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F ederal reserve Ba n k DALLAS, TEXAS of Dallas 75222 C ircu lar No. 77-117 October 19, 1977 PROPOSED AMENDMENTS TO REGULATION B—EQUAL CREDIT OPPORTUNITY Definition of A d v erse Action TO ALL BANKS, OTHER CREDITORS, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System has proposed for comment two alternative amendments to its Equal Credit Opportunity Regulation B affecting the definition of a d v e r s e action which re q u ire s notification to the custo mer that an application for c r e d it has been refused . The Board req u ested comment by November 15, 1977. Regulation B r eq u ires that when a d v e r s e action occurs the cred ito r must send the applicant a written notice within 30 d a y s , including a statement of the cre d ito r's specific reasons for taking the action, or notification of the custom er's rig h t to have such a statement. Regulation B sets forth th ree to extend c re d it as a d v e r s e action, and One circum stance that is excluded from in which the credit requested at a point lished cred it limit for the account. circum stances in which it defines a refusal it specifically excludes five circum stances. the definition of a d v e r s e action is the case of sale would exceed a p reviously estab Questions have a rise n w h eth er all refusals of cred it that do not exceed the established limit for the account a re a d v e r s e actions req u irin g notification. In resp o n se, the Board's staff issued an official staff interpretation stating that r e fusal or failure to authorize the use of an o p en-end (credit card) account at the point of sale, or to make a cash ad v an ce, is not a d v e r s e action. In resp o n se to req u e sts for reconsideration of this in terpretation, the Board offers for comment two alternative revisions of Regulation B. a) This proposal would provide that a d v e r s e action has occu rred at the point of sale when (1) the cred ito r refuses to increase the credit limit for the account in accordance with p ro ced u re s e s ta b lished by the c red ito r, or (2) the action terminates the account, or (3) the action makes an unfavorable change in the terms of an a c count that does not affect all or most other such accounts. Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-492-4403 (intrastate) and 1-800-527-4970 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - b) This alternative proposal would provide that all refusals of c r e d it at the point of sale would be a d v e r s e actions except when the refusal is (1) occasioned by the custom er's failure to p r e s e n t a cred it card or re q u ired identification, or (2) because the customer p re se n ts an expired cred it c a rd , or (3) b ecause the credit card authorization cen ter is closed or known to the m erchant to be out of o r d e r. The staff interpretation mentioned above remains in effect until final action is taken on these proposals. Printed on the following pages is a copy of the Board's o r d e r as it a p peared in the FEDERAL REGISTER on October 11, 1977. Any questions regard ing this matter may be directed to Richard B. West or Ralph H. Richardson of our Examination Department, Consumer Affairs Section, at Ext. 6171 or Ext. 6181. Sincerely y o u r s , Robert H . Boykin First Vice P resident Extract From FEDERAL REGISTER, five events from the aenniuon 01 adverse action, including a creditor’s refusal to extend credit a t point of sale or loan V /m lit mo 1 oc because the credit requested would ex * INU. IS O , ceed a previously established credit limit T u esday October 11 1977 on 1116 account. Therefore, no notice of •' ' adverse action need plvpn when the pp. 54834 - 54835 use of a credit card would exceed the limit on the account. However, the Act r £ 0 1 0 —0 1 1 and regulation are not explicit as to L6 2 1 0 — 1 J 0 whether adverse action occurs and, thus, FEDERAL RESERVE SYSTEM whether notice must be given, when the ’ attempted use would not exceed the [ 12 CFR Part 202 ] credit limit on the account. [Beg. B; Docket No. R-0H7] In response to requests for clariflca.____ ______ ™ tion of this ambiguity, an official staff EQUAL CREDIT OPPORTUNITY interpretation of § 202.2(c) was issued Proposed Definition of Adverse Action (EC-0008, 42 FR 21605, April 28, 1977). Rn, rri of '-jrwpm— nf 1116 interpretation states th a t a credrefusal or failure to authorize the Federal Reserve System. use Qf an open_end account when such ACTION: Proposed rule. use would not exceed the account limit SUMMARY: In response to requests for ?“ » ? ot constitute adverse action and. therefore, does not require th a t the apclariflcation of the definition of adverse plicant be notified of the reasons for action, the Board proposes to amend th at definition. A num ber of creditors and two government agencies have raised the question of whether some or all point of sale or loan refusals or failures to au thorize an extension of credit th a t would not exceed the account limit are adverse action and therefore require notice to the customer. The Board is seeking pub lic comment in order to determine w hat regulatory course best implements the Equal Credit Opportunity Act. DATE: Comments m ust be received on or before November 15,1977. ADDRESS: Secretary, Board of Gov ernors of the Federal Reserve System, Washington, D.C. 20551. All comments should refer to Docket No. R-0117. FOR FURTHER INFORMATION CON TACT: Anne Geary, Manager, Equal Credit Opportunity Section, Division of Con sumer Affairs, Board of Governors of the Federal Reserve System, W ash ington, D.C. 20551 (202-452-3946). SUPPLEMENTARY INFORMATION: The Equal Credit Opportunity Act and Regulation B require th a t notification be given to an applicant when adverse action occurs. Section 202.2(c) of Regu lation B provides th a t adverse action occurs in three instances. First, it occurs when there is a refusal to grant credit in substantially the amount or on substantially the terms renuested by an applicant, unless the applicant uses or expressly accepts the amount or terms th at the creditor offers. Second, adverse action occurs if there is a term ination of an account or an unfavorable change in its terms th a t does not affect all or a substantial portion of a classification of the creditor’s accounts. Third, it occurs when there is a refusal to increase the amount of credit avail able to an applicant who has requested the increase in accordance with the cred itor’s procedures for th a t type of credit. The regulation specifically excludes the refusal. The staff of the Federal Trade Commission and the Justice De partm ent have asked for reconsideration of this interpretation. The Board proposes to amend § 202.2 (c) in order to resolve this ambiguity in the definition of adverse action. Board staff’s official interpration, EC-0008, re m ains in effect in the interim. Two proposals are offered for com ment. Proposal A would amend § 202.2(c) to provide th a t a refusal or failure to au thorize the use of an account a t a point of sale or loan is not adverse action un less such refusal or failure: (1) Occurs in connection with a request to increase the credit limit on the account in accord ance with the procedures established by the creditor, (2) is a termination of the account, or (3) is an unfavorable change in the terms of an account th at does not affect all or a substantial portion of a classification of a creditor’s accounts. In addition, the term “application” would be substituted for “applicant" in subsec tion (1) (i) of the current definition, and language would be inserted to emphasize th a t § 202.2(c) (2) takes precedence over § 202.2(c) (1). The effect of adopting this proposal would be th a t all point of sale or loan refusals or failures to authorize use of an account are not adverse action, except in the three cases described im mediately above. Proposal B, on the other hand, would amend § 202.2(c) (2) to provide th a t a refusal or failure to authorize the use of an account a t point of sale or loan would not be adverse action if occasioned by the customer’s failure to present a credit card or required identification, the cus tom er’s presentation of an expired credit card, or the fact th a t the authorization center was closed or known to the m er chant to be malfunctioning. All other point-of-sale refusals of credit would be adverse action requiring notice. The ef fect of adopting proposal B would be to limit the events th a t would not require a notice to those specifically exempted. Notices would still be required, for ex ample, when an applicant presents a card reported lost or stolen, when an applicant attem pts to use an account on which th a t applicant has disclaimed re sponsibility, or when the equipment at point of sale is malfunctioning. Simi larly, a notice would be necessary if the use of the card did not fit into the appli can t’s previous pattern of card use or if the use of the card exceeded the credit limit for cash advances, for a particular kind of purchase, or for a geographic area. These are generally considered se curity control mechanisms. To aid in consideration of this pro posed rulemaking by the Board, inter ested persons are invited to submit rele vant data, comments, or analyses. Any such information should be submitted in writing to the Secretary, Board of Gov ernors of the Federal Reserve System, Washington, D.C. 20551, to be received not later th a n November 15, 1977. All m aterial submitted should include the Docket No. R-0117. Such information will be made available for inspection and copying upon request except as provided In § 261.6(a) of the Board’s rules regard ing availability of information (12 CFR 261.6(a)). The following proposed amendments are published pursuant to the Board’s authority under section 703(a) of the Equal Credit Opportunity Act (15 U.S.C. 1691(b)). P ro p o sal A § 2 0 2 .2 D efinitions a n d rules o f con stru ctio n . * * * * * (c) A d v e r s e a c t i o n . (1) For the p u r pose of notification of action taken, statem ent of reasons for denial, and record retention, the term means: (1) A refusal to grant credit in sub stantially the am ount or on substantially the terms requested in an application unless the creditor offers to grant credit other th an in substantially the amount or on substantially the terms requested by the applicant and the applicant uses or expressly accepts the credit offered; or * * * * * (2) The term does not include: ■ * • * * * (iii) A refusal or failure to authorize the use of an account a t a point of sale or loan, except when the refusal Is caused by a term ination or an unfavor able change in the terms of an account th a t does not affect all or a substantial portion of a classification of the credi to r’s accounts or when the refusal re sults in the denial of an application to increase the amount of credit available under the account; or * * * * * (3) When a particular action falls within the definitions of both paragraphs (c)(1) and (c)(2) of this section, the provisions of paragraph (c) (2) of this section control. P roposal B § 20 2.2 D efinitions an d ra le s o f con struction. * * * * * (c) Adverse action. * * * (2) T he term does not include; * * * * * (vi) A refusal to extend credit because an applicant fails to present a credit card or presents an expired credit card; or (vii) A refusal to extend credit be cause an applicant fails to present the required identification; or (viii) A refusal to extend credit be cause the credit card issuer’s authoriza tion center is closed or known to the m erchant to be malfunctioning. * * * * * By order of the Board of Governors, effective September 28, 1977. T h e o d o r e E. A l l i s o n , S e c re ta ry o f th e B oard. [PR Doc.77-29629 Filed 10-7-77;8:45 am]