CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No.01 February 20, 2003

Vol 2003 No. 02 February 20, 2003

Federal Reserve Revises Regulation

The Federal Reserve has issued a final rule amending Regulation B (Equal Credit Opportunity Act) to create an exception from the prohibition against collecting personal applicant data when requested in connection with a self-test. The allowance is voluntary and is intended to help creditors monitor their own compliance with fair lending laws. The final rule also requires creditors to retain records related to prescreened credit solicitations for 25 months to help determine whether national origin, race, age or other prohibited bases of discrimination are used in such solicitations.

Other changes are made to both the rule and the Official Staff Commentary. This Bulletin summarizes the more significant changes. The entire text and Official Staff Commentary to Regulation B will be issued with the final rule, which may be retrieved from Federal Reserve's web site or from the Federal Register. At the time this Bulletin was prepared, only a draft of the final rule was available.

Self test privilege. To qualify for the exception from the prohibition against collecting personal data for non-mortgage credit transactions, a creditor must satisfy all the elements of a self-test set forth in Section 202.15 of Regulation B, and provide the disclosures at the time the information is requested, as set forth in Section 202.5(b)(1) (namely, that provision of the information is voluntary, the information is requested to monitor the creditor's compliance with the ECOA, that federal law prohibits the creditor from discriminating on the basis of the information, or on the basis of a decision not to furnish the information, and (if applicable) that certain information will be collected based on visual observation or surname if not provided). The final rule provides a model notice.

In order for the privilege to apply, applicant personal characteristics collected as part of a self-test must be kept separate from loan or application files and business records related to credit transactions, such as the application, loan documents, and minutes of loan committee meetings. The accompanying commentary to the final rule notes that information collected pursuant to this exception should be analyzed in a timely fashion as part of the creditor's self-testing. Self-testing creditors should develop a written plan that includes a description of the self-test, the methodology, the geographic area covered, the types of credit transactions involved, and the timing parameters.

All written records pertaining to a self-test must be retained for 25 months after a test has been completed (and longer in the case of an investigation or enforcement proceeding or civil action of which the creditor has received notice.)

Data collected under the exception may not be used for other purposes, such as marketing, unless necessary to take corrective action. Note also that the self-test provision requires creditors to take appropriate and timely corrective action when the self-test shows that it is "more likely than not" that a violation of the ECOA or Regulation B has occurred. See Sections 202.15(a)(2) and 202.15(c)(1). Banks that intend to conduct voluntary self-tests should consult an attorney first to ensure that they are performed in a manner that preserves the privilege and avoids leaving them vulnerable to liability.

Retention of records of prescreened solicitations. Creditors using prescreened credit solicitations must retain the following for 25 months after the date that an offer of credit is made to potential customers: the text of the solicitation, list of criteria used to select potential recipients, and correspondence related to formal or informal complaints about the solicitation. The rule does not require creditors to establish a separate database or set of files for correspondence relating to complaints about prescreened solicitations. Nor will creditors be required to match consumer complaints with specific solicitations.

Other changes include the following:

Adverse action on a class of accounts-Section 202.2(c)(1)(ii) provides that adverse action includes a creditor's termination of, or unfavorable change to, the terms of an account, unless the action affects "all or a substantial portion of a class of the creditor's accounts." "Substantial portion" is changed to "substantially all," meaning that a creditor's action must affect the overwhelming majority of accounts in a designated class to be excluded from the definition of adverse action.

The revised exception is intended to apply only when the action is not based on the individual credit characteristics of the affected accountholders. Thus, it would apply where a creditor terminates all secured credit accounts because it no longer offers that type of credit. But it would not apply if the creditor terminated only those secured credit accounts that could not be moved into another card program after an evaluation of the individual credit characteristics of the accountholders.

Application. The Official Staff Commentary is amended to clarify that an application includes a request for a preapproved loan under procedures in which a creditor issues creditworthy persons a written commitment to extend credit up to a designated amount that is valid for a designated period of time, even if subject to conditions.

Creditor. The definition of creditor under Section 202.2(l) changes the words "regularly participates in the decision of whether or not to extend credit" to "regularly participates in a credit decision, including setting the terms of the credit." This change makes the rules parallel for insured depository institutions and private-sector loan intermediaries. The Federal Reserves notes that a potential assignee of a loan who establishes underwriting guidelines for its purchases but does not influence individual credit decisions is not a creditor under this definition. (See comment 2(l)-1).

General rules. New Section 202.4(d) generally requires that if a disclosure is given in writing, it must be clear and conspicuous and in a form an applicant may retain. The retainability requirement does not apply to disclosures given on or with an application under Sections 202.5 and 202.13 (e.g., the option not to list income from alimony, child support, or separate maintenance, and the collection of information about an applicant's national origin, race, sex, marital status, and age for mortgage credit).

Spousal signatures. Section 202.7(d)(1) is revised to clarify that a creditor is not entitled to presume that a submission of joint financial information equates to a joint application for credit, noting that evidence of intent to apply for joint credit requires something more.

Statement of specific reasons. Section 202.9(b)(2) is revised to clarify that whether a creditor's denial of credit is based on the creditworthiness of the applicant, a joint applicant, or guarantor, the reasons provided for an adverse action must be specific. The requirement for specificity achieves the dual purposes of discouraging a creditor from discriminating based on a prohibited basis, and to educate and inform the applicant. The Federal Reserve dismissed the privacy concerns inherent in communicating the reasons for an adverse action to an applicant where they relate to co-applicants and guarantors, noting that when a person agrees to be a co-applicant, guarantor, or similar party, there should be an understanding that information will be shared.

Official Staff Commentary. The commentary has been revised to conform to and explain changes in the rule, and to make other clarifications. The following is a review of some of those changes not already discussed.

Incomplete applications. In many instances applicants make preapproval requests and then fail to follow through. Comment 9(c)(1)-1 describes an exception from the requirement to provide a notice of incompleteness for preapprovals that meet the definition of "application" as clarified in comment 2(f)-5. This exception parallels the amendment to Regulation C (Home Mortgage Disclosure), which treats preapproval requests as applications, but does not require reporting of preapproval requests that remain incomplete.

The revised rule is effective April 1, 2003, but compliance is not mandatory until April 1, 2004. For further information, contact the Federal Reserve as follows: John C. Wood, Counsel; Kathleen C. Ryan or David A. Stein, Senior Attorneys; or Minh-Duc T. Le, Attorney; Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412; for users of Telecommunications Device for the Deaf ("TDD") only, contact (202) 263-4869.