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F ederal R eser v e Bank OF DALLAS W IL L IA M fir s t H. WALLACE DALLAS. TEXAS 7 5 2 2 2 V IC E p r e s i d e n t A N D C H IE F O P E R A T IN G O F F IC E R September 4, 1990 C i r c u l a r 90-62 TO: The Chief Executive O f f i c e r of each f i n a n c i a l i n s t i t u t i o n in t he Eleventh Federal Reserve D i s t r i c t SUBJECT Official Staff Commentary on Regulation B--Equal Credit Opportunity DETAILS The Board o f Governors o f t h e Federal Reserve System has pu blished an amended O f f i c i a l S t a f f Commentary on Regulation B, e f f e c t i v e April 1990. The new commen t a r y should be i n s e r t e d i n to volume 2 o f your R eg u l at i on s binder. ENCLOSURE The amended commentary i s en cl o s ed . MORE INFORMATION For more in for ma tio n, p le a s e c o n t a c t W. Art hu r T r i b b le a t (214) 744-7479. For a d d i t i o n a l co p i es o f t h i s c i r c u l a r or the commentary, p le a se c o n t a c t t h e P ub l i c A f f a i r s Department a t (214) 651-6289. . Sincerely, For additional copies of any circular, please contact the Public Affairs Department at (214) 651-6289. Bankers and others are encouraged to use the following toll-free number in contacting the Federal Reserve Bank of Dallas: (800) 333-4460. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Board of Governors of the Federal Reserve System Official Staff Commentary on Regulation B Equal Credit Opportunity As amended effective April 1, 1990 Any inquiry relating to Regulation B should be addressed to the Federal Reserve Bank of the Federal Reserve District in which the inquiry arises. May 1990 Contents Introduction ............................................ Page 1 Page Section 202.8—Special-purpose credit pro gram s.............................................. 12 Section 202.1—Authority, scope, and purpose.................................................. 1 Section 202.9—Notifications.................. 13 Section 202.2—Definitions...................... 2 Section 202.10—Furnishing of credit inform ation.......................................... 16 Section 202.11—Relation to state law . . . 16 Section 202.12—Record retention.......... 16 Section 202.13—Information for monitoring purposes............................ 17 Section 202.14— Enforcement, penalties, and liabilities........................................ 18 Appendix B—Model application forms.. 18 Section 202.3—Limited exceptions for certain classes of transactions.............. 4 Section 202.4— General rule prohibiting discrim ination...................................... 5 Section 202.5—Rules concerning taking of applications...................................... 5 Section 202.6—Rules concerning evaluation of applications.................... 6 Section 202.7—Rules concerning extensions of c re d it.............................. 9 Official Staff Commentary on Regulation B As amended effective April 1, 1990 Following is an official staff interpretation of Regulation B issued under authority delegated by the Federal Reserve Board to officials in the Division of Consumer and Community Affairs. References are to sections of the regu lation or the Equal Credit Opportunity Act (15 USC 1601 et seq.). designated with as much specificity as possible according to the particular regulatory provi sion addressed. Each comment in the com mentary is identified by a number and the reg ulatory section or paragraph that it interprets. For example, comments to section 202.2(c) are further divided by subparagraph, such as comment 2(c) (1) (ii)—1 and comment 2(c) (2) (ii)—1. IN T R O D U C T IO N 1. Official status. Section 706(e) of the Equal Credit Opportunity Act protects a creditor from civil liability for any act done or omitted in good faith in conformity with an interpreta tion issued by a duly authorized official of the Federal Reserve Board. This commentary is the means by which the Division of Consumer and Community Affairs of the Federal Re serve Board issues official staff interpretations of Regulation B. Good faith compliance with this commentary affords a creditor protection under section 706(e) of the act. 2. Issuance o f interpretations. Under appendix D to the regulation, any person may request an official staff interpretation. Interpretations will be issued at the discretion of designated officials and incorporated in this commentary following publication for comment in the Fed eral Register. Except in unusual circum stances, official staff interpretations will be issued only by means of this commentary. 3. Status o f previous interpretations. Interpre tations of Regulation B previously issued by the Federal Reserve Board and its staff have been incorporated into this commentary as appropriate. All other previous Board and staff interpretations, official and unofficial, are superseded by this commentary. 4. Footnotes. Footnotes in the regulation have the same legal effect as the text of the regula tion, whether they are explanatory or illustra tive in nature. 5. Comment designations. The comments are SE C T IO N 202.1— A uthority, Scope, and Purpose 1 (a ) A uth ority and Scope 1. Scope. The Equal Credit Opportunity Act and Regulation B apply to all credit—com mercial as well as personal—without regard to the nature or type of the credit or the credi tor. If a transaction provides for the deferral of the payment of a debt, it is credit covered by Regulation B even though it may not be a credit transaction covered by Regulation Z (Truth in Lending). Further, the definition of creditor is not restricted to the party or person to whom the obligation is initially payable, as is the case under Regulation Z. Moreover, the act and regulation apply to all methods of credit evaluation, whether performed judgmentally or by use of a credit scoring system. 2. Foreign applicability. Regulation B general ly does not apply to lending activities that oc cur outside the United States. The regulation does apply to lending activities that take place within the United States (as well as the Com monwealth of Puerto Rico and any territory or possession of the United States), whether or not the applicant is a citizen. 3. Board. The term “Board,” as used in this regulation, means the Board of Governors of the Federal Reserve System. 1 Regulation B Commentary § 202.2 SE C T IO N 202.2— Definitions • 2 (c ) A dverse A ction • Paragraph 2(c)(1)(H) 1. Move from service area. If a credit card is suer terminates the open-end account of a cus tomer because the customer has moved out of the card issuer’s service area, the termination is “adverse action” for purposes of the regula tion unless termination on this ground was ex plicitly provided for in the credit agreement between the parties. In cases where termina tion is adverse action, notification is required under section 202.9. 2. Termination based on credit limit. If a creditor terminates credit accounts that have low credit limits (for example, under $400) but keeps open accounts with higher credit limits, the termination is adverse action and notification is required under section 202.9. Paragraph 2(c)(2)(ii) 1. Default—exercise o f due-on-sale clause. If a mortgagor sells or transfers mortgaged prop erty without the consent of the mortgagee, and the mortgagee exercises its contractual right to accelerate the mortgage loan, the mortgagee may treat the mortgagor as being in default. An adverse-action notice need not be given to the mortgagor or the transferee. (See comment 2 (e )-l for treatment of a purchaser who requests to assume the loan.) Paragraph 2(c)(2)(iii) 1. Point-of-sale transactions. Denial of credit at point of sale is not adverse action except under those circumstances specified in the regulation. For example, denial at point of sale is not adverse action in the following situations: • • • 2 A credit cardholder presents an expired card or a card that has been reported to the card issuer as lost or stolen. The amount of a transaction exceeds a cash advance or credit limit. The circumstances (such as excessive use of a credit card in a short period of time) suggest that fraud is involved. The authorization facilities are not functioning. Billing statements have been returned to the creditor for lack of a forwarding address. Paragraph 2(c) (2) (v) 1. Terms o f credit versus type o f credit offered. When an applicant applies for credit and the creditor does not offer the credit terms re quested by the applicant (for example, the in terest rate, length of maturity, collateral, or amount of downpayment), a denial of the ap plication for that reason is adverse action (un less the creditor makes a counteroffer that is accepted by the applicant) and the applicant is entitled to notification under section 202.9. 2 (e ) A pplicant 1. Request to assume loan. If a mortgagor sells or transfers the mortgaged property and the buyer makes an application to the creditor to assume the mortgage loan, the mortgagee must treat the buyer as an applicant unless its policy is not to permit assumptions. 2 (f) A pplication 1. General. A creditor has the latitude under the regulation to establish its own application process and to decide the type and amount of information it will require from credit applicants. 2. “Procedures established. ” The term refers to the actual practices followed by a creditor for making credit decisions as well as its stat ed application procedures. For example, if a creditor’s stated policy is to require all appli cations to be in writing on the creditor’s appli cation form, but the creditor also makes credit decisions based on oral requests, the creditor’s established procedures are to accept both oral and written applications. 3. When an inquiry becomes an application. A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the applicant, decides to decline the request, and communicates this to the applicant, the credi § 202.2 Regulation B Commentary tor has treated the inquiry as an application and must then comply with the notification requirements under section 202.9. Whether the inquiry becomes an application depends on how the creditor responds to the applicant, not on what the applicant says or asks. the applicant, such as an address or telephone number needed to verify employment, the creditor should contact the applicant prompt ly. (But see comment 9 (a )(l)-3 , which dis cusses the creditor’s option to deny an appli cation on the basis of incompleteness.) 4. Examples o f inquiries that are not applica tions. The following examples illustrate situa tions in which only an inquiry has taken place: 2 (g ) Business C redit • When a consumer calls to ask about loan terms and an employee explains the credi tor’s basic loan terms, such as interest rates, loan-to-value ratio, and debt-toincome ratio. • When a consumer calls to ask about inter est rates for car loans, and, in order to quote the appropriate rate, the loan officer asks for the make and sales price of the car and the amount of the downpayment, then gives the consumer the rate. • When a consumer asks about terms for a loan to purchase a home and tells the loan officer her income and intended downpay ment, but the loan officer only explains the creditor’s loan-to-value ratio policy and other basic lending policies, without telling the consumer whether she qualifies for the loan. • When a consumer calls to ask about terms for a loan to purchase vacant land and states his income and the sale price of the property to be financed, and asks whether he qualifies for a loan, and the employee responds by describing the general lending policies, explaining that he would need to look at all of the applicant’s qualifications before making a decision, and offering to send an application form to the consumer. 5. Completed application— diligence require ment. The regulation defines a completed application in terms that give a creditor the latitude to establish its own information re quirements. Nevertheless, the creditor must act with reasonable diligence to collect infor mation needed to complete the application. For example, the creditor should request in formation from third parties, such as a credit report, promptly after receiving the applica tion. If additional information is needed from 1. Definition. The test for deciding whether a transaction qualifies as business credit is one of primary purpose. For example, an openend credit account used for both personal and business purposes is not business credit unless the primary purpose of the account is business-related. A creditor may rely on an appli cant’s statement of the purpose for the credit requested. 2 (j) C redit 1. General. Regulation B covers a wider range of credit transactions than Regulation Z (Truth in Lending). For purposes of Regula tion B, a transaction is credit if there is a right to defer payment of a debt—regardless of whether the credit is for personal or commer cial purposes, the number of installments required for repayment, or whether the transaction is subject to a finance charge. 2(1) C reditor 1. Assignees. The term “creditor” includes all persons participating in the credit decision. This may include an assignee or a potential purchaser of the obligation who influences the credit decision by indicating whether or not it will purchase the obligation if the transaction is consummated. 2. Referrals to creditors. For certain purposes, the term “creditor” includes persons such as real estate brokers who do not participate in credit decisions but who regularly refer appli cants to creditors or who select or offer to se lect creditors to whom credit requests can be made. These persons must comply with sec tion 202.4, the general rule prohibiting dis crimination, and with section 202.5(a), on discouraging applications. 3 § 202.2 2(p ) Empirically Derived and Other Credit Systems 1. Purpose o f definition. The definition under section 202.2(p)(l)(i) through (iv) sets the criteria that a credit system must meet in or der for the system to use age as a predictive factor. Credit systems that do not meet these criteria are judgmental systems and may con sider age only for the purpose of determining a “pertinent element of creditworthiness.” (Both types of systems may favor an elderly applicant. See section 202.6(b)(2).) 2. Periodic revalidation. The regulation does not specify how often credit scoring systems must be revalidated. To meet the require ments for statistical soundness, the credit scoring system must be revalidated frequently enough to ensure that it continues to meet recognized professional statistical standards. 2(w ) Open-End Credit 1. Open-end real estate mortgages. The term “open-end credit” does not include negotiated advances under an open-end real estate mortgage or a letter of credit. 2(z) Prohibited Basis 1. Persons associated with applicant. “Prohib ited basis” as used in this regulation refers not only to characteristics—the race, color, reli gion, national origin, sex, marital status, or age—of an applicant (or officers of an appli cant in the case of a corporation) but also to the characteristics of individuals with whom an applicant is affiliated or with whom the ap plicant associates. This means, for example, that under the general rule stated in section 202.4, a creditor may not discriminate against an applicant because of that person’s personal or business dealings with members of a certain religion, because of the national origin of any persons associated with the extension of credit (such as the tenants in the apartment complex being financed), or because of the race of oth er residents in the neighborhood where the property offered as collateral is located. 2. National origin. A creditor may not refuse to grant credit because an applicant comes from a particular country but may take the 4 Regulation B Commentary applicant’s immigration status into account. A creditor may also take into account any ap plicable law, regulation, or executive order re stricting dealings with citizens (or the govern ment) of a particular country or imposing limitations regarding credit extended for their use. 3. Public assistance program. Any federal, state, or local governmental assistance pro gram that provides a continuing, periodic in come supplement, whether premised on enti tlement or need, is “public assistance” for purposes of the regulation. The term includes (but is not limited to) Aid to Families with Dependent Children, food stamps, rent and mortgage supplement or assistance programs, Social Security and Supplemental Security In come, and unemployment compensation. Only physicians, hospitals, and others to whom the benefits are payable need consider Medicare and Medicaid as public assistance. SECTION 202.3—Limited Exceptions for Certain Classes of Transactions 1. Scope. This section relieves burdens with regard to certain types of credit for which full application of the procedural requirements of the regulation is not needed. All classes of transactions remain subject to the general rule given in section 202.4, barring discrimination on a prohibited basis, and to any other provision not specifically excepted. 3(a) Public-Utilities Credit 1. Definition. This definition applies only to credit for the purchase of a utility service, such as electricity, gas, or telephone service. Credit provided or offered by a public utility for some other purpose—such as for financing the purchase of a gas dryer, telephone equip ment, or other durable goods, or for insula tion or other home improvements—is not excepted. 2. Security deposits. A utility company is a creditor when it supplies utility service and bills the user after the service has been provid ed. Thus, any credit term (such as a re quirement for a security deposit) is subject to the regulation. § 202.5 Regulation B Commentary 3. Telephone companies. A telephone compa ny’s credit transactions qualify for the excep tions provided in section 202.3(a)(2) only if the company is regulated by a government unit or files the charges for service, delayed payment, or any discount for prompt payment with a government unit. 3 (c ) Incidental C redit 1. Examples. If a service provider (such as a hospital, doctor, lawyer or retailer) allows the client or customer to defer the payment of a bill, this deferral of a debt is credit for purpos es of the regulation, even though there is no finance charge and no agreement for payment in installments. Because of the exceptions pro vided by this section, however, these particu lar credit extensions are excepted from com pliance with certain procedural requirements as specified in the regulation. 3 (d ) G overnm ent C redit 1. Credit to governments. The exception re lates to credit extended to (not by) govern mental entities. For example, credit extended to a local government by a creditor in the pri vate sector is covered by this exception, but credit extended to consumers by a federal or state housing agency does not qualify for special treatment under this category. SE C T IO N 202.4— G eneral R ule Prohibiting D iscrim ination 1. Scope o f section. The general rule stated in section 202.4 covers all dealings, without ex ception, between an applicant and a creditor, whether or not addressed by other provisions of the regulation. Other sections of the regula tion identify specific practices that the Board has decided are impermissible because they could result in credit discrimination on a basis prohibited by the act. The general rule covers, for example, application procedures, criteria used to evaluate creditworthiness, administra tion of accounts, and treatment of delinquent or slow accounts. Thus, whether or not specif ically prohibited elsewhere in the regulation, a credit practice that treats applicants different ly on a prohibited basis violates the law because it violates the general rule. SE C T IO N 202.5— R ules C oncerning T aking of A pplications 5 (a ) D iscouraging A pplications 1. Potential applicants. Generally, the regula tion’s protections apply only to persons who have requested or received an extension of credit. In keeping with the purpose of the act—to promote the availability of credit on a nondiscriminatory basis—section 202.5(a) covers acts or practices directed at potential applicants. Practices prohibited by this section include— • • • a statement that the applicant should not bother to apply, after the applicant states that he is retired use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discrimi natory preference or a policy of exclusion in violation of the act use of interview scripts that discourage ap plications on a prohibited basis. 2. Affirmative advertising. A creditor may af firmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit, especially groups that might not normally seek credit from that creditor. 5 (b ) G eneral Rules C oncerning Requests for Inform ation 1. Requests fo r information. This section gov erns the types of information that a creditor may gather. Section 202.6 governs how infor mation may be used. Paragraph 5(b)(2) 1. Local laws. Information that a creditor is allowed to collect pursuant to a “state” stat ute or regulation includes information re quired by a local statute, regulation, or ordinance. 2. Information required by Regulation C. Regulation C generally requires creditors cov ered by the Home Mortgage Disclosure Act (HM DA) to collect and report information about the race or national origin and sex of applicants for home-improvement loans and home-purchase loans, including some types of 5 § 202.5 Regulation B Commentary loans not covered by section 202.13. Certain creditors with assets under $30 million, though covered by HMDA, are not required to collect and report these data; but they may do so at their option under HMDA, without violating the ECOA or Regulation B. disclose the fact that income is derived from alimony, child support, or separate mainte nance payments. For example, an application form that asks about specific types of income such as salary,. wages, or investment income need not include the disclosure. 5 (d ) O th er Lim itations on Inform ation Requests 5 (e ) W ritten A pplications Paragraph 5(d)(1) 1. Indirect disclosure o f prohibited informa tion. The fact that certain credit-related infor mation may indirectly disclose marital status does not bar a creditor from seeking such in formation. For example, the creditor may ask about— • the applicant’s obligation to pay alimony, child support, or separate maintenance • the source of income to be used as the ba sis for repaying the credit requested, which could disclose that it is the income of a spouse • whether any obligation disclosed by the applicant has a co-obligor, which could disclose that the co-obligor is a spouse or former spouse • the ownership of assets, which could dis close the interest of a spouse Paragraph 5(d)(2) 1. Disclosure about income. The sample appli cation forms in appendix B to the regulation illustrate how a creditor may inform an appli cant of the right not to disclose alimony, child support, or separate maintenance income. 2. General inquiry about source o f income. Since a general inquiry about the source of income may lead an applicant to disclose ali mony, child support, or separate maintenance, a creditor may not make such an inquiry on an application form without prefacing the re quest with the disclosure required by this paragraph. 3. Specific inquiry about sources o f income. A creditor need not give the disclosure if the in quiry about income is specific and worded in a way that is unlikely to lead the applicant to 6 1. Requirement fo r written applications. The requirement of written applications for certain types of dwelling-related loans is intended to assist the federal supervisory agencies in mon itoring compliance with the ECOA and the Fair Housing Act. Model application forms are provided in appendix B to the regulation, although use of a printed form of any kind is not required. A creditor will satisfy the re quirement by writing down the information that it normally considers in making a credit decision. The creditor may complete the ap plication on behalf of an applicant and need not require the applicant to sign the application. 2. Telephone applications. A creditor that ac cepts applications by telephone for dwellingrelated credit covered by section 202.13 can meet the requirements for written applications by writing down pertinent information that is provided by the applicant(s). 3. Computerized entry. Information entered directly into and retained by a computerized system qualifies as a written application under this paragraph. (See the commentary to section 202.13(b).) SE C T IO N 202.6— R ules C oncerning E valuation o f A pplications 6 (a ) G eneral R ule C oncerning Use o f Inform ation 1. General. When evaluating an application for credit, a creditor generally may consider any information obtained. However, a credi tor may not consider in its evaluation of cred itworthiness any information that it is barred by section 202.5 from obtaining. 2. Effects test. The effects test is a judicial § 202.6 Regulation B Commentary doctrine that was developed in a series of em ployment cases decided by the Supreme Court under title VII of the Civil Rights Act of 1964 (42 USC 2000e et seq.). Congressional intent that this doctrine apply to the credit area is documented in the Senate Report that accom panied H.R. 6516, No. 94-589, pp. 4-5; and in the House Report that accompanied H.R. 6516, No. 94-210, p. 5. The act and regulation may prohibit a creditor practice that is dis criminatory in effect because it has a dispro portionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neu tral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. For exam ple, requiring that applicants have incomes in excess of a certain amount to qualify for an overdraft line of credit could mean that wom en and minority applicants will be rejected at a higher rate than men and nonminority ap plicants. If there is a demonstrable relation ship between the income requirement and creditworthiness for the level of credit in volved, however, use of the income standard would likely be permissible. 6 (b ) Specific Rules C oncerning Use of Inform ation Paragraph 6(b)(2) 1. Favoring the elderly. Any system of evalu ating creditworthiness may favor a credit ap plicant who is age 62 or older. A credit pro gram that offers more favorable credit terms to applicants age 62 or older is also permissi ble; a program that offers more favorable credit terms to applicants at an age lower than 62 is permissible only if it meets the specialpurpose credit requirements of section 202.8. 2. Consideration o f age in a credit scoring sys tem. Age may be taken directly into account in a credit scoring system that is “demonstra bly and statistically sound,” as defined in sec tion 202.2 (p), with one limitation: an appli cant who is 62 years old or older must be treated at least as favorably as anyone who is under age 62. 3. Consideration o f age in a judgmental sys tem. In a judgmental system, defined in sec tion 202.2 (t), a creditor may not take age di rectly into account in any aspect of the credit transaction. For example, the creditor may not reject an application or terminate an ac count because the applicant is 60 years old. But a creditor that uses a judgmental system may relate the applicant’s age to other infor mation about the applicant that the creditor considers in evaluating creditworthiness. For example: • Paragraph 6(b)(1) 1. Prohibited basis— marital status. A creditor may not use marital status as a basis for deter mining the applicant’s creditworthiness. How ever, a creditor may consider an applicant’s marital status for the purpose of ascertaining the creditor’s rights and remedies applicable to the particular extension of credit. For ex ample, in a secured transaction involving real property, a creditor could take into account whether state law gives the applicant’s spouse an interest in the property being offered as collateral. 2. Prohibited basis—special-purpose credit. In a special-purpose credit program, a creditor may consider a prohibited basis to determine whether the applicant possesses a characteristic needed for eligibility. (See section 202.8.) A creditor may consider the applicant’s occupation and length of time to retire ment to ascertain whether the applicant’s income (including retirement income) will support the extension of credit to its maturity. • A creditor may consider the adequacy of any security offered when the term of the credit extension exceeds the life expectan cy of the applicant and the cost of realiz ing on the collateral could exceed the ap plicant’s equity. (An elderly applicant might not qualify for a 5 percent down, 30-year mortgage loan but might qualify with a larger downpayment or a shorter loan maturity.) • A creditor may consider the applicant’s age to assess the significance of the length of the applicant’s employment (a young applicant may have just entered the job 7 § 202.6 market) or length of time at an address (an elderly applicant may recently have retired and moved from a long-term residence). As the examples above illustrate, the evalua tion must be made in an individualized, caseby-case manner; and it is impermissible for a creditor, in deciding whether to extend credit or in setting the terms and conditions, to base its decision on age or information related ex clusively to age. Age or age-related informa tion may be considered only in evaluating oth er “pertinent elements of creditworthiness” that are drawn from the particular facts and circumstances concerning the applicant. 4. Consideration o f age in a combined system. A creditor using a credit scoring system that qualifies as “empirically derived” under sec tion 202.2 (p) may consider other factors (such as a credit report or the applicant’s cash flow) on a judgmental basis. Doing so will not negate the classification of the credit scoring component of the combined system as “de monstrably and statistically sound.” While age could be used in the credit scoring por tion, however, in the judgmental portion age may not be considered directly. It may be used only for the purpose of determining a “pertinent element of creditworthiness.” (See comment 6(b) (2)—3.) 5. Consideration o f public assistance. When considering income derived from a public as sistance program, a creditor may take into ac count, for example— • • • the length of time an applicant will likely remain eligible to receive such income whether the applicant will continue to qualify for benefits based on the status of the applicant’s dependents (such as Aid to Families with Dependent Children or So cial Security payments to a minor) whether the creditor can attach or garnish the income to assure payment of the debt in the event of default Paragraph 6(b)(5) 1. Consideration o f an individual applicant. A creditor must evaluate income derived from part-time employment, alimony, child sup port, separate maintenance, retirement bene Regulation B Commentary fits, or public assistance (all referred to as “protected income” ) on an individual basis, not on the basis of aggregate statistics, and must assess its reliability or unreliability by analyzing the applicant’s actual circum stances, not by analyzing statistical measures derived from a group. 2. Payments consistently made. In determin ing the likelihood of consistent payments of alimony, child support, or separate mainte nance, a creditor may consider factors such as whether payments are received pursuant to a written agreement or court decree; the length of time that the payments have been received; whether the payments are regularly received by the applicant; the availability of court or other procedures to compel payment; and the creditworthiness of the payor, including the credit history of the payor when it is available to the creditor. 3. Consideration o f income. A creditor need not consider income at all in evaluating cred itworthiness. If a creditor does consider in come, there are several acceptable methods, whether in a credit scoring or a judgmental system: • • • A creditor may score or take into account the total sum of all income stated by the applicant without taking steps to evaluate the income. A creditor may evaluate each component of the applicant’s income, and then score or take into account reliable income sepa rately from income that is not reliable, or the creditor may disregard that portion of income that is not reliable before aggregat ing it with reliable income. A creditor that does not evaluate all in come components for reliability must treat as reliable any component of protected in come that is not evaluated. In considering the separate components of an applicant’s income, the creditor may not automatically discount or exclude from con sideration any protected income. Any dis counting or exclusion must be based on the applicant’s actual circumstances. 4. Part-time employment, sources o f income. A creditor may score or take into account the fact that an individual applicant has more § 202.7 Regulation B Commentary than one source of earned income—a full-time and a part-time job or two part-time jobs. A creditor may also score or treat earned income from a secondary source differently than earned income from a primary source. How ever, the creditor may not score or otherwise take into account the number of sources for protected income—for example, retirement income, Social Security, alimony. Nor may the creditor treat negatively the fact that an applicant’s only earned income is derived from a part-time job. Paragraph 6(b)(6) 1. Types o f credit references. A creditor may restrict the types of credit history and credit references that it will consider, provided that the restrictions are applied to all credit appli cants without regard to sex, marital status, or any other prohibited basis. However, on the applicant’s request, a creditor must consider credit information not reported through a credit bureau when the information relates to the same types of credit references and history that the creditor would consider if reported through a credit bureau. tor may not require a creditworthy applicant seeking an individual credit account to pro vide additional signatures. However, the cred itor may condition the designation of an au thorized user by the account holder on the authorized user’s becoming contractually lia ble for the account, as long as the creditor does not differentiate on any prohibited basis in imposing this requirement. 2. Open-end credit— choice o f authorized user. A creditor that permits an account holder to designate an authorized user may not restrict this designation on a prohibited basis. For ex ample, if the creditor allows the designation of spouses as authorized users, the creditor may not refuse to accept a nonspouse as an authorized user. 3. Overdraft authority on transaction ac counts. If a transaction account (such as a checking account or NOW account) includes an overdraft line of credit, the creditor may require that all persons authorized to draw on the transaction account assume liability for any overdraft. 7 (b ) D esignation o f N am e Paragraph 6(b)(7) 1. National origin— immigration status. The applicant’s immigration status and ties to the community (such as employment and contin ued residence in the area) could have a bear ing on a creditor’s ability to obtain repayment. Accordingly, the creditor may consider and differentiate, for example, between a nonciti zen who is a long-time resident with perma nent resident status and a noncitizen who is temporarily in this country on a student visa. 2. National origin—citizenship. Under the regulation, a denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin. SE C T IO N 202.7— Rules C oncerning Extensions of C redit 7 (a ) Individual A ccounts 1. Open-end credit— authorized user. A credi 1. Single name on account. A creditor may require that joint applicants on an account designate a single name for purposes of ad ministering the account and that a single name be embossed on any credit card(s) is sued on the account. But the creditor may not require that the name be the husband’s name. (See section 202.10 for rules governing the furnishing of credit history on accounts held by spouses.) 7 (c ) A ction C oncerning Existing Openend A ccounts Paragraph 7(c)(1) 1. Termination coincidental with marital status change. When an account holder’s mar ital status changes, a creditor generally may not terminate the account unless it has evi dence that the account holder is unable or un willing to repay. But the creditor may termi nate an account on which both spouses are jointly liable, even if the action coincides with 9 Regulation B Commentary § 202.7 a change in marital status, when one or both spouses— • • • repudiate responsibility for future charges on the joint account request separate accounts in their own names request that the joint account be closed 2. Updating information. A creditor may pe riodically request updated information from applicants but may not use events related to a prohibited basis—such as an applicant’s re tirement, reaching a particular age, or change in name or marital status—to trigger such a request. Paragraph 7(c)(2) 1. Procedure pending reapplication. A credi tor may require a reapplication from a con tractually liable party, even when there is no evidence of unwillingness or inability to repay, if (1) the credit was based on the qualifica tions of a person who is no longer available to support the credit and (2) the creditor has information indicating that the account hold er’s income by itself may be insufficient to support the credit. While a reapplication is pending, the creditor must allow the account holder full access to the account under the existing contract terms. The creditor may specify a reasonable time period within which the account holder must submit the required information. 7 (d ) Signature o f Spouse o r O ther Person commentary to section 202.7(d)(5) ( 6 ).) and Paragraph 7(d)(1) 1. Joint applicant. The term “joint applicant” refers to someone who applies contemporane ously with the applicant for shared or joint credit. It does not refer to someone whose sig nature is required by the creditor as a condi tion for granting the credit requested. Paragraph 7(d)(2) 1. Jointly owned property. In determining the value of the applicant’s interest in jointly owned property, a creditor may consider fac tors such as the form of ownership and the property’s susceptibility to attachment, execu tion, severance, or partition and the cost of such action. If the applicant’s interest in the property does not support the amount and terms of credit sought, the creditor may give the applicant some other option of providing additional support for the extension of credit, for example— • • • requiring an additional party under sec tion 202.7(d)(5) offering to grant the applicant’s request on a secured credit basis asking for the signature of the co-owner of the property on an instrument that ensures access to the property but does not impose personal liability unless necessary under state law 2. Need fo r signature— reasonable belief. A creditor’s reasonable belief as to what instru ments need to be signed by a person other than the applicant should be supported by a thorough review of pertinent statutory and de cisional law or an opinion of the state attorney general. 1. Qualified applicant. The signature rules en sure that qualified applicants are able to ob tain credit in their own names. Thus, when an applicant requests individual credit, a creditor generally may not require the signature of an other person unless the creditor has first de termined that the applicant alone does not qualify for the credit requested. Paragraph 7(d)(3) 2. Unqualified applicant. When an applicant applies for individual credit but does not alone meet a creditor’s standards, the creditor may require a cosigner, guarantor or the like—but cannot require that it be the spouse. (See 1. Residency. In assessing the creditworthi ness of a person who applies for credit in a community property state, a creditor may as sume that the applicant is a resident of the state unless the applicant indicates otherwise. 10 Regulation B Commentary Paragraph 7(d)(4) 1. Creation o f enforceable lien. Some state laws require that both spouses join in execut ing any instrument by which real property is encumbered. If an applicant offers such prop erty as security for credit, a creditor may require the applicant’s spouse to sign the in struments necessary to create a valid security interest in the property. The creditor may not require the spouse to sign the note evidencing the credit obligation if signing only the mort gage or other security agreement is sufficient to make the property available to satisfy the debt in the event of default. However, if under state law both spouses must sign the note to create an enforceable lien, the creditor may require them to do so. 2. Need fo r signature— reasonable belief. Gen erally, a signature to make the secured proper ty available will only be needed on a security agreement. A creditor’s reasonable belief that, to ensure access to the property, the spouse’s signature is needed on an instrument that im poses personal liability should be supported by a thorough review of pertinent statutory and decisional law or an opinion of the state attorney general. 3. Integrated instruments. When a creditor uses an integrated instrument that combines the note and the security agreement, the spouse cannot be required to sign the integrat ed instrument if the signature is only needed to grant a security interest. But the spouse could be asked to sign an integrated instru ment that makes clear—for example, by a leg end placed next to the spouse’s signature— that the spouse’s signature is only to grant a security interest and that signing the instrument does not impose personal liability. Paragraph 7(d)(5) 1. Qualifications o f additional parties. In es tablishing guidelines for eligibility of guaran tors, cosigners, or similar additional parties, a creditor may restrict the applicant’s choice of additional parties buy may not discriminate on the basis of sex, marital status or any other prohibited basis. For example, the creditor could require that the additional party live in the creditor’s market area. § 202.7 2. Reliance on income o f another person—in dividual credit. An applicant who requests in dividual credit relying on the income of an other person (including a spouse in a non community property state) may be required to provide the signature of the other person to make the income available to pay the debt. In community property states, the signature of a spouse may be required if the applicant relies on the spouse’s separate income. If the appli cant relies on the spouse’s future earnings that as a matter of state law cannot be character ized as community property until earned, the creditor may require the spouse’s signature, but need not do so—even if it is the creditor’s practice to require the signature when an ap plicant relies on the future earnings of a per son other than a spouse. (See section 202.6(c) on consideration of state property laws.) 3. Renewals. If the borrower’s creditworthi ness is reevaluated when a credit obligation is renewed, the creditor must determine whether an additional party is still warranted and, if not, release the additional party. Paragraph 7(d)(6) 1. Guarantees. A guarantee on an extension of credit is part of a credit transaction and therefore subject to the regulation. The rules in section 202.7(d) bar a creditor from requir ing the signature of a guarantor’s spouse just as they bar the creditor from requiring the sig nature of an applicant’s spouse. For example, when all officers of a closely held corporation are required to personally guarantee a corpo rate loan, the creditor may not automatically require that spouses of married officers also sign. However, an evaluation of the financial circumstances of an officer may indicate that an additional signature is necessary, and this may be the signature of a spouse in appropri ate circumstances. 7 (e ) Insurance 1. Differences in terms. Differences in the availability, rates, and other terms on which credit-related casualty insurance or credit life, health, accident, or disability insurance is of fered or provided to an applicant does not vio late Regulation B. 11 § 202.7 Regulation B Commentary 2. Insurance information. A creditor may ob tain information about an applicant’s age, sex, or marital status for insurance purposes. The information may only be used, however, for determining eligibility and premium rates for insurance, and not in making the credit decision. 8 (c ) Special R ule C oncerning Requests and Use o f Inform ation SE C T IO N 202.8— Special-Purpose C redit Program s 2. Examples. Examples of programs under which the creditor can ask for and consider information related to a prohibited basis are— 8 (a ) Standards for Program s • 1. Determining qualified programs. The Board does not determine whether individual programs qualify for special-purpose credit status, or whether a particular program bene fits an “economically disadvantaged class of persons.” The agency or creditor administer ing or offering the loan program must make these decisions regarding the status of its program. 1. Request o f prohibited information. This sec tion permits a creditor to request and consider certain information that would otherwise be prohibited by sections 202.5 and 202.6 to de termine an applicant’s eligibility for a particu lar program. • energy conservation programs to assist the elderly, for which the creditor must con sider the applicant’s age programs under a Minority Enterprise Small Business Investment Corporation, for which a creditor must consider the ap plicant’s minority status 8 (d ) Special R ule in the Case of F inancial N eed 2. Compliance with a program authorized by federal or state law. A creditor does not vio late Regulation B when it complies in good faith with a regulation promulgated by a gov ernment agency implementing a specialpurpose credit program under section 202.8(a)(1). It is the agency’s responsibility to promulgate a regulation that is consistent with federal and state law. 1. Request o f prohibited information. This sec tion permits a creditor to request and consider certain information that would otherwise be prohibited by sections 202.5 and 202.6, and to require signatures that would otherwise be prohibited by section 202.7(d). 3. Expressly authorized. Credit programs au thorized by federal or state law include pro grams offered pursuant to federal, state, or local statute, regulation or ordinance, or by judicial or administrative order. • 4. Creditor liability. A refusal to grant credit to an applicant is not a violation of the act or regulation if the applicant does not meet the eligibility requirements under a special-purpose credit program. 8 (b ) R ules in O ther Sections 1. Applicability o f rules. A creditor that re jects an application because the applicant does not meet the eligibility requirements (com mon characteristic or financial need, for ex ample) must nevertheless notify the applicant of action taken as required by section 202.9. 12 2. Examples. Examples of programs in which financial need is a criterion are— • subsidized housing programs for low- to moderate-income households, for which a creditor may have to consider the appli cant’s receipt of alimony or child support, the spouse’s or parents’ income, etc. student loan programs based on the fami ly’s financial need, for which a creditor may have to consider the spouse’s or par ents’ financial resources 3. Student loans. In a guaranteed student loan program, a creditor may obtain the signature of a parent as a guarantor when required by federal or state law or agency regulation, or when the student does not meet the creditor’s standards of creditworthiness. (See sections 202.7(d)(1) and (5).) The creditor may not require an additional signature when a stu dent has a work or credit history that satisfies the creditor’s standards. § 202.9 Regulation B Commentary SE C T IO N 202.9— N otifications 1. Use o f the term “adverse action.” The regu lation does not require that a creditor use the term “adverse action” in communicating to an applicant that a request for an extension of credit has not been approved. In notifying an applicant of adverse action as defined by sec tion 202.2(c)(1), a creditor may use any words or phrases that describe the action tak en on the application. 2. Expressly withdrawn applications. When an applicant expressly withdraws a credit appli cation, the creditor is not required to comply with the notification requirements under sec tion 202.9. (The creditor must, however, com ply with the record-retention requirements of the regulation. See section 202.12(b)(3).) 3. When notification occurs. Notification oc curs when a creditor delivers or mails a notice to the applicant’s last known address or, in the case of an oral notification, when the cred itor communicates the credit decision to the applicant. 4. Location o f notice. The notifications re quired under section 202.9 may appear on ei ther or both sides of a form or letter. 9 (a ) N otification o f A ction Taken, E C O A N otice, and Statem ent o f Specific Reasons Paragraph 9(a)(1) 1. Timing o f notice— when an application is complete. Once a creditor has obtained all the information it normally considers in making a credit decision, the application is complete and the creditor has 30 days in which to noti fy the applicant of the credit decision. (See also comment 2(f)-5.) 2. Notification o f approval. Notification of ap proval may be express or by implication. For example, the creditor will satisfy the notifica tion requirement when it gives the applicant the credit card, money, property, or services requested. 3. Incompletion application— denial fo r in completeness. When an application is incom plete regarding matters that the applicant can complete and the creditor lacks sufficient data for a credit decision, the creditor may deny the application giving as the reason for denial that the application is incomplete. The credi tor has the option, alternatively, of providing a notice of incompleteness under section 202.9(c). 4. Incomplete application— denial fo r reasons other than incompleteness. When an applica tion is missing information but provides suffi cient data for a credit decision, the creditor may evaluate the application and notify the applicant under this section as appropriate. If credit is denied, the applicant must be given the specific reasons for the credit denial (or notice of the right to receive the reasons); in this instance the incompleteness of the appli cation cannot be given as the reason for the denial. 5. Length o f counteroffer. Section 202.9(a) (l) ( iv ) does not require a creditor to hold a counteroffer open for 90 days or any other particular length of time. 6. Counteroffer combined with adverse-action notice. A creditor that gives the applicant a combined counteroffer and adverse-action no tice that complies with section 202.9(a)(2) need not send a second adverse-action notice if the applicant does not accept the counterof fer. A sample of a combined notice is con tained in form C-4 of appendix C to the regulation. 7. Denial o f a telephone application. When an application is conveyed by means of telephone and adverse action is taken, the creditor must request the applicant’s name and address in order to provide written notification under this section. If the applicant declines to pro vide that information, then the creditor has no further notification responsibility. Paragraph 9(a)(3) 1. Coverage. In determining the rules in this paragraph that apply to a given business-credit application, a creditor may rely on the ap plicant’s assertion about the revenue size of the business. (Applications to start a business are governed by the rules in section 202.9(a)(3 )(i).) If an applicant applies for 13 § 202.9 credit as a sole proprietor, the revenues of the sole proprietorship will determine which rules in the paragraph govern the application. However, if an applicant applies for businesspurpose credit as an individual, the rules in paragraph 9(a) (3) (i) apply unless the appli cation is for trade or similar credit. 2. Trade credit. The term “trade credit” gen erally is limited to a financing arrangement that involves a buyer and a seller—such as a supplier who finances the sale of equipment, supplies, or inventory; it does not apply to an extension of credit by a bank or other finan cial institution for the financing of such items. 3. Factoring. Factoring refers to a purchase of accounts receivable and thus is not subject to the act or regulation. If there is a credit exten sion incident to the factoring arrangement, the notification rules in section 202.9(a)(3) (ii) apply, as do other relevant sections of the act and regulation. 4. Manner o f compliance. In complying with the notice provisions of the act and regulation, creditors offering business credit may follow the rules governing consumer credit. Similar ly, creditors may elect to treat all business credit the same (irrespective of revenue size) by providing notice in accordance with sec tion 202.9(a) (3) (i). 5. Timing o f notification. A creditor subject to section 202.9(a) (3) (ii) (A ) is required to no tify a business credit applicant, orally or in writing, of action taken on an application within a reasonable time of receiving a com pleted application. Notice provided in accord ance with the timing requirements of section 202.9(a)(1) is deemed reasonable in all instances. 9 (b ) Form o f EC O A N otice and Statem ent o f Specific Reasons Paragraph 9(b)(1) 1. Substantially similar notice. The ECOA notice sent with a notification of a credit deni al or other adverse action will comply with the regulation if it is “substantially similar” to the notice contained in section 202.9(b)(1). For example, a creditor may add a reference 14 Regulation B Commentary to the fact that the ECOA permits age to be considered in certain credit scoring systems, or add a reference to a similar state statute or regulation and to a state enforcement agency. Paragraph 9(b)(2) 1. Number o f specific reasons. A creditor must disclose the principal reasons for denying an application or taking other adverse action. The regulation does not mandate that a specif ic number of reasons be disclosed, but disclo sure of more than four reasons is not likely to be helpful to the applicant. 2. Source o f specific reasons. The specific rea sons disclosed under section 202.9(a)(2) and (b)(2 ) must relate to and accurately describe the factors actually considered or scored by a creditor. 3. Description o f reasons. A creditor need not describe how or why a factor adversely affect ed an applicant. For example, the notice may say “length of residence” rather than “too short a period of residence.” 4. Credit scoring system. If a creditor bases the denial or other adverse action on a credit scoring system, the reasons disclosed must re late only to those factors actually scored in the system. Moreover, no factor that was a principal reason for adverse action may be ex cluded from disclosure. The creditor must disclose the actual reasons for denial (for ex ample, “age of automobile” ) even if the rela tionship of that factor to predicting creditwor thiness may not be clear to the applicant. 5. Credit scoring— method fo r selecting rea sons. The regulation does not require that any one method be used for selecting reasons for a credit denial or other adverse action that is based on a credit scoring system. Various methods will meet the requirements of the regulation. One method is to identify the fac tors for which the applicant’s score fell fur thest below the average score for each of those factors achieved by applicants whose total score was at or slightly above the minimum passing score. Another method is to identify the factors for which the applicant’s score fell furthest below the average score for each of those factors achieved by all applicants. These Regulation B Commentary average scores could be calculated during the development or use of the system. Any other method that produces results substantially similar to either of these methods is also ac ceptable under the regulation. 6. Judgmental system. If a creditor uses a judgmental system, the reasons for the denial or other adverse action must relate to those factors in the applicant’s record actually re viewed by the person making the decision. 7. Combined credit scoring and judgm ental system. If a creditor denies an application based on a credit evaluation system that em ploys both credit scoring and judgmental components, the reasons for the denial must come from the component of the system that the applicant failed. For example, if a creditor initially credit scores an application and de nies the credit request as a result of that scor ing, the reasons disclosed to the applicant must relate to the factors scored in the system. If the application passes the credit scoring stage but the creditor then denies the credit request based on a judgmental assessment of the applicant’s record, the reasons disclosed must relate to the factors reviewed judgmentally, even if the factors were also considered in the credit scoring component. 8. Automatic denial. Some credit-decision methods contain features that call for auto matic denial because of one or more negative factors in the applicant’s record (such as the applicant’s previous bad credit history with that creditor, the applicant’s declaration of bankruptcy, or the fact that the applicant is a minor). When a creditor denies the credit re quest because of an automatic-denial factor, the creditor must disclose that specific factor. 9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure of the principal reasons for denying or taking other adverse action on an application for an extension of credit. The Fair Credit Reporting Act re quires a creditor to disclose when it has based its decision in whole or in part on information from a source other than the applicant or from its own files. Disclosing that a credit re port was obtained and used to deny the appli cation, as the FCRA requires, does not satisfy § 202.9 the ECOA requirement to disclose specific reasons. For example, if the applicant’s credit history reveals delinquent credit obligations and the application is denied for that reason, to satisfy section 202.9(b)(2) the creditor must disclose that the application was denied because of the applicant’s delinquent credit obligations. To satisfy the FCRA require ment, the creditor must also disclose that a credit report was obtained and used to deny credit. Sample forms C-l through C-5 of ap pendix C of the regulation provide for the two disclosures. 9 (c ) Incom plete A pplications Paragraph 9(c)(2) 1. Reapplication. If information requested by a creditor is submitted by an applicant after the expiration of the time period designated by the creditor, the creditor may require the applicant to make a new application. Paragraph 9(c)(3) 1. Oral inquiries fo r additional information. If the applicant fails to provide the information in response to an oral request, a creditor must send a written notice to the applicant within the 30-day period specified in section 202.9(c)(1) and (c)(2 ). If the applicant does provide the information, the creditor shall take action on the application and notify the applicant in accordance with section 202.9(a). 9 (g ) A pplications Subm itted T hrough a T hird Party 1. Third parties. The notification of adverse action may be given by one of the creditors to whom an application was submitted. Alterna tively, the third party may be a noncreditor. 2. Third-party notice— enforcement agency. If a single adverse action notice is being provid ed to an applicant on behalf of several credi tors and they are under the jurisdiction of dif ferent federal enforcement agencies, the notice need not name each agency; disclosure of any one of them will suffice. 3. Third-party notice—liability. When a no15 § 202.9 tice is to be provided through a third party, a creditor is not liable for an act or omission of the third party that constitutes a violation of the regulation if the creditor accurately and in a timely manner provided the third party with the information necessary for the notification and maintains reasonable procedures adapted to prevent such violations. SE C T IO N 202.10— F urnishing o f C redit Inform ation 1. Scope. The requirements of section 202.10 for designating and reporting credit informa tion apply only to creditors that furnish credit information to credit bureaus or to other cred itors. There is no requirement that a creditor furnish credit information on its accounts. 2. Reporting on all accounts. The require ments of section 202.10 apply only to ac counts held or used by spouses. However, a creditor has the option to designate all joint accounts (or all accounts with an authorized user) to reflect the participation of both par ties, whether or not the accounts are held by persons married to each other. 3. Designating accounts. In designating ac counts and reporting credit information, a creditor need not distinguish between ac counts on which the spouse is an authorized user and accounts on which the spouse is a contractually liable party. 4. File and index systems. The regulation does not require the creation or maintenance of separate files in the name of each participant on a joint or user account, or require any oth er particular system of recordkeeping or in dexing. It requires only that a creditor be able to report information in the name of each spouse on accounts covered by section 202.10. Thus, if a creditor receives a credit inquiry about the wife, it should be able to locate her credit file without asking the husband’s name. Regulation B Commentary parties and should furnish subsequent credit information on the account in the new names. 2. Request to change designation o f account. A request to change the manner in which in formation concerning an account is furnished does not alter the legal liability of either spouse upon the account and does not require a creditor to change the name in which the account is maintained. S E C T IO N 202.11— R elation to State Law 11 (a ) Inconsistent State Laws 1. Preemption determination— New York. fective November 11, 1988, the Board has termined that the following provisions in state law of New York are preempted by federal law: Ef de the the • Article 15, Section 2 9 6 a(l)(b )—Unlawful discriminatory practices in relation to credit on the basis of race, creed, color, national origin, age, sex, marital status, or disability. This provision is preempted to the extent that it bars taking a prohibited basis into account when establishing eligibility for cer tain special-purpose credit programs. • Article 15, Section 2 9 6 a (l)(c )—Unlawful discriminatory practice to make any record or inquiry based on race, creed, color, na tional origin, age, sex, marital status, or dis ability. This provision is preempted to the extent that it bars a creditor from request ing and considering information regarding the particular characteristics (for example, race, national origin, or sex) required for eligibility for special-purpose credit programs. SE C T IO N 202.12— R ecord R etention 10(a) D esignation o f A ccounts 12(a) R etention o f Prohibited Inform ation 1. New parties. When new parties who are spouses undertake a legal obligation on an ac count, as in the case of a mortgage-loan assumption, the creditor should change the designation on the account to reflect the new 1. Receipt o f prohibited information. Unless the creditor specifically requested such infor mation, a creditor does not violate this section when it receives prohibited information from a consumer reporting agency. 16 Regulation B Commentary 2. Use o f retained information. Although a creditor may keep in its files prohibited infor mation as provided in section 202.12(a), the creditor may use the information in evaluat ing credit applications only if permitted to do so by section 202.6. 12(b) Preservation o f Records 1. Copies. A copy of the original record in cludes carbon copies, photocopies, microfilm or microfiche copies, or copies produced by any other accurate retrieval system, such as documents stored and reproduced by comput er. A creditor that uses a computerized or mechanized system need not keep a written copy of a document (for example, an adverse action notice) if it can regenerate all pertinent information in a timely manner for examination or other purposes. 2. Computerized decisions. A creditor that enters information items from a written appli cation into a computerized or mechanized sys tem and makes the credit decision mechani cally, based only on the items of information entered into the system, may comply with sec tion 202.12(b) by retaining the information actually entered. It is not required to store the complete written application, nor is it re quired to enter the remaining items of infor mation into the system. If the transaction is subject to section 202.13, however, the credi tor is required to enter and retain the data on personal characteristics in order to comply with the requirements of that section. Paragraph 12(b)(3) 1. Withdrawn and brokered applications. In most cases, the 25-month retention period for applications runs from the date a notification is sent to the applicant granting or denying the credit requested. In certain transactions, a creditor is not obligated to provide a notice of the action taken. (See, for example, comment 9-2.) In such cases, the 25-month requirement runs from the date of application, as when— • • an application is withdrawn by the applicant an application is submitted to more than one creditor on behalf of the applicant, §202.13 and the application is approved by one of the other creditors SE C T IO N 202.13— Inform ation for M onitoring Purposes 13(a) Inform ation to Be Requested 1. Natural person. Section 202.13 applies only to applications from natural persons. 2. Principal residence. The requirements of section 202.13 apply only if an application re lates to a dwelling that is or will be occupied by the applicant as the principal residence. A credit application related to a vacation home or a rental unit is not covered. In the case of a two- to four-unit dwelling, the application is covered if the applicant intends to occupy one of the units as a principal residence. 3. Temporary financing. An application for temporary financing to construct a dwelling is not subject to section 202.13. But an applica tion for both a temporary loan to finance con struction of a dwelling and a permanent mort gage loan to take effect upon the completion of construction is subject to section 202.13. 4. New principal residence. A person can have only one principal residence at a time. Howev er, if a person buys or builds a new dwelling that will become that person’s principal resi dence within a year or upon completion of construction, the new dwelling is considered the principal residence for purposes of section 202.13. 5. Transactions not covered. The informationcollection requirements of this section apply to applications for credit primarily for the purchase or refinancing of a dwelling that is or will become the applicant’s principal resi dence. Therefore, applications for credit se cured by the applicant’s principal residence but made primarily for a purpose other than the purchase or refinancing of the principal residence (such as loans for home improve ment and debt consolidation) are not subject to the information-collection requirements. An application for an open-end home equity line of credit is not subject to this section un less it is readily apparent to the creditor when 17 §202.13 the application is taken that the primary pur pose of the line is for the purchase or refinanc ing of a principal dwelling. 6. Refinancings. A creditor who receives an application to change the terms and condi tions of an existing extension of credit made by that creditor for the purchase of the appli cant’s dwelling may request the monitoring information again but is not required to do so if it was obtained in the earlier transaction. 7. Data collection under Regulation C. See comment 5(b) (2)-2. 13(b) O btaining o f Inform ation 1. Forms fo r collecting data. A creditor may collect the information specified in section 202.13(a) either on an application form or on a separate form referring to the application. 2. Written applications. The regulation re quires written applications for the types of credit covered by section 202.13. A creditor can satisfy this requirement by recording in writing or by means of computer the informa tion that the applicant provides orally and that the creditor normally considers in a cred it decision. 3. Telephone, mail applications. If an appli cant does not apply in person for the credit requested, a creditor does not have to com plete the monitoring information. For example: • • When a creditor accepts an application by telephone, it does not have to request the monitoring information. When a creditor accepts an application by mail, it does not have to make a special request to the applicant if the applicant fails to complete the monitoring informa tion on the application form sent to the creditor. If it is not evident on the face of the applica tion that it was received by mail or telephone, the creditor should indicate on the form or other application record how the application was received. 4. Applications through loan-shopping services. When a creditor accepts an application through an unaffiliated loan-shopping service, 18 Regulation B Commentary it does not have to request the monitoring information. 5. Inadvertent notation. If a creditor inadver tently obtains the monitoring information in a dwelling-related transaction not covered by section 202.13, the creditor may process and retain the application without violating the regulation. 13(c) D isclosure to A pp lican t(s) 1. Procedures for providing disclosures. The disclosures to an applicant regarding the mon itoring information may be provided in writ ing. Appendix B contains a sample disclosure. A creditor may devise its own disclosure so long as it is substantially similar. The creditor need not orally request the applicant to pro vide the monitoring information if it is re quested in writing. 13 (d) Substitute M onitoring Program 1. Substitute program. An enforcement agen cy may adopt, under its established rulemak ing or enforcement procedures, a program requiring creditors under its jurisdiction to collect information in addition to that re quired by this section. SE C T IO N 202.14— Enforcem ent, Penalties, and Liabilities 14(c) F ailure o f Com pliance 1. Inadvertent errors. Inadvertent errors in clude, but are not limited to, clerical mistake, calculation error, computer malfunction, and printing error. An error of legal judgment is not an inadvertent error under the regulation. 2. Correction o f error. For inadvertent errors that occur under sections 202.12 and 202.13, this section requires that they be corrected prospectively only. A P P E N D IX B— M odel A pplication Form s 1. FHLMC/FNMA form — residential loan application. The residential loan application form (FHLMC 65/FNM A 1003), including Regulation B Commentary supplemental form (FHLMC 65A/FNMA 1003A ), prepared by the Federal Home Loan Mortgage Corporation and the Federal Na tional Mortgage Association and dated Octo ber 1986, complies with the requirements of this regulation in some transactions but not others because of the form’s section “Informa tion for Government Monitoring Purposes.” Creditors that are governed by section 202.13(a) of the regulation (which limits col lection to applications primarily for the pur chase or refinancing of the applicant’s princi pal residence) should delete, strike, or modify the data-collection section on the form when using it for transactions not covered by sec tion 202.13(a) to ensure that they do not col lect the information. Creditors that are subject to more extensive collection requirements by a substitute monitoring program under section 202.13(d) may use the form as issued, in compliance with that substitute program. 2. FHLMC/FNMA form —home-improve- Appendix B ment loan application. The home-improvement and energy loan application form (FHLMC 703/FNMA 1012), prepared by the Federal Home Loan Mortgage Corpora tion and the Federal National Mortgage Asso ciation and dated October 1986, complies with the requirements of the regulation for some creditors but not others because of the form’s section “Information for Government Monitoring Purposes.” Creditors that are gov erned by section 202.13(a) of the regulation (which limits collection to applications pri marily for the purchase or refinancing of the applicant’s principal residence) should delete, strike, or modify the data-collection section on the form when using it for transactions not covered by section 202.13(a) to ensure that they do not collect the information. Creditors that are subject to more extensive collection requirements by a substitute monitoring pro gram under section 202.13(d) may use the form as issued, in compliance with that substi tute program.
@FedFRASER