Federal Fair Lending and Equal Credit Opportunity ( B)

Background a prohibited basis. In addition, a bank may not use prescreening tactics likely to discourage potential The Equal Credit Opportunity Act (ECOA) of 1974, applicants on a prohibited basis. Instructions to which is implemented by the Board’s Regulation B, loan officers or brokers to use scripts, rate quotes, applies to all creditors. The requires finan­ or other means to discourage minority applicants cial institutions and other firms engaged in the from applying for credit are also prohibited. extension of credit to ‘‘make credit equally available The prohibition against discouraging applicants to all creditworthy customers without regard to sex applies to in- oral and telephone inquiries as or marital status.’’ Moreover, the statute makes it well as to written applications. Lending officers unlawful for ‘‘any creditor to discriminate against must refrain from requesting prohibited information any applicant with respect to any aspect of a credit in conversations with applicants during the pre­ transaction (1) on the basis of race, color, religion, interview phase (that is, before the application is national origin, sex or marital status, or age taken) as well as when taking the written application. (provided the applicant has the to con­ tract); (2) because all or part of the applicant’s To prevent discrimination in the credit-granting income derives from any public assistance pro­ process, the regulation imposes a delicate balance gram; or (3) because the applicant has in good between the creditor’s need to know as much as faith exercised any right under the Consumer possible about a prospective borrower and the Credit Protection Act.’’ In keeping with the broad borrower’s right not to disclose information irrel­ reach of the prohibition, the regulation covers evant to the credit transaction. To this end, the creditor activities before, during, and after the regulation prescribes rules for taking, evaluating, extension of credit. and acting on applications as well as rules for furnishing and maintaining credit information. Under the ECOA, the Federal Reserve Board is responsible for drafting and interpreting the imple­ menting regulation. Enforcement responsibility, how­ Rules for Taking Applications— ever, rests with a creditor’s functional regulator or, for any category not so assigned, with the Federal Section 202.5 Trade Commission. A synopsis of some of the more important points of Regulation B follows. Regulation B prohibits creditors from requesting and collecting specific personal information about an applicant that has no bearing on the applicant’s Prohibited Practices ability or willingness to repay the credit requested and could be used to discriminate against the Regulation B contains two basic and comprehen­ applicant. sive prohibitions against discriminatory lending practices (section 202.4): Applicant Characteristics • A creditor shall not discriminate against an applicant on a prohibited basis regarding any Creditors may not request or collect information aspect of a credit transaction. about an applicant’s race, color, religion, national origin, or sex. Exceptions to this rule generally • A creditor shall not make any oral or written involve situations in which the information is statement, in advertising or otherwise, to appli­ necessary to test for compliance with fair lending cants or prospective applicants that would rules or is required by a state or federal regulatory discourage, on a prohibited basis, a reasonable agency or other government entity for a particular person from making or pursuing an application. purpose, such as to determine eligibility for a Note that the regulation is concerned not only with particular program. For example, a creditor may the treatment of who have initiated the request prohibited information application process, but also with lender behavior • In connection with a self-test being conducted before the application is even taken. Lending by the creditor (provided that the self-test meets officers and employees must be careful to take no certain requirements) action that would, on a prohibited basis, discour­ age anyone from applying for a loan. For example, • For monitoring purposes in relation to credit a bank may not advertise its credit services and secured by real practices in ways that would tend to encourage • To determine an applicant’s eligibility for special- some types of borrowers and discourage others on purpose credit programs

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Information about a Spouse or Alimony, Child Support, or Separate Former Spouse (§ 202.5(c)) Maintenance Income (§ 202.5(d)(2)) A bank may not request information about an A bank may ask if an applicant is receiving alimony, applicant’s spouse or former spouse except under child support, or separate maintenance payments. the following circumstances: However, the bank must first disclose to the applicant that such income need not be revealed • The non-applicant spouse will be a user of or unless the applicant wishes to rely on that income joint obligor on the account. (Note: The term in the determination of creditworthiness. An appro­ ‘‘user’’ applies only to open-end accounts.) priate notice to that effect must be given whenever • The non-applicant spouse will be contractually the bank makes a general request concerning liable on the account. income and the source of that income. Therefore, a • The applicant is relying on the spouse’s income, bank either must ask questions designed to solicit at least in part, as a source of repayment. only information about specific income (for exam­ ple, ‘‘salary,’’ ‘‘wages,’’ ‘‘employment,’’ or other • The applicant resides in a community property specified categories of income) or must state that state, or the property upon which the applicant is disclosure of alimony, child support, or separate relying as a basis for repayment of the credit maintenance payments is not required. requested is located in such a state. • The applicant is relying on alimony, child sup­ port, or separate maintenance income as a basis Residency and Status for obtaining the credit. (§ 202.5(e)) The bank may inquire about the applicant’s perma­ Marital status nent residence and immigration status in order to (§§ 202.5(d)(1) and 202.5(d)(3)) determine creditworthiness. Individual Credit Rules for Evaluating Applications— When an applicant applies for individual credit, the Section 202.6 bank may not ask the applicant’s marital status. There are two exceptions to this rule: General Rule • If the credit transaction is to be secured, the A creditor may consider any information in evaluat­ bank may ask the applicant’s marital status. (This ing applicants, so long as the use of the information information may be necessary to determine what does not have the intent or the effect of discrimi­ would be required to gain access to the collateral nating against an applicant on a prohibited basis. in the event of default.) Generally, a creditor may not • If the applicant either resides in a community • Consider any of the prohibited bases, including property state or lists assets to support the debt age (providing the applicant is old enough, that are located in such a state, the bank may under state , to enter into a binding ) ask the applicant’s marital status. (In community and the receipt of public assistance property states, assets owned by a married individual may also be owned by the spouse, • Use childbearing or childrearing information, thus complicating the accessibility of the collat­ assumptions, or statistics to determine whether eral in the event of default.) an applicant’s income may be interrupted or decreased • Consider whether there is a telephone listing in Joint Credit the applicant’s name (but the creditor may consider whether there is a telephone in the When a request for credit is joint (made by two or applicant’s home) more individuals who will be primarily liable), the bank may ask the applicant’s marital status, • Discount or exclude part-time income from an regardless of whether the credit is to be secured or applicant or the spouse of an applicant unsecured, but may use only the terms ‘‘married,’’ ‘‘unmarried,’’ and ‘‘separated.’’ This requirement Systems for Analyzing Credit applies to oral as well as written requests for marital status information. ‘‘Unmarried’’ may be defined to Regulation B neither requires nor endorses any include divorced, widowed, or never married, but particular method of credit analysis. Creditors may the application must not be structured in such a use traditional methods, such as judgmental sys­ way as to encourage the applicant to distinguish tems that rely on a credit officer’s subjective among these. evaluation of an applicant’s creditworthiness, or

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they may use more-objective, statistically devel­ The subsections dealing with signatures have oped techniques such as credit scoring. been, for many creditors, some of the most commonly misunderstood provisions of Regulation B. For that reason, and to increase examiners’ Credit Scoring Systems ability to facilitate lender compliance and deter­ Section 202.2(p) of Regulation B prescribes the mine whether a particular signature practice is or is standards that a credit scoring system must meet not a violation of the regulation, additional guid­ to qualify as an ‘‘empirically derived, demonstrably ance is provided in CA Letter 02-1, Clarifying and statistically sound, credit system.’’ All forms of Signature Provisions under Sec. 202.7(d) of Regu­ credit analysis that do not meet the standards are lation B. Examiners should consult that CA letter automatically classified as ‘‘judgmental’’ systems. when assessing the level of a bank’s compliance This distinction is important because creditors that with the signature requirements. use a ‘‘demonstrably and statistically sound’’ system may take applicant age directly into account as a predictive variable, whereas judgmen­ Special-Purpose Credit Programs— tal systems may not. Section 202.8

The ECOA and Regulation B allow creditors to Judgmental Evaluation Systems establish special-purpose credit programs for appli­ cants who meet certain eligibility requirements. Any system other than one that is empirically Generally, these programs target an economically derived and demonstrably and statistically sound disadvantaged class of individuals and are autho­ is a judgmental system (including any credit rized by federal or state law. Some are offered by scoring system that does not meet the prescribed not-for-profit organizations that meet certain IRS technical standards). Such a system may not take guidelines, and some by for-profit organizations applicant age directly into account in evaluating that meet specific tests outlined in section 202.8. creditworthiness. The act and the regulation do, however, permit a creditor to consider the appli­ Experience has shown that creditors rarely seek cant’s age for the purpose of evaluating other to use section 202.8. Additionally, as stated in the applicant information that has a demonstrable commentary (supplement I to the regulation), the relationship to creditworthiness. Federal Reserve ‘‘does not determine whether individual programs qualify for special-purpose credit status, or whether a particular program Rules for Extensions of Credit— benefits an ‘economically disadvantaged class of Section 202.7 persons.’ The agency or creditor administering or offering the loan program must make these deci­ Section 202.7 of Regulation B provides a set of sions regarding the status of its program.’’ Conse­ rules proscribing certain discriminatory practices quently, examiners are encouraged, if an issue regarding the creation and continuation of credit arises regarding such a program, to consult with accounts. Board staff.

Signature Requirements Notifications—Section 202.9

The primary purpose of the signature requirements A bank must notify an applicant of action taken on is to permit creditworthy individuals (particularly the applicant’s request for credit, whether favor­ women) to obtain credit on their own. Two general able or adverse, within thirty days after receiving a rules apply: completed application. Notice of approval may be expressly stated or implied (for example, the bank • A bank may not require a signature other than the may give the applicant the credit card, money, applicant’s or joint applicant’s if under the bank’s property, or services for which the applicant standards of creditworthiness the applicant quali­ applied). Notification of adverse action taken on an fies for the amount and terms of the credit existing account must also be made within thirty requested. days. • A bank has more latitude in seeking signatures on instruments necessary to reach property used Under at least two circumstances, the bank need as security, or in support of the customer’s not comply with the thirty-day notification rule: creditworthiness, than it has in obtaining the • The bank must notify an applicant of adverse signatures of persons other than the applicant on action within ninety days after making a counter­ documents that establish the contractual obliga­ offer unless the applicant accepts or uses the tion to repay. credit during that time.

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• The bank may not have to notify an applicant of business had gross revenues of $1,000,000 or less adverse action if the application was incomplete in the preceding fiscal year. Extensions of trade and the bank sent the applicant a notice of credit, credit incident to a factoring agreement, and incompleteness that met certain requirements similar types of credit are subject to the same rules set forth in section 202.9(c). as those that apply to businesses that had gross revenues of more than $1,000,000. Adverse Action Notice (§ 202.9(a)(2)) Generally, a bank must comply with the same notification requirements for business credit appli­ A notification of adverse action must be in writing cants with gross revenues of $1,000,000 or less as and must contain certain information, including the it does for consumer credit applicants. However, name and address of the bank and the nature of the the bank has more options when dealing with these action that was taken. In addition, the bank must business credit applicants. First, the bank may tell provide an ECOA notice that includes the identity of the business credit applicant orally of the action the federal agency responsible for enforcing com­ taken. Second, if the bank chooses to provide a pliance with the act for that bank. This notice is notice informing the business credit applicant of generally included on the notification of adverse the right to request the reason for action taken, it action. The bank must also either provide the may, rather than disclose the reason itself, provide applicant with the specific principal reason for the the notice at the time of application. If the bank action taken or disclose that the applicant has the chooses to inform the applicant of the right to right to request the reason(s) for denial within sixty request a reason, however, it must provide a days of receipt of the bank’s notification, along with disclosure with an ECOA notice that is in retainable the name, address, and telephone number of the form and that gives the applicant the same person who can provide the specific reason(s) for information that must be provided to consumer the adverse action. The reason may be given orally credit applicants when this option is used (see if the bank also advises the applicant of the right to section 202.9(a)2)(ii)). Finally, if the application was obtain the reason in writing upon request. made entirely over the phone, the bank may provide an oral statement of action taken and of the Incomplete Applications (§ 202.9(c)) applicant’s right to a statement of reasons for adverse action. When a bank receives an incomplete application, it The notification requirements for business credit may send one of two alternative notifications to the applicants with gross revenues of more than applicant. One is a notice of adverse action; the $1,000,000 are relatively simple. The bank must other is a notice of incompleteness. The notice of notify the applicant of the action taken within a incompleteness must be in writing and must reasonable time period. The notice may be oral or specify the information the bank needs if it is to in writing; a written statement of the reasons for consider the application; it must also provide a adverse action and the ECOA notice need be reasonable period of time for the applicant to provided only if the applicant makes a written furnish the missing information. request within sixty days of the bank’s notification of the action taken. Applications Submitted through a Third Party (§ 202.9(g)) Designation of Accounts— When more than one bank is involved in a Section 202.10(a) transaction and adverse action is taken with respect to the application for credit by all the banks A creditor that furnishes credit information to a involved, each bank that took such action must consumer reporting agency must designate provide a notice of action taken. The notification • Any new account to reflect the participation of may be given by a third party; however, the notice both spouses if the applicant’s spouse is permit­ must disclose the identity of each bank on whose ted to use or is contractually liable on the behalf the notice is given. If one of the banks account approves the application, the banks that took adverse action need not provide notification. • Any existing account to reflect the participation of both spouses within ninety days after receiv­ ing a written request to do so from one of the Notification to Business Credit spouses Applicants (§ 202.9(a)(3)) If a creditor furnishes credit information to a The notification requirements for business credit consumer reporting agency, the creditor must applicants are different from those for consumer furnish the information in the name of the spouse credit applicants and are more extensive if the about whom the information was requested.

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Record Retention—Section 202.12 Incentives for Self-Testing and Self-Correction—Section 202.15 Applications A self-test, as discussed in section 202.15 of In general, a bank must preserve all written or Regulation B, must meet two criteria. First, it must recorded information connected with an applica­ be a program, practice, or study that a lender tion for twenty-five months (twelve months for designs and uses specifically to determine the business credit) after the date on which the bank extent or effectiveness of its compliance with the informed the applicant of action taken on an regulation. Second, the results of the self-test must application or of incompleteness of an application. create data or factual information that is otherwise not available and cannot be derived from loan or application files or other records related to credit Prohibited Information transactions. The findings of a self-test that is conducted voluntarily by a creditor and that A bank may retain information in its files that it may meets the conditions set forth in section 202.15 not use in evaluating applications. However, the are privileged against discovery or use by (1) a information must have been obtained inadvertently government agency in any examination or investi­ or in accordance with federal or state law or gation related to the ECOA or Regulation B or (2) a regulation. government agency or an applicant in any legal proceeding involving an alleged violation of the Existing Accounts ECOA or Regulation B. Privileged information includes the report or results of the test; data or A bank must preserve any written or recorded other information created by the test; and any information concerning adverse action on an analysis, opinions, or conclusions regarding the existing account as well as any written statement results of the test. The privilege does not cover submitted by the applicant alleging a violation of information about whether a test was conducted; the ECOA or Regulation B. This must be the methodology, scope, time period, or dates kept for twenty-five months (twelve months for covered by the test; loan or application files or business credit). other business records; and information derived from such files and records, even if aggregated, summarized, or reorganized. Prescreened Solicitations

The twenty-five-month retention rule also applies Requirements for Electronic when a bank makes an offer of credit to potential Communication—Section 202.16 customers. In such cases, the bank must retain for twenty-five months following the date of the solici­ Subject to the specific provisions of section 202.16 tation regarding disclosures, consumer consent, redeliv­ ery, electronic signatures, and exceptions, a credi­ • The text of any prescreened solicitation, tor may provide by electronic communication any • The list of criteria the creditor used to select disclosure otherwise required by the regulation to potential recipients of the solicitation, and be in writing. • Any correspondence related to complaints (for­ mal or informal) about the solicitation. Enforcement, Penalties, and Liabilities—Section 202.17 Rules for Providing Appraisal In addition to actual damages, Regulation B provides for punitive damages of up to $10,000 in Reports—Section 202.14 individual and up to the lesser of $500,000 or 1 percent of the bank’s net worth in class action Regulation B requires that banks provide a copy of suits. Successful complainants are also entitled to the appraisal report used in connection with an an award of costs and attorney’s fees. application for credit to be secured by a lien on a dwelling. A bank may provide the copy either A bank is not liable for failure to comply with the routinely (whether or not credit is granted or the notification requirements of section 202.9 if the application is withdrawn) or upon an applicant’s failure was caused by an inadvertent error and the written request. If the bank provides an appraisal bank, after discovering the error, (1) corrects the report only upon request, it must inform the error as soon as possible and (2) begins compli­ applicant in writing of the right to receive a copy of ance with the requirements of the regulation. the report. ‘‘Inadvertent errors’’ include mechanical, elec-

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tronic, and clerical errors that the bank can show 202.12, and 202.13 is not considered a violation if it (1) were not intentional and (2) occurred despite results from an inadvertent error and the bank takes the fact that the bank maintains procedures the corrective action noted above. Errors involving reasonably adapted to avoid such errors. Similarly, sections 202.12 and 202.13 may be corrected failure to comply with sections 202.6(b)(6), 202.10, prospectively by the bank.

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