Full text of District Notices (Federal Reserve Bank of Dallas) : Regulation B -- Equal Credit Opportunity, Circular No. 76-156

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R e s e r v e Ba n k
DALLAS, TEXAS

of

D allas

75222
Circular No. 76-156
November 15, 1976

A m e ric a n R e v o lu tio n B ic en ten n ia l

REGULATION B—EQUAL CREDIT OPPORTUNITY
Revision of Proposed Amendments

TO ALL BANKS, OTHER CREDITORS,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
On Ju ly 15, 1976, the Board of Governors of the Federal R eserve System issued
a set of proposed amendments and additions to Federal R eserve Regulation B, "Equal Credit
O p p o rtu n ity ." T he p u rp o se of these changes was to implement the 1976 Amendments to the
Equal C red it Opportunity Act (ECOA), and they w ere transm itted to you u n d e r our C ircu lar
No. 76-103, Ju ly 22, 1976.
On November 3, 1976, the Board issued a second set of proposed amendments
and additions to Regulation B, taking into account comments that had been received since
the e a r lie r pro p osal. On the same d ate, the Board issued a p r e s s release summarizing the
November 3 proposed am endm ents. The p r e s s release read s as follows:
T he Board of Governors of the Federal R eserve System today issued r e ­
vised proposals for changes in its Regulation B to c a r r y out the 1976 am end­
ments to the Equal Credit Opportunity Act.
T he Board req uested comment th ro u g h December 3, 1976.
The 1976 Amendments to the Act will become effective March 23, 1977.
They p ro h ib it discrim ination in extensions of c red it based on ra c e , color,
religion, national o r ig in , ag e, receipt of income from public assista n c e p r o ­
g ra m s, and good faith e x e rc ise of rig h ts u n d e r the Consumer Credit Protec­
tion Act (which includes the T ru th -in -L e n d in g , Fair C re d it Billing, Equal
Credit O p p ortunity, Fair Credit R eporting, and Consumer Leasing Acts) .
The original ECOA, which became effective last October 28, prohibited d is ­
crimination in c re d it tran saction s on the b asis of sex or marital status.
T he C ongress d ire c te d the Federal R eserve Board to w rite implementing
ru les for both the original and the amended ECOA. T he proposed revision
of Regulation B will become effective, like the rev ised Act, next March 23,
and will su p e rs e d e the existing Regulation B in its e n tire ty . T he existing
reg ulatory r u l e s , implementing the Act's provisions ag ain st discrimination
in cred it tran sactio n s on the b asis of sex o r marital sta tu s , remain in effect
until that time.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

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T he rev ised Regulation will be enforced by the same Federal agencies
d esignated in the Act to enforce the existing Regulation.
On J u ly 15, 1976, the Board made initial proposals to re v ise Regula­
tion B to incorporate the 1976 Amendments to the Act. Changes in the rules
as now proposed reflect w ritten comments received from the public and
testimony at a hearin g on the initial proposals held A ugust 12 and 13.
The p rin cip al p ro visions of Regulation B as now proposed a r e :
C o v erag e: The Regulation will apply to all perso n s who a r e c re d ito rs .
A cred ito r is defined in the proposals as a p erso n who, in the o rd in a ry co u rse
of b u s in e s s , re g u la rly participates in decisions w h eth er to extend cred it.
This does not include a perso n whose only participation in a cre d it t r a n s ­
action is honoring a cre d it c a r d , or who only occasionally extends cred it.
Sex and marital s ta tu s : The pro visions of the existing Regulation,
dealing only with prohibitions of discrim ination in c re d it transactio ns based
on sex and marital s ta tu s , remain essentially unchan g ed .
A pplications: To a s s is t small c red ito rs and any o th ers having diffi­
culty desig n in g c r e d it application forms to comply with ECOA req u irem ents
the Board proposed to supply model forms th at, when p ro p e rly u se d , would
a s s u r e the c re d ito r of being in compliance. C red ito rs could d esig n th e ir
own forms, or rev ise the model form s, but they would then b ear r e sp o n s i­
bility for being in compliance.
New P ro p o sals:
T he B oard's proposals included several new d ra ft p ro v isio n s, not a part
of the existing Regulation B or of the proposals the Board made in J u ly .
T hese include:
Discrimination on the b asis of perm anent residence or immigration
status: T he Board's proposals would perm it cred ito rs to in q u ire into an a p ­
p lican t's perm anent resid en ce o r immigration status (Section 202.5(d) (5))
and would perm it c re d ito rs to co n s id e r an a p p lic an t's perm anent residence
o r immigration status along with o th er material relevan t to asce rtain in g the
c r e d ito r 's r ig h ts , and ability to s e c u re repaym ent of the c re d it req u ested
(Section 202.6(b) (7)) . T hese a r e creditw o rth in ess te s ts , and a re not in­
tended to perm it c re d ito rs to make blan k et refusals of cre d it to n on-citizens.
Borrowed c re d it-s c o rin g sy s te m s: As d isc u sse d below (in the p a rt of
this release on "Age") the Board p ro vid ed in its c u r r e n t proposals for the
tem porary u se of borrow ed system s of c re d it sc o rin g . (Section 202.2(3))
C red it related i n s u r a n c e : (Section 202.7(e)) T he Board proposed that a
cred ito r shall not be guilty of violating ECOA o r Regulation B if rates c h a rg ed

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for c re d it related casualty insu ran ce or c re d it life in su ran ce a r e different
for different types of applicants (such as older and y o u ng er app lican ts,
male and female applicants) .
Liability: Non-governmental cred ito rs not complying with the Act or
Regulation a re subject to civil liabilities limited to $10,000 in individual
cases and the lesser of $500,000 or 1 p erc en t of the c re d ito r's net worth in
class actions plus costs and reasonable atto rn e y 's fees.
Two proposals that grew out of re q u ests for comment from the public made
by the Board in its J u ly p ro p o sa ls—data notation for enforcement p u rp o se s ,
and specialized treatm ent of some classes of cred it tra n sa c tio n s—are d i s ­
cussed later.
Other P ro p o sals:
A d v erse actio n : In accordance with the 1976 Amendments to the Act, the
Board proposed to add to Regulation B a new section defining what is and what
is not an a d v e rse action on an application for cre d it. An a d v e r s e action would
re q u ire a c re d ito r to p rovide the applicant with a statement of reasons for the
action, and would t r ig g e r the requirem ents relating to w ritten notice of a d ­
v e rse action, notice of the ap p lican t's rights u n d e r ECOA, and the r e q u ir e ­
ments of the proposed Regulation concerning the retention of re c o rd s . As now
p r o p o se d .1 /
1.

A dv erse action has o c cu rre d if:

— A c red ito r declines to g r a n t c re d it in substantially the amount or
on substantially the term s requ ested by the applicant;
—

The c re d ito r makes a counter offer substantially different in
amount and term s than re q u e ste d , and the applicant does not
accept it;

—

A c re d ito r makes an unfavorable change in the term s of an
account, or term inates an account, in an action that does not
apply to all o r su bstantially all of the c re d ito r's accounts;

— A cre d ito r refuses a req u est by an ap p licant to increase a credit
limit if the req u est is made according to the c r e d ito r's estab lish ed
p ro c e d u re s for learning that an applicant wants a h ig h e r limit.

1/ T h e proposals that an a d v e r s e action has o c c u rre d if a creditor makes a counter offer
of c re d it that the applicant does not accept, and that an a d v e rse action has not o c c u rre d
when c re d it is refused on g ro u n d s that g ran tin g the cred it would be illegal were not in
the July pro po sals.

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2.

An a d v e rs e action has not o c c u rre d if:

—

T he term s of an account a r e changed in agreem ent with an
applicant;

—

The cre d ito r takes an action (or forebears from taking an action)
concerning an account d ue to inactivity of the account, o r default
or delinquency;

—

A refusal to g ra n t c re d it at the point of sale, or denial of a r e ­
q u est for a loan, connected with the u se of an account when the
c re d it d e s ire d would exceed a prev io usly a g reed cre d it limit that
has been disclosed to the applicant;

—

Credit is refused because applicable law does not perm it it;

—

Credit is refused because the cred ito r does not offer the type of
cre d it req u ested .

Notification of action, statement of re a so n s , and ECOA notice:
To c a r r y out requirem ents of the 1976 Amendments to the Act, the Board
p roposed th at, w h en ev er an a d v e rs e action has been taken, the applicant
should receive notice of the action, a statement of rig h ts u n d e r ECOA, and
a statement of specific reasons for the a d v e r s e action (or d isclo sure of the
app lican t's rig h t to get such an e x p la n a tio n ). The content of all the notices
is su b stantially the same as in the existing Regulation, but they a r e to be
provided together in o r d e r to enhance public u n d e rsta n d in g .
A change from the existing Regulation is the provision in this proposal
that the statem ent of rig h ts u n d e r ECOA should be p ro vided only to p ersons
a g ain st whom an a d v e rse action has been tak en , ra th e r than supplying it to
all applican ts.
T he proposal p rovides a sample notice of ECOA rig h ts (Section 202.9).
Unlike the existing Regulation, it need not be used verbatim but may be in
language su b stantially the same as the language of the sample notice. The
text of the proposed sample notice is identical to the existing notice, except
that the prohibitions of the 1976 Amendments to the Act have been ad d ed .
The Board also p ro v ided a sample statement of specific reasons for a d ­
v e r s e action (Sec. 202.9) . T his checklist form of reasons for a d v e r s e a c tio n !/

2/ T he requirem ents for reasons for denial a re basically the same a s in the J u ly proposal,
chiefly, that the reasons must be specific. However, they have been ex p an d ed , including
a req u irem en t to facilitate consum er complaints calling for inclusion in the statement of
reasons of the name and a d d r e s s of the su p e rv isin g Federal a g en cy , a n d , in the in terests
of making the statement of reasons specific, inclusion of a g r e a te r num ber of reasons for
d en ial.

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is sim ilar to the form in the existing Regulation, but its title has been
changed to indicate that it may be used in all cases of a d v e r s e action and
not, as at p r e s e n t, only in cases of denial o r termination of c re d it. Creditors
who p ro p e rly u se the sample form supplied would be in compliance with the
Regulation and the Act.
The Act p rovides that cre d ito rs who received 150 or fewer applications
for cre d it in the p reced in g y e a r may give the above notices orally.
Retention of R e c o rd s: Requirements for retention of re co rd s in the
B oard's proposed revision of Regulation B a r e essentially the same as in the
existing Regulation, except that, since the amended Act estab lishes a statute
of limitations of 24 months, the period of retention is 25 months instead of the
p r e s e n t 15 months.
A g e: For c re d ito rs using c re d it-s c o rin g sy stem s, the Act provides that
it is not a discrim inatory action to consider age in a cred it system based on
e xp erien ces if the system is dem onstrably and statistically sound in ac c o r­
dance with the Board's reg u latio n s, so long as the system does not operate
to assig n the age of an e ld erly applicant a "negative factor or v alu e."
The Board proposed that c re d ito rs using such a scoring system would
not be a ssig n in g a negative factor o r value if the cre d ito r gives elderly a p ­
plicants the score for age dictated by the c r e d ito r's ex p e rie n c e , so long as
the score is not lower than the high est score the cred ito r as sig n s to any age
c a te g o r y .
The Board proposed that an em pirically d e riv e d c re d it-s c o rin g system
be defined as one that p r e d ic ts , on the b asis of a numerical sc o re, an a p ­
p lican t's pro bab le w illingness and financial ability to repay the req u ested
c re d it. The score would be d eriv ed from points assig n ed to key questions
determ ined and weighted in accordance with past ex p erien ce with app li­
cants for cre d it.
T he Board also proposed sta n d a rd s for what would constitute a demon­
strab ly and statistically sound c re d it system as one developed by the
application of, and in accordance w ith, g en erally accepted sampling p ro ­
c ed u res and p r in c ip le s , having a statistically significant relation to cred it
r isk u n d e r accepted sta n d a rd s of a n a ly s is , and developed for the p u rp o se
of p redicting th e cred itw o rth in ess of applicants in relation to the legitimate
b u sin e ss in terests of the c re d ito r, such as to minimize bad debt losses and
operating e x p e n s e s. (Section 202.2)

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T he credito r may use a borrow ed system of c re d it scoring for age which
satisfies the general c rite ria for such sy stem s. If a borrow ed system is u se d ,
validation from the c r e d ito r's own ex p erien ce must begin within one y e a r . ! /
Inquiries may be made concerning age in all c a s e s , but the use of this
information would be re s tr ic te d , u n d e r the B oard's draft r u le s , to the a s s e s s ­
ment of creditw o rth in ess and may not be u se d a r b itra r ily to cu t off or diminish
c re d it d ue to an ap p lican t's age.
T he proposal would forbid c re d ito rs to re q u ire a reapplication, change
the term s of an account, o r terminate an account b ecause a p erson reaches a
certain age or r e t i r e s , if the applicant has not dem onstrated unw illingness
o r inability to re p ay .
T he Board specified that considerations of age would apply only to natural
p e r s o n s , not to b u s in e s s e s .
What information c re d ito rs may req u est: The Board proposed to add to
existing rules (relating to sex o r marital status) reg a rd in g in q uiries cred ito rs
may or may not make u n d e r ECOA, p ro visions implementing the 1976 Amend­
ments to ECOA. Under the proposed r u le s , in gen eral a cred ito r may not
re q u e st information on a c re d it application as to the race, color, religion, or
national o rigin of the applicant, or o thers associated with the ap plicant. The
c re d ito r may in q uire as to the perm anent residence or immigration status of
the applicant. In specified circu m stan ce s, for enforcement p u rp o s e s , the
cred ito r is re q u ire d to make inquiries o th erw ise p ro s c rib e d . (See Data
Notation below)
What u se may be made of information c re d ito rs o b tain : In g e n e ra l, the
Board p ro p o se d , a cred ito r may consider any information obtained, so long as
the information is not used to discrim inate against an applicant on a prohibited
b a s is. Details and exceptions a r e noted in Section 202.6, su bstantially u n ­
changed from the existing Regulation.
In a footnote to Section 202.6 the Board cautioned against the use of "insuf­
ficiently refined general information" not related to determination of
cre d itw o rth in e s s, w here th e effect may be to discrim inate ag ain st an applicant
although discrim ination is not intended.

3/ Authorization for cred ito rs to make tem porary u se of a borrow ed system of c re d it
scoring for ag e, and the validation req u irem en t, w ere not included in the Ju ly
pro p o sals.

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T he Board noted that in the legislative h isto ry of the amended Act the
co u rts a r e d irected to take account of the "effects" test developed in employ­
ment discrim ination c a s e s , and added:
"T here a r e . . . p r a c t i c e s . . .that a r e not specifically p r o s c r i b e d . ..
th at, in certain circu m sta n ces, also may have the effect of unlaw ­
fully discrim inating ag a in st applicants if (i) those practices re su lt
in a d v e rs e cred it decisions re g a rd in g applicants who a r e members
of a class protected by the Act o r this (Regulation); (ii) such d e ­
cisions occur at a significantly h ig h e r rate than a d v e rse decisions
involving applicants who a r e not members of the protected class;
and (iii) the information o r evaluation c rite ria un d erly in g the
practice does not have a manifest relationship to the c re d ito r's
determination of c re d itw o rth in e s s."
Special Purpose Credit P ro g ram s: In g e n e ra l, this proposal would
perm it otherw ise discrim inatory actions by cre d ito rs who offer certain
types of special c re d it assista n ce p rogram s intended to achieve social or
economic g oals. In such circum stances the cred ito r may refuse to extend
such cred it solely because an applicant does not qualify u n d e r the special
requirem ents of a p a rtic u la r program recognized u n d e r the proposed Regu­
lation. T hese include:
1. Credit assistan ce p rogram s e x p r e s s ly authorized by Federal or
State law for the benefit of an economically d isa d vantaged class of p e rso n s.
2. C red it assistan ce p rogram s adm inistered by a no n -p ro fit o rg an iza ­
tion (as defined by the Internal Revenue Code, Section 501 (c) as a m e n d e d ),
for the benefit of its members or for the benefit of an economically d is ­
advantaged class of p e rs o n s .
'
3. Any special p u rp o se cred it program offered by a fo r-profit o rg a n i­
zation to meet special social needs that a r e in accord with the provisions of
the regulation reg ard in g such p ro g ra m s .
Data notation for enforcement p u r p o s e s : ft/ The Board proposed that
c re d ito rs be re q u ire d to in q u ire as to the se x , marital sta tu s , race-national

4/ T his requ irem ent was not included in the J u ly p ro p o sals, w hich, how ever, asked
for comment on a num ber of questions concerning the issue w hether such data should be
collected by cred ito rs in o r d e r to p ro v id e a b a s is for a s se s sin g compliance with the Act
and Regulation B. T he Ju stic e Department, the Federal T ra d e Commission, the V eterans
A dm inistration, and th e Small B usiness A dm inistration, as well as rep re se n tativ e s of
women's g ro u p s and th e heads of the House and Senate Banking Committees u rg e d the
Board to re q u ire data collection for enforcement p u rp o se s.

o rig in , and age of applicants for residential mortgage cre d it b u t that
applicants have the rig h t to decline to su p p ly such information if they d e s ire .
C red ito rs would not be r e q u ire d to make th e ir own assessm en t. Race or
national o rig in categories proposed would be American Indian or Alaskan
Native; Asian o r Pacific Islander; Black; White; Hispanic and O ther (at the
ap p lican t's option) . T he marital status categories would be m a rrie d , unm ar­
ri e d , and se p a ra te d . A n sw ers could be listed, at the c r e d ito r's option, on
the application form o r on a se p ara te form that refe rs to the application.
Specialized treatm ent for certain types of c r e d it: 5/ T he Board p r o ­
posed exemptions from some of the Regulation B req uirem ents with re sp e ct to
c r e d it tran sactio n s of utilities and o th e r b u s in e s s e s , se cu rities c re d it, inci­
dental c re d it, and governm ental c re d it. With the addition of governmental
c re d it, th ese proposed partial exemptions are sim ilar to those in the existing
Regulation B . They do not exempt th ese classes of credito rs from the basic
nondiscrim ination req u irem ents of the Act. G enerally, they a r e exemptions
from detailed req uirem ents of Regulation B con cern in g notifications, fu rn is h ­
ing c re d it information, and retention of rec o rd s and req u ests fo r, or use of,
information about marital status and se x . In the cases of exemption from
requ irem en ts concerning notifications and retention of r e c o rd s , applicants
can o v e rrid e the exemption by w ritten re q u e s t. Section 202.3 (b through f)
of the proposed Regulation p rovides d etails.
Preemption of inconsistent State law s: The Board proposed that only
States whose laws ag ain st discrim ination in the g ran tin g of c re d it are incon­
sisten t with Federal law would b e p reem p ted, and then only to the extent of
the inconsistency. The proposals prov id ed sev en guidelines by which c r e d ­
itors could a s s e s s State laws for the consistency with ECOA and Regulation B.
(Section 202.11)
Key pro v ision s of the proposed Regulation not d isc u sse d above that a r e
u n c h an g e d , or su b stan tially so, from the proposals made in J u ly include:
—

T he gen eral ru le ag ain st discrim ination.

(Section 202.4)

—

Notice to m arried people that they may req u est that th e ir account be
c a r rie d u n d e r the name of each spouse (except that the p r e s e n t p ro ­
posals call for both s ig n a tu r e s , not j u s t one, on the request) .
(Section 202.10(2))

—

Provisions for in terpretations of the Regulation.

(Section 202.1 (d))

5/ T he Ju ly p ro posals contained a se rie s of req u ests for public comment on w h ether
certain classes of cred it transactio ns should be exempted from some or all requirem ents
of the Regulation.

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—

Definition of discrim ination as "to tre a t an applicant less favorably
than other a p p lic a n ts ." (Section 2 02 .2 ( n ) )

—

Requests c re d ito rs may make for sig n a tu res (rew orded without
change in substance) . (Section 202.7(d))

The text of the November 3 proposal and additional explanatory comments a r e
being pu b lish ed in the FEDERAL REGISTER. They will probably also ap p e ar in various
commercially p u b lish ed se rv ic e s and p erio d ica ls. For these reaso n s, and because of the
length of the document (116 typew ritten p a g e s ) , the Federal R e serve Bank of Dallas is not
routinely d istrib u tin g the text and the explanatory comments. If you need a copy, please
w rite to the S e c re ta ry 's Office, Federal R eserve Bank of Dallas, Dallas, T exas 75222.
Copies of the document will be available in the n ear future.
Comments on the November 3 proposal can be received th rou g h December 3,
1976, and should be directed to the S e c r e ta ry , Board of Governors of the Federal R eserve
System, Washington, D .C. 20551. Reference should be made to Docket No. R-0031. Any
w ritten comments will be made available for public inspection and copying as provided
in section 261.6(a) of the Board's Rules Regarding Availability of Information (12 CFR 261).
S incerely y o u r s ,
T . W. Plant
F irst Vice P resid en t