Financial Update (October-December 1999)
Reg B Revisions
Proposed Revisions to the Equal Credit Opportunity Act
he Federal Reserve Board recently published proposed revisions to Regulation B, which implements the Equal Credit Opportunity Act, and the official staff commentary to the regulation. The act makes it unlawful for creditors to discriminate against an applicant in any aspect of a credit transaction on the basis of race, color, religion, national origin, marital status, sex, age and other specified bases. The proposed revisions involve changes in prescreened solicitations, noting applicant information, evaluating applicants and record retention.
The proposed rule would require creditors to retain information on certain prescreened credit solicitations. The information required by the proposed rule the criteria for selection, the solicitation, correspondence and the marketing plan the solicitation relates to should enable regulators to evaluate creditors' possible use of prohibited bases to pre-approve credit solicitations.
Removing Prohibition Against Noting Applicant Information
The Federal Reserve is proposing removing the prohibition against noting applicant characteristics such as race, color, religion and so forth. The Fed recognizes that removing the prohibition against noting such information would allow loan officers to have access to information on applicant characteristics that might not otherwise be available and, thus, could provide the opportunity for unlawful discrimination. Also, the Fed recognizes that the usefulness of the data for fair lending enforcement purposes would depend on whether creditors implement standards for uniform collection of the data along product lines, for example, or for all applicants, for all borrowers, etc.
On balance, however, removing the prohibition for all nonmortgage credit may allow issues of credit discrimination to be better addressed. Because notation would be on a voluntary basis, creditors could target those products for which particular concern exists about potential discrimination.
The proposed rule provides that applicants must not be required to provide information about their race, color, religion, national origin or sex. It also requires creditors who request information on applicant characteristics to disclose, at the time they request the information, that providing it is optional and that the creditor will not take the information (or the applicant's decision not to provide the information) into account in any aspect of the credit transaction.
Rules Concerning Evaluation of Applicants
A section would be added to the regulation to clarify that a creditor may not evaluate married and unmarried applicants by different standards. The Fed believes that this guidance, currently in the commentary, is more appropriately placed in the regulation. A new paragraph would be added to make clear that a creditor may not consider race, color, religion, national origin or sex to determine an applicant's creditworthiness, except as permitted by law, nor may the creditor consider the applicant's decision not to provide the information.
Preservation of Records
Currently, creditors must retain credit applications and other records for 12 months for business credit. Under the proposal, a 25-month record retention period would apply to credit applications involving businesses with gross revenues of $1 million or less; the rule would remain unchanged for credit applications involving other businesses. The Fed believes that increasing the record retention period would assist the federal financial regulatory agencies, in monitoring and enforcing compliance with the act, given the relatively low volume of business loans on a yearly basis for some institutions and given the agencies' reduction of examination frequency (from 18 to 24 months and, in some instances, to 36 months).
A new paragraph would be added to the regulation to include the record retention requirements for certain preapplication marketing information.
A copy of the proposed rule is available on the Board of Governors' Web site at www.federalreserve.gov/boarddocs/press/BoardActs/1999/19990804. All comments must be received by Nov. 10, 1999. Any comments should refer to Docket No. R-1008 and can be mailed to Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Ave., N.W., Washington, D.C. 20551.