[Federal Register Volume 68, Number 52 (Tuesday, March 18, 2003)]
[Rules and Regulations]
[Pages 13144-13198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-5666]



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Part III





Federal Reserve System





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12 CFR Part 202



Equal Credit Opportunity; Final Rule

  Federal Register / Vol. 68, No. 52 / Tuesday, March 18, 2003 / Rules 
and Regulations  

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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: Final rule.

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SUMMARY: The Board is publishing a final rule amending Regulation B, 
pursuant to the Board's policy of periodically reviewing and updating 
its regulations. Regulation B implements the Equal Credit Opportunity 
Act. Among other things, the final rule retains the general prohibition 
against inquiring about, or noting, applicant characteristics for 
nonmortgage credit transactions, and creates an exception when such 
data are collected for the purpose of conducting a self-test. The final 
rule also requires creditors to retain certain records related to 
prescreened solicitations for 25 months, to enable Federal financial 
enforcement agencies to assess whether or how national origin, race, 
age, or other prohibited bases of discrimination under the ECOA are 
taken into account in prescreened solicitations. The official staff 
commentary has also been amended; consideration of several previously 
proposed amendments has been deferred to allow for supplemental 
comment.

DATES: Effective April 15, 2003; however, to allow time for any 
necessary operational changes, the mandatory compliance date is April 
15, 2004.

FOR FURTHER INFORMATION CONTACT: John C. Wood, Counsel; Kathleen C. 
Ryan or David A. Stein, Senior Attorneys; or Minh-Duc T. Le, Attorney; 
Division of Consumer and Community Affairs, Board of Governors of the 
Federal Reserve System, at (202) 452-3667 or 452-2412; for users of 
Telecommunications Device for the Deaf (``TDD'') only, contact (202) 
263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

    The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691-1691f, 
makes it unlawful for a creditor to discriminate against an applicant 
in any aspect of a credit transaction on the basis of the applicant's 
national origin, marital status, religion, sex, color, race, 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. In addition to 
a general prohibition against discrimination, the regulation contains 
specific rules concerning: the taking and evaluation of credit 
applications, how credit history information is reported on accounts 
used by spouses, procedures and notices for credit denials and other 
adverse action, and limitations on requiring signatures of persons 
other than the applicant on credit documents. The regulation also 
excepts certain types of credit (such as securities credit) from some 
requirements, and provides model forms for optional use by creditors.
    When enacted in 1974, the ECOA prohibited discrimination on the 
basis of marital status and sex. In 1976, the Act was amended to 
designate other prohibited bases of discrimination, including race and 
national origin. Over the years, several significant amendments have 
been made. In 1989, the ECOA was amended by the Women's Business 
Ownership Act of 1988 (Pub. L. 100-533, 102 Stat. 2692) to require that 
creditors give business applicants notice 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 the 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 established referral 
responsibilities on the part of the Federal financial supervisory 
agencies (for referrals to the Department of Justice and the Department 
of Housing and Urban Development) for certain violations of the ECOA. 
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 
(Pub. L. 104-208, 110 Stat. 3009) amended the ECOA to create a 
privilege against disclosure for information developed by creditors as 
a result of ``self-tests'' they conduct.

II. 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 began a review of Regulation B in March 1998. (The Board's 
previous comprehensive review of Regulation B was completed in 1985.) 
An Advance Notice of Proposed Rulemaking (Advance Notice) was published 
to solicit general comment on revisions to the regulation, and also 
identified specific issues for comment (63 FR 12326, March 12, 1998). 
The Board received 330 comment letters on the Advance Notice. Most 
commenters addressed only the issues identified in the Advance Notice.
    In August 1999, the Board issued a proposed rule (64 FR 44581, 
August 16, 1999). The major proposed revisions included the following: 
Removing the general prohibition against creditors' noting or inquiring 
about applicant characteristics such as race, national origin, and sex 
for nonmortgage credit; requiring creditors to retain certain records 
for prescreened credit solicitations; and expanding from 12 to 25 
months the record retention period for most business credit 
applications.
    For public utilities, securities, and business credit, credit 
extended to governments, and incidental credit (for example, credit 
extended by a physician), Regulation B provides exceptions from certain 
of the notice, record retention, and other requirements. The Board 
proposed to retain the general categories of exceptions with some 
modifications. Other proposed revisions to the regulation (and to the 
official staff commentary) involved the definition of an 
``application'' (including guidance on the distinction between an 
inquiry about credit and an application for credit); the definition of 
``creditor''; the term ``adverse action''; the credit evaluation of 
married and unmarried applicants; and what constitutes evidence of a 
joint application for credit.
    In addition to comments on the proposed revisions, the Board 
requested specific suggestions for other revisions that would 
facilitate compliance with, or improve, the regulation. Approximately 
750 comments were received on the proposed rulemaking, and are 
discussed below under the relevant sections. Industry commenters 
opposed most of the major proposed revisions to the regulation, but 
provided suggestions for additional revisions to help facilitate 
compliance with the regulation, such as providing additional reasons, 
or clarifying existing reasons, for adverse action on the model forms. 
Most of the comments addressed the proposal to remove the prohibition 
on data notation, expressing views both for and against.

III. Summary of Revisions to the Regulation

    Major revisions adopted by the Board include rules that adjust the 
limited

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exceptions for public utilities credit (Sec.  202.3(a)); create an 
exception to the general prohibition against inquiring about, or 
noting, applicant characteristics for nonmortgage credit transactions 
for the purpose of conducting a self-test (Sec.  202.5(b)(1)); and 
require record retention for prescreened credit solicitations (Sec.  
202.12(b)(7)). Other amendments clarify the definitions of ``adverse 
action'' (Sec.  202.2(c)) and ``creditor'' (Sec.  202.2(l)); the rules 
for evaluating married and unmarried credit applicants (Sec.  
202.6(b)(8)); and certain rules about obtaining signatures of 
nonapplicants (Sec.  202.7(d)(1)).

IV. Section-by-Section Analysis

    The following discussion addresses the regulatory revisions 
section-by-section. Technical and non-substantive revisions generally 
are not separately discussed. Revisions to the official staff 
commentary are addressed in parts V and VI.

Section 202.1--Authority, scope and purpose

    There are no revisions to this section.

Section 202.2--Definitions

    Sections 202.2(c)(1) and (2), and 202.2(l) have been revised. 
Proposed revisions to Sec.  202.2(f) were not adopted.
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 substantial portion of a class of the creditor's 
accounts.'' Under the proposal, ``substantial portion'' was changed to 
``substantially all'' to clarify 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. This revision 
emphasized that the exception applies only when the creditor's action 
is not based on the individual credit characteristics of the affected 
accountholders. For example, the exception would apply where a creditor 
terminates all secured credit accounts because it no longer offers that 
type of credit. The exception would not apply if the creditor 
terminated only those secured credit accounts that could not be moved 
into another card program after an evaluation of the individual credit 
characteristics of the accountholders.
    Industry commenters expressed concern that the proposal would 
significantly narrow the application of the exception. Some of these 
commenters noted that adverse action notices would serve no useful 
purpose in the circumstances outside the narrower exception. On the 
other hand, community groups urged the Board to revise the exception so 
that it would apply only if all accounts in a class were adversely 
affected.
    The revision has been adopted by the Board as proposed. The ECOA 
and Regulation B require creditors to give consumers reasons for an 
adverse credit decision. This notice requirement enables some 
recipients to identify and remedy errors in credit reports and credit 
problems generally, and may also help in the detection of unlawful 
credit discrimination. The exception in Sec.  202.2(c)(1)(ii) is 
intended to address the limited circumstance where an adverse action 
notice will not likely serve the intended informational or 
antidiscrimination goals. The Board expects to request supplemental 
comment on guidance for defining a ``class of accounts.''
2(c)(2)
    Section 202.2(c)(2)(iii) has been revised to conform to changes in 
Sec.  202.2(c)(1)(ii).
2(f) Application
    The Board proposed to revise Sec.  202.2(f) to include in the 
definition of application 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. In the 
final rule, the proposed language on preapprovals is not included in 
the regulation's definition of application, but is instead contained in 
the official staff commentary, which clarifies that certain 
preapprovals are covered by the definition of application. (See comment 
2(f)-5 and the supplementary information thereto.) A technical change 
in the definition (replacing ``established'' with ``used'') has been 
made for clarity.
2(l) Creditor
    Section 202.2(l) has been adopted substantially as proposed. The 
final rule changes the words ``regularly participates in the decision 
of whether or not to extend credit'' to ``regularly participates in a 
credit decision, including setting the terms of the credit'' to clarify 
the definition of ``creditor.''
    Some commenters agreed with the proposed clarification, noting that 
it makes the rules parallel for insured depository institutions and 
private-sector loan intermediaries. A few commenters disagreed with the 
proposal, believing the scope of the definition was unclear. Other 
commenters asked that the Board clarify that a potential assignee that 
establishes terms of general applicability for credit extensions that 
it may acquire, but does not otherwise participate in setting the terms 
of individual loans, is not a creditor for purposes of the regulation. 
The final rule clarifies that the definition of creditor includes those 
who make the decision to deny or extend credit, as well as those who 
negotiate and set the terms of the credit with the consumer. But a 
potential assignee who establishes underwriting guidelines for its 
purchases but does not influence individual credit decisions is not a 
creditor. (See comment 2(l)-1).

Section 202.3--Limited Exceptions for Certain Classes of Transactions

    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 against 
discrimination on a prohibited basis. The exceptions generally address 
issues such as record retention, furnishing credit information, and 
inquiries about marital status and spousal information.
    Revisions were proposed to the exceptions for public utilities, 
securities, and incidental credit. Based on comments and further 
analysis, the Board believes that providing certain 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 currently subject to all of the 
regulatory requirements except those relating to furnishing credit 
information to consumer reporting agencies, collecting information 
about marital status, and retaining records. Under the proposed rule, 
only the exception for record retention would have been retained. The 
final rule has been modified. As discussed below, public utilities 
credit

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is now subject to all of the regulatory requirements except those 
relating to record retention and marital status information.
    Commenters generally supported the proposal to remove the exception 
relating to the furnishing of credit information under Sec.  202.10 
(concerning accounts held or used by spouses). A number of commenters 
believed that removing the exception would help spouses build credit 
histories. A few commenters mistakenly thought the proposal required 
public utility companies that do not currently report payment history 
information to start reporting such information. 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. Because some creditors now 
consider public utility payments as a source of repayment history for 
underwriting purposes, eliminating the exception from Sec.  202.10 
seems necessary to facilitate the availability of this information to 
such other creditors.
    Upon further analysis, the Board has retained the marital status 
exception. Although some public utilities do not currently collect 
marital status information, or are prohibited by state law from doing 
so, others may collect such information. Permitting utility firms to 
collect such information is consistent with eliminating the exception 
for furnishing credit information--those creditors that collect marital 
status information and report to credit bureaus will be able to reflect 
the participation of both spouses on the account.
    The final rule retains the exception for 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. Extending this exception is appropriate because 
requiring record retention pursuant to Regulation B 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 section 7 of the Securities 
Exchange Act of 1934, regulations under that act, and rules of the 
self-regulatory organizations. 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, rules governing 
signature requirements, record retention, and asking about the sex of 
an applicant.
    Because securities credit is subject to an extensive regulatory 
scheme, the Board proposed to retain the limited exceptions for such 
credit, with one exception--information about the sex of an applicant. 
The proposal to eliminate the exception was for consistency with the 
Board's proposal under Sec.  202.5 to remove the general prohibition 
against the collection of applicant characteristics for nonmortgage 
credit. Since the Board has retained the general prohibition, there is 
a continued need for an exception regarding the sex of an applicant. 
Technical revisions have been 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 by a local merchant that does not normally 
extend credit, for example, to a long-standing customer; or by a doctor 
or lawyer, as an accommodation to a patient or a client.
    The proposed rule would have expanded the definition of incidental 
credit to include incidental business credit. While some commenters 
supported the expansion, other commenters opposed it because of 
concerns about discrimination against minority-owned businesses. Upon 
further analysis, based on commenters' concerns about possible 
discrimination, the Board has retained the current definition of 
incidental credit.
3(c)(2) Exceptions
    Incidental credit is excepted from a number of provisions in the 
regulation including those that govern requests for information about 
an applicant's marital status, an applicant's spouse or former spouse, 
and sources of an applicant's income. The proposed rule would have 
eliminated the exception for requesting information about the sex of an 
applicant, consistent with the Board's proposal under Sec.  202.5 to 
remove the general prohibition against the collection of applicant 
characteristics for nonmortgage credit. Since the general prohibition 
has been retained, this exception also has been retained.
3(d) Government Credit
    The exceptions for government credit apply to extensions of credit 
made to governments or governmental subdivisions, agencies, or 
instrumentalities. The exceptions do not apply to credit extended by 
such entities; for example, a government agency that extends credit to 
a consumer who applies for individual credit may not require the 
signature of another person (including the spouse) on a credit 
instrument if the applicant is individually creditworthy. The Board 
believes that extending the exceptions for government credit remains 
appropriate, as applying the rules would not contribute substantially 
to effectuating the purposes of the Act.

Section 202.4--General Rules

    Section 202.4 has been revised, as proposed, to incorporate general 
rules that apply under the regulation, some of which were previously in 
other sections. Specifically, Sec.  202.4(a) contains the general rule 
against discrimination; Sec.  202.4(b) (former Sec.  202.5(a)) contains 
the general rule against discouraging applications; and Sec.  202.4(c) 
(former Sec.  202.5(e)) contains the requirement for written 
applications in mortgage transactions covered by Sec.  202.13(a).
    Section 202.4(d) is new and generally requires written notices and 
other disclosures to be provided in a clear and conspicuous manner and 
in a form an applicant may retain. Most of the other consumer 
protection regulations administered by the Board already contain these 
standards.
    The clear and conspicuous and the retainability standards have been 
revised in response to commenters' concerns. Some commenters stated 
that the proposed language appeared to suggest that disclosures under 
the sections specified (Sec. Sec.  202.5, 202.5a (now Sec.  202.14), 
202.9, and 202.13(c)) are required to be given in writing. While 
certain disclosures under Sec. Sec.  202.9 and 202.14 are required to 
be in writing, others may be provided orally. Accordingly, the final 
rule provides generally that if a disclosure is given in writing, it 
must be clear and conspicuous and in a form the applicant may retain.
    Other commenters suggested that the retainability requirement 
should not apply to certain disclosures given on or with an 
application, such as those under Sec. Sec.  202.5 and 202.13. These 
disclosures relate, for example, to the option not to

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list income from alimony, child support, or separate maintenance, and 
to the collection of information about an applicant's national origin, 
race, sex, marital status, and age for mortgage credit. These 
disclosures are relevant primarily at the time of application. In 
addition, since the application will be submitted to the creditor, the 
only way to provide the disclosures to the applicant in retainable form 
would be to provide an extra copy of the application. The final rule 
exempts disclosures under Sec. Sec.  202.5 and 202.13 (even if provided 
in writing) from the retainability requirement.
    In addition, the Board issued an interim final rule in April 2001 
concerning the electronic delivery of disclosures under Regulation B. 
(66 FR 17779, April 4, 2001.) A new Sec.  202.4(b) was added in that 
rulemaking to provide rules on foreign-language disclosures. The 
present rulemaking re-designates that revision as Sec.  202.4(e).

Section 202.5--Rules Concerning Requests for Information

    Section 202.5 has been revised from the proposal. The final rule 
adopted by the Board retains the general prohibition against creditors' 
inquiring about, or noting, an applicant's sex, race, color, religion, 
or national origin for nonmortgage credit products, subject to some 
exceptions, including a new exception that permits collection for the 
purpose of conducting a self-test that meets the requirements of Sec.  
202.15, as discussed below.
    Because the ECOA makes it unlawful for creditors to consider any 
prohibited bases of discrimination in a credit transaction, Regulation 
B has generally prohibited creditors from inquiring about, or noting, 
an applicant's sex, race, color, religion and national origin. This 
general prohibition was intended to discourage discrimination, based on 
the premise that if creditors cannot inquire about or note applicants' 
personal characteristics, such as national origin or race, they are 
less likely unlawfully to consider the information in connection with a 
credit transaction.
    For home mortgage lending, there were specific concerns at the time 
the regulation was adopted in the 1970s about discrimination based on 
applicants' personal characteristics; and thus Regulation B requires 
creditors to record the applicant's national origin or race, marital 
status, sex, and age in applications for purchasing or refinancing home 
loans. (This requirement was added in 1977 when the regulation was 
amended to implement expanded coverage of the ECOA to include national 
origin, race, and other prohibited bases of discrimination. As enacted 
by the Congress in 1974, the ECOA initially barred discrimination only 
on the basis of sex and marital status.) The data collection enables 
enforcement agencies to better monitor home mortgage lenders' 
compliance with the ECOA. In 1989, the Congress amended the Home 
Mortgage Disclosure Act (HMDA), implemented by the Board's Regulation 
C, to impose a similar data collection requirement that applies to 
mortgage loans more broadly, encompassing home improvement loans in 
addition to purchase-money and refinanced home loans.
    In 1995, the Board proposed to remove the prohibition against 
noting applicants' personal characteristics for nonmortgage credit 
products. The proposed revision was published at the time the federal 
financial regulatory agencies were revising regulations that implement 
the Community Reinvestment Act to respond to concerns about whether 
creditors were meeting the needs of their communities, particularly for 
small business and small farm lending. The majority of commenters on 
the 1995 proposal opposed removal of the prohibition. After extensive 
deliberation, the Board withdrew the proposal in December 1996, and 
stated that, given the political sensitivity of the issues, the matter 
was better left to the Congress.
    In 1998, the Board again solicited comment in its Advance Notice of 
Proposed Rulemaking on removal of the prohibition. The Board raised the 
issue in response to concerns that continued to be expressed by the 
Department of Justice and some of the federal financial regulatory 
agencies. These agencies pointed to anecdotal evidence of 
discrimination in connection with small business and other types of 
credit. Comments received in response to the Advance Notice were fairly 
evenly divided between those in support of, and those in opposition to, 
lifting the ban. Most of those who favored lifting the prohibition were 
focused, however, on removing it for small business lending only.
    In its August 1999 proposed rule to amend Regulation B, the Board 
proposed to remove the general prohibition against inquiring about or 
noting information about an applicant's race, national origin, 
religion, color, or sex to allow voluntary collection of such data for 
nonmortgage credit products. Consideration of applicant characteristics 
such as race in evaluating creditworthiness, except as permitted by 
law, would continue to be prohibited. The Board recognized that 
removing the prohibition could give loan officers access to information 
on applicants' personal characteristics that might not otherwise be 
available and, thus, could provide the opportunity for unlawful 
discrimination. Also, the usefulness of the data for fair lending 
enforcement would depend on whether creditors implemented standards for 
uniform collection of the data--such as by product, for all applicants, 
or for all borrowers. Nevertheless, the Board believed that removing 
the prohibition for all nonmortgage credit might allow issues of credit 
discrimination to be better addressed. Because data notation by the 
creditor would be on a voluntary basis, creditors could target those 
products where they might have particular concern about potential 
discrimination.
    The proposed rule lifting the prohibition also provided that 
applicants could not be required to provide information about their 
race, national origin, religion, color, or sex. Creditors that chose to 
engage in data notation would have been required to disclose--at the 
time they requested the information--that providing the data was 
optional, and that the creditor would not take the information (or the 
applicant's decision not to provide it) into account in any aspect of 
the credit transaction. A proposed model notice was included.
    More than 600 commenters addressed the issue of data notation 
raised by the 1999 proposal. Many commenters--including most of the 
federal financial regulatory agencies, the Department of Justice, the 
Department of Housing and Urban Development, small businesses and their 
trade associations, consumer advocates, community organizations, 
individual consumers, and a few banks--favored removing the 
prohibition. Enforcement agencies and others believed that creditors' 
ability to collect and analyze information about the ethnicity and race 
of applicants and an agency's ability to review that information could 
provide a better fair lending tool than prohibiting the notation of 
such information. A significant number of these commenters favored 
removing the prohibition for all nonmortgage credit products, but most 
of those who favored lifting the ban focused their comments on small 
business lending.
    Most of the commenters favoring removal of the prohibition believed 
that mandatory collection is the more effective way to monitor and 
enforce fair lending compliance for small business and other 
nonmortgage loans. Consumer advocate and community group

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commenters generally endorsed voluntary data collection, but often as a 
first step toward mandatory data collection and disclosure. These 
commenters also believed that standards for data collection were needed 
and urged the Board to develop HMDA-like standards for data collection 
on nonmortgage loans. These commenters 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. Some commenters believed 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.
    Most industry commenters preferred to retain the general 
prohibition. A number of them indicated that they would not collect 
data if the prohibition were removed. These commenters expressed 
reservations about the Board's lifting the prohibition, including 
concerns about the likely pressure to collect data and the risk of 
litigation based on unreliable data. Commenters also expressed concern 
that creditors that obtained data about ethnicity, race, and other 
personal characteristics would be placed at a competitive disadvantage 
relative to other lenders because some consumers might find notation 
offensive. Some commenters expressed concern that a requirement for 
mandatory collection of data would soon follow the lifting of the 
prohibition, which would impose substantial burdens and costs on 
institutions. Many commenters criticized the lack of standards to 
ensure the collection of accurate and reliable data. They expressed 
concern, for example, that the lack of any uniform guidance regarding 
how to determine the minority-owned or women-owned status of small 
businesses would render any data meaningless. Some commenters believed 
the current rule has been effective in discouraging discrimination by 
denying creditors access to information that would enable them to 
discriminate on a prohibited basis. Some commenters, including 
individual consumers, asserted that data notation intrudes upon 
consumers' privacy.
    Some commenters indicated that if the prohibition were removed, 
they would likely not collect information about applicants' personal 
characteristics unless collection was subject to the ECOA's self-test 
privilege, and urged the Board to extend the self-test privilege to 
information about applicants' personal characteristics. (Under the 
statutory amendments of 1996, the self-test privilege protects 
creditors against disclosure of the results of a self-test to a 
government agency in an examination or investigation or by an agency or 
an applicant in any proceeding or lawsuit alleging a violation of the 
ECOA or Regulation B.) In the August 1999 proposal, the Board noted 
that creditors choosing to collect applicant characteristics would 
likely do so on the application form or in the application process, and 
therefore the privilege would not apply to this data collection. 
Industry commenters challenged this view of the scope of the self-test 
privilege.
    Some congressional commenters submitted a legal analysis which 
included the argument that the prohibition against inquiring about 
applicants' personal characteristics is required by the ECOA and must 
be enforced by the Board, and which stated that creditors would 
continue to be barred from collecting information about personal 
characteristics even if the Board amended Regulation B to remove the 
regulatory prohibition. They argued in their legal analysis that the 
ECOA's enumeration of exceptions to the general prohibition against 
discrimination on the basis of race, color, sex, national origin, 
religion, age and certain other characteristics implied a prohibition 
on any other collection by creditors of data regarding these personal 
characteristics of applicants. The Board disagrees with this analysis; 
the fact that the ECOA provides that certain types of inquiries 
regarding personal characteristics are permitted does not mean that 
other inquiries are prohibited.
    The Board believes that it has the authority under the ECOA to 
permit data collection. The Board has express authority under the ECOA 
to adopt regulations that carry out the purposes of the Act. The ECOA 
does not contain an express prohibition against inquiring about an 
applicant's personal characteristics; it prohibits the practice of 
discriminating on a prohibited basis, a prohibition that the Board's 
amendment does not change. The Board adopted its regulatory provision 
prohibiting collection of personal characteristics data in order to 
further the purpose of the ECOA. The Board believes it is well within 
its authority to adopt the self-testing exception to its regulatory 
prohibition because it better achieves the purposes of both the central 
prohibition against discrimination contained in the ECOA and the self-
testing provision in the ECOA.
    The fact that the ECOA provides that certain types of inquiries 
regarding personal characteristics are permitted does not imply that 
other inquiries are prohibited. The list of exceptions in the ECOA is 
needed for another purpose. The list allows creditors to inquire about 
characteristics of an applicant and to use that information in the 
credit decision--such as asking about marital status to determine 
property rights. Without expressly permitting these inquiries, a 
creditor could not use information about an applicant's personal 
characteristics in making its decision without violating the ECOA's 
central prohibition. Removal by the Board in whole or in part of the 
regulatory prohibition on inquiring about characteristics of applicants 
does not allow the creditor to consider this information in violation 
of the ECOA.
    Based on comments received and its own analysis and for the reasons 
stated below, the Board has retained the general prohibition on 
inquiring about, or noting, information about nonmortgage credit 
applicants' personal characteristics, such as race and national origin; 
and has created an exception for collection of this information by a 
creditor for the purpose of conducting a self-test under Sec.  202.15.
    The Board adopted its regulatory provision prohibiting collection 
of personal characteristic data for nonmortgage credit in order to 
further the purposes of the ECOA. The Board believes that the existing 
prohibition, by restricting creditors' access to information about 
applicants' personal characteristics, contributes to reducing or 
avoiding credit discrimination. Lifting the prohibition and permitting 
creditors to collect and use data on applicant characteristics for any 
purpose without limitation, as was proposed, would create some risk of 
use of the data for discriminatory purposes. For example, lifting the 
prohibition without constraints could have resulted in selective 
inquiries or notation. Moreover, without standards, the reliability of 
voluntarily collected data is questionable.
    At the same time, creditors desiring to monitor and assure 
compliance with the ECOA by collecting information about applicants' 
personal characteristics should not be prevented from doing so. The 
Board believes that creating an exception for collecting such 
information as part of a self-test would further the purposes of the 
ECOA by providing creditors with an additional tool for measuring and 
improving their levels of compliance with the ECOA and Regulation B. 
Permitting data notation

[[Page 13149]]

as part of a self-test would enable creditors to develop compliance 
programs that utilize data about applicant characteristics in a 
controlled and targeted manner. The Board has, therefore, created an 
exception to the general regulatory prohibition to permit creditors to 
inquire about, and note, information about nonmortgage credit 
applicants' personal characteristics for the purpose of conducting 
self-tests under Sec.  202.15.
    The Congress adopted the self-test privilege in 1996 as part of the 
Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Pub. L. 
104-208, 110 Stat. 3009). The purpose for creating a self-test 
privilege was ``to encourage institutions to undertake candid and 
complete self-tests for possible fair lending violations and to act 
decisively to correct any discovered problems.'' S. Rep. No. 104-185, 
at 15 (Dec. 14, 1995). Section 202.15 of Regulation B, which implements 
the self-test provision, defines a self-test as a program, practice, or 
study designed and used specifically to determine compliance with the 
Act and regulation, that 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. The privilege applies 
only if the creditor takes appropriate corrective action when it 
determines that it is more likely than not that a violation has 
occurred. The results of the self-test cannot be obtained by a 
government agency in an examination or investigation, or by an agency 
or an applicant in any proceeding or lawsuit alleging a violation of 
the ECOA or Regulation B.
    As adopted by the Board, Sec.  202.5 of the final rule retains the 
general prohibition on collecting information about applicants' 
personal characteristics and creates an exception to permit the 
collection of personal characteristics for the purpose of conducting a 
self-test. Section 202.5(a) now contains the general rules previously 
contained in former Sec.  202.5(b). Section 202.5(a)(1) has been 
revised to apply to information requests in connection with a credit 
transaction to reflect more accurately the scope of the regulation. 
Certain headings in Sec.  202.5(a) have been revised for clarity. 
Former Sec. Sec.  202.5(a) and (e) have been moved to Sec.  202.4 to 
facilitate compliance with the regulation.
    New Sec.  202.5(b) sets forth the general prohibition against a 
creditor's inquiring about the race, color, religion, national origin, 
or sex of an applicant or any other person in connection with a credit 
transaction. The general prohibition incorporates the rules previously 
contained in the first sentences of former Sec.  202.5(d)(3) and (5). 
The general prohibition is subject to the exceptions found in 
subsections (b)(1) and (2).
    Section 202.5(b)(1), which is new, permits creditors to inquire 
about, and note, personal characteristics such as race or national 
origin for the purpose of conducting a self-test under Sec.  202.15 to 
determine the creditor's compliance with the ECOA or Regulation B. To 
qualify for this exception, the creditor must satisfy all the elements 
of a self-test as set forth in Sec.  202.15, and must provide the 
disclosures required by Sec.  202.5(b)(1) at the time the information 
is requested. (A model notice is included in Appendix C.)
    This exception to the general prohibition applies to a self-test 
even if the creditor should subsequently lose or waive the self-test 
privilege by disclosing any privileged information as provided in Sec.  
202.15(d)(2)(i) and (ii). Other laws or regulations, such as the Gramm-
Leach-Bliley Act privacy regulations, may restrict other disclosure of 
such data.
    Creditors that opt to conduct a self-test may rely upon the 
principles discussed below. Much of this guidance is set forth in Sec.  
202.15 and the accompanying official staff commentary and this 
preamble. Any additional guidance, including the guidance provided in 
this preamble, will be incorporated into the official staff commentary 
at a later date, as appropriate. A ``self-test'' is defined as any 
program, practice, or study that is designed and used specifically to 
determine the extent or effectiveness of a creditor's compliance with 
the Act or Regulation B and creates new data or factual information 
that is not available and cannot be derived from loan or application 
files or other records related to credit transactions. 12 CFR 
202.15(b)(1).
    The constraints imposed by the regulation's self-test provision 
will help ensure that the information is not used to discriminate on a 
prohibited basis and is only collected and used for the purpose of 
monitoring compliance with the ECOA and Regulation B and for taking 
appropriate corrective action. Any information about applicant's 
personal characteristics collected as part of a self-test would have to 
be kept separate from the loan or application files and from other 
business records related to credit transactions, in order for the 
privilege to apply. Thus, creditors may not place such data with non-
privileged business records, such as the credit application, loan 
documents, or minutes of loan-committee meetings. See 12 CFR Supp. I, 
202.15(b)(1)(ii)-2 and 202.15(b)(3)(ii)-1. In response to the issue 
raised by certain commenters, the Board notes that the existing 
regulation regarding the self-test privilege does not prohibit 
collection of data in the application process. Although creditors may 
collect the information during the application process, the information 
may not be placed with nonprivileged business records, such as the 
credit application or loan documents, and may not be considered in 
extending credit.
    Information about applicants' personal characteristics that is 
collected pursuant to this exception should be analyzed in a timely 
fashion as part of a program, practice, or study under the self-test 
provision. Timely analysis of data is essential to ensure that a self-
test was conducted to determine compliance with the ECOA and Regulation 
B. Creditors retain the flexibility to establish the time, place, 
scope, and methodology of any self-test. See 12 CFR Supp. I, 
202.15(b)(3)(i)-1. In preparing to conduct a self-test that involves 
the collection of applicants' personal characteristics, creditors would 
be expected to develop a written plan that describes, among other 
things, the specific purpose of the self-test, the methodology to be 
used, the geographic area covered by the test, the types of credit 
transactions involved, the identity of the entity that will conduct the 
test and analyze the data (such as the creditor's audit department), 
and the timing of the test, including the expected start date and end 
date or the expected duration of the test. The creditor is generally 
required to retain records regarding a self-test, including personal-
characteristics data and all other written or recorded information 
about the self-test for 25 months after a test has been completed (and 
longer in the case of an investigation or enforcement proceeding or 
civil action of which the creditor has received notice.) See 12 CFR 
202.12(b)(6).
    Currently, creditors may use ``mystery shoppers'' or fictitious 
applicants (``testers'') to determine compliance with the ECOA at the 
pre-application stage. With the revision to the regulation, creditors 
would have the flexibility to utilize and develop a variety of self-
testing techniques (internally or using independent third-parties) to 
ensure ECOA compliance at various stages of a credit transaction using 
information collected about applicant characteristics combined with 
other information. For example, a self-test using information about 
actual applicants' personal characteristics might better determine 
whether, at the application stage, persons seeking credit

[[Page 13150]]

are being treated differently from other applicants on the basis of 
race, age, sex, religion, or national origin; or, for loan 
originations, whether disparities based on race or other prohibited 
bases of discrimination may exist in the terms and conditions of loan 
agreements entered into by similarly situated applicants. A self-test 
might also be conducted to test account review or collection 
procedures, or other aspects of the credit transaction where unlawful 
discrimination might occur.A creditor may not use the data collected 
under the new exception for other purposes, such as marketing, unless 
necessary to take corrective action, without losing the self-test 
privilege.
    The data about applicant characteristics collected as part of a 
self-test may only be used and evaluated by persons conducting the 
self-test. The data may not be used or evaluated by persons involved in 
a credit transaction, except in the context of taking corrective action 
when it is more likely than not that a violation has occurred. The data 
may not be used in a credit decision. In collecting information about 
personal characteristics as part of a self-test, creditors must 
disclose to applicants that providing the information is optional, that 
the information is being collected to monitor for compliance with the 
ECOA and will not be used in making a credit decision, and where 
applicable, that certain information will be noted based on visual 
observation or surname.
    The self-test provision requires that creditors take appropriate 
and timely corrective action when the self-test shows that it is ``more 
likely than not'' that a violation of the ECOA or Regulation B has 
occurred, even though no violation has been formally adjudicated. 12 
CFR 202.15(c)(1) (emphasis added). Creditors should ensure that 
corrective action is taken on a timely basis and is ``reasonably likely 
to remedy the cause and effect of a likely violation.'' 12 CFR 
202.15(a)(2) and 202.15(c)(1). The commentary to Sec.  202.15(c) 
suggests various forms of corrective action that may be appropriate, 
such as correcting institutional policies or procedures that may have 
contributed to the likely violation and adopting new policies as 
appropriate, or improving audit and oversight systems to avoid a 
recurrence of the likely violation. See 12 CFR Supp. I, 202.15(c)(2)-3. 
The appropriateness of a particular form of corrective action is 
determined on a case-by-case basis and the scope of the corrective 
action that is required depends upon the scope of the self-test. See 12 
CFR Supp. I, 202.15(c)(2)-1. No corrective action is required if a 
self-test does not identify any likely violation of the ECOA or 
Regulation B. See 12 CFR Supp. I, 202.15(a)(2)-1.
    Section 202.5(b)(2) permits a limited inquiry that may indicate the 
sex of an applicant through an optional designation of title on an 
application form. This exception is identical to the exception 
previously contained in former Sec.  202.5(d)(3). No substantive change 
is intended.
    Section 202.5(c) is substantially unchanged. Section 202.5(d)(1)-
(3) incorporates the provisions previously contained in former Sec.  
202.5(d)(1), (d)(2), and (d)(4) without substantive change.
    New Sec.  202.5(e) permits creditors to inquire about the permanent 
residency and immigration status of an applicant or any other person in 
connection with a credit transaction. This rule was previously 
contained in former Sec.  202.5(d)(5). The exception for inquiries 
about the permanent residence and immigration status has been conformed 
to the general rule in Sec.  202.5(b), which explicitly covers both an 
applicant and any other person in connection with a credit transaction, 
such as a guarantor or co-signer.

Section 202.5a--Rules on Providing Appraisal Reports

    This section now appears as Sec.  202.14.

Section 202.6--Rules Concerning Evaluation of Applications

    Sections 202.6(b)(8) and (9) have been adopted, as proposed.
6(b) Specific Rules Concerning use of Information
6(b)(8)
    Section 202.6(b)(8) of the regulation, adopted as proposed, makes 
clear that a creditor may not evaluate married and unmarried applicants 
by different standards. Some commenters were concerned that the rule 
would prevent creditors from considering state property laws. The rule 
provides that the requirement applies except as otherwise permitted or 
required by law. Thus, a creditor may consider the rules in Sec. Sec.  
202.5, 202.6, and 202.7 in evaluating applications. But a creditor that 
aggregates the incomes of married co-applicants, for example, is 
required to aggregate the incomes of unmarried co-applicants under this 
rule.
6(b)(9)
    Section 202.6(b)(9) has been adopted as proposed, consistent with 
the Board's decision to retain the general prohibition in Sec.  202.5 
(against collecting applicants' personal characteristics) except for 
the purpose of conducting a self-test under Sec.  202.15. This 
provision clarifies that data collected for a self-test may not be used 
in any aspect of a credit transaction.

Section 202.7--Rules Concerning Extensions of Credit

    Section 202.7(d)(1) has been revised.
7(d) Signature of Spouse or Other Person
    Section 202.7(d)(1) provides that a creditor may not require the 
signature of a person other than the applicant, or joint applicant, on 
any credit instrument if the applicant is individually creditworthy. 
Over the years, the Board has received questions about how creditors 
can establish that applicants intend to apply jointly. Although the 
issue arises in consumer credit, it is more prevalent in the context of 
business credit. Some creditors have sought to treat the submission of 
a joint financial statement or other evidence of jointly held assets as 
an application for joint credit. The proposed rule bars a creditor from 
presuming that the submission of joint financial information 
constitutes an application for joint credit.
    Some commenters disagreed with the proposal, stating that a 
creditor should always be able to deem the submission of joint 
information as an application for joint credit. Other commenters 
believed the rule should simply state that the mere submission of joint 
information may not be used to establish intent and something more is 
needed.
    Evidence of intent to apply for joint credit requires more than the 
submission of joint financial information. The fact that a credit 
applicant owns property with another and submits information concerning 
the property and the joint owner in order to establish creditworthiness 
does not mean that both owners intend to be obligated for the extension 
of credit; other evidence must expressly reflect that intent. Section 
202.7(d)(1) has been adopted as proposed. Additional guidance 
concerning how to evidence intent to apply for joint credit is provided 
in the official staff commentary in comment 7(d)(1)-3. Also, see the 
supplementary information to Appendix B concerning revisions to Model 
Application Forms 1-4.

Section 202.8--Special-Purpose Credit Programs

    The proposed revisions to Sec.  202.8(a)(3) have not been adopted.

[[Page 13151]]

8(a) Standards for Programs
    Section 202.8(a)(3) addresses special-purpose credit programs 
offered by for-profit organizations, or in which for-profit 
organizations participate. Under the proposed rule, that section would 
have been revised to delete the phrase ``special social needs.'' The 
meaning of the phrase is specifically set forth in Sec.  202.8(a)(3)(i) 
and (ii). Although few commenters addressed the issue, there was some 
concern that by removing the phrase, a creditor might not understand 
that the program must meet special social needs. Upon further analysis, 
because the legislative history of this provision is clear that 
special-purpose credit programs offered by for-profit organizations 
must meet special social needs, and because the statute includes the 
phrase, the proposed revision was not adopted.

Section 202.9--Notifications

    A technical revision has been made to Sec.  202.9(a)(3)(i)(B). The 
proposed revision to Sec.  202.9(a)(3)(ii)(A) has not been adopted. 
Section 202.9(b)(2) has been revised as proposed.
9(a) Notification of Action Taken, ECOA Notice, and Statement of 
Specific Reasons
9(a)(3) Notification to Business Credit Applicants
    A technical revision has been made to Sec.  202.9(a)(3)(i)(B) to 
omit the proposed language requiring a creditor to provide the 
disclosure of an applicant's right to a statement of reasons in a form 
the applicant may retain. New Sec.  202.4(d) requires that disclosures 
provided in writing be clear and conspicuous and in a form the 
applicant may retain. Since the disclosure required by Sec.  
202.9(a)(3)(i)(B) must be in writing, the language referring to 
retention is deleted as unnecessary.
    The regulation provides for exceptions from certain notification 
and record retention requirements for business credit. The Board is 
required periodically to review the exceptions to determine whether 
they should be retained. The ECOA provides that the Board may extend an 
exception 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. As discussed below, the Board 
expressly finds that application of additional provisions of the ECOA 
to business credit would not contribute substantially to effectuating 
the purposes of the Act.
    In the proposal, the Board stated its belief that applying the 
notification rules in full, or changing the current threshold of $1 
million in gross revenues to distinguish between large and small 
businesses for purposes of Regulation B, would not contribute 
substantially to effectuating the purposes of the ECOA. 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; nearly the same percentage of all businesses 
(85 percent) currently fall below that threshold. In addition, a gross 
revenue test is likely easier for creditors to administer than other 
suggested tests, such as basing the exceptions on the sophistication of 
the applicant. Commenters did not oppose this aspect of the proposal.
    The Board proposed to revise Sec.  202.9(a)(3)(ii)(A) 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 denial or other adverse action. Under the 
regulation, 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. But although the regulation 
requires creditors to notify business credit applicants (orally or in 
writing) of the adverse action, it does not require notification of the 
right to obtain the statement of reasons. The Board stated in its 
proposal that requiring the disclosure should not significantly 
increase the compliance burden for creditors, and would benefit 
applicants who may not be aware of their right to the written statement 
of reasons.
    Some commenters supported or did not oppose the proposed change; 
some commenters urged that creditors be required to provide business 
applicants with a written notice of reasons for adverse action, or of 
the right to request such reasons. Other commenters suggested that 
notification of the right to reasons is unnecessary because businesses 
in this category are sophisticated and communication between the 
creditor and the applicant is extensive and ongoing.
    Based on the comments and further analysis, the Board believes that 
notification of the right to request the reasons for adverse action 
would not contribute substantially to effectuating the purposes of the 
ECOA. Accordingly, the final rule does not include the requirement.
9(b) Form of ECOA Notice and Statement of Specific Reasons
9(b)(2) Statement of Specific Reasons
    Section 202.9(b)(2), adopted as proposed, clarifies 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 
guarantor did not meet the creditor's standards of creditworthiness'' 
is insufficient.
    The legislative history of the requirement to provide specific 
reasons for adverse action indicates that the purposes of the 
disclosure are to help achieve the anti-discrimination goals of the 
ECOA and to educate and inform consumers. These dual purposes are 
served by the clarification in Sec.  202.9(b)(2). For example, the 
disclosure may discourage a creditor from discriminating based on a co-
applicant's or guarantor's race, sex, age, or other prohibited basis. 
Also, the disclosure may help educate and inform applicants, co-
applicants, or guarantors as to reasons for denial that are not 
apparent from looking at their credit report.
    Many commenters were concerned about the co-applicant's or 
guarantor's privacy when the reasons for adverse action pertaining to 
creditworthiness are given to the primary applicant. When a person 
agrees to be a co-applicant, guarantor, or similar party, however, 
there is (or should be) a general understanding that information will 
be shared. Accordingly, the rule has been adopted as proposed.

Section 202.10--Furnishing of Credit Information

    There are no revisions to this section.

Section 202.11--Relation to State Law

    There are no revisions to this section.

Section 202.12--Record Retention

    The proposed revisions to Sec.  202.12(b)(1)-(4) have not been 
adopted. New Sec.  202.12(b)(7) has been adopted, as proposed.
12(b) Preservation of Records
    Section 703(a)(4) of the ECOA 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 for no less 
than one year, unless otherwise excepted. Section 202.12(b) requires 
creditors to retain credit applications and other records for

[[Page 13152]]

12 months for credit extended to businesses with gross revenues of $1 
million or less. For businesses with gross revenues in excess of $1 
million, a creditor must retain records for 60 days. If within that 
time the applicant requests in writing the reasons for adverse action, 
or requests that records be retained, the creditor must retain the 
records for 12 months.
    The Board proposed to extend the record retention period to 25 
months for credit applications involving businesses with gross revenues 
of $1 million or less in response to concerns expressed by some Reserve 
Banks and enforcement agencies about the short duration of the record 
retention period for business credit. (The rule would remain unchanged 
for credit applications involving larger businesses or extensions of 
trade credit, credit incident to a factoring agreement, or other 
similar types of business credit.) The volume of business loans on a 
yearly basis for some financial institutions is low, and the banking 
agencies have changed the frequency of examinations (from 18 to 24 
months or, in some instances, to 36 months). Thus, it is sometimes 
difficult for examiners to obtain an adequate sample in order to 
determine whether the creditor is complying with the requirements of 
Regulation B. The Board believed that extending the record retention 
period would better enable the federal financial regulatory agencies to 
monitor and enforce compliance with the ECOA. Also, the Board believed 
that previously expressed concerns about storing business credit files 
might no longer be compelling given technological advances and the 
increased use of electronic storage.
    Community groups and a civil rights organization supported the 
proposed extension of the record retention period, to better determine 
patterns of unlawful discrimination in connection with business credit. 
Some industry commenters also supported the proposed extension; they 
believed compliance would be easier with consistent rules for consumer 
and small business credit. Most industry commenters opposed the 
proposal, however, stating that it would impose a significant burden by 
increasing the need for storage space and equipment and for additional 
employees. Some of these commenters noted that business documentation 
is typically more voluminous than documentation for consumer loans, and 
that a substantial amount of business loan documentation is kept in 
paper form. One commenter stated that the burden would be greater for 
smaller creditors than for larger creditors; larger creditors likely 
benefit from the development of standardized business loan products and 
credit scoring models, while smaller creditors may rely more heavily on 
judgmental evaluation and paper documentation. Some commenters believed 
that records for the 12-month period preceding an examination are 
sufficient to establish lending patterns within a financial 
institution.
    The final rule retains the current record retention period of 12 
months. Although an expanded retention period could assist the 
enforcement agencies in monitoring and enforcing compliance with the 
Act, the Board believes that the benefits of expanding the record 
retention requirement are outweighed by the compliance burdens. For 
example, the use of electronic record storage for many business credit 
records is not as prevalent as the Board believed when it issued the 
proposal.
12(b)(7) Prescreened Solicitations
    Section 202.12(b)(7) is new and has been adopted to require record 
retention for certain information used in prescreened credit 
solicitations so that enforcement agencies can review and analyze 
creditors' possible use of prohibited bases in connection with such 
solicitations. The ECOA prohibits discrimination by a creditor against 
an applicant--a person who has requested or received credit--on a 
prohibited basis regarding any aspect of a credit transaction. 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 encompasses a person who 
has, at a minimum, sought 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 (including 
its advertisements) that would discourage a reasonable person, on a 
prohibited basis, from applying for credit.
    In some circumstances, consumers do not have to initiate a request 
for credit, but rather respond to a solicitation from the creditor. 
Creditors use a number of techniques to identify potential customers. 
For instance, creditors will often specify criteria to consumer 
reporting agencies, which then draw on information from credit files to 
compile 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. In the 
marketing of some credit products through prescreened solicitations, 
creditors often offer discounted introductory rates, attractive credit 
terms, and enhancements (such as purchase discounts, in the case of 
credit cards) that may not be available through other application 
channels.
    Prescreened credit solicitations, particularly for credit cards, 
are not new. With advances in technology that facilitate the building 
of databases, however, the use of prescreened solicitations has become 
more commonplace and more sophisticated. Prescreened solicitations can 
be used to target consumers most likely to use a particular credit 
product, or to target segments of the population that are most likely 
to respond to the offer of credit. Conversely, prescreened 
solicitations can be used to exclude some consumers from receiving 
offers of credit. They can potentially be used to target consumers in 
low-income neighborhoods (which are often predominantly minority) for 
less favorable credit products or credit terms on the supposition that 
these consumers are less creditworthy. The Board has become aware 
(through the compliance examination function of the Board and other 
federal financial regulatory agencies) of instances in which creditors, 
primarily in the credit card industry, have used age to identify 
potential recipients of preapproved credit.
    Over the years, there has been concern that Regulation B generally 
does not apply to marketing through prescreened solicitations. When the 
regulation was originally implemented in 1975, the definition of 
``credit transaction'' included ``solicitation of prospective 
applicants by advertising or other means.'' Thus, the prohibition 
against discrimination based on marital status and sex applied to 
solicitations. In December 1976--when Regulation B was revised to 
prohibit discrimination based on national origin, race, and other 
specified bases--the definition of credit transaction omitted any 
reference to solicitations. In the final rule, the regulation instead 
prohibited creditors from discouraging persons on a prohibited basis 
from applying for credit.
    Under the proposed rule, the Board would require that creditors 
retain their existing records for those prescreened solicitations 
defined as ``firm offers of credit'' under the Fair Credit Reporting 
Act (FCRA). Creditors would retain information about the criteria used 
to select potential customers, the text of any solicitation, complaints 
that might be received about the solicitation, and the portion of the 
marketing plan related to the solicitation.

[[Page 13153]]

    The Board received about 100 comment letters on this proposal. 
Commenters generally acknowledged that prospective applicants and 
advertisements are covered by the regulation's rule against 
discouraging prospective applicants on a prohibited basis. But some of 
them questioned the Board's legal authority to require record retention 
for prescreened solicitations given that the ECOA and the regulation's 
protections generally apply only to persons who have requested credit.
    The Board has clear authority to require the retention of 
information regarding prescreened solicitation practices. In enacting 
the ECOA, the Congress found that there is a need to ensure that 
creditors exercise their responsibility to make credit available with 
fairness and impartiality and without discrimination on a prohibited 
basis. Thus, creditors must make credit available equally to all 
creditworthy customers regardless of race, national origin, sex, or 
other prohibited bases of credit discrimination. In this regard, 
Regulation B prohibits a creditor from making any statement, in 
advertising or otherwise, that would discourage on a prohibited basis a 
reasonable person from making or pursuing an application for credit.
    The ECOA authorizes the Board to prescribe regulations to carry out 
the purposes of the Act including, in particular, regulations that ``in 
the judgment of the Board are necessary or proper to effectuate the 
purposes of this title, to prevent circumvention or evasion thereof, or 
to facilitate or substantiate compliance therewith.'' 15 U.S.C. 
1691b(a)(1). This provides the Board authority to require creditors to 
retain records that the Board believes are necessary to assure that 
creditors are not circumventing or evading the requirements of the ECOA 
and Regulation B.
    Prescreened solicitations are an increasingly important mechanism 
for making certain types of credit available to consumers, and can be 
an effective way of enhancing a creditor's compliance with the ECOA. On 
the other hand, prescreened solicitations also could provide a means 
for creditors to circumvent or evade the ECOA and defeat its purposes 
by excluding prospective applicants on a prohibited basis. The Board 
believes that, in order to help monitor solicitation practices and 
prevent evasion or circumvention of the ECOA, creditors should be 
required to retain records related to prescreened solicitations, so 
that enforcement agencies can review and analyze creditor practices in 
generating offers of credit. The Board believes that imposing this 
recordkeeping requirement is within its authority and is consistent 
with the Act's purpose.
    Some commenters criticized the proposed requirements as burdensome. 
In particular, they expressed concern about the retention of 
correspondence relating to complaints and the retention of ``components 
of marketing plans related to solicitations.'' They did not, however, 
quantify in cost or time the additional burdens associated with the 
requirements.
    Commenters focused on how correspondence about complaints is kept 
and organized, rather than suggesting that creditors do not retain such 
correspondence. They said that complaint correspondence may not be 
stored and tracked by solicitation in existing complaint tracking 
systems, and may not be retained in a central location within a 
financial institution. Also, commenters noted that marketing plans may 
vary significantly from creditor to creditor; some plans may not have a 
specific ``component'' devoted to prescreened solicitations.
    Consumer representatives and others supporting the proposed record 
retention believed that the benefit of the requirement substantially 
outweighs any compliance burden. They believed that creditors already 
retain most, if not all, of the documents required by the proposal for 
business or other reasons, such as to monitor the effectiveness of 
their marketing approach. Many of these commenters believed that 
Regulation B should cover creditors' pre-application marketing 
practices more generally, beyond credit advertisements and beyond the 
record retention requirements that were proposed.
    Based on comments and its own further analysis, the Board is 
adopting the proposal requiring creditors to retain records related to 
the text of the solicitation, the criteria used to select potential 
customers for prescreened solicitations, and correspondence related to 
consumer complaints. The Board believes that record retention will 
provide useful information without imposing excessive burden for 
determining at some future date whether additional steps might be 
warranted for coverage of prescreened solicitations by Regulation B.
    Nothing in the final rule requires creditors to establish a 
separate database or set of files for correspondence relating to 
complaints about prescreened solicitations. Creditors will not be 
required to match consumer complaints with specific solicitation 
programs. Creditors have the flexibility to retain correspondence in 
any manner that would make it reasonably accessible and understandable 
to examiners.
    The Board has made one modification to reduce compliance burden. 
Upon further analysis, the Board believes that the proposed requirement 
to identify and retain the component of the marketing plan to which the 
solicitation relates may be overly burdensome. And since prescreened 
solicitations may be one aspect of a creditor's overall marketing 
program, reviewing a single component may not provide the proper 
context. Therefore, the Board is not adopting the proposed requirement 
related to creditors' marketing plans.
    The Board believes that these steps will enable the Board to 
monitor solicitation practices, based on information that creditors 
currently maintain, in a systematic way. Generally, for business and 
other reasons, creditors retain much of the required information. For 
example, under the Fair Credit Reporting Act (FCRA), persons that use 
information in consumer reports to select consumers to receive offers 
of credit are required to maintain the criteria used to select the 
consumers for three years after the date the offer is made to the 
consumer. The Board's rule requires a 25-month retention period.
    There will be some incremental burden associated with retaining 
information in a form necessary to demonstrate compliance. The Board 
believes, however, that the costs of retaining these records for 
purposes of examination under Regulation B will not likely be 
substantial; and commenters did not provide evidence to the contrary.

Section 202.13--Information for Monitoring Purposes

    Technical revisions have been made to this section to conform to a 
directive issued in 1997 by the U.S. Office of Management and Budget. 
For ethnicity, the standards provide for requesting data on whether (or 
not) individuals are Hispanic or Latino. The standards prescribe five 
racial designations: American Indian or Alaska Native; Asian; Black or 
African American; Native Hawaiian or Other Pacific Islander; and White. 
The standards eliminate the option of designating ``Other,'' which 
Regulation B currently allows. The standards also require that 
respondents be offered the option of selecting more than one racial 
designation. 62 FR 58782, 58786 (October 30, 1997).
    The Appendix B model application form for use in complying with 
Sec.  202.13 is issued by Fannie Mae and Freddie

[[Page 13154]]

Mac, which are in the process of making revisions to their forms. 
Creditors may continue to use the current model form until the Board 
publishes a revised form that reflects the new ethnicity and racial 
designations.

Section 202.14--Rules on Providing Appraisal Reports

    The rules previously contained in Sec.  202.14, Enforcement, 
Penalties, and Liabilities, have been moved to Sec.  202.17. Section 
202.14 now contains the rules from former Sec.  202.5a. There are no 
revisions to this section.

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

    Technical revisions have been made to Sec.  202.15(d)(1).

Section 202.16--Requirements for Electronic Communication

    Section 202.16 now contains the rules from former Sec.  202.17. 
Section 202.16 contains an interim final rule published in April 2001, 
incorporating the requirements of the Electronic Signatures in Global 
and National Commerce Act (the E-Sign Act) into Regulation B for 
disclosures provided by electronic communication (66 FR 17779, April 4, 
2001). The interim final rule is republished for convenience; the Board 
lifted the mandatory compliance date for the interim final rule in 
August 2001 (66 FR 41439, August 8, 2001). Any substantive revisions to 
the interim final rule for Sec.  202.16--as well as for other 
electronic disclosures under Regulations E, M, Z, and DD--will be made 
at a future date.

Section 202.17--Enforcement, Penalties, and Liabilities

    Section 202.17 now contains the rules from former Sec.  202.14. 
Technical revisions have been made to Sec.  202.17(a) and (b). Proposed 
revisions to Sec.  202.17(c) have not been adopted.
17(c) Failure of Compliance
    The Board proposed to delete the third sentence of Sec.  202.17(c) 
to conform with the proposal to remove the general prohibition against 
data notation. Consistent with the Board's decision to retain the 
general prohibition in Sec.  202.5 against noting applicants' personal 
characteristics in nonmortgage credit transactions, except for the 
purpose of conducting a self-test, the proposed revision has not been 
adopted. Section 202.17(c) is retained in its current form.

Appendix A to Part 202--Federal Enforcement Agencies

    Appendix A has been revised to reflect changes in the names and 
addresses of some agencies.

Appendix B to Part 202--Model Application Forms

    Technical revisions have been made to the introductory paragraphs. 
As proposed, the ``Residential Loan Application'' has been replaced 
with an updated ``Uniform Residential Loan Application'' (Freddie Mac 
65/Fannie Mae 1003). Also, the first four model forms have been revised 
to clarify the guidance in the official staff commentary in comment 
7(d)(1)-3 concerning how to evidence applicants' intent to apply for 
joint credit.

Appendix C--Sample Notification Forms

    Appendix C has been revised in the final rule, consistent with the 
Board's decision to retain the general prohibition in Sec.  202.5 
against notation of applicants' personal characteristics for 
nonmortgage credit except for the purpose of conducting a self-test. 
New model form C-10 is added to provide the disclosure requirements for 
creditors that request applicants' race, ethnicity, and other such 
characteristics for conducting a self-test under Sec.  202.15.
    A number of commenters suggested revisions to the sample forms, 
such as using consistent language for all references to the Fair Credit 
Reporting Act, and adding or rearranging adverse action reasons. Some 
of these suggestions are adopted, with no substantive change intended.

Appendix D--Issuance of Staff Interpretations

    There are no revisions to this section.

V. Summary of Revisions to the Commentary

    Major revisions to the commentary include clarifying that the 
definition of application includes certain preapproval requests (Sec.  
202.2(f)); providing an exception from the requirement to provide a 
notice of incompleteness for preapprovals that constitute applications 
(Sec.  202.9(c)(1)); and clarifying the record retention requirements 
for prescreened solicitations (Sec.  202.12(b)(7)). The commentary also 
clarifies when an inquiry about credit becomes an application for 
credit (Sec. Sec.  202.2(f) and 202.9).

VI. Section-by-Section Analysis

    The following discussion addresses the commentary revisions 
section-by-section. Technical and non-substantive revisions generally 
are not separately discussed. Proposed amendments to several provisions 
of the staff commentary relating to the definition of ``adverse 
action'' are not being adopted at this time in order to allow the Board 
to solicit supplemental comment.

Section 202.1--Authority, Scope and Purpose

    There are no revisions to this section.

Section 202.2--Definitions

    Revisions have been made to comments in Sec.  202.2(f) concerning 
the definition of application; and Sec.  202.2(l) concerning the 
definition of creditor. A technical revision has been made to a comment 
in Sec.  202.2(z).
2(c) Adverse Action
    Proposed comments 2(c)(1)(i)-2; 2(c)(1)(ii)-1; 2(c)(2)(i)-1; 2( 
c)(2)(ii)-3; and a revision to 2(c)(2)(ii)-2 are not being adopted at 
this time. These interpretations will be reviewed and reissued for 
additional public comment.
2(f) Application
    A technical change (replacing ``established'' with ``used'') has 
been made to comment 2(f)-2 to conform the comment to the technical 
change in the definition of application in Sec.  202.2(f) of the 
regulation.
    Comments 2(f)-3 and -5 have been adopted as proposed with some 
modifications. Comment 2(f)-3 clarifies that prequalification requests 
are subject to the same test applicable to inquiries. In addition, the 
term ``applicant'' has been changed to ``consumer.'' Using 
``applicant'' presumes that an application exists, while the point of 
the comment is that, in the case of an inquiry or prequalification 
request, an application may or may not exist depending upon the 
circumstances. Also, cross-references have been added in comment 2(f)-
3, referencing comment 9-5, which provides a more detailed discussion 
of when a prequalification request becomes an application, and new 
comment 2(f)-5, which clarifies when a request for a preapproval 
constitutes an application.
    The treatment of inquiries and prequalification requests, on the 
one hand, and certain preapproval requests, on the other, now differs 
for purposes of determining whether an application exists. Comment 
2(f)-5 clarifies this difference. As discussed in the supplementary 
information to Sec.  202.2(f) of the regulation, the Board proposed to 
include within the definition of application a request for a 
preapproved loan under procedures in which a

[[Page 13155]]

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. The Board further stated that a 
``preapproval'' without procedures involving a written commitment would 
be treated as a prequalification.
    Some commenters supported the proposed revision, noting that 
preapprovals should be considered applications since creditors require 
applicants to complete applications before issuing written commitments 
to lend. Other commenters opposed the proposal, arguing that it would 
have a chilling effect on lenders offering preapproval programs, and 
would discourage potential applicants; that the utility of covering 
preapprovals as applications is questionable since they generally 
contain contingencies and are subject to verification; and that many 
applicants requesting preapprovals never return to the creditor to 
pursue the request, suggesting that notices required by Sec.  202.9 
would not be useful.
    The Board believes that preapproval requests are applications, 
because they involve requests for extensions of credit made in 
accordance with creditors' procedures. The fact that a preapproval 
request is not a completed application is not relevant, because 
Regulation B generally applies even to applications that are 
incomplete. (But see comment 9(c)(1)-1). In addition, Regulation C 
(Home Mortgage Disclosure) as revised (67 FR 7222, February 15, 2002) 
includes preapproval requests as applications for purposes of that 
regulation. In general, the Board believes that the coverage of 
applications under Regulations B and C should be consistent, to the 
extent possible. Accordingly, comment 2(f)-5 clarifies that certain 
preapproval requests constitute applications for purposes of Regulation 
B. The text of the final comment has been revised slightly to more 
closely parallel the Regulation C amendment relating to preapprovals.
    Commenters raised an issue concerning the treatment of an inquiry 
in regard to a creditor's preapproval program. For example, if a 
creditor has a preapproval program involving written commitments and 
other features discussed in comment 2(f)-5, a request for preapproval 
under the program constitutes an application. If, however, a consumer 
merely inquires about the program, but does not initiate a preapproval 
request under it, commenters questioned whether the creditor must treat 
the inquiry as an application. The Board believes that whether the 
inquiry in this case is an application should be determined under the 
criteria set forth in comments 2(f)-3 and 9-5.
    Finally, some commenters asked whether a preapproval that 
constitutes an application includes preapproved credit solicitations. 
Prescreened solicitations are not applications for purposes of 
Regulation B. (See Sec.  202.12(b)(7)).
2(l) Creditor
    Comment 2(l)-2 has been revised to clarify the type of creditors 
subject only to the general prohibitions against discrimination and 
discouragement in Sec. Sec.  202.4(a) and (b), respectively.
    Some industry commenters expressed concern that the clarification 
would include in the definition of creditor persons without discretion 
to decide whether credit will be extended. The Board recognizes that in 
the credit application process persons may play a variety of roles, 
from accepting applications through extending or denying credit. 
Comment 2(l)-2 is intended to clarify that where the only role a person 
plays is accepting and referring applications for credit, or selecting 
creditors to whom applications will be made, the person meets the 
definition of creditor, but only for purposes of the prohibitions 
against discrimination and discouragement. For example, an automobile 
dealer may merely accept and refer applications for credit, or it may 
accept applications, perform underwriting, and make a decision whether 
to extend credit. Where the automobile dealer only accepts applications 
for credit and refers those applications to another creditor who makes 
the credit decision--for example, where the dealer does not participate 
in setting the terms of the credit or making the credit decision--the 
dealer is subject only to Sec. Sec.  202.4(a) and (b) for purposes of 
compliance with Regulation B.
2(z) Prohibited Basis
    A technical revision has been made to comment 2(z)-1 for clarity. 
Comment 2(z)-3 has been amended to reflect 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 has been made to comment 3-1.

Section 202.4--General Rule Prohibiting Discrimination

    Section 202.4 has been substantially revised, as proposed. Former 
comment 4(a)-1 has been divided into comments 4(a)-1 and -2. Additional 
examples of disparate treatment have been included in comment 4(a)-2. 
Comments 4(b)-1 and -2 are former comments 5(a)-1 and -2, respectively, 
with minor revisions. References to ``potential'' applicants in former 
comment 5(a)-1, which is now comment 4(b)-1, have been changed to 
``prospective'' applicants with no substantive change intended. 
Comments 4(c)-1, -2, and -3 are former comments 5(e)-1, -2, and -3, 
respectively. New comment 4(d)-1 clarifies the ``clear and 
conspicuous'' requirement.

Section 202.5--Rules Concerning Taking of Applications

    Section 202.5 has been substantially revised. Comments 5(a)-1 and -
2 have been moved to comments 4(b)-1 and -2, respectively, consistent 
with changes to the regulation. Comment 5(b)-1 has been re-designated 
as comment 5(a)(1)-1. Comments 5(b)(2)-1, -2, and -3 have been re-
designated as comments 5(a)(2)-1, -2, and -3, respectively, consistent 
with the restructuring of the regulation and the Board's decision to 
retain the general prohibition against inquiring about, or noting, 
applicants' personal characteristics for nonmortgage credit, with some 
exceptions. Comments 5(d)(1)-1 and 5(d)(2)-1, -2, and -3 have not been 
revised. Comments 5(e)-1, -2, and -3 have been moved to comments 4(c)-
1, -2, and -3, respectively, consistent with changes to the regulation.

Section 202.5a--Rules on Providing Appraisal Reports

    Former Sec.  202.5a is now Sec.  202.14.

Section 202.6--Rules Concerning Evaluation of Applications

    Comments to Sec. Sec.  202.6(a), 202.6(b)(1), (2), (5) and (8) have 
been revised.
6(a) General Rule Concerning use of Information
    Comment 6(a)-1 has been revised to reflect the exception for 
collecting applicant characteristics for purposes of a self-test.
6(b) Specific Rules Concerning use of Information
6(b)(1)
    As proposed, former comment 6(b)(1)-1 has been divided and certain 
portions have been moved to Sec.  202.6(b)(8) of the regulation and 
other portions have been moved to Sec.  202.6(b)(8) of the commentary 
for clarity. Comment 6(b)(1)-2 has been re-designated as 6(b)(1)-1.

[[Page 13156]]

6(b)(2)
    Technical revisions have been made to comments 6(b)(2)-2 and -3, 
with no substantive change intended. 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, -3, and -4 have been revised for clarity, with 
no substantive change intended.
6(b)(8)
    New comment 6(b)(8)-1 incorporates a portion of former comment 
6(b)(1)-1 and clarifies that a creditor may consider the marital status 
of an applicant or joint applicant to ascertain its rights and remedies 
under state law for the particular extension of credit.

Section 202.7--Rules Concerning Extensions of Credit

    Revisions have been made in comments to Sec.  202.7(d)(1).
7(d)(1)
    Comment 7(d)(1)-1, adopted substantially as proposed, clarifies 
that when an applicant is individually creditworthy, a creditor may not 
require the signature of any person besides the applicant on a credit 
instrument. A cross-reference has been added to note the special rule 
under comment 7(d)(6)-1 for guarantors of closely held corporations.
    Comment 7(d)(1)-3 provides guidance on how to evidence applicants' 
intent to apply for joint credit. The proposed rule clarified that 
creditors must document in some manner a person's intent to become 
jointly liable for a credit obligation, and provided examples. Some 
commenters expressed concern that the Board is requiring written 
applications for business credit. Other commenters believed that the 
best method to evidence intent is to require written applications. A 
few commenters asked that the Board afford creditors the flexibility to 
determine how to evidence intent for joint credit.
    Written applications for business credit are not required, nor has 
the Board proposed to require such applications. While creditors are 
required to have documentation evidencing intent to apply for joint 
credit, creditors have the flexibility to determine the methods used to 
establish intent. The comment has been adopted substantially as 
proposed, with revisions for clarity. First, the comment clarifies that 
evidence of intent must be provided at the time of application. 
Accordingly, a creditor could not use the fact that two parties signed 
the note, for example, as evidence of intent to be jointly liable at 
the time of application. Second, the examples in the proposed rule have 
been revised to provide greater clarity. Consistent with providing 
greater clarity in the examples, some of the model forms in Appendix B 
have been modified slightly to reflect this guidance.

Section 202.8--Special Purpose Credit Programs

    Minor revisions have been made in comments to Sec.  202.8(a). 
Proposed revisions to comments in Sec.  202.8(c) and (d) have not been 
adopted.
8(a) Standards for Programs
    Comment 8(a)-5 adds an example of how creditors designing a special 
purpose credit program may determine need, and has been adopted as 
proposed.
8(c) Special Rule Concerning Requests and Use of Information
    Proposed revisions to comment 8(c)-1 have not been adopted, 
reflecting the Board's decision to retain the general prohibition under 
Sec.  202.5 against the collection of applicant characteristic 
information, except for the purpose of conducting a self-test. 
Technical revisions have been made for clarity.
8(d) Special Rule in the Case of Financial Need
    Proposed revisions to comment 8(d)-1 have not been adopted, 
reflecting the Board's decision to retain the general prohibition under 
Sec.  202.5 against the collection of applicant characteristic 
information, except for the purpose of conducting a self-test. 
Technical revisions have been made for clarity.

Section 202.9--Notifications

    Revisions have been made in comments to Sec. Sec.  202.9, 
202.9(b)(2), 202.9(c), and 202.9(g). In comment 9-5 concerning 
prequalifications, the discussion of preapprovals has been removed as 
proposed, and certain preapproval requests are now treated differently 
from prequalification requests, as clarified in comments 2(f)-3 and 
2(f)-5. Also, in response to public comments, language has been added 
to clarify that a creditor may tell consumers not only the maximum 
amount they may borrow under various loan programs, but also the rates 
and other terms available, without turning prequalification requests 
into applications for credit.
    Some commenters suggested adding language to clarify that the 
specific information that a creditor may evaluate about a consumer in a 
prequalification includes credit information. The Board believes that 
the language in the comment as revised is sufficiently broad to cover 
credit information. Creditors should bear in mind, however, that unless 
an application for credit has been made by the consumer, or the 
creditor has written instructions from the consumer to obtain a credit 
report, a permissible purpose for obtaining a credit report on the 
consumer may not exist under the Fair Credit Reporting Act.
9(b) Form of ECOA Notice and Statement of Specific Reasons
9(b)(2)
    Comment 9(b)(2)-7 has been adopted as proposed with minor revisions 
for clarity. The proposed comment clarified that in a combined credit 
scoring and judgmental system where an applicant is neither approved 
nor denied based on the first component of the system but is denied 
based on the second component, the adverse action reasons must come 
from both components of the system. Several commenters found the 
comment confusing. These commenters believed that the proposed language 
of the comment contradicts the general rule of the comment that the 
reasons for denial must come from the component of the system the 
applicant failed. The comment, however, is intended to address several 
distinct situations.
    The comment applies when applications are automatically denied 
based on the first component, for example the credit scoring component, 
and are not forwarded to the judgmental component. In those cases, the 
adverse action reasons must come solely from the credit scoring 
component. The comment also applies when applications pass the credit 
scoring system, are automatically forwarded to the judgmental 
component, and are denied based on the judgmental component. In those 
cases, the adverse action reasons must come solely from the judgmental 
component. These examples are consistent with the rule that the reasons 
for denial must come from the component the applicant failed.
    The amendments to the comment apply when a creditor utilizes a 
scorecard with ``gray bands,'' meaning that the applicant's score does 
not pass or fail the credit scoring component but falls within a range 
where referral to an analyst for judgmental review is required. If 
credit is denied, the adverse action reasons must come from both the 
credit scoring component and the judgmental component of the system.

[[Page 13157]]

Providing one or more adverse action reasons from the credit scoring 
component will help educate consumers about why their credit score did 
not pass the credit scoring component. In all situations addressed by 
the comment, a combination of more than four principal adverse action 
reasons is not likely to be helpful to applicants.
9(c) Incomplete Applications
9(c)(1) Notice Alternatives
    As discussed in the supplementary information to Sec.  202.2(f) of 
the regulation and commentary, the definition of application includes 
certain preapproval requests. Some commenters expressed concern that in 
many cases applicants make preapproval requests and then fail to follow 
through on the request. Under Sec.  202.9(c), within 30 days of 
receiving an application that is incomplete regarding matters that the 
applicant can complete, the creditor must notify the applicant of 
action taken or of the incompleteness. According to some commenters, 
where a preapproval request remains incomplete, sending the applicant a 
notice of incompleteness does not appear useful.
    The Board believes that in the case of a traditional application, 
the applicant is interested in pursuing a loan, but may be unaware that 
the application remains incomplete in some respect; in this situation, 
a notice of incompleteness can serve an important function. This seems 
less likely in the case of a preapproval request, which is often a less 
complicated and more expeditious process. Therefore, comment 9(c)(1)-1 
has been added to include an exception from the requirement to provide 
a notice of incompleteness for preapprovals that meet the definition of 
``application'' as clarified in comment 2(f)-5. This exception 
parallels the amendment to Regulation C (Home Mortgage Disclosure), 
which treats preapproval requests as applications, but does not require 
reporting of preapproval requests that remain incomplete. (See 67 FR 
7222, February 15, 2002.)
9(g) Applications Submitted Through a Third Party
    The proposed revisions to comment 9(g)-1 clarified that the 
requirements of Sec.  202.9(a)(2) apply to applications submitted 
through a third party. The requirement to include the address of each 
creditor gives the applicant the information necessary to request a 
statement of specific reasons for the adverse action or an explanation 
of the reasons. Accordingly, comment 9(g)-1 has been adopted as 
proposed.

Section 202.10--Furnishing of Credit Information

    There are no revisions to this section.

Section 202.11--Relation to State Law

    There are no revisions to this section.

Section 202.12--Record Retention

    As proposed, comments in Sec.  202.12(b) have been added to reflect 
changes to the regulation concerning retention of certain records 
related to prescreened solicitations.
12(b)(7) Prescreened Solicitations
    The Board proposed to add three new comments to new Sec.  
202.12(b)(7) to clarify the record retention requirements for 
prescreened solicitations. With one exception, the comments have been 
adopted as proposed, with technical revisions for clarity. Proposed 
comment 12(b)(7)-3 would have clarified the regulatory requirement to 
retain the portion of the marketing plan to which the solicitation 
relates. Since the final rule eliminates the marketing plan 
requirement, the proposed comment has not been adopted. Comment 
12(b)(7)-3 now clarifies the requirement to retain records of 
correspondence relating to complaints (whether formal or informal) 
about prescreened solicitations. (See detailed discussion in the 
supplementary information to Sec.  202.12(b)(7) of the regulation.)

Section 202.13--Information for Monitoring Purposes

    The proposed revision to a comment in Sec.  202.13(a) has not been 
adopted. A technical revision has been made for clarity. Comments in 
Sec.  202.13(b) have been revised.
13(a) Information To Be Requested
    Comment 13(a)-7 has been retained, consistent with the Board's 
decision to retain the general prohibition against the notation of 
applicant characteristics for nonmortgage credit transactions, subject 
to certain exceptions. The citation in the comment has been revised to 
conform with the reorganization of the regulation.
13(b) Obtaining of Information
    Consistent with a revision to Sec.  202.13(a) of the regulation, 
comment 13(b)-1 has been revised to clarify the guidance issued in 1997 
by the Office of Management and Budget.
    Comment 13(b)-3 has been revised to make the treatment of 
applications received by telephone consistent with Appendix A, 
paragraph V.D. 2., and Appendix B, paragraph I.B.4. of Regulation C 
(Home Mortgage Disclosure) for the purpose of collecting monitoring 
information. Comment 13(b)-4 combines existing comments 13(b)-4 and -5, 
and has been revised to make the treatment of applications received 
electronically consistent with comment 203.4(a)(7)-5 of Regulation C.
    Comment 13(b)-7 has been retained and re-designated as comment 
13(b)-6, consistent with the Board's decision to retain the general 
prohibition against the notation of applicant characteristics for 
nonmortgage credit transactions, except for the purpose of conducting a 
self-test.

Section 202.14--Rules on Providing Appraisal Reports

    Section 202.14 is former Sec.  202.5a. There are no revisions to 
comments in this section.

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

    The proposed addition of a comment to Sec.  202.15(b)(3) has not 
been adopted.
15(b)(3)
    As discussed earlier, the Board is retaining the general 
prohibition against inquiring about, or noting, information about an 
applicant's personal characteristics, such as race or national origin, 
except for the purpose of conducting a self-test under Sec.  202.15. 
Accordingly, proposed comment 15(b)(3)(ii)-2--which would have 
clarified that the collection of information about an applicant's 
characteristics does not qualify for the self-test privilege--has not 
been adopted. For a discussion of the exception for self-testing, see 
Sec.  202.5(b)(1) and the supplementary information to that section.

Section 202.16--Requirements for Electronic Communication

    Section 202.16 is former Sec.  202.17. The comments in Sec.  202.16 
have been republished for convenience. Consistent with the Board's 
decision to lift the mandatory compliance date for the interim final 
rule in Sec.  202.16 (66 FR 41439, August 8, 2001), the comments in 
this section are not currently in effect on a mandatory basis and will 
be separately finalized. Accordingly, there are no revisions to 
comments in this section.

Section 202.17--Enforcement, Penalties, and Liabilities

    Section 202.17 is former Sec.  202.14. There are no revisions to 
comments in this section.

[[Page 13158]]

Appendix B to Part 202--Model Application Forms

    Comment 1 to Appendix B has been revised to delete a reference to 
U.S. Office of Management and Budget classifications. Other proposed 
changes to comment 1 have not been adopted, reflecting the Board's 
decision to retain the general prohibition against the collection of 
applicant characteristics for nonmortgage credit. Consistent with that 
decision, comment 2 has been retained.

Appendix C--Sample Notification Forms

    There are no revisions to the comment in Appendix C.

VII. Reorganization of the Regulation

    Provisions of the regulation and commentary are re-designated as 
indicated in the tables below. While the tables present a substantially 
complete summary of the reorganization, they should not be used as a 
substitute for a detailed comparison of the revised regulation with the 
old regulation.

                  Table 1.--Section 202.2--Definitions
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Comment 2(f)-5................  Comment 2(f)-6.
------------------------------------------------------------------------


   Table 2.--Section 202.3--Limited Exceptions for Certain Classes of
                              Transactions
------------------------------------------------------------------------
            Current                                New
------------------------------------------------------------------------
Regulation 202.3(a)(2)(ii)....  Deleted.
Regulation 202.3(a)(2)(iii)...  Regulation 202.3(a)(2)(ii).
Regulation 202.3(b)(2)(i).....  Regulation 202.3(b)(2)(ii).
Regulation 202.3(b)(2)(ii)....  Regulation 202.3(b)(2)(iii).
Regulation 202.3(b)(2)(iii)...  Regulation 202.3(b)(2)(i).
Regulation 202.3(c)(2)(i).....  Regulation 202.3(c)(2)(ii).
Regulation 202.3(c)(2)(ii)....  Regulation 202.3(c)(2)(iii).
Regulation 202.3(c)(2)(iii)...  Regulation 202.3(c)(2)(iv).
Regulation 202.3(c)(2)(iv)....  Regulation 202.3(c)(2)(i).
------------------------------------------------------------------------


                 Table 3.--Section 202.4--General Rules
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Comment 202.4-1...............  Comment 4(a)-1, -2.
Regulation 202.4(b)...........  Regulation 202.4(e).
------------------------------------------------------------------------


   Table 4.--Section 202.5--Rules Concerning Requests for Information
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Regulation 202.5(a)...........  Regulation 202.4(b).
Comment 202.5(a)-1............  Comment 202.4(b)-1.
Comment 202.5(a)-2............  Comment 202.4(b)-2.
Comment 202.5(b)-1............  Comment 202.5(a)(1)-1.
Regulation 202.5(b)(1)........  Regulation 202.5(a)(1).
Regulation 202.5(b)(2)........  Regulation 202.5(a)(2).
Comment 202.5(b)(2)-1.........  Comment 202.5(a)(2)-1.
Comment 202.5(b)(2)-2.........  Comment 202.5(a)(2)-2.
Comment 202.5(b)(2)-3.........  Comment 202.5(a)(2)-3.
Regulation 202.5(b)(3)........  Regulation 202.5(a)(3).
Regulation 202.5(d)(3)........  Regulation 202.5(b), (b)(2).
Regulation 202.5(d)(4)........  Regulation 202.5(d)(3).
Regulation 202.5(d)(5)........  Regulation 202.5(b), (e).
Regulation 202.5(e)...........  Regulation 202.4(c).
Comment 202.5(e)-1............  Comment 202.4(c)-1.
Comment 202.5(e)-2............  Comment 202.4(c)-2.
Comment 202.5(e)-3............  Comment 202.4(c)-3.
------------------------------------------------------------------------


     Table 5.--Section 202.5a--Rules on Providing Appraisal Reports
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Regulation 202.5a(a)..........  Regulation 202.14(a).
Comment 202.5a(a)-1...........  Comment 202.14(a)-1.
Comment 202.5a(a)-2...........  Comment 202.14(a)-2.
Comment 202.5a(a)(2)(i)-1.....  Comment 202.14(a)(2)(i)-1.
Comment 202.5a(a)(2)(ii)-1....  Comment 202.14(a)(2)(ii)-1.
Regulation 202.5a(b)..........  Regulation 202.14(b).
Regulation 202.5a(c)..........  Regulation 202.14(c).
Comment 202.5a(c)-1...........  Comment 202.14(c)-1.

[[Page 13159]]

 
Comment 202.5a(c)-2...........  Comment 202.14(c)-2.
------------------------------------------------------------------------


  Table 6.--Section 202.6--Rules Concerning Evaluation of Applications
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Comment 202.6(b)(1)-1.........  Regulation 202.6(b)(8), Comment
                                 202.6(b)(8)-1.
Comment 202.6(b)(1)-2.........  Comment 202.6(b)(1)-1.
------------------------------------------------------------------------


     Table 7.--Section 202.7--Rules Concerning Extensions of Credit
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Comment 7(d)(1)-1.............  Comment 7(d)(1)-2.
------------------------------------------------------------------------


      Table 8.--Section 202.13--Information for Monitoring Purposes
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Regulation 202.13(a)..........  Regulation 202.13(a)(1), (a)(2).
Regulation 202.13(a)(1).......  Regulation 202.13(a)(1)(i).
Regulation 202.13(a)(2).......  Regulation 202.13(a)(1)(ii).
Regulation 202.13(a)(3).......  Regulation 202.13(a)(1)(iii).
Regulation 202.13(a)(4).......  Regulation 202.13(a)(1)(iv).
Comment 202.13(b)-4, -5.......  Comment 202.13(b)-4.
Comment 202.13(b)-6...........  Comment 202.13(b)-5.
Comment 202.13(b)-7...........  Comment 202.13(b)-6.
------------------------------------------------------------------------


    Table 9.--Section 202.14--Enforcement, Penalties and Liabilities
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Regulation 202.14(a)..........  Regulation 202.17(a).
Regulation 202.14(b)..........  Regulation 202.17(b).
Regulation 202.14(c)..........  Regulation 202.17(c).
Comment 202.14(c)-1...........  Comment 202.17(c)-1.
Comment 202.14(c)-2...........  Comment 202.17(c)-2.
------------------------------------------------------------------------


  Table 10.--Section 202.17--Requirements for Electronic Communications
------------------------------------------------------------------------
            Current                              Revised
------------------------------------------------------------------------
Regulation 202.17(a)..........  Regulation 202.16(a).
Regulation 202.17(b)..........  Regulation 202.16(b).
Comment 202.17(b)-1...........  Comment 202.16(b)-1.
Comment 202.17(b)-2...........  Comment 202.16(b)-2.
Comment 202.17(b)-3...........  Comment 202.16(b)-3.
Comment 202.17(b)-4...........  Comment 202.16(b)-4.
Comment 202.17(b)-5...........  Comment 202.16(b)-5.
Regulation 202.17(c)..........  Regulation 202.16(c).
Regulation 202.17(d)..........  Regulation 202.16(d).
Comment 202.17(d)(1)-1........  Comment 202.16(d)(1)-1.
Comment 202.17(d)(2)-1........  Comment 202.16(d)(2)-1.
Comment 202.17(d)(2)-2........  Comment 202.16(d)(2)-2.
Regulation 202.17(e)..........  Regulation 202.16(e).
Comment 202.17(e)-1...........  Comment 202.16(e)-1.
Regulation 202.17(f)..........  Regulation 202.16(f).
Comment 202.17(f)-1...........  Comment 202.16(f)-1.
------------------------------------------------------------------------

VIII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (PRA) (44 
U.S.C. 3506; 5 CFR 1320, Appendix A.1), the Board reviewed the final 
rule under the authority delegated to the Board by the U.S. Office of 
Management and Budget. The Federal Reserve may not conduct or sponsor, 
and an organization is not required to respond to, an information 
collection unless it displays a currently valid OMB control number. The 
OMB

[[Page 13160]]

control number for this final rule is 7100-0201.
    The information collection that is revised by this rulemaking is 
found in 12 CFR part 202. This information collection 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 income, 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.).
    Regulation B applies to all types of creditors, not just state 
member banks (SMBs). However, under the Paperwork Reduction Act, the 
Federal Reserve accounts for the burden of the paperwork associated 
with the regulation only for entities that are supervised by the 
Federal Reserve. Appendix A of Regulation B defines these creditors as 
SMBs, 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. Other Federal agencies account for the paperwork 
burden for the institutions they supervise. Creditors are required to 
retain records for 12 to 25 months as evidence of compliance.
    The estimated annual burden for entities supervised by the Federal 
Reserve is approximately 175,700 hours for the 1,312 creditors that are 
``respondents'' for purposes of the Paperwork Reduction Act. In 
conjunction with the proposed revisions to Regulation B, the Board 
sought comment on the burden estimate for the proposed changes. 
Approximately 750 comments were received on the proposed rulemaking. 
Commenters generally opposed most of the major proposed revisions to 
the regulation, but provided suggestions for additional revisions to 
help facilitate compliance with the regulation. Creditors commented 
that the burden estimate in the proposed rulemaking was too low; 
however, none quantified or provided evidence of acceptable higher 
estimates.
    The increase in the estimated annual burden, from previously 
published burden estimates, is due to the new disclosure requirement 
associated with Sec.  202.5(b)(1). Section 202.5(b)(1) requires 
creditors that collect applicant characteristics for purposes of 
conducting a self-test to disclose to credit applicants that providing 
the information is optional, that the creditor will not take the 
information into account in any aspect of the credit transaction, and, 
if applicable, that the information will be noted by visual observation 
or surname if the applicant chooses not to provide it. To help ease 
burden, a model notice is provided in Appendix C to Regulation B.
    The exact burden of the disclosure requirement is difficult to 
quantify because it is unclear how many creditors will choose to 
conduct self-tests, but that burden is expected to be minimal given 
that a model form is provided. The estimated annual burden for the new 
disclosure is approximately 10,000 hours. The estimated annual burden 
represents about 3.5 percent of total Federal Reserve System burden.
    For purposes of the PRA, no paperwork burden is associated with the 
recordkeeping requirement for information about prescreened 
solicitations (Sec.  202.12(b)(7)). The final rule generally requires 
creditors to retain information they already retain for business 
purposes. Thus, there will likely be some incremental compliance burden 
but no additional paperwork burden; and commenters did not provide any 
comments to the contrary.
    Because the records would be maintained at state member banks and 
the notices are not provided to the Federal Reserve, no issue of 
confidentiality normally arises. However, the information 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 Board has a continuing interest in the public's opinions of the 
Federal Reserve's collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this information 
collection, including suggestions for reducing the burden, may be sent 
to: Secretary, Board of Governors of the Federal Reserve System, 20th 
and C Streets, NW., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0201), 
Washington, DC 20503.

IX. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 604(a)), the Board has prepared a final regulatory 
flexibility analysis of these revisions to Regulation B. The final rule 
is a consequence of Board policy to review and update its regulations 
periodically. The Board's previous comprehensive review of Regulation B 
was completed in 1985.
    The Board received no comments specifically responding to the 
initial regulatory flexibility analysis published in conjunction with 
the proposed rule. As discussed in the supplementary information 
presented above, however, many comments the Board received discussed 
the compliance burdens arising from particular proposals. Such comments 
are summarized throughout the supplementary information, as are the 
Board's responses. The supplementary information also contains 
discussions of the alternative measures the Board considered, and in 
some cases adopted, to reduce burden.
    Some changes in the final rule should not impose additional burden 
on institutions. The general prohibition on data notation for 
nonmortgage credit products has been retained, subject to an exception 
to allow the collection of applicants' personal characteristics for the 
purpose of conducting a self-test under Sec.  202.15. To the extent 
creditors choose to collect these data, however, the final rule 
requires a disclosure to be made to applicants. The Board has tried to 
minimize any burden imposed by the disclosure requirement by publishing 
a model disclosure form. The exact burden of the disclosure requirement 
is difficult to quantify; it is uncertain how many creditors will 
choose to conduct self-tests and collect these data.
    The final rule imposes a new requirement upon creditors to retain 
certain records in connection with certain prescreened solicitations. 
This requirement will enable the Board and the other enforcement 
agencies to monitor solicitation practices in a systematic way that to 
date has not been possible, based on information that creditors 
currently maintain. The Board will at some future date determine 
whether additional steps might be warranted for coverage of prescreened 
solicitations by Regulation B.
    Although the new rule will impose some burden on creditors, the 
Board has sought to minimize burden by tracking existing legal 
requirements and current business practice. For example, users of 
consumer reports are required to retain some prescreening information 
under the Fair Credit Reporting Act. The final rule under Regulation B 
parallels this requirement. In addition, many creditors retain part or 
much of the solicitation information for business purposes, such as to 
evaluate marketing plans.
    The Board has modified the final rule to further reduce compliance 
burden. The proposed rule would have required creditors to keep the 
marketing plan to

[[Page 13161]]

which a solicitation relates. The Board has not adopted this 
requirement because it may be overly burdensome. And since prescreened 
solicitations may be one aspect of a creditor's overall marketing 
program, reviewing a single component might not have provided the 
proper context. While creditors will be required to keep information 
relating to complaints about solicitations, creditors will not be 
required to store the information in a centralized database or set of 
files. Creditors will have the flexibility to retain such 
correspondence in any manner that would be reasonably accessible and 
understandable to examiners.
    Burdens associated with the requirement to retain records relating 
to prescreened solicitations likely will be greater for large creditors 
than for small creditors, because large creditors are more active in 
this area. The number of small creditors affected by the recordkeeping 
requirement is unknown but is likely to be small.
    The proposed rule would have required creditors to retain records 
for 25 months rather than 12 months for certain types of business 
credit. The Board has not adopted the proposed rule, based on its 
belief that the compliance burden would outweigh the benefits. For 
example, the use of electronic record storage for many business credit 
records is not as prevalent as the Board believed when it issued the 
proposal. Thus, no additional burden is imposed by the final rule.
    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.

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.

    For the reasons set forth in the preamble, 12 CFR part 202 is 
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 rules.
202.5 Rules concerning requests for information.
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.
202.13 Information for monitoring purposes.
202.14 Rules on providing appraisal reports.
202.15 Incentives for self-testing and self-correction.
202.16 Requirements for electronic communication.
202.17 Enforcement, penalties and liabilities.
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, 
this regulation applies to all persons who are creditors, as defined in 
Sec.  202.2(1). 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 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;
    (iii) A refusal or failure to authorize an account transaction at 
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 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.
    (e) 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

[[Page 13162]]

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 used by a creditor 
for the type of credit requested. 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 Sec.  202.3(a)-(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 a credit decision, including 
setting the terms of the credit. The term creditor includes a 
creditor's assignee, transferee, or subrogee who so participates. For 
purposes of Sec.  202.4(a) and (b), the term creditor 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 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 in 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

[[Page 13163]]

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 do not 
apply to public utilities credit:
    (i) Section 202.5(d)(1) concerning information about marital 
status; and
    (ii) 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) concerning information about the sex of an 
applicant;
    (ii) Section 202.5(c) concerning information about a spouse or 
former spouse;
    (iii) Section 202.5(d)(1) concerning information about marital 
status;
    (iv) Section 202.7(b) relating to designation of name to the extent 
necessary to comply with rules regarding an account in which a broker 
or dealer has an interest, or rules regarding the aggregation of 
accounts of spouses to determine controlling interests, beneficial 
interests, beneficial ownership, or purchase limitations and 
restrictions;
    (v) Section 202.7(c) relating to action concerning open-end 
accounts, to the extent the action taken is on the basis of a change of 
name or marital status;
    (vi) Section 202.7(d) relating to the signature of a spouse or 
other person;
    (vii) Section 202.10 relating to furnishing of credit information; 
and
    (viii) Section 202.12(b) relating to record retention.
    (c) Incidental credit--(1) Definition. Incidental credit refers to 
extensions of consumer credit other than 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); 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) concerning information about the sex of an 
applicant, but only to the extent necessary for medical records or 
similar purposes;
    (ii) Section 202.5(c) concerning information about a spouse or 
former spouse;
    (iii) Section 202.5(d)(1) concerning information about marital 
status;
    (iv) Section 202.5(d)(2) concerning information about income 
derived from alimony, child support, or separate maintenance payments;
    (v) Section 202.7(d) relating to the signature of a spouse or other 
person;
    (vi) Section 202.9 relating to notifications;
    (vii) Section 202.10 relating to furnishing of credit information; 
and
    (viii) 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 against discrimination on a prohibited basis, the 
requirements of this regulation do not apply to government credit.


Sec.  202.4  General rules.

    (a) Discrimination. A creditor shall not discriminate against an 
applicant on a prohibited basis regarding any aspect of a credit 
transaction.
    (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) Form of disclosures. A creditor that provides in writing any 
disclosures or information required by this regulation must provide the 
disclosures in a clear and conspicuous manner and, except for the 
disclosures required by Sec. Sec.  202.5 and 202.13, in a form the 
applicant may retain.
    (e) Foreign-language disclosures. Disclosures may be made in 
languages other than English, provided they are available in English 
upon request.


Sec.  202.5  Rules concerning requests for information.

    (a) General rules--(1) Requests for information. Except as provided 
in paragraphs (b) through (d) of this section, a creditor may request 
any information in connection with a credit transaction.\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) through (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 statutes or regulations.
    (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).
    (b) Limitation on information about race, color, religion, national 
origin, or sex. A creditor shall not inquire about the race, color, 
religion, national origin, or sex of an applicant or any other person 
in connection with a credit transaction, except as provided in 
paragraphs (b)(1) and (b)(2) of this section.
    (1) Self-test. A creditor may inquire about the race, color, 
religion, national origin, or sex of an applicant or any other person 
in connection with a credit transaction for the purpose of

[[Page 13164]]

conducting a self-test that meets the requirements of Sec.  202.15. A 
creditor that makes such an inquiry shall disclose orally or in 
writing, at the time the information is requested, that:
    (i) The applicant will not be required to provide the information;
    (ii) The creditor is requesting the information to monitor its 
compliance with the federal Equal Credit Opportunity Act;
    (iii) Federal law prohibits the creditor from discriminating on the 
basis of this information, or on the basis of an applicant's decision 
not to furnish the information; and
    (iv) If applicable, certain information will be collected based on 
visual observation or surname if not provided by the applicant or other 
person.
    (2) Sex. 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.
    (c) Information about a spouse or former spouse--(1) General rule. 
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 
(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 is 
relying on property located in such a state as a basis for repayment of 
the credit requested; 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 that an 
applicant list any account on which the applicant is contractually 
liable and to provide the name and address of the person in whose name 
the account is held. A creditor may also ask an applicant to list the 
names in which the applicant has previously received credit.
    (d) 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) 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.
    (e) Permanent residency and immigration status. A creditor may 
inquire about the permanent residency and immigration status of an 
applicant or any other person in connection with a credit transaction.


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, 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 make assumptions or use aggregate statistics 
relating to the likelihood that any category 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;

[[Page 13165]]

    (ii) On the applicant's request, any information the applicant may 
present that tends to indicate 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 the applicant's 
immigration status or status as a permanent resident of the United 
States, 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 or 
other person'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 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 applicant is relying on property 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 credit 
requested under the creditor's standards of creditworthiness; and
    (ii) The applicant does not have sufficient separate property to 
qualify for the 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 credit requested, a creditor may request a 
cosigner, guarantor, endorser, or similar party. 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

[[Page 13166]]

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 the 
provisions of this regulation apply to each of the special purpose 
credit programs described in paragraph (a) of this section except as 
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 credit 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 credit 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:
    (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 on 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 
Sec.  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 the applicant's written request for confirmation.
    (3) Notification to business credit applicants. For business 
credit, a creditor shall comply with the notification requirements of 
this section in the following manner:
    (i) With regard to a business that had gross revenues of $1 million 
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) of this section, 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 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 entirely by telephone, a creditor 
satisfies the requirements of paragraph (a)(3)(i) of this section 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 million 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) Notify the applicant, within a reasonable time, orally or in 
writing, of the action taken; 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 
the creditor's notification.
    (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 a 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

[[Page 13167]]

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. 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. In the case of a 
creditor that did not receive more than 150 applications during the 
preceding calendar year, the requirements of this section (including 
statements of specific reasons) are satisfied by oral notifications.
    (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 the credit offered, each creditor 
taking adverse action must comply with this section, 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.
    (h) Duties of third parties. A third party may use electronic 
communication in accordance with the requirements of Sec.  202.16, as 
applicable, to comply with the requirements of paragraph (g) of this 
section on behalf of a creditor.


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 
special purpose credit program as defined by Sec.  202.8.
    (2) A creditor, state, or other interested party may request that 
the Board 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 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 those of 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 of the Act 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 
for use in

[[Page 13168]]

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, except as provided in paragraph (b)(5) of 
this section) after the date that a creditor notifies an applicant of 
action taken on an application or of incompleteness, 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, except as provided in paragraph (b)(5) of this section) after 
the date that a creditor notifies an applicant of adverse action 
regarding an existing account, 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, except as provided in paragraph (b)(5) of this section) 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, 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 months for business credit, 
except as provided in paragraph (b)(5) of this section) if 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.  202.17 
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 that had gross revenues in excess of $1 million 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) Prescreened solicitations. For 25 months after the date on 
which an offer of credit is made to potential customers (12 months for 
business credit, except as provided in paragraph (b)(5) of this 
section), the creditor shall retain in original form or a copy thereof:
    (i) The text of any prescreened solicitation;
    (ii) The list of criteria the creditor used to select potential 
recipients of the solicitation; and
    (iii) Any correspondence related to complaints (formal or informal) 
about the solicitation.


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):
    (i) Ethnicity, using the categories Hispanic or Latino, and not 
Hispanic or Latino; and race, using the categories American Indian or 
Alaska Native, Asian, Black or African American, Native Hawaiian or 
Other Pacific Islander, and White;
    (ii) Sex;
    (iii) Marital status, using the categories married, unmarried, and 
separated; and
    (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 information. Questions regarding ethnicity, race, 
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 ethnicity, race, 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 ethnicity, race, 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 ethnicity, race 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  Rules on providing appraisal reports.

    (a) Providing appraisals. A creditor shall provide a copy of an 
appraisal report used in connection with an application for credit that 
is to be

[[Page 13169]]

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 an 
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 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 regulation. 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 regulation 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 appraisal 
reports 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.  202.15  Incentives for self-testing and self-correction.

    (a) General rules--(1) Voluntary self-testing and correction. The 
report or results of a 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 the information 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) Scope of privilege--(1) General rule. 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)) 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 13170]]

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


Sec.  202.16  Requirements for electronic communication.

    (a) Definition. Electronic communication means a message 
transmitted electronically between a creditor and an applicant in a 
format that allows visual text to be displayed on equipment, for 
example, a personal computer monitor.
    (b) General rule. In accordance with the Electronic Signatures in 
Global and National Commerce Act (the E-Sign Act) (15 U.S.C. 7001 et 
seq.) and the rules set forth in this regulation, a creditor may 
provide by electronic communication any disclosure required by this 
regulation to be in writing. Disclosures provided by electronic 
communication must be provided in a clear and conspicuous manner and in 
a form the applicant may retain.
    (c) When consent is required. For disclosures required by this 
regulation to be in writing, a creditor shall obtain an applicant's 
affirmative consent in accordance with the requirements of the E-Sign 
Act. Disclosures under Sec. Sec.  202.9(a)(3)(i)(B), 202.13(a), and 
202.14(a)(2)(i) are not subject to this requirement if provided on or 
with the application.
    (d) Address or location to receive electronic communication. A 
creditor that uses electronic communication to provide disclosures 
required by this part shall:
    (1) Send the disclosure to the applicant's electronic address; or
    (2) Make the disclosure available at another location such as an 
Internet Web site; and
    (i) Alert the applicant of the disclosure's availability by sending 
a notice to the applicant's electronic address (or to a postal address, 
at the creditor's option). The notice shall identify the account 
involved and the address of the Internet Web site or other location 
where the disclosure is available; and
    (ii) Make the disclosure available for at least 90 days from the 
date the disclosure first becomes available or from the date of the 
notice alerting the applicant of the disclosure, whichever comes later.
    (3) Exceptions. A creditor need not comply with paragraph (d)(2)(i) 
and (ii) of this section for the disclosure required by Sec.  
202.13(a).
    (e) Redelivery. When a disclosure provided by electronic 
communication is returned to a creditor undelivered, the creditor shall 
take reasonable steps to attempt redelivery using information in its 
files.
    (f) Electronic signatures. An electronic signature as defined under 
the E-Sign Act satisfies any requirement under this part for an 
applicant's signature or initials.


Sec.  202.17  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, Surface 
Transportation Board, 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 702(g) and 706(a) and 
(b) 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 702(g) and 704(b), (c), and (d) of the 
Act, violations of the Act or this regulation also constitute 
violations of other federal laws. Liability for punitive damages can 
apply only 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, it may 
refer the matter to the Attorney General of the United States. 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 that one or more creditors 
have 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. If the agency has 
reason to believe that one or more creditors violated section 701(a) of 
the Act, the agency may refer a matter to the Attorney General.
    (4) On referral, or whenever the Attorney General has reason to 
believe that one or more creditors have engaged in a pattern or 
practice in violation of the Act or this regulation, 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, a consumer compliance examination, or some 
other basis) 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:
    (i) Notify the Secretary of Housing and Urban Development; and
    (ii) Inform the applicant that the Secretary of Housing and Urban 
Development has been notified and that remedies may be available under 
the Fair Housing Act.
    (c) Failure of compliance. A creditor's failure to comply with 
Sec. Sec.  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 Sec. Sec.  202.9 and 202.10, the creditor shall correct it 
as soon as possible. If a creditor inadvertently obtains the monitoring 
information regarding the ethnicity, race, and sex of the applicant in 
a dwelling-related transaction not covered by Sec.  202.13, the 
creditor may retain information and act on the application without 
violating the regulation.

Appendix A to Part 202--Federal Enforcement Agencies

    The following list indicates the federal agencies that enforce 
Regulation B for

[[Page 13171]]

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 Group, 1301 McKinney Street, 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: 
FDIC Consumer Response Center, 2345 Grand Boulevard, Suite 100, 
Kansas City, Missouri 64108

    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: Office of 
Proceedings, 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., 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 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), (c) and (d) of Sec.  202.5 of this 
regulation.
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[[Page 13184]]

Appendix C to Part 202--Sample Notification Forms

    1. This appendix contains ten 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 
Sec. Sec.  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 Sec. Sec.  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.  
202.14. Form C-10 is designed for use in notifying an applicant for 
nonmortgage credit that the creditor is requesting applicant 
characteristic information.
    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 section 
615(a) disclosure when adverse action is taken against a consumer 
based on information from a consumer reporting agency. A creditor 
must provide the section 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 
section 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 
section 615(a) or section 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 Sec. Sec.  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 Sec.  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.  202.14 of this part. Proper use of 
Form C-10 will satisfy the requirements of Sec.  202.5(b)(1).

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
------ Collection action or judgment
------ Garnishment or attachment
------ Foreclosure or repossession
------ Bankruptcy
------ Number of recent inquiries on credit bureau report
------ 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):

Your Income:

------ is below our minimum requirement.

[[Page 13185]]

------ 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 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 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:
    [sbull] Insufficient bank references
    [sbull] Type of occupation
    [sbull] Insufficient credit experience
    [sbull] Number of recent inquiries on credit bureau report
    In evaluating your application the consumer reporting agency 
listed below provided us with information that in whole or in part 
influenced our decision. The consumer 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. 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 received 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 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

[[Page 13186]]

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, which 
prohibits unlawful discrimination. You are not required to provide 
this information. We will not take this information (or your 
decision not to provide this information) into account in connection 
with your application or credit transaction. The law provides that a 
creditor may not discriminate based on this information, or based on 
whether or not you choose to provide it. [If you choose not to 
provide the information, we will note it by visual observation or 
surname].

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 creditor is not restricted to the 
party or person to whom the obligation is initially payable, as is 
the case

[[Page 13187]]

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. If the applicant applied in 
accordance with the creditor's procedures, a refusal to refinance or 
extend the term of a business or other loan is adverse action.

Paragraph 2(c)(1)(ii)

    1. 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 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. 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)(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 an account when the 
accountholder is currently in default or delinquent on that account. 
Notification in accordance with Sec.  202.9 of the regulation 
generally is required, however, if the creditor's action is based on 
a past delinquency or default on the account.

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 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 used. The term ``procedures'' 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 based on oral requests, the creditor's 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 
consumer, decides to decline the request, and communicates this to 
the consumer, 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 consumer, not on what the consumer says 
or asks. (See comment 9-5 for further discussion of prequalification 
requests; see comment 2(f)-5 for a discussion of preapproval 
requests.)
    4. Examples of inquiries that are not applications. The 
following examples illustrate situations in which only an inquiry 
has taken place:
    i. A consumer calls to ask about loan terms and an employee 
explains the creditor's basic loan terms, such as interest rates, 
loan-to-value ratio, and debt-to-income ratio.
    ii. 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 price of the car and the amount of the 
downpayment, then gives the consumer the rate.
    iii. A consumer asks about terms for a loan to purchase a home 
and tells the loan officer her income and intended downpayment, 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. A consumer calls to ask about terms for a loan to purchase 
vacant land and states his income and the sales price of the 
property to be financed, and asks whether he qualifies for a loan; 
the employee responds by describing the general lending policies, 
explaining that he would need to look at all of the consumer's 
qualifications before making a decision, and offering to send an 
application form to the consumer.
    5. Examples of an application. An application for credit 
includes the following situations:
    i. 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 reviews the request under a program in 
which the institution, after a comprehensive analysis of her 
creditworthiness, issues a written commitment valid for a designated 
period of time to extend a loan up to a specified amount. The 
written commitment may not be subject to conditions other than 
conditions that require the identification of adequate collateral, 
conditions that require no material change in the applicant's 
financial condition or creditworthiness prior to funding the loan, 
and limited conditions that are not related to the financial 
condition or creditworthiness of the applicant that the lender 
ordinarily attaches to a traditional application (such as 
certification of a clear termite inspection for a home purchase 
loan, or a maximum mileage requirement for a used car loan). But if 
the creditor's program does not provide for giving written 
commitments, requests for preapprovals are treated as 
prequalification requests for purposes of the regulation.
    ii. Under the same facts as above, the financial institution 
evaluates the person's creditworthiness and determines that she does 
not qualify for a preapproval.
    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 a telephone number 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.)

[[Page 13188]]

    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). Under 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 only accept applications and 
refer applicants to creditors, or 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.  202.4(b), the general rule against 
discouraging applications.
    2(p) Empirically derived and other credit scoring systems.
    1. Purpose of definition. The definition under Sec.  
202.2(p)(1)(i) through (iv) sets the criteria that a credit system 
must meet in order 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. The credit scoring 
system must be revalidated frequently enough to ensure that it 
continues to meet recognized professional statistical standards for 
statistical soundness. To ensure that predictive ability is being 
maintained, the creditor 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.
    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. A 
creditor is responsible for ensuring its system is validated and 
revalidated based on the creditor's own data when it becomes 
available.
    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. As used in this 
regulation, prohibited basis 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) 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.

Section 202.3--Limited Exceptions for Certain Classes of Transactions

    1. Scope. Under this section, procedural requirements of the 
regulation do not apply to certain types of credit. All classes of 
transactions remain subject to Sec.  202.4(a), the general rule 
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's bar against 
discrimination on a prohibited basis.
    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 merchant) 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 Sec.  202.3(c).
    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 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

Paragraph 4(a)

    1. Scope of 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 provisions 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

[[Page 13189]]

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 exist, for example, in the 
following situations:
    A. 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. A creditor provides more comprehensive information to men 
than to similarly situated women.
    C. A creditor requires a minority applicant to provide greater 
documentation to obtain a loan than a similarly situated nonminority 
applicant.
    D. 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 an 
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 requirement for written applications by writing down 
pertinent information that is provided by the applicant.
    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 Requests for Information

    5(a) General rules.

Paragraph 5(a)(1)

    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(a)(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, ethnicity, 
and sex of applicants for home-improvement loans and home-purchase 
loans, including some types of loans not covered by Sec.  202.13.
    3. Collecting information on behalf of creditors. Persons such 
as loan brokers and correspondents do not violate the ECOA or 
Regulation B if they collect information that they are otherwise 
prohibited from 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) Other limitations on information requests.

Paragraph 5(d)(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 income.
    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)

    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 income, a creditor 
making such an inquiry on an application form should preface 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.

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 or from 
using for any purpose other than to conduct a self-test under Sec.  
202.15.
    2. Effects test. The effects test is a judicial doctrine that 
was developed in a series of employment cases decided by the U.S. 
Supreme Court under Title VII of the Civil Rights Act of 1964 (42 
U.S.C. 2000e et seq.), and the burdens of proof for such employment 
cases were codified by Congress in the Civil Rights Act of 1991 (42 
U.S.C. 2000e-2). 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 income 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 nonminority 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.

[[Page 13190]]

Paragraph 6(b)(1)

    1. Prohibited basis--special purpose credit. In a special 
purpose credit 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. Some credit systems segment the 
population and use different scorecards based on the age of an 
applicant. In such a system, one card may cover 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 may cover all other applicants, who are evaluated under the 
attributes predictive for that broader class. When a system uses a 
card covering a wide age range that encompasses elderly applicants, 
the credit scoring system is not deemed to 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 
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. For example, 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. 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 length of 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).
    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 (as in the case of 
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 payments, retirement benefits, or 
public assistance 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 for reliability.
    B. A creditor may evaluate each component of the applicant's 
income, and then score or take into account income determined to be 
reliable separately from other income; or the creditor may disregard 
that portion of income that is not reliable when it aggregates 
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 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 
primary source. The creditor may not, however, score or otherwise 
take into account the number of sources for income 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. On the applicant's request, however, a creditor must consider 
credit information not reported through a credit bureau when the

[[Page 13191]]

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 immigration status 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. 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 the 
marital status of an applicant or joint applicant 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. But 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 cards issued on the account. But the creditor may not require 
that the name be the husband's name. (See Sec.  202.10 for rules 
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 now 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 or reaching 
a particular age, or a 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 an account holder, 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 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 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 requests individual 
credit but does not meet a creditor's standards, the creditor may 
require a cosigner, guarantor, endorser, or similar partie--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. (But see comment 7(d)(6)-1 concerning guarantors of closely 
held corporations.)
    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 person's intent to be a 
joint applicant must be evidenced at the time of application. 
Signatures on a promissory note may not be used to show intent to 
apply for joint credit. On the other hand, signatures or initials on 
a credit application affirming applicants' intent to apply for joint 
credit may be used to establish intent to apply for joint credit. 
(See Appendix B). The method used to establish intent must be 
distinct from the means used by individuals to affirm the accuracy 
of information. For example, signatures on a joint financial 
statement affirming the veracity of information are not sufficient 
to establish intent to apply for joint credit.

Paragraph 7(d)(2)

    1. Jointly owned property. If an applicant requests unsecured 
credit, does not own sufficient separate property, and relies on 
joint property to establish creditworthiness, the creditor must 
value the applicant's interest in the jointly owned property. A 
creditor may not request that a nonapplicant joint owner sign any 
instrument as a condition of the credit extension unless the 
applicant's interest does not support the amount and terms of the 
credit sought.
    i. Valuation of applicant's interest. In determining the value 
of an applicant's interest in jointly owned property, a creditor may 
consider factors such as the form of ownership and the property's 
susceptibility to attachment, execution, severance, or partition; 
the value of the applicant's interest after such action; and the 
cost associated with the action. This determination must be based on 
the existing form of ownership, 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 could 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 
qualify for the extension of credit. For example:
    A. Providing a co-signer or other party (Sec.  202.7(d)(5));
    B. Requesting that the credit be granted on a secured basis 
(Sec.  202.7(d)(4)); or
    C. Providing 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 (such as 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

[[Page 13192]]

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 the signatures.
    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 asked 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 
warranted, 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 of the married officers of 
a business or the married shareholders of a closely held 
corporation.
    2. Spousal guarantees. The rules in Sec.  202.7(d) bar a 
creditor from requiring the signature of a guarantor's spouse just 
as they bar the creditor from requiring the signature of an 
applicant's spouse. For example, although a creditor may require all 
officers of a closely held corporation to personally guarantee a 
corporate loan, the creditor may not automatically require that 
spouses of married officers also sign the guarantee. If an 
evaluation of the financial circumstances of an officer indicates 
that an additional signature is necessary, however, the creditor may 
require the signature of another person 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 for determining 
eligibility and premium rates for insurance, however, 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 pursuant to 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 credit 
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 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 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 that would 
otherwise be prohibited by Sec. Sec.  202.5 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 about 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

[[Page 13193]]

consider certain information that would otherwise be prohibited by 
Sec. Sec.  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 comply, however, 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. Whether a creditor must provide a 
notice of action taken for a prequalification request depends on the 
creditor's response to the request, as discussed in comment 2(f)-3. 
For instance, a creditor may treat the request as an inquiry if the 
creditor evaluates specific information about the consumer and tells 
the consumer the loan amount, rate, and other terms of credit the 
consumer could qualify for under various loan programs, explaining 
the process the consumer must follow to submit a mortgage 
application and the information the creditor will analyze in 
reaching a credit decision. On the other hand, a creditor has 
treated a request as an application, and is subject to the adverse 
action notice requirements of Sec.  202.9 if, after evaluating 
information, the creditor decides that it will not approve the 
request and communicates that decision to the consumer. For example, 
if the creditor tells the consumer that it would not approve an 
application for a mortgage because of a bankruptcy in the consumer's 
record, the creditor has denied an application for credit.
    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)-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 information that the applicant 
can provide 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, make its credit decision, and notify the 
applicant accordingly. 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 missing information 
or ``incomplete 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 
made by 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 which rules in this paragraph 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 govern the application. However, if an applicant applies 
for business credit as an individual, the rules in Sec.  
202.9(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 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 Sec. Sec.  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

[[Page 13194]]

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, but falls into a gray band, 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 its own files. Disclosing that a credit 
report was obtained and used in the denial of 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 credit obligations. To satisfy the FCRA requirement, the 
creditor must also disclose that a credit report was obtained and 
used in the denial of the application. 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)(1)

    1. Exception for preapprovals. The requirement to provide a 
notice of incompleteness does not apply to preapprovals that 
constitute applications under Sec.  202.2(f).

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 an 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 Sec.  202.9(c)(1) and (2). If the applicant 
provides the information, the creditor must 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. 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 must change the designation on the account 
to reflect the new parties and must 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 on 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.
    1. Preemption determination--New York. The Board has determined 
that the following provisions in the state law of New York are 
preempted by the federal law, effective November 11, 1988:
    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,

[[Page 13195]]

national origin, or sex) required for eligibility for special-
purpose credit programs.
    2. Preemption determination--Ohio. The Board has determined that 
the following provision in the state law of Ohio is preempted by the 
federal law, effective July 23, 1990:
    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. Copies of the original record include 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 paper copy of a document (for 
example, of 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. Prescreened credit solicitations. The rule requires creditors 
to retain copies of prescreened credit solicitations. For purposes 
of this regulation, a prescreened solicitation is an ``offer of 
credit'' as described in 15 U.S.C. 1681a(1) 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, or 
annual fee.
    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 and to determine who will actually be 
offered credit.
    3. Correspondence. A creditor may retain correspondence relating 
to consumers' complaints about prescreened solicitations in any 
manner that is reasonably accessible and is understandable to 
examiners. There is no requirement to establish a separate database 
or set of files for such correspondence, or to match consumer 
complaints with specific solicitation programs.

Section 202.13--Information for Monitoring 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(a)(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. The 
applicant must be offered the option to select more than one racial 
designation.
    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 on paper or by 
means of computer the information that the applicant provides orally 
and that the creditor normally considers in a credit decision.
    3. Telephone, mail applications.
    i. A creditor that accepts an application by telephone or mail 
must request the monitoring information.
    ii. A creditor that accepts an application by mail need not make 
a special request for the monitoring information if the applicant 
has failed to provide it on the application form returned to the 
creditor.
    iii. If it is not evident on the face of an application that it 
was received by mail, telephone, or via an electronic medium, the 
creditor should indicate on the form or other application record how 
the application was received.
    4. Video and other electronic-application processes.
    i. If a creditor takes an application through an electronic 
medium that allows the creditor to see the applicant, the creditor 
must treat the application as taken in person. The creditor must 
note the monitoring information on the basis of visual observation 
or surname, if the applicant chooses not to provide the information.
    ii. If an applicant applies through an electronic medium without 
video capability,

[[Page 13196]]

the creditor treats the application as if it were received by mail.
    5. 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 of an applicant on brokered applications or 
applications received through a correspondent.
    6. 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 applicants.
    1. Procedures for providing disclosures. The disclosure 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 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 information required by this section.

Section 202.14--Rules on Providing Appraisal Reports

    14(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.  
202.14(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. This section applies when an applicant requests the 
renewal of an existing extension of credit and the creditor obtains 
a new appraisal report. This section does not apply when a creditor 
uses the appraisal report previously obtained to evaluate the 
renewal request.
    14(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.
    14(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).
    14(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 
the property's value.
    ii. A document prepared by the creditor's staff that 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 202.15--Incentives for Self-Testing and Self-Correction

    15(a) General rules.
    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.
    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.
    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 be privileged under this section whether or 
not the creditor's assertion of another privilege is upheld.
    15(b) Self-test defined.
    15(b)(1) Definition.

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)

    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.

[[Page 13197]]

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 
preapplication 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)

    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.
    15(c) Appropriate corrective action.
    1. The rule only addresses the corrective actions required for a 
creditor to take advantage of the privilege in this section. A 
creditor may be required to take other actions or provide additional 
relief if a formal finding of discrimination is made.
    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.
    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 a 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.

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 who was 
discriminated against on a prohibited basis, to qualify for the 
privilege in this section the creditor must provide appropriate 
remedial relief to that applicant; the creditor is not required to 
identify other applicants who might also have been adversely 
affected.

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 for 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.
    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 (such as in 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); a creditor 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.

Paragraph 15(d)(2)(i)

    1. A creditor's corrective action, 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. The 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)

    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)

    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

    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 such a requirement does not 
evidence the creditor's intent to forfeit the privilege.

Section 202.16--Requirements for Electronic Communication.

    16(b) General Rule.
    1. Relationship to the E-Sign Act. The E-Sign Act authorizes the 
use of electronic disclosures. It does not affect any requirement 
imposed under this part other than a provision that requires 
disclosures to be in paper form, and it does not affect the content 
or timing of disclosures. Electronic disclosures are subject to the 
regulation's format, timing, and retainability rules and the clear 
and conspicuous standard. For example, to satisfy the clear and 
conspicuous standard for disclosures, electronic disclosures must 
use visual text. The clear and conspicuous standard and 
retainability requirements apply to all disclosures provided 
electronically--those expressly required by the Act and regulation 
to be in writing, and those provided in writing where the creditor 
has the option to give the disclosure orally or in writing.
    2. Clear and conspicuous standard. A creditor must provide 
electronic disclosures using a clear and conspicuous format. Also, 
in accordance with the E-Sign Act:
    i. The creditor must disclose the requirements for accessing and 
retaining disclosures in that format;

[[Page 13198]]

    ii. The applicant must demonstrate the ability to access the 
information electronically and affirmatively consent to electronic 
delivery; and
    iii. The creditor must provide the disclosures in accordance 
with the specified requirements.
    3. Timing and effective delivery. i. When an applicant applies 
for credit on-line. When a creditor permits an applicant to apply 
for credit on-line, the applicant must be required to access the 
disclosures required at application before submitting the 
application. A link to the disclosures satisfies the timing rule if 
the applicant cannot bypass the disclosures before submitting the 
application. Or the disclosures must automatically appear on the 
screen, even if multiple screens are required to view all of the 
information. The creditor is not required to confirm that the 
applicant has read the disclosures.
    ii. Appraisals and adverse action. Disclosures provided by e-
mail are timely based on when the disclosures are sent. Disclosures 
posted at an Internet Web site, such as adverse action notices or 
copies of appraisals, are timely when the creditor has both made the 
disclosures available and sent a notice alerting the applicant that 
the disclosures have been posted. For example, under Sec.  202.9, a 
creditor must provide a notice of action taken within 30 days of 
receiving a completed application. For an adverse action notice 
posted on the Internet, a creditor must post the notice and notify 
the applicant of its availability within 30 days of receiving the 
applicant's completed application.
    4. Retainability of disclosures. Creditors satisfy the 
requirement that disclosures be in a form that the applicant may 
keep if electronic disclosures are delivered in a format that is 
capable of being retained (such as by printing or storing 
electronically). The format must also be consistent with the 
information required to be provided under section 101(c)(1)(C)(i) of 
the E-Sign Act (15 U.S.C. 7001(c)(1)(C)(i)) about the hardware and 
software requirements for accessing and retaining electronic 
disclosures.
    5. Disclosures provided on creditor's equipment. A creditor that 
controls the equipment providing electronic disclosures to 
applicants (for example, a computer terminal in a creditor's lobby 
or an automated loan machine at a public kiosk) must ensure that the 
equipment satisfies the regulation's requirements to provide timely 
disclosures in a clear and conspicuous format and in a form that the 
applicant may keep. For example, if disclosures are required at the 
time of an on-line application, the disclosures must be sent to the 
applicant's e-mail address or must be made available at another 
location such as the creditor's Internet Web site, unless the 
creditor provides a printer that automatically prints the 
disclosures.
    16(d) Address or Location to Receive Electronic Communication.

Paragraph 16(d)(1)

    1. Electronic address. An applicant's electronic address is an 
e-mail address that is not limited to receiving communication 
transmitted solely by the creditor.

Paragraph 16(d)(2)

    1. Identifying account involved. A creditor may identify a 
specific account in a variety of ways and is not required to 
identify an account by reference to the account number. For example, 
where the applicant has only one credit card account, and no 
confusion would result, the creditor may refer to ``your credit card 
account.'' If the applicant has two credit card accounts, the 
creditor may, for example, differentiate accounts based on the card 
program or by using a truncated account number.
    2. 90-day rule. The actual disclosures provided to an applicant 
must be available for at least 90 days, but the creditor has 
discretion to determine whether they should be available at the same 
location for the entire period.
    16(e) Redelivery.
    1. E-mail returned as undeliverable. If an e-mail to the 
applicant (containing an alert notice or other disclosure) is 
returned as undeliverable, the redelivery requirement is satisfied 
if, for example, the creditor sends the disclosure to a different e-
mail address or postal address that the creditor has on file for the 
applicant. Sending the disclosures a second time to the same 
electronic address is not sufficient if the creditor has a different 
address for the applicant on file.
    16(f) Electronic Signatures.
    1. Relationship to the E-Sign Act. The E-Sign Act provides that 
electronic signatures have the same validity as handwritten 
signatures. Section 106 of the E-Sign Act (15 U.S.C. 7006) defines 
an electronic signature. To comply with the E-Sign Act, an 
electronic signature must be executed or adopted by an applicant 
with the intent to sign the record. Accordingly, regardless of the 
technology used to meet this requirement, the process must evidence 
the applicant's identity.

Section 202.17--Enforcement, Penalties, and Liabilities

    17(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 
Sec. Sec.  202.12 and 202.13, this section requires that they be 
corrected prospectively.

Appendix B--Model Application Forms

    1. Freddie Mac/Fannie Mae form--residential loan application. 
The uniform residential loan application form (Freddie Mac 65/Fannie 
Mae 1003), including supplemental form (Freddie Mac 65A/Fannie Mae 
1003A), prepared by the Federal Home Loan Mortgage Corporation and 
the Federal National Mortgage Association and dated October 1992 may 
be used by creditors without violating this regulation. Creditors 
that are governed by the monitoring requirements of this 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 
ensure 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) 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 ensure 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, March 5, 2003.
Jennifer J. Johnson,
Secretary of the Board.

[FR Doc. 03-5666 Filed 3-17-03; 8:45 am]
BILLING CODE 6210-01-P