Following is an official staff
interpretation of Regulation B 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official and unofficial, are superseded by this commentary.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). Further, the definition of creditor is not restricted
to the party or person to whom the obligation is initially payable,
as is the case under Regulation Z. Moreover, the Act and regulation
apply to all methods of credit evaluation, whether performed judgmentally
or by use of a credit scoring system.
2. Foreign applicability. Regulation
B generally does not apply to lending activities that occur outside
the United States. The regulation does apply to lending activities
that take place within the United States (as well as the Commonwealth
of Puerto Rico and any territory or possession of the United States),
whether or not the applicant is a citizen.
3. Board. The term Board, as
used in this regulation, means the Board of Governors of the Federal
Reserve System.
Section 202.2 Definitions
2(c) Adverse action.
Paragraph 2(c)(1)(i)
1. Application for credit. A
refusal to refinance or extend the term of a business or other
loan is adverse action if the applicant applied in accordance
with the creditor's procedures.
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 for purposes of the regulation
unless termination on this ground was explicitly provided for
in the credit agreement between the parties. In cases were 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:
A credit cardholder presents an expired card or a card
that has been reported to the card issuer as lost or stolen.
The amount of a transaction exceeds a cash advance or
credit limit.
The circumstances (such as excessive use of a credit
card in a short period of time) suggests that fraud is involved.
The authorization facilities are not functioning.
Billing statements have been returned to the creditor
for lack of a forwarding address.
2. Application for increase in
available credit. A refusal or failure to authorize an account transaction
at the point of sale or loan is not adverse action, except when
the refusal is a denial of an application, submitted in accordance
with the creditor's procedures, for an increase in the amount of
credit.
Paragraph 2(c)(2)(v)
1. Terms of credit versus type
of credit offered. When an applicant applies for credit and the
creditor does not offer the credit terms requested by the applicant
(for example, the interest rate, length of maturity, collateral,
or amount of downpayment), a denial of the application for that
reason is adverse action (unless the creditor makes a counteroffer
that is accepted by the applicant) and the applicant is entitled
to notification under Sec. 202.9.
2(e) Applicant.
1. Request to assume loan. If
a mortgagor sells or transfers the mortgaged property and the buyer
makes an application to the creditor to assume the mortgage loan,
the mortgagee must treat the buyer as an applicant unless its policy
is not to permit assumptions.
2(f) Application.
1. General. A creditor has the
latitude under the regulation to establish its own application process
and to decide the type and amount of information it will require
from credit applicants.
2. Procedures established. The
term refers to the actual practices followed by a creditor for making
credit decisions as well as its stated application procedures. For
example, if a creditor's stated policy is to require all applications
to be in writing on the creditor's application form, but the creditor
also makes credit decision based on oral requests, the creditor's
establish procedures are to accept both oral and written applications.
3. When an inquiry 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
appliant, decides to decline the request, and communicates this
to the applicant, the creditor has treated the inquiry as an application
and must then comply with the notification requirements under Sec.
202.9. Whether the inquiry becomes an application depends on how
the creditor responds to the applicant, not on what the appliant
says or asks.
4. Examples of inquiries that
are not applications. The following examples illustrate situations
in which only an inquiry has taken place:
When a consumer calls to asks about loan terms and an
employee explains the creditor's basic loan terms, such as interest
rates, loan to value ration, and debt to income ratio.
When a consumer calls to ask about interest rates for
car loans, and, in order to quote the appropriate rate, the
loan officer asks for the make and sale price of the car and
amount of the down- payment, then given the consumer the rate.
When a consumer asks about terms for a loan to purchase
home and tells the loan officer her income and intended down-payment,
but the loan officer only explains the creditor's loan to value
ratio policy and other basic lending policies, without telling
the consumer whether she qualifies for the loan.
When a consumer calls to ask about terms for a loan to
purchase vacant land and states his income, the sale price of
the property to be financed, and asks whether he qualifies for
a loan, and the employee responds by describing the general
lending policies, explaining that he would need to look at all
of the applicant's qualifications before making a decision,
and offering to send an application form to the consumer.
5. Completed Application--diligence requirement. The regulation
defines a completed application in terms that give a creditor the
latitude to establish its own information requirements. Nevertheless,
the creditor must act with reasonable diligence to collect information
needed to complete the application. For example, the creditor should
request information from third parties, such as a credit report,
promptly after receiving the application. If additional information
is needed from the applicant, such as an address or telephone number
needed to verify employment, the creditor should contact the applicant
promptly. (But see comment 9(a)(1)-3, which discusses the creditors's
option to deny an application on the basis of incompleteness.)
2(g) Business credit.
1. Definition. The test for deciding
whether a transaction qualifies as business credit is one of primary
purpose. For example, an open-end credit account used for both personal
and business purposes is not business credit unless the primary
purpose of the account is business- related. A creditor may rely
on an applicant's statement of the purpose for the credit requested.
2(j) Credit.
1. General. Regulation B covers
a wider range of credit transactions than Regulation Z (Truth in
Lending). For purposes of Regulation B a transaction is credit if
there is a right to defer payment of a debt-- regardless of whether
the credit is for personal or commercial purposes, the number of
installments required for repayment, or whether the transaction
is subject to a finance charge.
2(1) 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 who do not participate in credit decisions but who
regularly refer applicants to creditors or who select or offer to
select creditors to whom credit requests can be made. These persons
must comply with Sec. 202.4, the general rule prohibiting discrimination,
and with Sec. 202.5(a), on discouraging applications.
2(p) Empirically derived and other
credit scoring systems.
1. Purpose of definition. The
definition under Sec. 202.2(p)(1) through (iv) sets the criteria
that a credit system must meet in order for the system to use age
as a predictive factor. Credit systems that do not meet these criteria
are judgmental systems and may consider age only for the purpose
of determining a ``pertinent element of creditworthiness.'' (Both
types of systems may favor an elderly applicant. See Sec. 202.6(b)(2).)
2. Periodic revalidation. The
regulation does not specify how often credit scoring systems must
be revalidated. To meet the requirements for statistical soundness,
the credit scoring system must be revalidated frequently enough
to assure that it continues to meet recognized professional statistical
standards. To ensure that predictive ability is being maintained,
creditors must periodically review the performance of the system.
This could be done, for example, by analyzing the loan portfolio
to determine the delinquency rate for each score interval, or by
analyzing population stability over time to detect deviations of
recent applications from the applicant population used to validate
the system. If this analysis indicates that the system no longer
predicts risk with statistical soundness, the system must be adjusted
as necessary to reestablish its predictive ability. A creditor is
responsible for ensuring its system is validated and revalidated
based on the creditor's own data when it becomes available.
3. Pooled data scoring systems.
A scoring system or the data from which to develop such a system
may be obtained from either a single credit grantor or multiple
credit grantors. The resulting system will qualify as an empirically
derived, demonstrably and statistically sound, credit scoring system
provided the criteria set forth in paragraph (p)(1) (i) through
(iv) of this section are met.
4. Effects test and disparate
treatment. An empirically derived, demonstrably and statistically
sound, credit scoring system may include age as a predictive factor
(provided that the age of an elderly applicant is not assigned a
negative factor or value). Besides age, no other prohibited basis
may be used as a variable. Generally, credit scoring systems treat
all applicants objectively and thus avoid problems of disparate
treatment. In cases where a credit scoring system is used in conjunction
with individual discretion, disparate treatment could conceivably
occur in the evaluation process. In addition, neutral factors used
in credit scoring systems could nonetheless be subject to challenge
under the effects test. (See comment 6(a)-2 for a discussion of
the effects test).
2(w) Open-end credit.
1. Open-end real estate mortgages.
The term open-end credit does not include negotiated advances under
an open-end real estate mortgage or a letter of credit.
2(z) Prohibited basis.
1. Persons associated with applicant.
Prohibited basis as used in this regulation refers not only to certain
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 creditor may not discriminate against
an applicant because of that person's personal or business dealings
with members of a certain religion, because of the national origin
of any persons associated with the extension of credit (such as
the tenants in the apartment complex being financed), or because
of the race of other residents in the neighborhood where the property
offered as collateral is located.
2. National origin. A creditor
may not refuse to grant credit because an applicant comes from a
particular country but may take the applicant's immigration status
into account. A creditor may also take into account any applicable
law, regulation, or executive order restricting dealings with citizens
(or the government) of a particular country or imposing limitations
regarding credit extended for their use.
3. Public assistance program.
Any Federal, state, or local governmental assistance program that
provides a continuing, periodic income supplement, whether premised
on entitlement or need, is public assistance for purposes of the
regulation. The term includes (but is not limited to) Aid to Families
with Dependent Children, 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. This section relieves
burdens with regard to certain types of credit for which full application
of the procedural requirements of the regulation is not needed.
All classes of transactions remain subject to the general rule given
in Sec. 202.4, barring discrimination on a prohibited basis, and
to any other provision not specifically excepted.
3(a) Public utilities credit.
1. Definition. This definition
applies only to credit for the purchase of a utility service, such
as electricity, gas, or telephone service. Credit provided or offered
by a public utility for some other purpose--such as for financing
the purchase of a gas dryer, telephone equipment, or other durable
goods, or for insulation or other home improvements--is not excepted.
2. Security deposits. A utility
company is a creditor when it supplies utility service and bills
the user after the service has been provided. Thus, any credit term
(such as a requirement for a security deposit) is subject to the
regulation.
3. Telephone companies. A telephone
company's credit transactions qualify for the exceptions provided
in Sec. 202.3(a)(2) only if the company is regulated by a government
unit or files the charges for service, delayed payment, or any discount
for prompt payment with a government unit.
3(c) Incidental credit.
1. Examples. If a service provider
(such as a hospital, doctor, lawyer or retailer) allows the client
or customer to defer the payment of a bill, this deferral of debt
is credit for purposes of the regulation, even though there is no
finance charge and no agreement for payment in installments. Because
of the exceptions provided by this section, however, these particular
credit extensions are excepted from compliance with certain procedural
requirements as specified in the regulation.
3(d) Government credit.
1. Credit to governments. The
exception relates to credit extended to (not by) governmental entities.
For example, credit extended to a local government by a creditor
in the private sector is covered by this exception, but credit extended
to consumers by a federal or state housing agency does not qualify
for special treatment under this category.
1. Scope of section. The general
rule stated in Sec. 202.4 covers all dealings, without exception,
between an applicant and a creditor, whether or not addressed by
other provisions of the regulation. Other sections of the regulation
identify specific practices that the Board has decided are impermissible
because they could result in credit discrimination on a basis prohibited
by the act. The general rule covers, for example, application procedures,
criteria used to evaluate creditworthiness, administration of accounts,
and treatment of delinquent or slow accounts. Thus, whether or not
specifically prohibited elsewhere in the regulation, a credit practice
that treats applicants differently on a prohibited basis violates
the law because it violates the general rule. Disparate treatment
on a prohibited basis is illegal whether or not it results from
a conscious intent to discriminate. Disparate treatment would be
found, for example, where a creditor requires a minority applicant
to provide greater documentation to obtain a loan than a similarly
situated nonminority applicant. Disparate treatment also would be
found where a creditor waives or relaxes credit standards for a
nonminority applicant but not for a similarly situated minority
applicant. 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.
Section 202.5--Rules Concerning Taking
of Applications
5(a) Discouraging applications.
1. Potential applicants. Generally,
the regulation's protections apply only to persons who have requested
or received an extension of credit. In keeping with the purpose
of the act--to promote the availability of credit on a nondiscriminatory
basis Sec. 202.5(a) covers acts or practices directed at potential
applicants. Practices prohibited by this section include:
A statement that the applicant should not bother to apply,
after the applicant states that he is retired.
Use of words, symbols, models or other forms of communication
in advertising that express, imply or suggest a discriminatory
preference or a policy of exclusion in violation of the act.
Use of interview scripts that discourage applications
on a prohibited basis.
2. Affirmative advertising. A
creditor may affirmatively solicit or encourage members of traditionally
disadvantaged groups to apply for credit, especially groups that
might not normally seek credit from that creditor.
5(b) General rules concerning requests for
information. 1. Requests for information.
This section governs the types of information that a creditor may
gather. Section 202.6 governs how information may be used.
Paragraph 5(b)(2)
1. Local laws. Information that
a creditor is allowed to collect pursuant to a ``state'' statute
or regulation includes information required by a local statute,
regulation, or ordinance.
2. Information required by Regulation
C. Regulation C generally requires creditors covered by the Home
Mortgage Disclosure Act (HMDA) to collect and report information
about the race or national origin and sex of applicants for home
improvement loans and home purchase loans, including some types
of loans not covered by Sec. 202.13. Certain creditors with assets
under $30 million, though covered by HMDA, are not required to collect
and report these data; but they may do so at their option under
HMDA, without violating the ECOA or Regulation B.
3. Collecting information on behalf
of creditors. Loan brokers, correspondents, or other persons do
not violate the ECOA or Regulation B if they collect information
that they are otherwise prohibited from 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:
The applicant's obligation to pay alimony, child support,
or separate maintenance.
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.
Whether any obligation disclosed by the applicant has
a co- obligor, which could disclose that the co-obligor is a
spouse or former spouse.
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, a creditor may not make such an inquiry on an application
form without prefacing the request with the disclosure required
by this paragraph.
3. Specific inquiry about sources
of income. A creditor need not give the disclosure if the inquiry
about income is specific and worded in a way that is unlikely to
lead the applicant to disclose the fact that income is derived from
alimony, child support or separate maintenance payments. For example,
an application form that asks about specific types of income such
as salary, wages, or investment income need not include the disclosure.
5(e) Written applications.
1. Requirement for written applications.
The requirement of written applications for certain types of dwelling-related
loans is intended to assist the federal supervisory agencies in
monitoring compliance with the ECOA and the Fair Housing Act. Model
application forms are provided in appendix B to the regulation,
although use of a printed form of any kind is not required. A creditor
will satisfy the requirement by writing down the information that
it normally considers in making a credit decision. The creditor
may complete the application on behalf of an applicant and need
not require the applicant to sign the application.
2. Telephone applications. A creditor
that accepts applications by telephone for dwelling-related credit
covered by Sec. 202.13 can meet the requirements for written applications
by writing down pertinent information that is provided by the applicant(s).
3. Computerized entry. Information
entered directly into and retained by a computerized system qualifies
as a written application under this paragraph. (See the commentary
to section 202.13(b), Applications through electronic media and
Applications through video.)
Section 202.5a--Rules on Providing
Appraisal Reports
5a(a) Providing appraisals.
1. Coverage. This section covers
applications for credit to be secured by a lien on a dwelling, as
that term is defined in Sec. 202.5a(c), whether the credit is for
a business purpose (for example, a loan to start a business) or
a consumer purpose (for example, a loan to finance a child's education).
2. Renewals. If an applicant requests
that a creditor renew an existing extension of credit, and the creditor
obtains a new appraisal report to evaluate the request, this section
applies. This section does not apply to a renewal request if the
creditor uses the appraisal report previously obtained in connection
with the decision to grant credit.
5a(a)(2)(i) Notice.
1. Multiple applicants. When an
application that is subject to this section involves more than one
applicant, the notice about the appraisal report need only be given
to one applicant, but it must be given to the primary applicant
where one is readily apparent.
5a(a)(2)(ii) Delivery.
1. Reimbursement. Creditors may
charge for photocopy and postage costs incurred in providing a copy
of the appraisal report, unless prohibited by state or other law.
If the consumer has already paid for the report--for example, as
part of an application fee--the creditor may not require additional
fees for the appraisal (other than photocopy and postage costs).
5a(c) Definitions.
1. Appraisal reports. Examples
of appraisal reports are:
i. A report prepared by an appraiser
(whether or not licensed or certified), including written comments
and other documents submitted to the creditor in support of the
appraiser's estimate or opinion of value.
ii. A document prepared by the
creditor's staff which assigns value to the property, if a third-party
appraisal report has not been used.
iii. An internal review document
reflecting that the creditor's valuation is different from a valuation
in a third party's appraisal report (or different from valuations
that are publicly available or valuations such as manufacturers'
invoices for mobile homes).
2. Other reports. The term ``appraisal
report'' does not cover all documents relating to the value of the
applicant's property. Examples of reports not covered are:
i. Internal documents, if a third-party
appraisal report was used to establish the value of the property.
ii. Governmental agency statements
of appraised value.
iii. Valuations lists that are
publicly available (such as published sales prices or mortgage amounts,
tax assessments, and retail price ranges) and valuations such as
manufacturers' invoices for mobile homes.
Section 202.6--Rules Concerning Evaluation
of Applications
6(a) General rule concerning use
of information.
1. General. When evaluating an
application for credit, a creditor generally may consider any information
obtained. However, a creditor may not consider in its evaluation
of creditworthiness any information that it is barred by Sec. 202.5
from obtaining.
2. Effects test. The effects test
is a judicial doctrine that was developed in a series of employment
cases decided by the Supreme Court under Title VII of the Civil
Rights Act of 1964 (42 U.S.C. 2000e et seq.), 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 is face, unless
the creditor practice meets a legitimate business need that cannot
reasonably be achieved as well by means that are less disparate
in their impact. For example, requiring that applicants have incomes
in excess of a certain amount to qualify for an overdraft line of
credit could mean that women and minority applicants will be rejected
at a higher rate than men and non-minority applicants. If there
is a demonstrable relationship between the income requirement and
creditworthiness for the level of credit involved, however, use
of the income standard would likely be permissible.
6(b) Specific rules concerning
use of information.
Paragraph 6(b)(1)
1. Prohibited basis--marital status.
A creditor may not use marital status as a basis for determining
the applicant's creditworthiness. However, a creditor may consider
an applicant's marital status for the purpose of ascertaining the
creditor's rights and remedies applicable to the particular extension
of credit. For example, in a secured transaction involving real
property, a creditor could take into account whether state law gives
the applicant's spouse an interest in the property being offered
as collateral. Except to the extent necessary to determine rights
and remedies for a specific credit transaction, a creditor that
offers joint credit may not take the applicants' marital status
into account in credit evaluations. Because it is unlawful for creditors
to take marital status into account, creditors are barred from applying
different standards in evaluating married and unmarried applicants.
In making credit decisions, creditors may not treat joint applicants
differently based on the existence, the absence, or the likelihood
of a marital relationship between the parties.
2. 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 section 202.2(p), with one limitation: applicants
62 years or older must be treated at least as favorably as applicants
who are under 62. If age is scored by assigning points to an applicant's
age category, elderly applicants must receive the same or a greater
number of points as the most favored class of nonelderly applicants.
i. Age-split scorecards. A creditor
may segment the population into scorecards based on the age of an
applicant. In such a system, one card covers a narrow age range
(for example, applicants in their twenties or younger) who are evaluated
under attributes predictive for that age group. A second card covers
all other applicants who are evaluated under the attributes predictive
for that broad class. When a system uses a card covering a wide
age range that encompasses elderly applicants, the credit scoring
system does not score age. Thus, the system does not raise the issue
of assigning a negative factor or value to the age of elderly applicants.
But if a system segments the population by age into multiple scorecards,
and includes elderly applicants in a narrower age range, the credit
scoring system does score age. To comply with the act and regulation
in such a case, the creditor must ensure that the system does not
assign a negative factor or value to the age of elderly applicants
as a class.
3. Consideration of age in a judgmental
system. In a judgmental system, defined in Sec. 202.2(t), a creditor
may not take age directly into account in any aspect of the credit
transaction. For example, the creditor may not reject an application
or terminate an account because the applicant is 60 years old. But
a creditor that uses a judgmental system may relate the applicant's
age to other information about the applicant that the creditor considers
in evaluating creditworthiness. For example:
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.
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.)
A creditor may consider the applicant's age to assess
the significance of the length of the applicant's employment
(a young applicant may have just entered the job market) or
length of time at an address (an elderly applicant may recently
have retired and moved from a long-term residence).
As the examples above illustrate,
the evaluation must be made in an individualized, case-by-case manner;
and it is impermissible for a creditor, in deciding whether to extend
credit or in setting the terms and conditions, to base its decision
on age or information related exclusively to age. Age or age-related
information may be considered only in evaluating other ``pertinent
elements of creditworthiness'' that are drawn from the particular
facts and circumstances concerning the applicant.
4. Consideration of age in a reverse
mortgage. A reverse mortgage is a home-secured loan in which the
borrower receives payments from the creditor, and does not become
obligated to repay these amounts (other than in the case of default)
until the borrower dies, moves permanently from the home or transfers
title to the home, or upon a specified maturity date. Disbursements
to the borrower under a reverse mortgage typically are determined
by considering the value of the borrower's home, the current interest
rate, and the borrower's life expectancy. A reverse mortgage program
that requires borrowers to be age 62 or older is permissible under
section 202.6(b)(2)(iv). In addition, under section 202.6(b)(2)(iii),
a creditor may consider a borrower's age to evaluate a pertinent
element of creditworthiness, such as the amount of the credit or
monthly payments that the borrower will receive, or the estimated
repayment date.
5. 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 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:
The length of time an applicant will likely remain eligible
to receive such income.
Whether the applicant will continue to qualify for benefits
based on the status of the applicant's dependents (such as Aid
to Families with Dependent Children or Social Security payments
to a minor).
Whether the creditor can attach or garnish the income
to assure payment of the debt in the event of default.
Paragraph 6(b)(5)
1. Consideration of an individual
applicant. A creditor must evaluate income derived from part-time
employment, alimony, child support, separate maintenance, retirement
benefits, or public assistance (all referred to as ``protected income'')
on an individual basis, not on the basis of aggregate statistics,
and must assess its reliability or unreliability by analyzing the
applicant's actual circumstances, not by analyzing statistical measures
derived from a group.
2. Payments consistently made.
In determining the likelihood of consistent payments of alimony,
child support, or separate maintenance, a creditor may consider
factors such as whether payments are received pursuant to a written
agreement or court decree; the length of time that the payments
have been received; whether the payments are regularly received
by the applicant; the availability of court or other procedures
to compel payment; and the creditworthiness of the payor, including
the credit history of the payor when it is available to the creditor.
3. Consideration of income. 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 creditor may score or take into account the total sum
of all income stated by the applicant without taking steps to
evaluate the income.
A creditor may evaluate each component of the applicant's
income, and then score or take into account reliable income
separately from income that is not reliable, or the creditor
may disregard that portion of income that is not reliable before
aggregating it with reliable income.
A creditor that does not evaluate all income components
for reliability must treat as reliable any component of protected
income that is not evaluated.
In considering the separate
components of an applicant's income, the creditor may not automatically
discount or exclude from consideration any protected income.
Any discounting or exclusion must be based on the applicant's
actual circumstances.
4. Part-time employment, sources of income. A creditor may score
or take into account the fact that an individual applicant has more
than one source of earned income--a full-time and a part-time job
or two part-time jobs. A creditor may also score or treat earned
income from a secondary source differently than earned income from
a primary source. However, the creditor may not score or otherwise
take into account the number of sources for protected income--for
example, retirement income, social security, alimony. Nor may the
creditor treat negatively the fact that an applicant's only earned
income is derived from a part-time job.
Paragraph 6(b)(6)
1. Types of credit references.
A creditor may restrict the types of credit history and credit references
that it will consider, provided that the restrictions are applied
to all credit applicants without regard to sex, marital status,
or any other prohibited basis. However, on the applicant's request,
a creditor must consider credit information not reported through
a credit bureau when the information relates to the same types of
credit references and history that the creditor would consider if
reported through a credit bureau. Paragraph 6(b)(7)
1. National origin--immigration
status. The applicant's immigration status and ties to the community
(such as employment and continued residence in the area) could have
a bearing on a creditor's ability to obtain repayment. Accordingly,
the creditor may consider and differentiate, for example, between
a noncitizen who is a long-time resident with permanent resident
status and a noncitizen who is temporarily in this country on a
student visa.
2. National origin--citizenship.
Under the regulation a denial of credit on the ground that an applicant
is not a United States citizen is nor per se discrimination based
on national origin.
Section 202.7--Rules Concerning Extensions
of Credit
7(a) Individual accounts.
1. Open-end credit--authorized
user. A creditor may not require a creditworthy applicant seeking
an individual credit account to provide additional signatures. However,
the creditor may condition the designation of an authorized user
by the account holder on the authorized user's becoming contractually
liable for the account, as long as the creditor does not differentiate
on any prohibited basis in imposing this requirement.
2. Open-end credit--choice of
authorized user. A creditor that permits an account holder to designate
an authorized user may not restrict this designation on a prohibited
basis. For example, if the creditor allows the designation of spouses
as authorized users, the creditor may not refuse to accept a non-spouse
as an authorized user.
3. Overdraft authority on transaction
accounts. If a transaction account (such as a checking account or
NOW account) includes an overdraft line of credit, the creditor
may require that all persons authorized to draw on the transaction
account assume liability for any overdraft.
7(b) Designation of name.
1. Single name on account. A creditor
may require that joint applicants on an account designate a single
name for purposes of administering the account and that a single
name be embossed on any credit card(s) issued on the account. But
the creditor may not require that the name be the husband's name.
(See Sec. 202.10 for rule governing the furnishing of credit history
on accounts held by spouses.) 7(c) Action concerning existing open-end
accounts.
Paragraph 7(c)(1)
1. Termination coincidental with
marital status change. When an account holder's marital status changes,
a creditor generally may not terminate the account unless it has
evidence that the account holder is unable or unwilling to repay.
But the creditor may terminate an account on which both spouses
are jointly liable, even if the action coincides with a change in
marital status, when one or both spouses:
Repudiate responsibility for future charges on the joint
account.
Request separate accounts in their own names.
Request that the joint account be closed.
2. Updating information. A creditor may periodically request updated
information from applicants but may not use events related to a
prohibited basis--such as an applicant's retirement, reaching a
particular age, or change in name or marital status--to trigger
such a request.
Paragraph 7(c)(2)
1. Procedure pending reapplication.
A creditor may require a reapplication from a contractually liable
party, even when there is no evidence of unwillingness or inability
to repay, if (1) the credit was based on the qualifications of a
person who is no longer available to support the credit and (2)
the creditor has information indicating that the account holder's
income by itself may be insufficient to support the credit. While
a reapplication is pending, the creditor must allow the account
holder full access to the account under the existing contract terms.
The creditor may specify a reasonable time period within which the
account holder must submit the required information.
7(d) Signature of spouse or other
person.
1. Qualified applicant. The signature
rules assure that qualified applicants are able to obtain credit
in their own names. Thus, when an applicant requests individual
credit, a creditor generally may not require the signature of another
person unless the creditor has first determined that the applicant
alone does not qualify for the credit requested.
2. Unqualified applicant. When
an applicant applies for individual credit but does not alone meet
a creditor's standards, the creditor may require a cosigner, guarantor
or the like--but cannot require that it be the spouse. (See commentary
to Sec. 202.7(d) (5) and (6).)
Paragraph 7(d)(1)
1. 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.
Paragraph 7(d)(2)
1. Jointly owned property. If
an applicant requests unsecured credit, does not own sufficient
separate property, and relies on joint property to establish creditworthiness,
the creditor must value the applicant's interest in the jointly
owned property. A creditor may not request that a nonapplicant joint
owner sign any instrument as a condition of the credit extension
unless the applicant's interest does not support the amount and
terms of the credit sought.
i. Valuation of applicant's interest.
In determining the value of an applicant's interest in jointly owned
property, a creditor may consider factors such as the form of ownership
and the property's susceptibility to attachment, execution, severance,
or partition; the value of the applicant's interest after such action;
and the cost associated with the action. This determination must
be based on the form of ownership prior to or at consummation, and
not on the possibility of a subsequent change. For example, in determining
whether a married applicant's interest in jointly owned property
is sufficient to satisfy the creditor's standards of creditworthiness
for individual credit, a creditor may not consider that the applicant's
separate property may be transferred into tenancy by the entirety
after consummation. Similarly, a creditor may not consider the possibility
that the couple may divorce. Accordingly, a creditor may not require
the signature of the nonapplicant spouse in these or similar circumstances.
ii. Other options to support credit.
If the applicant's interest in jointly owned property does not support
the amount and terms of credit sought, the creditor may offer the
applicant other options to provide additional support for the extension
of credit. For example--
A. Requesting an additional party
(see Sec. 202.7(d)(5));
B. Offering to grant the applicant's
request on a secured basis (see Sec. 202.7(d)(4)); or
C. Asking for the signature of
the joint owner on an instrument that ensures access to the property
in the event of the applicant's death or default, but does not impose
personal liability unless necessary under state law (e.g., a limited
guarantee). A creditor may not routinely require, however, that
a joint owner sign an instrument (such as a quitclaim deed) that
would result in the forfeiture of the joint owner's interest in
the property.
2. Need for signature--reasonable
belief. A creditor's reasonable belief as to what instruments need
to be signed by a person other than the applicant should be supported
by a thorough review of pertinent statutory and decisional law or
an opinion of the state attorney general.
Paragraph 7(d)(3)
1. Residency. In assessing the
creditworthiness of a person who applies for credit in a community
property state, a creditor may assume that the applicant is a resident
of the state unless the applicant indicates otherwise.
Paragraph 7(d)(4)
1. Creation of enforceable lien.
Some state laws require that both spouses join in executing any
instrument by which real property is encumbered. If an applicant
offers such property as security for credit, a creditor may require
the applicant's spouse to sign the instruments necessary to create
a valid security interest in the property. The creditor may not
require the spouse to sign the note evidencing the credit obligation
if signing only the mortgage or other security agreement is sufficient
to make the property available to satisfy the debt in the event
of default. However, if under state law both spouses must sign the
note to create an enforceable lien, the creditor may require them
to do so.
2. Need for signature--reasonable
belief. Generally, a signature to make the secured property available
will only be needed on a security agreement. A creditor's reasonable
belief that, to assure access to the property, the spouse's signature
is needed on an instrument that imposes personal liability should
be supported by a thorough review of pertinent statutory and decisional
law or an opinion of the state attorney general.
3. Integrated instruments. When
a creditor uses an integrated instrument that combines the note
and the security agreement, the spouse cannot be required to sign
the integrated instrument if the signature is only needed to grant
a security interest. But the spouse could be asked to sign an integrated
instrument that makes clear--for example, by a legend placed next
to the spouse's signature--that the spouse's signature is only to
grant a security interest and that signing the instrument does not
impose personal liability.
Paragraph 7(d)(5)
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 noncommunity property state) may be required to provide the
signature of the other person to make the income available to pay
the debt. In community property states, the signature of a spouse
may be required if the applicant relies on the spouse's separate
income. If the applicant relies on the spouse's future earnings
that as a matter of state law cannot be characterized as community
property until earned, the creditor may require the spouse's signature,
but need not do so--even if it is the creditor's practice to require
the signature when an applicant relies on the future earnings of
a person other than a spouse. (See Sec. 202.6(c) on consideration
of state property laws.)
3. Renewals. If the borrower's
creditworthiness is reevaluated when a credit obligation is renewed,
the creditor must determine whether an additional party is still
warranted and, if not, release the additional party.
Paragraph 7(d)(6)
1. Guarantees. A guarantee on
an extension of credit is part of a credit transaction and therefore
subject to the regulation. A creditor may require the personal guarantee
of the partners, directors, or officers of a business, and the shareholders
of a closely held corporation, even if the business or corporation
is creditworthy. The requirement must be based on the guarantor's
relationship with the business or corporation, however, and not
on a prohibited basis. For example, a creditor may not require guarantees
only for women-owned or minority-owned businesses. Similarly, a
creditor may not require guarantees only from the married officers
of a business or married shareholders of a closely held corporation.
2. Spousal guarantees. The rules
in Sec. 202.7(d) bar a creditor from requiring a signature of a
guarantor's spouse just as they bar the creditor from requiring
the signature of an applicant's spouse. For example, although a
creditor may require all officers of a closely held corporation
to personally guarantee a corporate loan, the creditor may not automatically
require that spouses of married officers also sign the guarantee.
If an evaluation of the financial circumstances of an officer indicates
that an additional signature is necessary, however, the creditor
may require the signature of a spouse in appropriate circumstances
in accordance with Sec. 202.7(d)(2).
7(e) Insurance.
1. Differences in terms. Differences
in the availability, rates, and other terms on which credit-related
casualty insurance or credit life, health, accident, or disability
insurance is offered or provided to an applicant does not violate
Regulation B.
2. Insurance information. A creditor
may obtain information about an applicant's age, sex, or marital
status for insurance purposes. The information may only be used,
however, for determining eligibility and premium rates for insurance,
and not in making the credit decision.
Section 202.8--Special Purpose Credit
Programs
(a) Standards for programs.
1. Determining qualified programs.
The Board does not determine whether individual programs qualify
for special purpose credit status, or whether a particular program
benefits an ``economically disadvantaged class of persons.'' The
agency or creditor administering or offering the loan program must
make these decisions regarding the status of its program.
2. Compliance with a program
authorized by Federal or State law. A creditor does not violate
Regulation B when it complies in good faith with a regulation promulgated
by a government agency implementing a special purpose credit program
under Sec. 202.8(a)(1). It is the agency's responsibility to promulgate
a regulation that is consistent with Federal and State law.
3. Expressly authorized. Credit
programs authorized by Federal or State law include programs offered
pursuant to Federal, State or local statute, regulation or ordinance,
or by judicial or administrative order.
4. Creditor liability. A refusal
to grant credit to an applicant is not a violation of the act or
regulation if the applicant does not meet the eligibility requirements
under a special purpose credit program.
5. Determining need. In designing
a special-purpose program under Sec. 202.8(a), a for-profit organization
must determine that the program will benefit a class of people who
would otherwise be denied credit or would receive it on less favorable
terms. This determination can be based on a broad analysis using
the organization's own research or data from outside sources including
governmental reports and studies. For example, a bank could review
Home Mortgage Disclosure Act data along with demographic data for
its assessment area and conclude that there is a need for a special-purpose
credit program for low-income minority borrowers.
6. Elements of the program. The
written plan must contain information that supports the need for
the particular program. The plan also must either state a specific
period of time for which the program will last, or contain a statement
regarding when the program will be reevaluated to determine if there
is a continuing need for it.
8(b) Rules is other sections.
1. Applicability of rules. A creditor
that rejects an application because the applicant does not meet
the eligibility requirements (common characteristic or financial
need, for example) must nevertheless notify the applicant of action
taker as required by Sec. 202.9.
8(c) Special rule concerning requests
and use of information.
1. Request of prohibited information.
This section permits a creditor to request and consider certain
information that would otherwise be prohibited by Secs. 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 related
to prohibited basis are:
Energy conservation programs to assist the elderly, for
which the creditor must consider the applicant's age.
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 information. This section permits a creditor to request
and consider certain information that would otherwise be prohibited
by Secs. 202.5 and 202.6, and to require signatures that would otherwise
be prohibited by Sec. 202.7(d).
2. Examples. Examples of programs
in which financial need is a criterion are:
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.
Student loan programs based on the family's financial
need, for which a creditor may have to consider to 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
in communicating to an applicant that a request for an extension
of credit has not been approved. In notifying an applicant of adverse
action as defined by Sec. 202.2(c)(1), a creditor may use any words
or phrases that describe the action taken on the application.
2. Expressly withdrawn applications.
When an applicant expressly withdraws a credit application, the
creditor is not required to comply with the notification requirements
under Sec. 202.9. (The creditor must, however, comply with the record
retention requirements of the regulation. See Sec. 202.12(b)(3).)
3. When notification occurs. Notification
occurs when a creditor delivers or mails a notice to the applicant's
last known address or, in the case of an oral notification, when
the creditor communicates the credit decision to the applicant.
4. Location of notice. The notifications
required under Sec. 202.9 may appear on either or both sides of
a form or letter.
5. Prequalification and preapproval
programs. Whether a creditor must provide a notice of action taken
for a prequalification or preapproval request depends on the creditor's
response to the request, as discussed in the commentary to section
202.2(f). For instance, a creditor may treat the request as an inquiry
if the creditor provides general information such as loan terms
and the maximum amount a consumer could borrow 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 in reviewing a request
for prequalification, a 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)-5.)
2. Notification of approval. Notification
of approval may be express or by implication. For example, the creditor
will satisfy the notification requirement when it gives the applicant
the credit card, money, property, or services requested.
3. Incomplete application--denial
for incompleteness. When an application is incomplete regarding
matters that the applicant can complete and the creditor lacks sufficient
data for a credit decision, the creditor may deny the application
giving as the reason for denial that the application is incomplete.
The creditor has the option, alternatively, of providing a notice
of incompleteness under Sec. 202.9(c).
4. Incomplete application--denial
for reasons other than incompleteness. When an application is missing
information but provides sufficient data for a credit decision,
the creditor may evaluate the application and notify the applicant
under this section as appropriate. If credit is denied, the applicant
must be given the specific reasons for the credit denial (or notice
of the right to receive the reasons); in this instance the incompleteness
of the application cannot be given as the reason for the denial.
5. Length of counteroffer. Section
202.9(a)(1)(iv) does not require a creditor to hold a counteroffer
open for 90 days or any other particular length of time.
6. Counteroffer combined with
adverse action notice. A creditor that gives the applicant a combined
counteroffer and adverse action notice that complies with Sec. 202.9(a)(2)
need not send a second adverse action notice if the applicant does
not accept the counteroffer. A sample of a combined notice is contained
in form C-4 of Appendix C to the regulation.
7. Denial of a telephone application.
When an application is conveyed by means of telephone and adverse
action is taken, the creditor must request the applicant's name
and address in order to provide written notification under this
section. If the applicant declines to provide that information,
then the creditor has no further notification responsibility.
Paragraph 9(a)(3)
1. Coverage. In determining the
rules in this paragraph that apply to a given business credit application,
a creditor may rely on the applicant's assertion about the revenue
size of the business. (Applications to start a business are governed
by the rules in Sec. 202.9(a)(3)(i).) If an applicant applies for
credit as a sole proprietor, the revenues of the sole proprietorship
will determine which rules in the paragraph govern the application.
However, if an applicant applies for business purpose credit as
an individual, the rules in paragraph 9(a)(3)(i) apply unless the
application is for trade or similar credit.
2. Trade credit. The term trade
credit generally is limited to a financing arrangement that involves
a buyer and a seller--such as a supplier who finances the sale of
equipment, supplies, or inventory; it does not apply to an extension
of credit by a bank or other financial institution for the financing
of such items.
3. Factoring. Factoring refers
to a purchase of accounts receivable, and thus is not subject to
the act or regulation. If there is a credit extension incident to
the factoring arrangement, the notification rules in Sec. 202.9(a)(3)(ii)
apply as do other relevant sections of the act and regulation.
4. Manner of compliance. In complying
with the notice provisions of the act and regulation, creditors
offering business credit may follow the rules governing consumer
credit. Similarly, creditors may elect to treat all business credit
the same (irrespective of revenue size) by providing notice in accordance
with Sec. 202.9(a)(3)(i).
5. Timing of notification. A creditor
subject to Sec. 202.9(a)(3)(ii)(A) is required to notify a business
credit applicant, orally or in writing, of action taken on an application
within a reasonable time of receiving a completed application. Notice
provided in accordance with the timing requirements of Sec. 202.9(a)(1)
is deemed reasonable in all instances.
9(b)
Form of ECOA notice and statement 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 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. 202.9 (a)(2) and (b)(2)
must relate to and accurately describe the factors actually considered
or scored by a creditor.
3. Description of reasons. A creditor
need not describe how or why a factor adversely affected an applicant.
For example, the notice may say ``length of residence'' rather than
``too short a period of residence.''
4. Credit scoring system. If a
creditor bases the denial or other adverse action on a credit scoring
system, the reasons disclosed must relate only to those factors
actually scored in the system. Moreover, no factor that was a principal
reason for adverse action may be excluded from disclosure. The creditor
must disclose the actual reasons for denial (for example, ``age
of automobile'') even if the relationship of that factor to predicting
creditworthiness may not be clear to the applicant.
5. Credit scoring--method for
selecting reasons. The regulation does not require that any one
method be used for selecting reasons for a credit denial or other
adverse action that is based on a credit scoring system. Various
methods will meet the requirements of the regulation. One method
is to identify the factors for which the applicant's score fell
furthest below the average score for each of those factors achieved
by applicants whose total score was at or slightly above the minimum
passing score. Another method is to identify the factors for which
the applicant's score fell furthest below the average score for
each of those factors achieved by all applicants. These average
scores could be calculated during the development or use of the
system. Any other method that produces results substantially similar
to either of these methods is also acceptable under the regulation.
6. Judgmental system. If a creditor
uses a judgmental system, the reasons for the denial or other adverse
action must relate to those factors in the applicant's record actually
reviewed by the person making the decision.
7. Combined credit scoring and judgmental system. If a creditor
denies an application based on a credit evaluation system that employs
both credit scoring and judgmental components, the reasons for the
denial must come from the component of the system that the applicant
failed. For example, if a creditor initially credit scores an application
and denies the credit request as a result of that scoring, the reasons
disclosed to the applicant must relate to the factors scored in
the system. If the application passes the credit scoring stage but
the creditor then denies the credit request based on a judgmental
assessment of the applicant's record, the reasons disclosed must
relate to the factors reviewed judgmentally, even if the factors
were also considered in the credit scoring component.
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 requires a creditor to
disclose when it has based its decision in whole or in part on information
from a source other than the applicant or from its own files. Disclosing
that a credit report was obtained and used to deny the application,
as the FCRA requires, does not satisfy the ECOA requirement to disclose
specific reasons. For example, if the applicant's credit history
reveals delinquent credit obligations and the application is denied
for that reason, to satisfy Sec. 202.9(b)(2) the creditor must disclose
that the application was denied because of the applicant's delinguent
credit obligations. To satisfy the FCRA requirement, the credit
must also disclose that a credit report was obtained and used to
deny credit. Sample forms C-1 through C-5 of appendix C of the regulation
provide for the two disclosures.
9(c) Incomplete applications.
Paragraph 9(c)(2)
1. Reapplication. If information
requested by a creditor is submitted by an applicant after the expiration
of the time period designated by the creditor, the creditor may
require the applicant to make a new application.
Paragraph 9(c)(3)
1. Oral inquiries for additional
information. If the applicant fails to provide the information in
response to an oral request, a creditor must send a written notice
to the applicant within the 30-day period specified in Sec. 202.9
(c)(1) and (c)(2). If the applicant does provide the information,
the creditor shall take action on the application and notify the
applicant in accordance with Sec. 202.9(a).
9(g) Applications submitted through
a third party.
1. Third parties. The notification
of adverse action may be given by one of the creditors to whom an
application was submitted. Alternatively, the third party may be
a noncreditor.
2. Third-party notice--enforcement
agency. If a single adverse action notice is being provided to an
applicant on behalf of several creditors and they are under the
jurisdiction of different federal enforcement agencies, the notice
need not name each agency; disclosure of any one of them will suffice.
3. Third-party notice--liability.
When a notice is to be provided through a third party, a creditor
is not liable for an act or omission of the third party that constitutes
a violation of the regulation if the creditor accurately and in
a timely manner provided the third party with the information necessary
for the notification and maintains reasonable procedures adapted
to prevent such violations.
Section 202.10--Furnishing of Credit
Information
1. Scope. The requirements of
Sec. 202.10 for designating and reporting credit information apply
only to consumer credit transactions. Moreover, they apply only
to creditors that opt to furnish credit information to credit bureaus
or to other creditors; there is no requirement that a creditor furnish
credit information on its accounts.
2. Reporting on all accounts.
The requirements of Sec. 202.10 apply only to accounts held or used
by spouses. However, a creditor has the option to designate all
joint accounts (or all accounts with an authorized user) to reflect
the participation of both parties, whether or not the accounts are
held by persons married to each other.
3. Designating accounts. In designating
accounts and reporting credit information, a creditor need not distinguish
between accounts on which the spouse is an authorized user and accounts
on which the spouse is a contractually liable party.
4. File and index systems. The
regulation does not require the creation or maintenance of separate
files in the name of each participant on a joint or user account,
or require any other particular system of recordkeeping or indexing.
It requires only that a creditor be able to report information in
the name of each spouse on accounts covered by Sec. 202.10. Thus,
if a creditor receives a credit inquiry about the wife, it should
be able to locate her credit file without asking the husband's name.
10(a) Designation of accounts.
1. New parties. When new parties
who are spouses undertake a legal obligation on an account, as in
the case of a mortgage loan assumption, the creditor should change
the designation on the account to reflect the new parties and should
furnish subsequent credit information on the account in the new
names.
2. Request to change designation
of account. A request to change the manner in which information
concerning an account is furnished does not alter the legal liability
of either spouse upon the account and does not require a creditor
to change the name in which the account is maintained.
Section 202.11 Relation to State Law
11(a) Inconsistent state laws.
1. Preemption determination--New
York. Effective November 11, 1988, the Board has determined that
the following provisions in the state law of New York are preempted
by the federal law:
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.
Article 15, section 296a(1)(c)--Unlawful discriminatory
practice to make any record or inquiry based on race, creed,
color, national origin, age, sex, marital status, or disability.
This provision is preempted to the extent that it bars a creditor
from requesting and considering information regarding the particular
characteristics (for example, race, national origin, or sex)
required for eligibility for special-purpose credit programs.
2. Preemption determination--Ohio.
Effective July 23, 1990, the Board has determined that the following
provision in the state law of Ohio is preempted by the federal law:
Section 4112.021(B)(1)--Unlawful discriminatory practices
in credit transactions. This provision is preempted to the extent
that it bars asking or favorably considering the age of an elderly
applicant; prohibits the consideration of age in a credit scoring
system; permits without limitation the consideration of age
in real estate transactions; and limits the consideration of
age in special-purpose credit programs to certain government-sponsored
programs identified in the state law.
Section 202.12--Record Retention
12(a) Retention of prohibited
information.
1. Receipt of prohibited information.
Unless the creditor specifically requested such information, a creditor
does not violate this section when it receives prohibited information
from a consumer reporting agency.
2. Use of retained information.
Although a creditor may keep in its files prohibited information
as provided in Sec. 202.12(a), the creditor may use the information
in evaluating credit applications only if permitted to do so by
Sec. 202.6.
12(b) Preservation of records.
1. Copies. A copy of the original
record includes carbon copies, photocopies, microfilm or microfiche
copies, or copies produced by any other accurate retrieval system,
such as documents stored and reproduced by computer. A creditor
that uses a computerized or mechanized system need not keep a written
copy of a document (for example, an adverse action notice) if it
can regenerate all pertinent information in a timely manner for
examination or other purposes.
2. Computerized decisions. A creditor
that enters information items from a written application into a
computerized or mechnaized 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:
An application is withdrawn by the applicant.
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.
Paragraph 12(b)(6)
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.
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 information-collection requirements.
An application for an open-end home equity line of credit is not
subject to this section unless it is readily apparent to the creditor
when the application is taken that the primary purpose of the line
is for the purchase or refinancing of a principal dwelling.
6. Refinancings. A refinancing
occurs when an existing obligation is satisfied and replaced by
a new obligation undertaken by the same borrower. A creditor that
receives an application to refinance an existing extension of credit
made by that creditor for the purchase of the applicant's dwelling
may request the monitoring information again but is not required
to do so if it was obtained in the earlier transaction.
7. Data collection under Regulation
C. See comment 5(b)(2)-2.
13(b) Obtaining of information.
1. Forms for collecting data.
A creditor may collect the information specified in Sec. 202.13(a)
either on an application form or on a separate form referring to
the application.
2. Written applications. The regulation
requires written applications for the types of credit covered by
Sec. 202.13. A creditor can satisfy this requirement by recording
in writing or by means of computer the information that the applicant
provides orally and that the creditor normally considers in a credit
decision.
3. Telephone, mail applications.
If an applicant does not apply in person for the credit requested,
a creditor does not have to complete the monitoring information.
For example:
