(d)(2) Loss of Privilege] 15(d)(2) Loss of 
privilege
    [Paragraph 15(d)(2)(i)] Paragraph 
15(d)(2)(i)
    1. Corrective action taken by a creditor, by itself, is not 
considered a voluntary disclosure of the self-test report or 
results. For example, a creditor does not disclose the results of a 
self-test merely by offering to extend credit to a denied applicant 
or by inviting the applicant to reapply for credit. Voluntary 
disclosure could occur under this paragraph, however, if the 
creditor disclosed the self-test results in connection with a new 
offer of credit.
    2. Disclosure of self-testing results to an independent 
contractor acting as an auditor or consultant for the creditor on 
compliance matters does not result in loss of the privilege.
    [Paragraph 15(d)(2)(ii)] Paragraph 
15(d)(2)(ii)
    1. The privilege is lost if the creditor discloses privileged 
information, such as the results of the self-test. The privilege is 
not lost if the creditor merely reveals or refers to the existence 
of the self-test.
    [Paragraph 15(d)(2)(iii)] Paragraph 
15(d)(2)(iii)
    1. A creditor's claim of privilege may be challenged in a court 
or administrative law proceeding with appropriate jurisdiction. In 
resolving the issue, the presiding officer may require the creditor 
to produce privileged information about the self-test.
    [Paragraph 15(d)(3) Limited use of Privileged Information] 
Paragraph 15(d)(3) Limited use of privileged 
information
    1. A creditor may be required to produce privileged documents 
for the purpose of determining a penalty or remedy after a violation 
of the ECOA or Regulation B has been formally adjudicated or 
admitted. A creditor's compliance with this requirement does not 
evidence the creditor's intent to forfeit the privilege.

Appendix B--Model Application Forms

    1. FHLMC/FNMA form--residential loan application. The uniform 
residential loan application form (FHLMC 65/FNMA 1003), including 
supplemental form (FHLMC 65A/FNMA 1003A), prepared by the Federal 
Home Loan Mortgage Corporation and the Federal National Mortgage 
Association and dated [May 1991] October 1992 
may be used by creditors without violating this regulation even 
though the form's listing of race or national origin categories in 
the ``Information for Government Monitoring Purpose'' section 
differs from the classifications currently specified in 
Sec. 202.13(a)(1). The classifications used on the FNMA-FHLMC form 
are those required by the U.S. Office of Management and Budget for 
notation of race and ethnicity by federal programs in their 
administrative reporting and statistical activities. [Creditors that 
are governed by the monitoring requirements of Regulation B (which 
limits collection to applications primarily for the purchase or 
refinancing of the applicant's principal residence) should delete, 
strike, or modify the data-collection section on the form when using 
it for transactions not covered by Sec. 202.13(a) to ensure that 
they do not collect

[[Page 44631]]

the information.] Creditors that are subject to more extensive 
collection requirements by a substitute monitoring program under 
Sec. 202.13(d) or by the Home Mortgage Disclosure Act (HMDA) may use 
the form as issued, in compliance with the substitute program or 
HMDA.
    2. FHLMC/FNMA form--home-improvement loan application. The home-
improvement and energy loan application form (FHLMC 703/FNMA 1012), 
prepared by the Federal Home Loan Mortgage Corporation and the 
Federal National Mortgage Association and dated October 1986, 
complies with the requirements of the regulation for some creditors 
but not others because of the form's section ``Information for 
Government Monitoring Purposes.'' [Creditors that are governed by 
Sec. 202.13(a) of the regulation (which limits collection to 
applications primarily for the purchase or refinancing of the 
applicant's principal residence) should delete, strike, or modify 
the data-collection section on the form when using it for 
transactions not covered by Sec. 202.13(a) to assure that they do 
not collect the information.] Creditors that are subject to more 
extensive collection requirements by a substitute monitoring program 
under Sec. 202.13(d) may use the form as issued, in compliance with 
that substitute program.

Appendix C--Sample Notification Forms

    1. 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, August 5, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-20598 Filed 8-13-99; 8:45 am]
BILLING CODE 6210-01-P