The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
ANNUAL REPORT TO CONGRESS ON THE EQUAL CREDIT OPPORTUNITY ACT FOR THE YEAR 1978 Board of Governors o f t h e F e d e r a l Reserve System February 1 , 1979 TABLE OF CONTENTS Page I. II. III. IV. V. VI. SPECIAL CIVIL RIGHTS ENFORCEMENT EFFORTS 1 COMPLIANCE 3 LEGISLATIVE RECOMMENDATIONS 10 UNIFORM GUIDELINES FOR ENFORCING REGULATION B 11 COMPREHENSIVE REVIEW OF REGULATION B 12 NEW INFORMATION A. Consumer Awareness Survey 13 B. I n q u i r y on E x e r c i s e o f R i g h t s under t h e Equal C r e d i t O p p o r t u n i t y Act VII. VIII. 14 CONSUMER ADVISORY COUNCIL 14 ADMINISTRATIVE FUNCTIONS A. Amendments and I n t e r p r e t a t i o n s of Regulation B B. During 1978 1. Occurrence o f Adverse A c t i o n a t P o i n t o f S a l e 2. Revised P r o c e d u r e s f o r Issuance o f O f f i c i a l Staff Interpretations 3. Proposed Amendments to R e g u l a t i o n B 4. O f f i c i a l Staff Interpretations Education APPENDIX A - S e l e c t e d R e s u l t s o f Consumer Awareness APPENDIX B - Members o f the Consumer A d v i s o r y Survey Council 15 15 16 16 17 17 APPENDIX A 1 • Type of credit problem considered unfair Per cent Niunbsf Problem mentlcced» Total Rspoudents Problems Credit refusals, limits Reason for refusal not given. Hfgli rates, charges Other terms poor, short maturities, etc Contract sale to other creditor Prepap^ment penalty Insufficieni information about credit terms Dunning, garnishment, embarrassment over bills Repossession Problem with handling of defective merchandise Billing errors Improper identification (another's purchase, former spouse, stolen credit card) Other mistakes, incorrect information, incompetence Rudeness, unfriendliness Family baclcground or sizt^and credit Sex. marital status, and credit Age and credit Ra^e and credit Other personal characteristics and credit Lack of: assets, security, savings account, downpayment Insufficient credit history Credit-rating problem Requirement of certain financial characteristics, residence, or job A l l other mentions D o not know or not ascertained "f 128 54 27 21 35 94 25 54 70 10 66 8 2 26 8 3 6 13 17 33 33 25 16 947 Total 100.0 > The 947 problems were mentioned by 622 respondents^or by 24.3 per cent of the 2,563 total respondents. Closed-end question about credit criteria used by creditors Number of mentions Critoioo 2 • Perceptions of credit critei'i^? used by creditors Mendont Crlterioo Number personal Marital status ' R ^ ::: pAfMnal chiaracter reoutation Other Credit Credit hlitory, credit rating, credit collateral Mcuritv AmoiiiK of oihiir dttbt. • Other Financial Type of employment, security of cmolovment time on job Homeownershio Time o f current a d d r e s s Other Other Not known not ascertained 68 69 27 110 12 .478 358 •57 i M g t h of time on present job Length of time at present address... Race Having a checking account or not... ^vneownership (own or rent) 74 Amount of other monVhiy payn^'ti (including rent or mortgage) Per cent (N-6,002) 1.1 1.1 .4 1.8 .023 219 Al« Income Marital sutus (married, single, separated, divorced) SizeoffamUy Previous credit experience 143 77 ,634 Per cent o f 57.7 14.0 2.2 9.8 28.3 2.9 1:1 62 A 5.6 3.0 <3.8 .1 7.8 1.2 1.583 556 646 40 26.4 9.3 1,033 94 192 1,089 34 17.2 1.6 1. r 18.1 .6 45 193 -7 3.2 6,002 100.0 Closed-end question about credit criterion used by creditors 10.8 Per cent of respondents .7 Grotip Race ^ Non-Caucasian Sex Ail "Under 50 years 50 years and over All Marital status Married Widowed Single, never married All Mentxonins Not mentionins 1.9 4.5 2.2 98.1 95.5 97.8 2.2 4.3 2.9 97.8 95.7 97.1 5.4 12.4 8.5 94.6 87.6 91.5 5.0 2.4 9.4 7.9 4.8 5.6 95.0 97.6 90.6 92.1 95.2 94.4 APPENDIX B CONSUMER ADVISORY COUNCIL Board of Governors of the F e d e r a l Reserve System W i l l i a m D. Warren, Chairman Los Angeles, C a l i f o r n i a 12-31-80 Percy W. Loy P o r t l a n d Oregon 12-31-79 Marcia A. Hakala, V i c e Chairman Omaha, Nebraska 12-31-80 R. C. Morgan E l Paso, Texas 12-31-80 Roland E. Brandel San F r a n c i s c o , C a l i f o r n i a 12-31-80 Florence M. R i c e New York, New York 12-31-81 James L . Brown Milwaukee, Wisconsin 12-31-81 Ralph J . Rohner Washington, D.C. 12-31-81 Mark E. Budnitz Boston, Massachusetts 12-31-81 Raymond J . Saulnier New York, New York 12-31-79 John G. B u l l Fort Lauderdale, 12-31-79 Henry S. Schechter Washington, D.C, 12-31-81 Florida Robert V. B u l l o c k F r a n k f o r t , Kentucky 12-31-80 E . G. Schuhart D a l h a r t , Texas 12-31-80 Carl Felsenfeld New York, New York 12-31-79 B l a i r Shick Cambridge, Massachusetts 12-31-79 Jean A, Fox P i t t s b u r g h , Pennsylvania 12-31-79 Thomas R. Swan P o r t l a n d , Maine 12-31-79 Richard H. Hoiton Berkeley, C a l i f o r n i a 12-31-79 Anne Gary Taylor Alexandria, V i r g i n i a 12-31-79 Edna DeCoursey Johnson Baltimore, Maryland 12-31-79 Richard A. Van Winkle S a l t Lake C i t y , Utah 12-31-81 Richard F. Kerr C i n c i n n a t i , Ohio 12-31-81 Richard D, Wagner Simsbury, Connecticut 12-31-80 Robert J . K l e i n New York, New York 12-31-80 Mary W. Walker Monroe, Georgia 12-31-81 Harvey M, Kuhnley Edina, Minnesota 12-31-81 Leonor K. S u l l i v a n , Chairman Emeritus St. Louis, Missouri 12-31-80 The t h i r d Annual Report on the Equal Credit Opportunity Act (ECOA) describes the enforcement of the act and R e g u l a t i o n B by the Board of Governors of the Federal Reserve System and the other Federal e n f o r c e ment agencies. I t presents the f i n d i n g s of a major survey of consumers, which gathered information about consumer perceptions, and a smaller i n q u i r y of c r e d i t o r s , which sought data on the use by consumers of consumer c r e d i t l e g i s l a t i o n . This report a l s o discusses the uniform guide- l i n e s proposed j o i n t l y by the f i n a n c i a l r e g u l a t o r y agencies f o r enforcing Regulation B, assesses the extent to which compliance w i t h the act i s being achieved, and o u t l i n e s the Board's a d m i n i s t r a t i o n of i t s f u n c t i o n s under the act• This report does not c o n t a i n recommendations of the Board f o r s t a t u t o r y amendments. Such recommendations, i f any, w i l l be made i n the Board's Annual Report to the Congress. I. SPECIAL CIVIL RIGHTS ENFORCEMENT EFFORTS A p r e l i m i n a r y review by the Board's s t a f f at the end of 1977 of the s p e c i a l i z e d consumer a f f a i r s enforcement program that was e s t a b l i s h e d e a r l i e r i n that year showed that although examinations f r e q u e n t l y revealed procedural v i o l a t i o n s , they had not been as s u c c e s s f u l i n uncovering evidence of. banks engaging i n substantive v i o l a t i o n s of R e g u l a t i o n B and the F a i r Housing A c t . The question arose whether e x i s t i n g procedures and t r a i n i n g were adequate to enable examiners to detect u n l a w f u l d i s c r i m i n a t i o n To supplement research conducted by the s t a f f on t h i s readily. question, the Board engaged a consultant to study the Board's procedures and m a t e r i a l s f o r e n f o r c i n g the ECOA and F a i r Housing Act and to make recommendations - 2 f o r changes. The c o n s u l t a n t ' s r e p o r t , which was p u b l i s h e d i n May 1978, suggested a r e d i r e c t i o n of emphasis i n the System's enforcement w i t h respect to c r e d i t d i s c r i m i n a t i o n . efforts On the b a s i s of t h i s report and independent research, a task f o r c e of Board and Reserve Bank s t a f f r e d r a f t e d examiner manuals and examination procedures f o r R e g u l a t i o n B and the F a i r Housing A c t . I n l i g h t of the f i e l d t e s t r e s u l t s , the manuals and procedures are being r e v i s e d . The s t a f f expects to present the r e v i s e d c i v i l r i g h t s enforcement program to the Board e a r l y in 1979. Meanwhile, i n August 1978 the D i v i s i o n of Consumer A f f a i r s augmented i t s compliance s t a f f by d e s i g n a t i n g three members of i t s s t a f f as c i v i l r i g h t s s p e c i a l i s t s . legal These persons, i n c o n j u n c t i o n w i t h the compliance s t a f f , were p r i m a r i l y r e s p o n s i b l e f o r d r a f t i n g new examiner manu a l s and examination procedures. Each Federal Reserve Bank a l s o appointed a member of i t s s t a f f to assume primary c i v i l r i g h t s The Board's c i v i l responsibilities. r i g h t s s p e c i a l i s t s conferred w i t h the s t a f f of the Department of J u s t i c e on recent c i v i l r i g h t s enforcement developments and i n September 1978, the Board's s t a f f arranged f o r the Department of J u s t i c e to conduct a s p e c i a l 1-day seminar f o r a l l s t a f f i n the D i v i s i o n of Consumer A f f a i r s and f o r the Reserve Bank c i v i l rights specialists. The Board a l s o conducted a 3-day t r a i n i n g seminar f o r 12 examiners and 8 Board s t a f f members on the subject of c i v i l rights enforcement. Three other Federal agencies reported s p e c i a l a c t i v i t i e s i n the area of c i v i l r i g h t s . The F e d e r a l Deposit Insurance Corporation (FDIC) e s t a b l i s h e d a C i v i l Rights Branch w i t h i n i t s O f f i c e of Consumer A f f a i r s and C i v i l Rights to provide l e a d e r s h i p i n a d m i n i s t e r i n g the FDIC's e n f o r c e ment of c i v i l r i g h t s laws and r e g u l a t i o n s . The Federal Home Loan Bank Board - 3 (FHLBB) adopted a new Nondiscrimination R e g u l a t i o n e f f e c t i v e J u l y 1, 1978, which enhances Regulation B by p r o h i b i t i n g d i s c r i m i n a t i o n i n housing l e n d i n g on a l l of the bases p r o h i b i t e d by the ECOA as w e l l as on two a d d i t i o n a l bases—age and l o c a t i o n of the d w e l l i n g . The Federal Trade Commission (FTC) commissioned a report concerning d i s c r i m i n a t i o n i n r e a l estate f i n a n c e , which reviews the FTC's enforcement options and provides recommendations about l i t i g a t i o n s t r a t e g i e s and p o s s i b l e rulemaking proceedings. II. COMPLIANCE During the past year the Federal Reserve System and other Federal enforcement agencies continued to enforce the Equal Credit Opportunity Act and Regulation B through a v a r i e t y of methods. T h i s s e c t i o n summarizes the compliance a c t i v i t i e s i n 1978 of the Federal Reserve System and the compliance reports of the other Federal enforcement agencies. Many compliance e f f o r t s f e a t u r e s p e c i a l i z e d examinations conducted by examiners versed i n consumer law and r e g u l a t i o n s . In the past year. Federal Reserve System examiners have conducted s p e c i a l examinations of approximately 800 State member banks to determine compliance w i t h consumer c r e d i t r e g u l a t i o n s , i n c l u d i n g equal c r e d i t opportunity. T r a i n i n g of examiners remains a major a c t i v i t y among those agenc i e s that enforce the act by means of an exmination p r o c e s s . The Comptroller of the Currency, f o r example, held s i x 2-week schools to t r a i n 300 of its examiners i n consumer r e g u l a t i o n s , and j o i n e d the FDIC and the Board i n conducting a 1-week seminar f o r supervisors and senior examiners. Most of the enforcement agencies handle consumer complaints by i n v e s t i g a t i n g c r e d i t o r s and r e s o l v i n g complaints. During the f i r s t 10 months - 4 - of 1978, the Federal Reserve System received 304 complaints to the act or Regulation B against State member banks. relating Of these, 260 charged u n f a i r d e n i a l , t e r m i n a t i o n , or change i n terms of credit. Over h a l f of these (138 complaints) claimed on a b a s i s the act does not d e f i n e as d i s c r i m i n a t o r y , h i s t o r y , l e v e l of income, and l e n g t h of employment. discrimination such as c r e d i t On the other hand, 28 complainants f e l t that m a r i t a l status or sex was the reason f o r the c r e d i t o r ' s adverse a c t i o n , 11 charged d i s c r i m i n a t i o n because of age, and 11 because of race, c o l o r , or n a t i o n a l origin. With respect to the 304 complaints regarding State member banks, 168 i n v e s t i g a t i o n s have been completed, 60 are s t i l l under investigation, and 76 were handled by f u r n i s h i n g information or an e x p l a n a t i o n . completed i n v e s t i g a t i o n s , In the 168 the bank was found t o be l e g a l l y c o r r e c t i n 139 cases ( i n 36 of which i t nevertheless reached an accommodation w i t h the complainant); to have made an e r r o r , which has s i n c e been c o r r e c t e d , i n 19 cases; to be i n p o s s i b l e v i o l a t i o n , s i n c e r e s o l v e d , i n 7 cases; and i n p o s s i b l e v i o l a t i o n , s t i l l unresolved, i n 1 case. I n two cases, the c r e d i t a p p l i c a n t was i n e r r o r . For t h i s same 10-month p e r i o d , the O f f i c e of the Comptroller reported 625 consumer complaints received, 280 of which a l l e g e d on the basis of sex or m a r i t a l s t a t u s . In a d d i t i o n , discrimination 58 complainants f e l t they had been d i s c r i m i n a t e d a g a i n s t due to r a c e , c o l o r , or n a t i o n a l that origin, 30 c i t e d age as the perceived reason f o r d e n i a l , and 16 charged d i s c r i m i n a t i o n due to r e c e i p t of p u b l i c a s s i s t a n c e , and 2 because of religion. The FHLBB noted 211 complaints received during t h i s p e r i o d . Over 25 per cent of these (56 complaints) a l l e g e d d i s c r i m i n a t i o n on the b a s i s of sex - 5 or m a r i t a l s t a t u s and nearly 25 per cent more (52 complaints) charged redlining. Complainants a l s o charged d i s c r i m i n a t i o n due t o r a c e , or n a t i o n a l o r i g i n i n 34 cases, age i n 16 cases, and r e l i g i o n color, in 1 case. During f i s c a l year 1978, the FDIC reported r e c e i v i n g 215 comp l a i n t s and 17 i n q u i r i e s concerning equal c r e d i t o p p o r t u n i t y . Of these, approximately 30 per cent involved the n o t i c e of adverse a c t i o n , 28 per cent a l l e g e d d i s c r i m i n a t i o n on the b a s i s of sex or m a r i t a l s t a t u s , and 8 per cent on the bases of race and age. The N a t i o n a l Credit Union A d m i n i s t r a t i o n (NCUA) stated that during t h i s same p e r i o d i t received 91 complaints about discrimination, the l a r g e s t number of which (30 complaints) a l l e g e d d i s c r i m i n a t i o n on the basis of race, c o l o r , or n a t i o n a l o r i g i n . Sex or m a r i t a l s t a t u s was con- sidered the reason f o r d i s c r i m i n a t i o n i n 20 i n s t a n c e s , age i n 4 i n s t a n c e s , and r e c e i p t of p u b l i c a s s i s t a n c e i n 3 i n s t a n c e s . During f i s c a l year 1978, the Federal Trade Commission (FTC) responded t o over 11,000 consumers w i t h complaints or i n q u i r i e s pertaining to the ECOA, an increase of approximately 4,000 from 1977. The FTC s t a f f stated that i t continues to r e l y h e a v i l y on i n f o r m a t i o n provided by consumers i n i d e n t i f y i n g suspected v i o l a t o r s of the act f o r ECOA e n f o r c e ment a c t i o n s . For t h i s reason, the FTC s t a f f i s developing a computerized system — s i m i l a r to those c u r r e n t l y used by the Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, and the N a t i o n a l Credit Union A d m i n i s t r a t i o n t o a i d i n the r e t r i e v a l of i n f o r m a t i o n about consumer complaints. — - 6 The Farm C r e d i t A d m i n i s t r a t i o n (FCA) reported r e c e i p t of 7 complaints of d i s c r i m i n a t i o n on the b a s i s of r a c e , c o l o r , or n a t i o n a l o r i g i n , and 5 on the b a s i s of sex or m a r i t a l s t a t u s . No complaints i n v o l v i n g farm c r e d i t l e n d i n g i n s t i t u t i o n s are known to have r e s u l t e d litigation. in However, the Department of J u s t i c e i s i n v e s t i g a t i n g , under the ECOA, p r a c t i c e s of a F e d e r a l land bank and a F e d e r a l land bank a s s o c i a t i o n due to a complaint that the FCA explored. The C i v i l Aeronautics Board (CAB) reported that i t r e c e i v e d a p p r o x i mately 150 complaints from the p u b l i c i n v o l v i n g the ECOA and R e g u l a t i o n B. The CAB i n d i c a t e d that v i r t u a l l y a l l of these complaints have been processed i n f o r m a l l y by c o n t a c t i n g the c a r r i e r or supplying i n f o r m a t i o n to the comp l a i n a n t , and that s e v e r a l major i n v e s t i g a t i o n s of consumer c r e d i t practices i n the a i r l i n e i n d u s t r y have been i n i t i a t e d as a r e s u l t of the complaints. During f i s c a l year 1978, 44 complaints of d i s c r i m i n a t i o n based on r a c e , n a t i o n a l o r i g i n , or sex were made against Small Business A d m i n i s t r a t i o n (SBA) program o f f i c e s and r e c i p i e n t s , but SBA i n v e s t i g a t i o n s found no v i o l a t i o n s . Neither the S e c u r i t i e s and Exchange Commission nor the A g r i c u l t u r a l Marketing Service (Packers and Stockyards) r e c e i v e d complaints a l l e g i n g dis- c r i m i n a t i o n under the ECOA d u r i n g 1978. The agencies r e s p o n s i b l e f o r e n f o r c i n g the Equal C r e d i t Opportunity Act have reported varying assessments of the extent to which c r e d i t o r s are complying w i t h the a c t . During the past year, two agencies noted s u b s t a n t i a l i n l e v e l s of c r e d i t o r noncompliance. increases NCUA's p r e l i m i n a r y r e s u l t s show that 63 per cent of the c r e d i t unions examined were not i n compliance, more than double the 28 per cent f o r 1977. i n g forms. Many of the v i o l a t i o n s i n v o l v e d noncomply- S i m i l a r l y , the p r o p o r t i o n of FDIC examination r e p o r t s indicating apparent v i o l a t i o n s rose from 26.6 per cent i n f i s c a l year 1977 to 51.3 per - 7 - cent i n f i s c a l year 1978. These reported v i o l a t i o n s r e l a t e d to f a i l u r e s to provide proper n o t i f i c a t i o n s primarily i n the event of adverse a c t i o n , and improper requests f o r the signature of a spouse. Both agen- c i e s a t t r i b u t e d the reports of increased noncompliance to the a d d i t i o n a l staff t r a i n i n g and improved examination techniques that f o l l o w e d special emphasis on c i v i l r i g h t s enforcement. Sincc many c r e d i t o r s supervised by the NCUA were found to be using improper forms, the NCUA has developed a set of model loan a p p l i c a t i o n forms w r i t t e n i n p l a i n E n g l i s h and designed to meet the needs of c r e d i t unions. special A f t e r the forms are re\iewed, t h e i r o p t i o n a l use by c r e d i t unions should r e s u l t i n a decrease i n t h i s kind of violation. From J u l y 1977 through June 1978, 89 per cent of n a t i o n a l banks examined by the Comptroller of the Currency (OCC) were found to be i n v i o l a t i o n of the r e g u l a t i o n compared w i t h 97 per cent during the previous report p e r i o d . Patterns of substantive v i o l a t i o n s of the r e g u l a t i o n were reported f o r 66 per cent of banks examined. Roughly t w o - t h i r d s of these involved requests f o r and subsequent c o n s i d e r a t i o n of c e r t a i n p r o h i b i t e d information w i t h regard to a p p l i c a n t s , and 30 per cent concerned requests f o r signature of a spouse or other person. When a n a t i o n a l bank i s alleged to be d i s c r i m i n a t i n g on a p r o h i b i t e d b a s i s , the OCC conducts a s p e c i a l investigation. Such an i n v e s t i g a t i o n , which may be t r i g g e r e d by a consumer complaint or by p r e l i m i n a r y evidence discovered i n the examination, entails use of a l a r g e r sample of loan f i l e s , and provides f o r a d e t a i l e d review of a p p r a i s a l p r a c t i c e s and other data. The C o m p t r o l l e r ' s o f f i c e s a i d i t b e l i e v e s that substantial compliance w i t h the act i s achieved by n a t i o n a l banks a f t e r a consumer ^8 examination occurs and the r e q u i r e d c o r r e c t i v e a c t i o n i s taken. the f o l l o w i n g three enforcement problems: I t noted the l a c k of uniform guide- l i n e s f o r req\iired c o r r e c t i v e a c t i o n f o r banks found t o be i n v i o l a t i o n ; the d i f f i c u l t y of d e t e c t i n g i l l e g a l discouragement of c r e d i t applications by a review of loan a p p l i c a t i o n f i l e s ; and the l a c k of w r i t t e n lending p o l i c i e s i n banks, which can be overcome only p a r t i a l l y by interviews w i t h 3ocn o f f i c e r s and bank management. The Federal Reserve System's f i r s t round of s p e c i a l consumer examinations revealed approximately 78 per cent of State member banks i n noncompliance w i t h the r e g u l a t i o n . Of those banks undergoing a second consumer examination, 28 per cent repeated v i o l a t i o n s p r e v i o u s l y c i t e d although 73 per cent continued to have v i o l a t i o n s of one k i n d or another. The overwhelming m a j o r i t y of v i o l a t i o n s continue t o r e l a t e to the use of noncomplying a p p l i c a t i o n forms, w h i l e other frequent v i o l a t i o n s involve the n o t i f i c a t i o n requirements of Regulation B and f a i l u r e to request i n f o r m a t i o n f o r monitoring purposes. The Federal Home Loan Bank Board reported that v i o l a t i o n s were found i n 53 per cent of i n s t i t u t i o n s examined from J u l y 1977 through June 1978. Major concentrations of v i o l a t i o n s concerned improper requests f o r i n f o r m a t i o n on m a r i t a l s t a t u s , f a i l u r e to n o t i f y about adverse a c t i o n , and f a i l u r e to obtain monitoring information. The FHLBB s a i d that enforcement of the ECOA was complicated by the d i f f i c u l t y of i d e n t i f y i n g and c o r r e c t i n g p r a c t i c e s that are n e u t r a l on t h e i r face but have the e f f e c t o f d i s c r i m i n a t i n g against a protected c l a s s . The l e g a l theory under which such p r a c t i c e s are i d e n t i f i e d holds that p r a c t i c e s having a greater negative impact on some p r o t e c t e d c l a s s e s may, if not j u s t i f i e d by business n e c e s s i t y , be i l l e g a l because of their - 9 - d i s c r i m i n a t o r y e f f e c t , even though they are not intentionally d i s c r i m i n a t o r y and are applied e q u a l l y t o a l l c r c d i t applicants. The FHLBB f u r t h e r i n d i c a t e d t h a t , without c l e a r e r standards and guidance from Congress or the c o u r t s , determinations as to how b u s i ness n e c e s s i t y and d i s c r i m i n a t i o n r e l a t e to mortgage l e n d i n g w i l l remain extremely d i f f i c u l t to make. The Federal Trade Commission stated that the l e v e l of compliance w i t h the ECOA v a r i e s g r e a t l y among c r e d i t o r s subject to i t s diction. juris- Although many v i o l a t i o n s arc apparently confined to narrow segments of an i n d u s t r y , c e r t a i n u n l a w f u l p r a c t i c e s appear t o occur more frequently. Such p r a c t i c e s include requesting i n f o r m a t i o n about an a p p l i c a n t ' s spouse, and obtaining the signature of the spouse or other person on a promissory note; disregarding or t r e a t i n g l e s s favorably income derived from sources other than employment, such as alimony, c h i l d support, pension, and p u b l i c a s s i s t a n c e payments; r e l y i n g on ZIP codes as c r i t e r i a of creditworthiness; misusing the Statement of Credit D e n i a l , Termination, or Change sample form i n Regulation B; f a i l i n g to d i s c l o s e that s e n s i t i v e f a c t o r s , such as age, are considered by the c r e d i t o r ; and p r o v i d i n g vague, rather than s p e c i f i c , reasons f o r rejecting applicants. The FTC described the f o l l o w i n g four enforcement problems encountered i n f i s c a l year 1978 as s i g n i f i c a n t : f a i l u r e of c r e d i t o r s to provide the p r i n c i p a l s p e c i f i c reasons f o r adverse a c t i o n ; d i f f i c u l t i e s i n d e t e c t i n g and remedying r a c i a l steering i n r e a l e s t a t e f i n a n c i n g ; d i f f i c u l t i e s documenting business c r e d i t d i s c r i m i n a t i o n ; and d i f f i c u l t i e s w i t h d i s c r i m i n a t o r y telephone and m a i l s o l i c i t a t i o n in i n dealing techniques. - 10 During the past y e a r , the FTC isstted two f i n a l Commission I n t e r p r e t a t i o n s of the F a i r C r e d i t Reporting A c t , designed to r e c o n c i l e the goals of that s t a t u t e w i t h the goals of the ECOA. Interpretation 600.7 f a c i l i t a t e s access to c r e d i t by women w h i l e preserving the p r i v a c y of t h e i r spouses. I n t e r p r e t a t i o n 600.8 permits c r e d i t o r s to o b t a i n r e p o r t s on the nonapplicant spouse i n c e r t a i n circumstances. p r e t a t i o n s are statements of FTC enforcement p o l i c y f o r a l l subject to FTC These i n t e r creditors jurisdiction. The agencies e n f o r c i n g the ECOA and R e g u l a t i o n B reported that they have taken the f o l l o w i n g formal a d m i n i s t r a t i v e a c t i o n s . During fiscal year 1978 the Federal Deposit Insurance Corporation i n i t i a t e d one ceasea n d - d e s i s t order, made f i n a l four p r e v i o u s l y i s s u e d o r d e r s , and terminated three outstanding o r d e r s . During t h i s same p e r i o d , the Federal Trade Commission accepted one consent order and obtained one consent judgment. The Federal Home Loan Bank Board and the C i v i l Aeronautics Board each i s s u e d one cease-and-desist order d u r i n g 1978. Each enforcement agency, w i t h the exception of the S e c u r i t i e s and Exchange Commission (SEC) and the I n t e r s t a t e Commerce Commission (ICC), submitted a cost estimate of i t s compliance e f f o r t i n connection w i t h the Equal C r e d i t Opportunity A c t . While these f i g u r e s are not s t r i c t l y com- p a r a b l e , the t o t a l estimated expenditure was approximately $7.6 m i l l i o n in 1978. III. LEGISLATIVE RECOMMENDATIONS Although the Board i s not making l e g i s l a t i v e recommendations t h i s r e p o r t , two of the other enforcement agencies made suggestions amending the Equal Credit Oportunity A c t . The Small Business in for Administration - 11 requests that the Congress t r a n s f e r to i t (from the FTC) the r e s p o n s i - b i l i t y f o r monitoring Regulation B and the ECOA i n i t s programs. SBA s a i d i t b e l i e v e s t h i s would avoid d u p l i c a t i v e a d m i n i s t r a t i v e hearings when c e r t a i n v i o l a t i o n s are a l l e g e d . The O f f i c e of Equal Opportunity w i t h i n the Department of A g r i c u l t u r e recommends that d i s c r i m i n a t i o n because of a handicap be included among the p r o h i b i t e d bases under the ECOA. IV. UNIFORM GUIDELINES FOR ENFORCING REGULATION B The f i v e Federal agencies that supervise F e d e r a l l y insured f i n a n c i a l i n s t i t u t i o n s — t h e O f f i c e of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, the Federal Reserve Board, and the N a t i o n a l Credit Union A d m i n i s t r a t i o n — have j o i n t l y proposed uniform g u i d e l i n e s f o r enforcement of the Equal C r e d i t Opportunity A c t , i t s implementing Regulation B, and the F a i r Housing Act. The g u i d e l i n e s were issued f o r p u b l i c comment i n June 1978. They are intended to promote improved and uniform enforcement of the equal c r e d i t opportunity and f a i r housing laws among F e d e r a l l y r e g u l a t e d f i n a n c i a l insti- t u t i o n s , by r e q u i r i n g c o r r e c t i v e a c t i o n f o r v i o l a t i o n s discovered during examinations and through i n v e s t i g a t i o n of complaints. The e n f o r c i n g agencies would encourage v o l u n t a r y correction and compliance, and take the a c t i o n s noted i n the g u i d e l i n e s to c o r r e c t violations. These v i o l a t i o n s i n c l u d e discouraging a p p l i c a t i o n s on a p r o h i b i t e d b a s i s , using d i s c r i m i n a t o r y elements i n c r e d i t evaluation systems, charging a higher r a t e of i n t e r e s t on a p r o h i b i t e d b a s i s or r e q u i r i n g insurance i n v i o l a t i o n of f a i r housing or equal c r e d i t opportunity laws, r e q u i r i n g a cosigner on a p r o h i b i t e d b a s i s , f a i l i n g to provide n o t i c e s of adverse a c t i o n , f a i l i n g to maintain and report separate c r e d i t histories - 12 - where required, f a i l i n g to c o l l e c t i n f o r m a t i o n f o r monttoring purposes, and terminating or changing the terms of accounts on a p r o h i b i t e d b a s i s . In each case,^the circumstances would be considered i n determining the s u i t a b i l i t y of the remedy provided i n the uniform g u i d e l i n e s . If v i o l a t i o n s remain uncorrected, the e n f o r c i n g agencies would take admini s t r a t i v e a c t i o n s to ensure c o r r e c t i o n . The agencies have reviewed the comments received and are working toward f i n a l V. guidelines. COMPREHENSIVE REVIEW OF REGULATION B In June 1978 the Board announced that i t was embarking on a comprehensive review of a l l i t s r e g u l a t i o n s , t o determine whether they needed modernization or improvement. The s t y l e and format o f existing regu'i'^tions are r e c e i v i n g s p e c i a l a t t e n t i o n i n an attempt t o make Federal Reserve r e g u l a t i o n s more understandable and t o reduce the burden o f compliance. The Federal Reserve Bank of P h i l a d e l p h i a , which was assigned r e s p o n s i b l i t y f o r reviewing R e g u l a t i o n B, submitted i t s r e p o r t to the Board at the end of 1978. The Board's s t a f f w i l l review the r e p o r t and make recommendations to the Board. VI. NEW INFORMATION During the past year, the Board published the r e s u l t s of two s t u d i e s — a major survey of consumers and a l e s s extensive c o l l e c t i o n of data 1 from c r e d i t o r s . Both i n q u i r i e s were undertaken to l e a r n more about c r e d i t use and consumer needs and t o provide information about consumer awareness and use of consumer c r e d i t legislation. 1 Thomas A. Durkin and Gregory E l l i e h a u s e n , 1977 Consumer C r e d i t Survey (Board of Governors of the Federal Reserve System, 1978); " E x e r c i s e of Consumer Rights under the Equal C r e d i t Opportunity and F a i r C r e d i t B i l l i n g A c t s , " Federal Reserve B u l l e t i n , v o l . 64 (May 1978), pp. 363-66. - 13 A. Consumer Awareness Survey I n the summer of 1977 the Survey Research Center of the U n i v e r s i t y of Michigan conducted a survey of consumer awareness under the j o i n t sponsorship of the Board, the Federal Deposit Insurance Corp o r a t i o n , and the O f f i c e of the Comptroller of the Currency. The survey, which i n v o l v e d interviews w i t h a nationwide sample of 2,563 consumers, i n c l u d e d s e v e r a l questions p e r t a i n i n g t o the act and R e g u l a t i o n B. Nearly one-quarter of the consumers surveyed experienced problems or treatment they considered u n f a i r i n t h e i r c r e d i t t i o n s ; 622 respondents mentioned 947 problems. transac- However, r e l a t i v e l y few of them considered c r e d i t d i s c r i m i n a t i o n to be among t h e i r problems. They reported only 26 problems because of sex or m a r i t a l s t a t u s , 8 because of age, 3 because of race, and 6 because of other personal c h a r a c t e r i s t i c s — a t o t a l of only 4.4 per cent of a l l problems (See Table 1 i n appendix A ) . The survey f u r t h e r asked respondents what i n f o r m a t i o n they thought c r e d i t o r s use i n d e c i d i n g whether t o make a l o a n . As shown i n Table 2, 9.6 per cent of the responses r e l a t e d to personal characteristics such as age or r a c e , w h i l e the r e s t r e l a t e d to c r e d i t h i s t o r y or f i n a n c i a l c h a r a c t e r i s t i c s . In response to a question that focused on personal c h a r a c t e r i s t i c s protected by the ECOA, personal f a c t o r s were mentioned very i n f r e q u e n t l y (Table 3 ) , even by m i n o r i t y , female, e l d e r l y , and nonmarried respondents (Table 4 ) . The survey d i d not attempt to measure consumers' awareness of the ECOA d i r e c t l y because at the time of the i n t e r v i e w s the law had only r e c e n t l y taken e f f e c t . Survey research w i t h respect to other credit laws i n d i c a t e s that p u b l i c awareness of them tended t o develop very s l o w l y . - 14 B. I n q u i r y on E x e r c i s e of Rights under the Equal C r e d i t Opportunity Act In November 1977 the Board surveyed e i g h t l a r g e c r e d i t o r s to determine the extent to which consumers e x e r c i s e c e r t a i n r i g h t s under the ECOA and the cost t o c r e d i t o r s of complying w i t h t h i s law. Two areas covered i n the i n q u i r y were the r i g h t to a separate c r e d i t f o r married persons, and n o t i f i c a t i o n by c r e d i t o r s of s p e c i f i c f o r d e n i a l of history reasons credit. C r e d i t o r s enclosed w i t h b i l l i n g statements the i n i t i a l notices regarding the r i g h t to a separate c r e d i t h i s t o r y . Approximately 11 per cent of customers requested the maintenance of separate c r e d i t histories. The average cost t o the c r e d i t o r s of p r i n t i n g and p r o c e s s i n g each n o t i c e i n such a m a i l i n g was l e s s than 1 c e n t , and the average cost of processing the r e t u r n requests and I n i t i a l l y r e p o r t i n g the new Information t o the c r e d i t - r e p o r t i n g agencies was about 9 cents per request. A s u b s t a n t i a l p r o p o r t i o n of r e j e c t e d c r e d i t requested the reasons f o r d e n i a l i f applicants they had not been given reasons at the time of r e j e c t i o n ; many a p p l i c a n t s subsequently provided a d d i t i o n a l i n f o r m a t i o n s u f f i c i e n t to warrant the g r a n t i n g of c r e d i t . many a p p l i c a n t s who were i n i t i a l l y given reasons f o r c r e d i t Similarly, denial supplied more Information, and a h i g h p r o p o r t i o n of these were then granted c r e d i t . The cost of p r o v i d i n g reasons f o r the d e n i a l of credit to the r e j e c t e d a p p l i c a n t s v a r i e d w i d e l y — r a n g i n g from 22 cents to $5.25 per account. VII. CONSUMER ADVISORY COUNCIL The Consumer Advisory C o u n c i l , whose members Include a broad r e p r e s e n t a t i o n of consumer and c r e d i t o r i n t e r e s t s , was e s t a b l i s h e d i n l a t e - 15 1976 t o a d v i s e on t h e B o a r d ' s r e s p o n s i b i l i t i e s credit protection laws. discussed various issues, R e g u l a t i o n B. i n the f i e l d of consumer During 1978, the C o u n c i l met f o u r times and i n c l u d i n g the u n i f o r m g u i d e l i n e s f o r In a d d i t i o n , enforcing the C o u n c i l reviewed the e f f o r t s o f the F e d e r a l Reserve System i n a c h i e v i n g member bank compliance w i t h t h e ECOA and F a i r Housing A c t , and e x p l o r e d approaches the Board s h o u l d in its consumer e d u c a t i o n consider efforts. I n F e b u r a r y 1978, the Board expanded the C o u n c i l membership t o 28 by a p p o i n t i n g 2 a d d i t i o n a l members. I n December, 8 new members were a p p o i n t e d t o the C o u n c i l f o r terms o f 3 years t o r e p l a c e t h o s e whose terms e x p i r e d a t t h e end o f 1978. on the C o u n c i l , and t h e i r VIII. A. A list o f members c u r r e n t l y serving terms, i s a t t a c h e d as appendix B. ADMINISTRATIVE FUNCTIONS Amendments and I n t e r p r e t a t i o n s of R e g u l a t i o n B D u r i n g 1978 1. Occurrence of Adverse A c t i o n a t P o i n t of Sale Under R e g u l a t i o n B, i n each i n s t a n c e o f adverse a c t i o n , a c r e d i t o r must e i t h e r g i v e a w r i t t e n e x p l a n a t i o n t o t h e customer o f reason f o r such a c t i o n or i n f o r m the customer o f the r i g h t an e x p l a n a t i o n upon r e q u e s t . to receive I n March 1978 t h e Board amended t h e i t i o n of adverse a c t i o n t o exclude most p o i n t - o f - s a l e o r l o a n from the adverse a c t i o n r e q u i r e m e n t s . the defin- denials Under t h e r e v i s e d d e f i n i t i o n a r e f u s a l t o a u t h o r i z e a p o i n t - o f - s a l e or l o a n t r a n s a c t i o n i s n o t adverse a c t i o n u n l e s s a c r e d i t o r u n f a v o r a b l y changes the terms o f an a c c o u n t , such as by l o w e r i n g the c u s t o m e r ' s c r e d i t l i m i t ; c l o s e s an a c c o u n t ; o r t u r n s down an a p p l i c a t i o n t o i n c r e a s e t h e c r e d i t l i m i t o f an account made i n accordance w i t h the c r e d i t o r ' s procedures a t the p o i n t o f sale. - The amendment superseded O f f i c i a l was 16 Staff - I n t e r p r e t a t i o n EC-0008, w h i c h rescinded. 2• Revised Procedures f o r tations Issuance o f O f f i c i a l S t a f f Interpre- I n A p r i l 1978 the Board amended R e g u l a t i o n B t o r e v i s e procedure f o r i s s u i n g o f f i c i a l procedure, o f f i c i a l staff staff interpretations. interpretations the Under t h e new aro Issued w i t h an e f f e c t i v e d a t e 30 days a f t e r p u b l i c a t i o n i n t h e F e d e r a l R e g i s t e r , w h i c h e n a b l e s the p u b l i c t o r e v i e w them b e f o r e they become e f f e c t i v e and p e r m i t s i n t e r e s t e d p a r t i e s t o r e q u e s t t h e o p p o r t u n i t y f o r p u b l i c comment. a request i s received, suspended and i t s t h e e f f e c t i v e date of t h e i n t e r p r e t a t i o n If is t e x t r e p u b l i s h e d f o r p u b l i c comment t o g e t h e r w i t h t h e r e q u e s t f o r a comment p e r i o d o r a summary o f t h e arguments p r e s e n t e d i n the request. is A f t e r t h e comments a r e r e v i e w e d , a f i n a l interpretation issued. 3» Proposed Amendments to R e g u l a t i o n B In response t o c e r t a i n recoraraendations from the s t a f f of the F e d e r a l Trade Commission and the P r e s i d e n t ' s Task F o r c e on Women B u s i n e s s Owners, the Board, i n October 1978, proposod f o r corPTnent s e v e r a l to R e g u l a t i o n B t h a t would broaden I t s s c o p e . The proposed amendments would (1) b r i n g under the r e g u l a t i o n a r r a n g e r s o f c r e d i t — f o r example, r e a l e s t a t e b r o k e r s who choose the c r e d i t o r s w i t h which a c r e d i t c a t i o n w i l l be f i l e d ; changes appli- (2) e l i m i n a t e the exemption o f b u s i n e s s c r e d i t the r e c o r d - k e e p i n g and n o t i f i c a t i o n requirements i n c e r t a i n from transactions under $100,000; and (3) e l i m i n a t e t h e exemption o f b u s i n e s s c r e d i t from the g e n e r a l bar a g a i n s t a s k i n g f o r an a p p l i c a n t ' s m a r i t a l s t a t u s . The proposed amendment r e g a r d i n g b u s i n e s s c r e d i t incorporates Official - 17 - Staff I n t e r p r e t a t i o n EC-0009, which r e q u i r e s c r e d i t o r s to give appli- c a n t s f o r b u s i n e s s c r e d i t w r i t t e n or o r a l n o t i c e of a c t i o n taken on an a p p l i c a t i o n or an e x i s t i n g account w i t h i n a r e a s o n a b l e time. The continent p e r i o d ended December 26, 1978. 4. O f f i c i a l Staff Interpretations D u r i n g 1978, the s t a f f issued three o f f i c i a l staff t i o n s of R e g u l a t i o n B and withdrew two p r e v i o u s l y i s s u e d . the Board i n s t r u c t e d i t s staff t o withdraw O f f i c i a l S t a f f EC-0007 d e a l i n g w i t h the c o l l e c t i o n , I n March 1978, Interpretation f o r marketing p u r p o s e s , o f t i o n o t h e r w i s e p r o h i b i t e d under the r e g u l a t i o n , informa- and t o i s s u e a new i n t e r - p r e t a t i o n , EC-OOlO, l i m i t i n g the a p p l i c a b i l i t y of the O f f i c i a l Staff interpreta- interpretation. I n t e r p r e t a t i o n EC-0008, which concerned whether adverse a c t i o n can occur a t the p o i n t of s a l e , was superseded by the March 1978 amendment t o the regulation. The remaining two o f f i c i a l staff interpretations, E C - O O l l and EC-0012, d e a l , r e s p e c t i v e l y , w i t h the a p p l i c a b i l i t y o f R e g u l a t i o n B t o c e r t a i n l e n d i n g o p e r a t i o n s conducted o u t s i d e the U n i t e d S t a t e s , and w i t h the r e v i s e d a p p l i c a t i o n forms f o r r e s i d e n t i a l mortgage l o a n s p r e p a r e d by the F e d e r a l Home Loan Mortgage A s s o c i a t i o n and the F e d e r a l Mortgage A s s o c i a t i o n . were not B. National Both were i s s u e d under the r e v i s e d p r o c e d u r e s , but challenged. Education An i n t e g r a l p a r t o f any enforcement program i s e d u c a t i n g both c r e d i t o r s and consumers o f t h e i r r i g h t s and r e s p o n s i b i l i t i e s . the past y e a r , the enforcement agencies p a r t i c i p a t e d i n a number o f -educational e f f o r t s , During i n c l u d i n g speeches and seminars i n v o l v i n g consinners. - 18 creditors, s c h o o l groups, p r o f e s s i o n a l a s s o c i a t i o n s , and o t h e r s . E x p l a n a t o r y pamphlets remain a p o p u l a r method o f education. consumer T h i s past y e a r , t h e F e d e r a l Reserve Board announced two new b r o c h u r e s , one of w h i c h . The E q u a l C r e d i t O p p o r t u n i t y A c t and ... C r e d i t R i g h t s i n H o u s i n g , p r o v i d e s i n f o r m a t i o n about how t h e major s i o n s o f the ECOA a f f e c t mortgage l e n d i n g . Handbook t o C r e d i t P r o t e c t i o n Laws, i s A n o t h e r , t h e B o a r d ' s Consumer a compilation of r i g h t s under c r e d i t laws and r e g u l a t i o n s . consumers* The Small B u s i n e s s t r a t i o n r e p o r t s t h a t pamphlets c o n c e r n i n g i t s are a v a i l a b l e f o r d i s t r i b u t i o n i n a l l Adminis- "Women i n Business The f i l m i s b e i n g d i s t r i b u t e d v a r i o u s consumer and c i v i c g r o u p s . Program" SBA program o f f i c e s . The F e d e r a l Reserve Bank of P h i l a d e l p h i a has r e c e n t l y a f i l m e n t i t l e d To Your C r e d i t . provi- I t d e p i c t s common problems produced to faced by consumers i n c r e d i t t r a n s a c t i o n s and o f f e r s s o l u t i o n s by i n f o r m i n g consumers o f t h e i r r i g h t s under t h e many consumer c r e d i t p r o t e c t i o n laws. The FTC and the F e d e r a l Reserve Bank o f San F r a n c i s c o have e^ch developed p u b l i c s e r v i c e announcements f o r t e l e v i s i o n and r a d i o . E d u c a t i o n of c r e d i t o r s o f t e n o c c u r s d u r i n g the e x a m i n a t i o n Most a g e n c i e s r e p o r t t h a t t h i s procedure e n a b l e s o n e - t o - o n e guidance the areas i n which i t cation, visits i s most needed. process. in As a supplement t o t h i s o n - s i t e the F e d e r a l Reserve System c o n t i n u e d i t s program o f t o member banks w i t h a p p r o x i m a t e l y 450 v i s i t s edu- advisory d u r i n g 1978. I n addition, s e v e r a l new p u b l i c a t i o n s have been developed f o r c r e d i t o r s i n 1978, such as the F e d e r a l Reserve Bank o f New Y o r k ' s Consumer R e g u l a t i o n s and the NCUA's Manual of Laws A f f e c t i n g F e d e r a l C r e d i t Unions. Checklist
@FedFRASER