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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)

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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 .
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(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
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(2) The term does not include:
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(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
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(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.
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(c) Adverse action. * * *
(2) T he term does not include;
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(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.
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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]


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102