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federal reserve
Bank
DALLAS. TEXAS
of
D allas
75222
Circular No. 82-63
June 3, 1982
REGULATION B
Equal Credit Opportunity
Credit Scoring Interpretations
Withdrawal of Proposed Business Credit Amendments
TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System has asked
for public comment on two proposed interpretations of Regulation
B
concerning credit scoring. The Board also proposed to withdraw possible
amendments to the business credit provisions of Regulation B. The amend
ments were first published for comment in 1978. Interested persons are
invited to submit comments to the Secretary, Board of Governors of the
Federal Reserve System, Washington, D.C. 20551, by July 1, 1982. Comments
should refer to Docket No. R-0203.
Printed on the following pages are copies of the press release and
the Federal Register documents. Questions regarding this material should be
directed to this Bank's Legal Department,
Ext. 6171.
Additional copies of this circular will be furnished upon request to
the Department of Communications, Financial and Community Affairs, Ext.
6289.
Sincerely yours,
William H. Wallace
First Vice President
Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
2
FEDERA^RESERVEpressrelease
For immediate release
May 25, 1982
The Federal Reserve Board today asked for public comment on two proposed
interpretations of Regulation B (Equal Credit Opportunity) and on the proposed
withdrawal of three previously proposed amendments to the regulation.
The Board requested comment by July 1, 1982.
The interpretations upon which the Board requested comment concern credit
scoring.
They are revisions of previous proposals following staff assessment of
comment received.
As revised and proposed for further comment, they are:
1.
An interepretation concerning the use of judgmental and credit
scoring systems in the treatment of income derived from alimony,
child support, separate maintenance, part-time employment,
retirement benefits or public assistance under the regulation's
requirement forbidding exclusion from consideration of such
income.
2.
An interpretation concerning the selection and disclosure of
reasons for adverse action on a credit applicaton.
At the
same time the Board proposed to withdraw possible amendments to
the business credit provisions of Regulation B first published for comment late in
1978.
There are attached the text of the Board's proposed interpretations
and the introduction to its proposal to withdraw the previously proposed amendments.
The text of the latter notice may be obtained from the Federal Reserve Board and the
Federal Reserve Banks.
Attachments
-0 -
3
FEDERAL RESERVE SYSTEM
12 CFR Pa rt 202
[Reg. B; Docket No. R-0203]
EQUAL CREDIT OPPORTUNITY
Proposed Board I n t e r p r e t a t i o n s ; Cons ideration of Income
and Disclosure of Reasons f o r Adverse Action
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Proposed Board i n t e r p r e t a t i o n s .
SUM ARY: The Board proposes to adopt two i n t e r p r e t a t i o n s of Regulation B, Equal
M
Credit Opportunity. The Board seeks comment on whether c r e d i t o r s a f f e c t e d by
the i n t e r p r e t a t i o n s will encounter te c h n i c a l problems in complying with thes e
i n t e r p r e t a t i o n s . The f i r s t i n t e r p r e t a t i o n d i s c u s s e s how users of judgmental
and c r e d i t scoring systems must t r e a t income derived from alimony, c h i l d sup
p o r t , s e p a r a t e maintenance, p a r t - t i m e employment, re t i re m en t b e n e f i t s or pub lic
a s s i s t a n c e t o comply with th e r e g u l a t i o n ' s requirement t h a t c r e d i t o r s not " d i s
count or exclude from co n s id er at i o n " such income. The second i n t e r p r e t a t i o n
ex pl ai ns how c r e d i t o r s should s e l e c t and d i s c l o s e th e p r i n c i p a l reason or reasons
for adverse a c t i o n . These i n t e r p r e t a t i o n s d er iv e from que st ions t h a t have been
r a i s e d about the a p p l i c a t i o n of Regulation B to c r e d i t scoring systems, but the
bas ic p r i n c i p l e s apply to judgmental systems as w e l l.
DATE:
Comments must be received on or before Ju l y 1, 1982.
ADDRESS: Comments may be mailed t o th e S e c r e t a r y , Board of Governors of t h e
Federal Reserve System, Washington, D.C. 20551, or d e li v e r e d t o Room B-2223,
20th and C o n s t i t u t i o n Avenue, N.W., Washington, D.C. between 8:45 a.m. and 5:15
p.m.
C o m m e n t s m a y be i n s p e c t e d at R o o m
B-1122 b e t w e e n 8:45 a.m. and 5:15 p.m.
All ma terial submitted should r e f e r t o Docket No. R-0203.
FOR FURTHER INFORMATION CONTACT: Lucy G r i f f i n , Senior Atto rn ey, Division of
Consumer and Community A f f a i r s , Board of Governors of th e Federal Reserve
System, Washington, D.C. 20551 (202-452-2412).
SUPPLEM
ENTARY INFORMATION: (1) I n t r o d u c t i o n . In response to re quests f o r
c l a r i f i c a t i o n on how c e r t a i n pr o v is io n s of i t s Regulation B £12 CFR Part 202)
apply t o the oper ati on of numerical c r e d i t scoring systems, J the Board asked
f o r public comment (44 FR 23865, April 23, 1979) on four ques tions about Regu
l a t i o n B's a p p l i c a t i o n to c r e d i t sco ring systems:
*/
B a s i c a l l y , c r e d i t scoring i s the use of s t a t i s t i c a l techniques t o assign
po ints or weights to various a p p l i c a n t c h a r a c t e r i s t i c s ( e . g . , income, c r e d i t
h i s t o r y ) or o t h e r f a c t o r s re l e v a n t to the t r a n s a c t i o n ( e . g . , type of s e c u r i t y )
in order to p r e d i c t th e l ik e l ih o o d t h a t th e a p p l i c a n t will s a t i s f a c t o r i l y
repay th e c r e d i t . In Regulation B, an e m p i r i c a l l y and s t a t i s t i c a l l y derived
c r e d i t scori ng system i s c o n t r a s t e d with the judgmental ev al u at io n performed
by a c r e d i t o f f i c e r or committee; compare th e d e f i n i t i o n of "a demonstrably
and s t a t i s t i c a l l y sound, e m p i r i c a l l y derived c r e d i t system" in § 202.2(p)
with the d e f i n i t i o n of "judgmental system of e v a lu a t i n g a p p l i c a n t s " in
§ 202.2 ( t ) .
4
° May a c r e d i t s c o r i n g system s c o re th e f a c t t h a t an a p p l i c a n t has
more than one job or m u l t i p l e so ur ce s of income, and may i t s c o re secondary
income d i f f e r e n t l y from primary income?
° How must a s c o r i n g system c o n s i d e r th e amount of an a p p l i c a n t ' s
income d e r i v e d from p a r t - t i m e employment, p e n s i o n , or alimony?
° How must a c r e d i t o r using a s c o r i n g system s e l e c t th e s p e c i f i c
r e a s o n s f o r ad ver se a c t i o n ?
o
Under what cir cu m sta nc es may a c r e d i t o r employing a c r e d i t s c o r i n g
system use t h e re asons f o r ad ver se a c t i o n c o n t a i n e d in Regu lation b ' s model s t a t e
ment?
The Board r e c e i v e d almost 300 w r i t t e n comments from members of Congr es s,
i n d u s t r y , academics, and o t h e r s . The comments ex p r es s ed a wide d i v e r s i t y of
views about how Reg ula tio n B's r u l e s should apply to c r e d i t s c o r in g sy st em s.
The m u l t i p l i c i t y of vie wp oin ts and t h e u n d er ly in g t e c h n i c a l complexity of t h e
q u e s t i o n s r a i s e d in th e comment pr ocess led t o a thorough r e c o n s i d e r a t i o n of
t h e i s s u e s and t h e p o l i c y o p t i o n s a v a i l a b l e . Based on t h a t re vi ew , t h e Board
i s s u e d f o r p u b l i c comment (45 FR 56818, August 26, 1980) two proposed i n t e r p r e
t a t i o n s . The f i r s t proposal ad dr es s ed s e v e ra l i s s u e s concerning c o n s i d e r a t i o n
o f income and income r e l i a b i l i t y .
The second proposal s e t f o r t h s e v e r a l p r i n c i
pl es governing t h e s e l e c t i o n and d i s c l o s u r e of ad ve rs e a c t i o n . Both proposed
i n t e r p r e t a t i o n s a f fi r m e d t h e Board's c o n c l u s i o n , based upon an a n a l y s i s of t h e
comments and th e Equal C r e d i t Opp or tu ni ty Act, t h a t the r u l e s in Regulation B
apply to a l l c r e d i t o r s , whether t hey e v a l u a t e c r e d i t w o r t h i n e s s j u d g m e n t a l l y or
through a c r e d i t s c o r i n g system.
The Board r e c e i v e d almost 300 w r i t t e n comments on t h e s e p r o p o s a ls
from members of Congress, f e d e r a l and s t a t e a g e n c i e s , i n d u s t r y , consumers, and
ac-iJeii ; s .
Generally,
creditors
('•etailers,
oil
companies, financial
institu
t i o n s , and t r a d e a s s o c i a t i o n s ) claimed t h a t a p r o p e r l y designed c r e d i t s c o r i n g
system i s an a c c u r a t e , o b j e c t i v e mechanism f o r deter mi ni ng c r e d i t w o r t h i n e s s .
They sug ge ste d t h a t t o p r e s e r v e t h e em p i r i c a l and s t a t i s t i c a l c h a r a c t e r of such
a system, a c r e d i t o r should be allowed wide l a t i t u d e to in c lu d e in o r exclude
from a p a r t i c u l a r system t h e amount and sou rc es of an a p p l i c a n t ' s income depending
on whether th o s e f a c t o r s were r e l a t e d in a s t a t i s t i c a l l y s i g n i f i c a n t way t o c r e d i t
wo rt hi n es s as e s t a b l i s h e d by th e c r e d i t o r developing t h e system. They a l s o advo
c a t e d t h a t wide l a t i t u d e be given t o d et er m in in g t h e most a p p r o p r i a t e way f o r
s e l e c t i n g and d i s c l o s i n g t h e p r i n c i p a l reason or re asons f o r an ad ve r se c r e d i t
decision.
Consumer commenters ( i n c l u d i n g s e v e ra l members of Congress and a
number of i n d i v i d u a l consumers) g e n e r a l l y were concerned t h a t t h e Board not
reduce or e l i m i n a t e what they p er ce i v ed as t h e b a s i c p r o t e c t i o n s a l r e a d y a f f o r d e d
by t h e law. They were opposed t o allo wi ng c r e d i t o r s t h e degree of f l e x i b i l i t y
sou gh t by t h e i n d u s t r y because of t h e b e l i e f t h a t such f l e x i b i l i t y might be
used t o mask i l l e g a l l y d i s c r i m i n a t o r y p r a c t i c e s .
Based on a review of t h e comments and i t s own a n a l y s i s , t h e Board has
r e d r a f t e d t h e proposed i n t e r p r e t a t i o n s .
Before ado pt in g them in f i n a l form,
however, t h e Board wishes t o pr ovide an o p p o r t u n i t y f o r comment on t e c h n i c a l
problems c r e d i t o r s might enco un ter in complying with t h e i n t e r p r e t a t i o n s .
5
The Board a l s o s o l i c i t s comments on whether a period of time i s needed f o r
t e c h n i c a l adjustments to e x i s t i n g c r e d i t scoring systems to comply with the
i n t e r p r e t a t i o n s . Because comments ar e only being s o l i c i t e d on th e t e c h n i c a l
d i f f i c u l t i e s c r e d i t o r s would encounter in complying with th e i n t e r p r e t a t i o n s ,
the Board f in ds i t is not necessary to follow t h e expanded rulemaking procedures
s e t f o r t h in the Board's p o l i c y statement of January 15, 1979 (44 FR 3957).
I nst ead , th e Board finds t h a t a 30 day comment period i s s u f f i c i e n t .
The f i r s t i n t e r p r e t a t i o n (§ 202.601) addresses several iss u es concern
ing c o n s id e r a t i o n of income and income r e l i a b i l i t y . The i n t e r p r e t a t i o n c l a r i
f i e s t h a t Regulation B a p p l i e s to c r e d i t scoring systems as well as to judgmental
systems. The i n t e r p r e t a t i o n al so advises t h a t income need not be co n si der ed, but
t h a t , i f income i s cons id ere d, p r o te ct ed income must be considered on an i n d i v i
dual b as i s and not assigned a weight based on aggregate s t a t i s t i c s .
The second i n t e r p r e t a t i o n (§ 202.901) s e t s f o r t h several p r i n c i p l e s
governinq th e s e l e c t i o n and d i s c lo s u r e of reasons f o r adverse a c t i o n . The
i n t e r p r e t a t i o n advises c r e d i t o r s t h a t t h e process used t o s e l e c t s p e c i f i c
reasons f o r adverse a ct io n must i d e n t i f y the f a c t o r s t h a t were most s i g n i f i
cant in the a p p l i c a n t ' s f a i l u r e t o achieve a passing score in a c r e d i t scoring
system. The i n t e r p r e t a t i o n a ls o advises c r e d i t o r s t h a t th e reasons must be
taken from those f a c t o r s a c t u a l l y considered f o r t h a t a p p l i c a n t . F i n a l l y , the
i n t e r p r e t a t i o n advis es c r e d i t o r s on proper use of th e model form f o r d i s c l o s i n g
reasons f o r adverse a c t i o n .
(2)
Regulatory f l e x i b i l i t y a n a l y s i s . The economic impact of e i t h e r
i n t e r p r e t a t i o n i s u n l i k e l y to be l a r g e . C r ed it or s c u r r e n t l y using c r e d i t scoring
systems which t r e a t p r o t e c t e d income in a manner t h a t v i o l a t e s th e f i r s t i n t e r
p r e t a t i o n will have t o modify t h e i r systems. This will e n t a i l th e r e t r a i n i n g of
persons making loan e v a lu a t i o n s and th e probable expense of f u r t h e r s t a t i s t i c a l
a n a l y s i s . Most c r e d i t o r s have th e t o o l s needed f o r making such changes as p a r t
of t h e i r procedures for normal p e r io d i c updates of t h e i r systems. System mod ifi
c a t i o n s to conform to the i n t e r p r e t a t i o n , however, might r eq u i re a system update
e a r l i e r than would normally be performed. The economic impact of the second
i n t e r p r e t a t i o n , governing th e s e l e c t i o n and d i s c l o s u r e of reasons f o r adverse
a c t i o n , i s l i k e l y t o be even sm a ll e r, as i t should not r e q u i r e any new s t a t i s t i
cal a n a l y s i s . The impact of e i t h e r i n t e r p r e t a t i o n on users of judgmental systems
should involve a t most th e expense of new forms and i n s t r u c t i o n s f o r loan o f f i c e r s .
O f f s e t t i n g t h e s e c o s t s , the c l a r i f i c a t i o n s provided by t h e i n t e r p r e t a t i o n s will
probably help both a p p l i c a n t s and c r e d i t o r s . With more p r e c i s e i n s t r u c t i o n s on
the proper tre at m en t of p r o te ct ed income, c r e d i t o r s who pr ev io u sly may have been
r e l u c t a n t t o use income in t h e i r c r e d i t systems may now do so. The b e n e f i t s of
the second i n t e r p r e t a t i o n will accrue p r i m a r i l y t o a p p l i c a n t s who are r e j e c t e d
because of i n c o r r e c t information and to a p p l i c a n t s who ar e unaware of t h e i r
c r e d i t weaknesses.
L is t of Subjects in 12 CFR Part 202
Banks, banking; Civil r i g h t s ; Consumer p r o t e c t i o n ; C r e d i t ; Federal
Reserve System; Marital s t a t u s d i s c r i m i n a t i o n ; Minority groups; P e n a l t i e s ;
Religious d i s c r i m i n a t i o n ; Sex d i s c r i m i n a t i o n ; Women.
6
(3) Text of i n t e r p r e t a t i o n s . Pursuant t o t h e a u t h o r i t y granted in
§ 703(a) of the Equal Cred it Opportunity Act (15 U.S.C. 1691 (a )), the Board
proposes t o adopt the following two i n t e r p r e t a t i o n s of Regulation B (12 C.F.R.
Part 202) to read as follows:
§ 202.601
Consideration of income.
Regulation B p r o h i b i t s c r e d i t o r s from d i sc oun tin g or excluding the
income of an a p p l i c a n t (or the spouse of the a p p l i c a n t ) from c o n s i d e r a t i o n
because of a p r o h ib it e d b as is or because th e income i s derived from alimony,
c h il d su p p or t, se p a r a t e maintenance, p a r t - t i m e employment, r e t i re m e n t b e n e f i t s
or pu blic a s s i s t a n c e ( " p r o t e c t e d income").i./ A c r e d i t o r may c o n s i d e r , however,
th e p r o b a b i l i t y of any income continuing in e v a l u a t i n g an a p p l i c a n t ' s c r e d i t
w o r t h i n e s s , and may cons ider th e e x t e n t to which alimony, c h i l d support or
s e p a r a t e maintenance i s l i k e l y to be c o n s i s t e n t l y made. Regulation B a p p l i e s
e q u a l l y t o a l l methods of c r e d i t ev al u at io n - - whether performed judgmentally
or through th e use of a c r e d i t scoring system.jV
C r ed it o r s need not consider income at a l l . However, c r e d i t o r s t h a t
do co n s id er income should co n s id er th e amount of income as requ ired in
§ 2 0 2 . 6 ( b ) ( 5 ) . A c r e d i t scoring system wi ll not be deprived of i t s s t a t u s as
a "demonstrably and s t a t i s t i c a l l y sound, e m p i r i c a l l y derived" c r e d i t scoring
system because i t aggregates income (in cl u d in g a type of income which, by
i t s e l f , would not be s e l e c t e d as a p r e d i c t i v e c h a r a c t e r i s t i c ) .
C r ed it o r s have asked whether e v a l u a ti n g or d er iv i n g a point score
f o r c e r t a i n types of income (such as Social Se cu ri ty and alimony) during the
development of th e system c o n s t i t u t e s " co ns id er at io n " of t h a t income f o r pur
poses of the r e g u l a t i o n , enabling the c r e d i t o r t o discount or exclude such
1/
Section 20 2. 6( b) (5 ) s t a t e s in r e l e v a n t p a r t :
A c r e d i t o r sh a ll not discount or exclude from c o n s i d e r a t i o n the
income of an a p p l i c a n t or the spouse of the a p p li c a n t because of a
p r o h i b it e d b a s i s or because the income i s derived from p a r t - t i m e
employment, or from an a n n u it y , pension, or o t h e r re t i re m en t b e n e f i t ;
but a c r e d i t o r may cons ider the amount and probable continuance of any
income in e v a l u a t i n g an a p p l i c a n t ' s c r e d i t w o r t h i n e s s . Where an a p p l i
cant r e l i e s on alimony, ch i l d supp or t, or s e p a r a t e maintenance payments
in applying f or c r e d i t , a c r e d i t o r sh a ll co ns id er such payments as
income t o the e x t e n t t h a t they are l i k e l y to be c o n s i s t e n t l y made.
Fac tors t h a t a c r e d i t o r may cons ider in determining the l i k e l i h o o d of
c o n s i s t e n t payments in c l u d e , but are not l i m it e d t o , whether
th e pay
ments are received pursuant t o a w r i t t e n agreement or co u rt decree;
th e length of time t h a t t h e payments have been r e c e i v e d ; the r e g u l a r i t y
of r e c e i p t ; th e a v a i l a b i l i t y of procedures t o compel payment; and the
c r e d i t w o r t h i n e s s of the payor . . . .
2J
The only d if f e r e n c e s in ev a l u a ti o n procedures f o r the two methods of judging
c r e d i t w o r t h i n e s s sanctioned by th e law r e l a t e t o co n s i d e r a t i o n of
age and
r e c e i p t of public a s s i s t a n c e .
(See § 2 0 2 . 6 ( b ) ( 2 ) ( i i ) and ( i i i ) . )
7
income based upon t h es e aggregate s t a t i s t i c s .
In th e Board's view, th e
s t a t u t e r e q u ir e s t h a t ev al u at i o n of p r o t e c t e d income be made on an individual
b a s i s , and not based upon aggregate s t a t i s t i c a l r e l a t i o n s h i p s such as those
underlying c r e d i t scoring models. Thus, c r e d i t o r s may not use blanket r u l e s
which au t o m at ic al l y deem a c e r t a i n type of p r o t e c t e d income t o be u n r e l i a b l e .
Nor may the average r e l i a b i l i t y of a p a r t i c u l a r type of p r o t ec t ed income be
used to p r e d i c t the r e l i a b i l i t y of the same types of income for an individual
applicant.
For c r e d i t o r s t h a t do co ns id er income, t h e r e a r e several acc ept ab le
methods under § 202 .6 (b) (5) which c r e d i t o r s using c r e d i t scoring systems may
use f or t h i s purpose. F i r s t , c r e d i t o r s can score the amount of a l l income
s t a t e d by th e a p p l i c a n t without tak i n g st ep s t o ev al u at e the income. This
method could be used in a system which i s based on the income the a p p l i c a n t
s t a t e s ; th e c r e d i t o r need not a c t u a l l y v e r i f y the amount. Second, hased on
an in di vidual ev al u at io n of each component of the a p p l i c a n t ' s income, the
c r e d i t o r may score r e l i a b l e income s e p a r a t e l y from income t h a t i s not r e l i a b l e .
A l t e r n a t i v e l y , the c r e d i t o r may include a p or tio n or d i s r e g a r d a por tio n of
income to th e e x t e n t t h a t i t is not r e l i a b l e , before aggregating and scoring
a l l r e l i a b l e income. Third, i f th e c r e d i t o r does not ev al u at e a l l income
components, any component of p r o t ec te d income t h a t i s not evaluated must be
t r e a t e d as r e l i a b l e . In co n si der in g t h e s e p a r a te components of an a p p l i c a n t ' s
income, the c r e d i t o r may not au t o m at ic al l y discount or exclude from c o n s i d e r a
t i o n any income of a type p r o te c te d by § 2 0 2 . 6 ( b ) ( 5 ) .
Cr ed it o r s have asked whether c r e d i t scoring systems may place values
on th e number of sources from which earned income is received without v i o l a t i n g
the r e g u l a t i o n ' s p r o h i b i t i o n a g a i n s t di sc ou nti ng income. The r e g u l a t i o n does
not p r o h i b i t c o n s id e ra t i o n of t h e number of earned income sources f or an i n d i
vidual a p p l i c a n t . For example, a c r e d i t o r may tak e i n t o account th e f a c t t h a t
an indi vi du al a p p li c a n t has more than one source of earned income - - a f u l l
time and a p a r t - t i m e j o b , or two p a r t - t i m e j o b s . A l t e r n a t i v e l y , a c r e d i t o r
might score an in di vidual a p p l i c a n t ' s earned income from a second source d i f
f e r e n t l y than the a p p l i c a n t ' s earned income from a primary so u rc e. Cr ed it o r s
may n o t , however, t r e a t as an adverse f a c t o r t h e f a c t t h a t an ind iv id u al a p p l i
c a n t ' s only source of earned income i s derived from a p a r t - t i m e j o b .
8
§ 202.901
Di sc los ur e of reasons f o r adverse a c t i o n .
The Board has been asked f o r an i n t e r p r e t a t i o n of § 202.9 of Regula
t i o n B regarding the s e l e c t i o n and d i s c l o s u r e of the reasons f o r adverse a c ti o n 1 /
where a c r e d i t scoring system i s used, alone or in conjunction with a judgmental
e v a l u a t i o n . Although th e i s s u e has a r i s e n in th e co nt ext of c r e d i t sc o ri n g , as
a general p r i n c i p l e th e p ro vi si o ns of Regulation B apply eq ual ly t o both ju d g
mental and c r e d i t scoring systems of c r e d i t e v a l u a t i o n . The reasons f o r adverse
a c ti o n d i s c l o s e d under § 2 0 2. 9( a) (2 ) and (b)(2) must r e l a t e to f a c t o r s a c t u a l l y
scored or
reviewed by t h e c r e d i t o r . The c r e d i t o r must d i s c l o s e th e s p e c i f i c
reason or
reasons f o r th e adverse a c t i o n .
Many c r e d i t systems contain f e a t u r e s t h a t c a l l f o r automatic adverse
a c ti o n because of one or more negative f a c t o r s in th e a p p l i c a n t ' s record (such
as th e a p p l i c a n t ' s previous bad c r e d i t h i s t o r y with t h a t c r e d i t o r , a d e c l a r a t i o n
of bankruptcy, or th e f a c t t h a t the a p p l i c a n t i s a minor) t h a t cannot be o f f s e t
by o t h e r f a c t o r s . When a c r e d i t o r ta ke s adverse a c t i o n because of an automatic
f a c t o r , th e c r e d i t o r must d i s c l o s e t h a t s p e c i f i c f a c t o r .
I f th e c r e d i t o r does not a u t o m a t i c a l l y r e j e c t th e a p p l i c a t i o n ,
and
bases th e de ci si o n on a c r e d i t scoring system, the reasons d is c lo s e d must r e l a t e
only t o those f a c t o r s a c t u a l l y scored in th e system, not to f a c t o r s t h a t ar e not
included in th e c r e d i t scori ng system. S i m i l a r l y , in a judgmental system, the
reasons d i s c lo s e d must r e l a t e t o th e f a c t o r s in th e a p p l i c a n t ' s record a c t u a l l y
reviewed by th e person making the d ec i s i on and must a c c u r a t e l y d es cr i b e t h e
reasons f o r adverse a c t i o n . If th e c r e d i t ev al u at io n system employs both
judgmental and c r e d i t scoring components, the f a c t o r s t o be d i s c lo s e d will
be determined by whether th e f i n a l d ec i s i on r e s u l t e d from the judgmental or
t h e scorinq system assessment of th e a p p l i c a t i o n . Thus, i f th e c r e d i t o r
i n i t i a l l y c r e d i t scores an a p p l i c a t i o n and tak es adverse a c ti on as a r e s u l t
of t h a t s c o r i n g , the reasons for adverse a c ti o n must r e l a t e only to the
f a c t o r s a c t u a l l y scored in the system. If the a p p l i c a t i o n passes th e c r e d i t
scoring stag e s u c c e s s f u l l y but the c r e d i t o r then tak es adverse a c ti on based
on th e judgmental assessment, one or more of the reasons d i s c lo s e d must r e l a t e
t o the f a c t o r s in the a p p l i c a n t ' s record t h a t were reviewed judgmentall.y.
1/
Section 20 2 . 9 (a ) (2 ) s t a t e s in r e le v a n t p a r t :
Any n o t i f i c a t i o n given t o an a p p l i c a n t a g a i n s t whom adverse a c ti on i s taken
s h a l l be in w r i t i n g and sh a ll c o n t a i n . . . a statement of s p e c i f i c reasons for
t h e a c t i o n tak en .
Section 2 0 2. 9(b )(2 ) s t a t e s in r e l e v a n t p a r t :
A statement of reasons f o r adverse a c ti o n sha ll be s u f f i c i e n t i f i t i s
s p e c i f i c and i n d i c a t e s the p r i n c i p a l reason (s) f o r the adverse a c t i o n .
A c r e d i t o r may formulate i t s own statement of reasons in check l i s t or
l e t t e r form or may use a l l or a p or tio n of th e sample form p r i n te d [i n
t h i s s u b s e c t i o n ] , which, i f properly completed, s a t i s f i e s th e r e q u i r e
ments of sub section ( a ) ( 2 ) ( i ) . Statements t h a t the adverse a c t i o n was
based on the c r e d i t o r ' s i n t e r n a l stand ards or p o l i c i e s or t h a t the
a p p l i c a n t f a i l e d t o achieve th e q u a l i f y i n a score on th e c r e d i t o r ' s
c r e d i t sco ring system ar e i n s u f f i c i e n t .
9
The r e g u l a t i o n does not r e q u i r e t h a t any one method be used f o r
s e l e c t i n g reasons f o r the adverse c r e d i t d e c i s i o n , nor does i t mandate t h a t
a s p e c i f i c number of reasons be d i s c l o s e d . However, d i s c l o s u r e of more than
fo ur reasons i s not l i k e l y t o be helpful t o the a p p l i c a n t . The Board recog
nizes t h a t th e r e may be a number of va li d methods f o r s e l e c t i o n of reasons f o r
denial which meet the requirements of Regulation B. One method, f or example,
would be to i d e n t i f y those f a c t o r s f o r which t h e a p p l i c a n t ' s score f e l l f u r t h e s t
below th e average score f or each of those f a c t o r s achieved by a p p l i c a n t s whose
t o t a l score was at or s l i g h t l y above th e minimum passing score..?/
Cr ed it o r s may i d e n t i f y reasons f o r adverse a c t i o n by mathematical or
manual s e l e c t i o n . No f a c t o r or f a c t o r s may be a r b i t r a r i l y excluded from the
pool of f a c t o r s su b j e ct to d i s c l o s u r e . The c r e d i t o r must d i s c l o s e reasons
a c t u a l l y considered (such as "age of automobile") even i f the r e l a t i o n s h i p of
t h a t f a c t o r t o p r e d i c t i n g c r e d i t w o r t h i n e s s may not be c l e a r t o t h e a p p l i c a n t .
C r e d i t o r s have a l s o asked about proper use of t h e sample form s e t f o rt h
in § 2 0 2 .9 (b )(2 ) when providing reasons f o r adverse a c t i o n . The sample form is
i l l u s t r a t i v e and may not be a p p r o p r i a t e f o r a l l c r e d i t o r s . It was designed to
d i s c l o s e those f a c t o r s which c r e d i t o r s most commonly c o n s i d e r . Some of the
reasons l i s t e d on the form could be misleading when compared to the f a c t o r s
a c t u a l l y sco red. In such c a s e s , i t i s improper t o complete the form by simply
checking the c l o s e s t i d e n t i f i a b l e f a c t o r l i s t e d . For example, a c r e d i t o r t h a t
considers only bank r ef er en ce s (and d i s r e g a r d s finance company r ef er en ce s a l t o
ge th er ) should d i s c l o s e " i n s u f f i c i e n t bank re fe r e n c e s " (not " i n s u f f i c i e n t c r e d i t
r e f e r e n c e s " ) . S i m i l a r l y , a c r e d i t o r t h a t con si der s bank r ef er en ce s and o th er
c r e d i t r ef er en ce s as s e p a ra t e f a c t o r s should t r e a t t h e two f a c t o r s s e p a r a t e l y
in d i s c l o s i n g re as on s. The c r e d i t o r should e i t h e r add those o t h e r f a c t o r s to
the form or check "other" and include th e a p p r o p r i a t e e x p l a n a ti o n .
2J
For example, i f a scoring system with a maximum score of 300 p o i n t s has a
c u t - o f f score of 200 p o i n t s , the c r e d i t o r could use a p p l i c a n t s whose t o t a l
scores f a l l between 200 and, f o r example, 205 p o i n t s to determine the
average score f o r those f a c t o r s .
By order of the Board of Governors of th e Federal Reserve .System,
May 25, 1982.
(signed) William W Wiles
.
William W Wiles
.
S ec r et ar y of the Board
[SEAL]
STA TEM EN T OF C RE D IT DENIAL.
TE RM IN ATIO N. OR C H A N G E
DATE
A p p l i c a n t ’s N a m e :
___________
A p p lica n t's A d d ress:
___________
D e s c r ip tio n o f A c c o u n t. T ra n sa ctio n , o r R eq u ested
C r e d i t : __________________________________________________ _
D escrip tio n o f A d verse A ctio n T a k en :
PRINCIPAL REASON(S) FOR ADVERSE
ACTION CON CE RN IN G CREDIT
_____C r e d it a p p l i c a t i o n i n c o m p l e t e
------- I n s u f f i c i e n t c r e d i t r e f e r e n c e s
_____ U n a b l e t o v e r i f y c r e d i t r e f e r e n c e s
_____ T e m p o r a r y o r ir r e g u l a r e m p l o y m e n t
-------
U n a b le to v erify e m p lo y m e n t
-------
L ength o f em p lo y m en t
_____ I n s u f f i c i e n t i n c o m e
_____ E x c e s s i v e o b l i g a t i o n s
_____ U n a b l e t o v e r i f y i n c o m e
-------
I n a d e q u a t e collateral
------- T o o s h o r t a p e r i o d o f r e s i d e n c e
_____ T e m p o r a r y r e s i d e n c e
_____ U n a b l e to v e r i f y r e s i d e n c e
_____ N o c r e d i t file
_____ I n s u f f i c i e n t c r e d i t file
_____ D e l i n q u e n t c r e d i t o b l i g a t i o n s
_____ G a r n i s h m e n t , a t t a c h m e n t , f o r e c l o s u r e , r e p o s
s e s s i o n , o r su it
_____ B a n k r u p t c y
_____ W e d o n o t g r a n t c r e d i t to a n y a p p l i c a n t o n
th e term s a n d c o n d itio n s y o u req u est.
___ Other, s p e c i f y : __________________________
D ISC L O SU R E
O B T A IN E D
OF USE
FROM
AN
OF
IN F O R M A T IO N
O U T SID E
SOURCE
_____ D i s c l o s u r e i n a p p l i c a b l e
_____ I n f o r m a t i o n o b t a i n e d in a r e p o r t f r o m a c o n
su m e r rep o rtin g a g e n c y
N a m e : ___________________________________________
Street a d d r e s s :______
Telephone n u m b e r : ______________________
____Information obtained from i n outside source
other '.hun a consumer repc.-:i.%T igertcy.
Under :he Fuir Credit Reporting Ac:, you
h a \ e :hj right to make a written request,
within 60 days of receipt of this r.c:ice. tor
disciosure of the nature o; the auverse in
formation.
Creditor's n a m e : ___________.______________
Creditor's address: - ____________________
Creditor's telephone number:
ECOA Notice;
11
Federal Reserve System
12 CFR P ar t 202
[Reg B; Docket No. R-0185]
EQUAL CREDIT OPPORTUNITY
Proposed Withdrawal of Proposed Amendments
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Proposed withdrawal of proposed amendments.
SUM ARY: The Board proposes to withdraw amendments to the business c r e d i t
M
p ro vi si o n s of Regulation B which i t published for comment in October 1978. The
Board s p e c i f i c a l l y s o l i c i t s comment, however, on whether c r e d i t o r s should be
re qui red to give business c r e d i t a p p l i c a n t s a w r i t t e n n o t i c e of adverse action
in c e r t a i n loan t r a n s a c t i o n s under $100,000. The amendments to the business
c r e d i t r u l e s would have (1) elim in ate d th e p a r t i a l exemption t h a t c u r r e n t l y
e x i s t s with r es p ec t to record keeping and adverse a c t i o n n o t i f i c a t i o n r e q u i r e
ments in c e r t a i n loan t r a n s a c t i o n s under $100,000; (2) subj ec te d business c r e d i t
to the general bar in the r e g u la t i o n a g a i n s t asking an a p p l i c a n t ' s mar it al s t a t u s ;
and (3) i n cor po rat ed o f f i c i a l s t a f f i n t e r p r e t a t i o n EC-0009 i n t o the r e g u l a t i o n
to make c l e a r t h a t c r e d i t o r s must give business a p p l i c a n t s some n o t i c e , oral or
w r i t t e n , of a ct io n taken on an a p p l i c a t i o n within a reasonable time. The amend
ments would have a f f e c te d only the mechanical requirements of the r e g u l a t i o n and
t h e i r withdrawal will not a f f e c t the s u b s t a n t i v e prov isi on s of the Equal Credit
Opportunity Act and Regulation B which will continue to p r o h i b i t d i s c r i m i n a t i o n
on the b asis of sex, mari ta l s t a t u s , r a c e , etc. in a n y a s p e c t of a business
credit transaction.
DATE:
Comments must be received on or before J u l y 1, 1982.
[NOTE: The remainder of t h i s n o t i c e may be obtained from the Federal Reserve
Board or the Federal Reserve Banks.]
12
Federal Reserve System
12 CFR Part 202
[Reg B; Docket No. R-0185]
EQUAL CREDIT OPPORTUNITY
Proposed Withdrawal of Proposed Amendments
AGENCY:
Board of Governors of th e Federal Reserve System.
ACTION:
Proposed withdrawal of proposed amendments.
SUM ARY: The Board proposes to withdraw amendments to the business c r e d i t
M
pr o v isi o n s of Regulation B which i t published f o r comment in October 1978. The
Board s p e c i f i c a l l y s o l i c i t s comment, however, on whether c r e d i t o r s should be
r equ ire d to give business c r e d i t a p p l i c a n t s a w r i t t e n n o ti ce of adverse a c ti o n
in c e r t a i n loan t r a n s a c t i o n s under $100,000. The amendments to th e business
c r e d i t r u le s would have (1) elimin ated the p a r t i a l exemption t h a t c u r r e n t l y
e x i s t s with r e s p e c t to record keeping and adverse a c ti on n o t i f i c a t i o n r e q u i r e
ments in c e r t a i n loan t r a n s a c t i o n s under $100,000; (2) sub je ct ed business c r e d i t
to the general bar in the r e g u l a t i o n a g a i n s t asking an a p p l i c a n t ' s mari ta l s t a t u s ;
and (3) incor po rat ed o f f i c i a l s t a f f i n t e r p r e t a t i o n EC-0009 i n t o th e r e g u l a t i o n
to make c l e a r t h a t c r e d i t o r s must give business a p p l i c a n t s some n o t i c e , oral or
w r i t t e n , of a c ti on taken on an a p p l i c a t i o n within a reasonable tim e. The amend
ments would have a f f e c t e d only the mechanical requirements of th e r e g u l a t i o n and
t h e i r withdrawal will not a f f e c t the s u b s t a n t i v e p ro vi si o ns of the Equal Cred it
Opportunity Act and Regulation B which will continue t o p r o h i b i t d i s c r i m i n a t i o n
on th e b as is of sex, m ar it al s t a t u s , r a c e , e t c . in any aspe ct of a business
credit transaction.
DATE:
Comments must be received on or before J u l y 1, 1982.
ADDRESS: Comments may be mailed to th e S e c r e t a ry , Board of Governors of t h e
Federal Reserve System, Washington, D.C. 20551, or d e l i v e r e d to Room B-2223,
20th and C o n s t i t u ti o n Avenue, N.W., Washington, D.C. between 8:45 a.m. and 5:15
p.m. Comments may be in spected a t Room B-1122 between 8:45 a.m. and 5:15 p.m.
All material submitted should r e f e r t o Docket No. R-0185.
FOR FURTHER INFORMATION CONTACT: Claudia J . Yarus, S t a f f Attorney, Division
of Consumer and Community A f f a i r s , Board of Governors of the Federal Reserve
System, Washington, D.C. 20551 (202-452-3667).
SUPPLEM
ENTARY INFORMATION: (1) I n t r o d u c t i o n . Regulation B (12 CFR Par t 202)
p r o h i b i t s d i s c r i m i n a t i o n , in any aspect of a c r e d i t t r a n s a c t i o n , on the b as is
of r a c e , c o l o r , r e l i g i o n , national o r i g i n , sex , ma ri ta l s t a t u s , age, r e c e i p t
o f publi c a s s i s t a n c e , or the e x e r c i s e of r i g h t s under th e Consumer Cred it
Pro te ct io n Act. The r e g u l a t i o n a p p li e s to a l l c r e d i t t r a n s a c t i o n s , inc lu di ng
business c r e d i t .
1
3
The r e g u l a t i o n s e t s c e r t a i n mechanical requirements t h a t c r e d i t o r s
must follow with regard t o a p p l i c a t i o n s t h a t they r e c e i v e . Sections 202.9 and
202.12(b) of Regulation B prov ide, r e s p e c t i v e l y , t h a t a c r e d i t o r must give the
a p p l i c a n t n o t i c e of th e a c t i o n taken on an a p p l i c a t i o n and r e t a i n , f o r 25
months, the records regarding the a p p l i c a t i o n . When the c r e d i t o r r e j e c t s a
c r e d i t a p p l i c a t i o n i t must give an "adverse a c ti o n " n o t i c e c o n s i s t i n g of a
w r i t t e n statement of reasons (or of the r i g h t to re q ue st th e reasons) f o r the
c r e d i t d e n i a l , t o g e t h e r with a s h o r t summary of the a p p l i c a n t ' s r i g h t s under
th e Equal Cred it Opportunity Act.
Because of the s p e c i a l i z e d natur e of th e business c r e d i t a p p l i c a t i o n
p ro ce ss , Section 203.3(e) of Regulation B provides a p a r t i a l exemption f or
business c r e d i t t r a n s a c t i o n s from th es e n o t i f i c a t i o n and record keeping r e q u i r e
ments. An a p p l i c a n t f o r business c r e d i t may request w r i t t e n n o t i c e of reasons
f o r adverse a c t i o n , but does not re ce iv e the w r i t t e n n o t i c e a u t o m a t i c a l l y . The
business a p p l i c a n t may al s o request to have records of t h e a p p l i c a t i o n r e t a i n e d
f o r 25 months. If t h e r e i s no such r e q u e s t , th e c r e d i t o r may d i s c a r d i t s
records of th e a p p l i c a t i o n 90 days a f t e r i t r e j e c t s th e c r e d i t r e q u e s t .
In October 1978 t h e Board published f o r comment proposed changes to
th e s e business c r e d i t pr ov isi on s (43 FR 49987). The proposed amendments would
have applied to d i r e c t loan a p p l i c a t i o n s in which the aggregate of any amount
alrea dy owed to a c r e d i t o r and the amount ap pl ie d for is l e s s than $100,000.
C r e d i t o r s would have been re quired in such cases to give w r i t te n n o t i f i c a t i o n
of adverse act io n to the a p p l i c a n t , and t o r e t a i n the records of the a p p l i c a t i o n
f o r 25 months.
The proposed rulemaking was in response to p e t i t i o n s from the P r e s i
d e n t ' s Interagency Task Force on W
omen Business Owners and the s t a f f of the
Federal Trade Commission. The Interagency Task Force and the FTC s t a f f both
expressed concern about e f f e c t i v e enforcement of the act in business c r e d i t
t r a n s a c t i o n s . W i t h r e g a r d to
the a d v e r s e a c t i o n n o t i c e , t h e y c o n t e n d e d that
unless a c r e d i t o r gives n o t i c e , women and mi n or it y group members who own small
busin esse s may not r e a l i z e t h a t the act ap pl ie s to business c r e d i t . The FTC
s t a f f al s o suggested t h a t s u b j e c t i n g business c r e d i t a p p l i c a t i o n s to record
r e t e n t i o n would ensure the a v a i l a b i l i t y of documentary evidence t o both
p r i v a t e l i t i g a n t s and enforcement ag encies.
Another proposal r e l a t e d to marital s t a t u s i n q u i r i e s . Regulation B
g en er al ly p r o h i b i t s c r e d i t o r s from in q u i ri n g about an a p p l i c a n t ' s marital s t a t u s
except in the case of a p p l i c a t i o n s f or secured c r e d i t . Section 2 0 2 . 3 (e ) (1 ) of
Regulation B p r o v id es , however, t h a t a c r e d i t o r who re ceives an a p p l i c a t i o n for
business c r e d i t is not s u b je c t to t h i s r e s t r i c t i o n . The Interagency Task Force
on W
omen Business Owners expressed concern t h a t the c u r re n t exemption may d i l u t e
t h e p r o t e c t i o n of the a c t f or women business owners. The Board published for
comment a proposed amendment t h a t would have elim in ate d the exemption, making
business c r e d i t s u b j e c t to the general information bar a g a i n s t m ar it al s t a t u s
inquiries.
Based on a review of th e comments received and i t s own a n a l y s i s , the
Board proposes to withdraw the proposed amendments. Because of the time t h a t
has elapsed sinc e the amendments were pub lished, however, the Board i s s o l i c i t i n g
comment s p e c i f i c a l l y on whether th e r e have been int er v en in g developments which
suggest t h a t c r e d i t o r s should be required to give business c r e d i t a p p l i c a n t s a
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w r i t te n n o t ic e of adverse a c ti o n for d i r e c t loans in which the aggregate of
any amount al re ady owed to a c r e d i t o r and the amount applied f or i s l e s s than
$100,000. The Board understands t h a t some c r e d i t o r s a u to m a t i c a l l y provide a
w r i t t e n n o ti c e of adverse a c t i o n to t h e i r business c r e d i t a p p l i c a n t s and t h a t
t h i s i s useful to th e a p p l i c a n t s . The Board i s p a r t i c u l a r l y i n t e r e s t e d in
le a r n i n g what impact, i f any, the requirement of an adverse a c t i o n n o t i c e
would have on c u r r e n t c r e d i t o r p r a c t i c e s i f th e Board should decide to adopt
t h i s p a r t of the amendment proposed in 1978. Therefore, the Board f in ds t h a t
i t is not necessary to follow the expanded rulemaking procedures s e t f o r t h in
th e Board's po li cy statement of January 15, 1979 (44 FR 3957). I n s t e a d , th e
Board finds t h a t a 30 day comment period i s s u f f i c i e n t .
The Board's proposed withdrawal of the business c r e d i t amendments is
based on a number of f a c t o r s .
In th e int er v en in g years si n c e the amendments were
proposed, l i t t l e or no concr ete evidence of th e s p e c i f i c problems t h a t t h e s e amend
ments were intended t o a l l e v i a t e (and no general evidence of widespread problems)
has been brought to th e a t t e n t i o n of the Board. In l i g h t of th e co s ts and burdens
t h a t would be a s s o c i a t e d with the implementation of th e s e amendments, t h e i r
adoption appears unwarranted a t t h i s time. The r e g u l a t i o n al r ea d y provides t h a t
business c r e d i t a p p l i c a n t s may r ece iv e w r i t t e n n ot ic e and have records r e t a i n e d
on r e q u e s t , and any e x i s t i n g problems could be handled, f or example, through
educational e f f o r t s . The l i k e l y b e n e f i t s of p r o h i b i t i n g i n qu iry about an a p p l i
c a n t ' s marital s t a t u s al s o appear to th e Board to be r a t h e r l i m i t e d . Because
most a p p l i c a t i o n s f or business c r e d i t are f o r secured c r e d i t , c r e d i t o r s would in
most cases continue t o be able to i n q u i re about marital s t a t u s .
The proposal published by th e Board a ls o would have c o d i f i e d within
t h e t e x t of th e r e g u l a t i o n an o f f i c i a l s t a f f i n t e r p r e t a t i o n , EC-0009, which was
issued on November 2, 1977. That s t a f f i n t e r p r e t a t i o n r e q u ir e s c r e d i t o r s to
give business a p p l i c a n t s some n o t i c e , e i t h e r oral or w r i t t e n , of ac ti on taken on
an a p p l i c a t i o n within a reasonable time. O ffi ci al s t a f f i n t e r p r e t a t i o n EC-0009
will remain in e f f e c t even i f the Board withdraws the proposed amendments.
Cred it or s ar e al so reminded t h a t th e proposed amendments which the Board
proposes to withdraw would have a f f e c t e d only the mechanical requirements of the
r e g u l a t i o n . The s u b s t a n t i v e p r ov isi on s of the Equal Cred it Opportunity Act and
Regulation B continue to p r o h i b i t d i s c r i m i n a t i o n on th e b as i s of sex, marital
s t a t u s , r a c e , e t c . in any as pe ct of a business c r e d i t t r a n s a c t i o n .
(2)
Regulatory f l e x i b i l i t y a n a l y s i s . In 1981 t h e denial r a t e a t
commercial banks f o r business c r e d i t a p p l i c a n t s d e s i r i n g to s t a r t a new business
was estimated to be approximately 50 p e r c e n t . The denial r a t e estimated f o r
e x i s t i n g businesses was 27 p e r c e n t . ! / Many of t he se d en ia ls would have re qu ire d
1/
Survey of Commercial Bank Lending t o Small Busin ess, February 1982, Cynthia
Glassman and Peter Struck. The denial r a t e i s an es tim a te of th e prop ortion
of w r i t t e n c r e d i t a p p l i c a t i o n s turned down by a l l f e d e r a l l y insured commer
c i a l banks t h a t had a t l e a s t $1 m il l i o n in commercial and i n d u s t r i a l loans
in t h e i r p o r t f o l i o s on December 31, 1980. These f i g u r e s do not include
informal a p p l i c a t i o n s and may r e f l e c t unusually weak c r e d i t demand caused
by high i n t e r e s t r a t e s . Thus, the number of r e j e c t e d a p p l i c a t i o n s su b j e ct
to the proposed amendments may be much l a r g e r . Estimates in th e survey
r e f l e c t the banks' pe rc ep ti on s of t h e i r small business len ding, not th e
perce pt io ns of the small business community.
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w r it te n "adverse ac t i o n " n o t i f i c a t i o n and record r e t e n t i o n f o r 25 months under
t h e proposed amendments. At th e 1981 level of d e n i a l s , t h e annual compliance
cost of the proposed amendments to the banking i n d u s t r y as a whole could be
s u b s t a n t i a l . Although th e impact on a f t e r - t a x p r o f i t s would l i k e l y be minimal
f o r v i r t u a l l y a l l banks, many of th e r e l a t i v e l y small s h o r t - t e rm loans t h a t
a r e c u r r e n t l y a v a i l a b l e to small businesses could become u n p r o f i t a b l e . Many
banks find i t d i f f i c u l t to provide a f f o r d a b l e c r e d i t to t h e i r small business
customers during periods o f high i n t e r e s t r a t e s . The proposed amendments could
only aggravate the c r e d i t problems of small b u s in e s s e s , because the co s t of
compliance would u l t i m a t e l y be passed on to borrowers as increased co st of
c r e d i t and reduced c r e d i t a v a i l a b i l i t y .
Small banks would l i k e l y be a f f e c t e d more than ot h e r banks by the pro
posed amendments. Their business loans tend to be e x c l u s i v e l y t o small bu si n e ss .
Small banks' loan p o r t f o l i o s contain r e l a t i v e l y few loans over $100,000, and
t h e i r average loan s i z e is l e s s than t h a t f o r o t h e r banks. Therefore, the
amendments would l i k e l y r e s u l t in a g r e a t e r co s t per d o l l a r of loan f o r small
banks and t h e i r customers.
The p o t e n t i a l negative impact of the proposed amendments on c o s t and
a v a i l a b i l i t y of r e l a t i v e l y small s h o r t - t e r m small business loans would a f f e c t
a l l c r e d i t o r s s u b j e c t to th e a c t , not only commercial banks.
The p o t e n t i a l b e n e f i t s of th e proposed amendments appear to be l i m i t e d .
Survey evidence shows t h a t small business c r e d i t is more c o s t l y and le s s acces
s i b l e to some groups p r o te c te d by th e a c t , 2 / but evidence suggesting t h a t the
d i s p a r i t y is caused by unlawful d i s c r i m i n a t i o n r a t h e r than a l e g i t i m a t e e v a l u a
t i o n of r i s k is meager. Furthermore, i t is u n l i k e l y t h a t the proposed amendments
could e f f e c t i v e l y uncover any unlawful d i s c r i m i n a t i o n t h a t may e x i s t . The
business c r e d i t process is complex, and t h e m ul t i t u de of f a c t o r s considered
in a p p r o v i n g or d e n y i n g b u s i n e s sc r e d i t m a k e such d i s c o v e r y d i f f i c u l t .
(3)
Text of 1978 pr o po sal . For the convenience of commenters the
t e x t of t h e 1978 proposal is included in t h i s m a t e r i a l . At t h a t time, the Board
proposed to amend Section 202.3(e) by d e l e t i n g paragraph (1 ), by renumbering
e x i s t i n g paragraphs ( 2 ) , ( 3 ) , and (4) as paragraphs ( 1 ) , (2 ), and (3 ), r e s p e c
t i v e l y , and by r e v i s i n g the paragraphs renumbered (1) and (3):
SECTION 202.3 - SPECIAL TREATM
ENT FOR CERTAIN CLASSES O TRANSACTIONS
F
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(e) Business c r e d i t . The following pr ov is io ns of t h i s Part sh a l l
not apply to extensions of c r e d i t of th e type desc ribe d in sub section ( a ) ( 4 ) :
(1)
2/
Section 202.9(a) r e l a t i n g to n o t i f i c a t i o n s , except t h a t :
Federal Monetary Policy and I t s Effect on Small Bu si ne ss, H.R. Report of
t he Committee on Small Business, 1980.
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(1) This exemption i s not a v a i l a b l e regarding a p p l i c a t i o n s f o r or
e x i s t i n g exte ns io ns of d i r e c t loans where th e aggregate of th e amounts owed by
t h e a p p l i c a n t to the c r e d i t o r and any amount applied f o r is l e s s than $100,000;
and
(ii)
In th e case of any a p p l i c a t i o n or account where t h i s exemption
is a v a i l a b l e , t h e c r e d i t o r n e v e r t h e le s s sh a l l n o t i f y th e a p p l i c a n t , o r a l l y or
in w r i t i n g , within a reasonable time of any a c t i o n taken regarding th e a p p l i c a t i o n
or account; and i f the a p p l i c a n t , wi thin 30 days a f t e r a n o t i f i c a t i o n of adverse
a c t i o n is given, req ues ts in w r it in g th e reasons for such a c t i o n , t h e c r e d i t o r
sh a ll fu rn is h a w r i t t e n statement of s p e c i f i c reasons for the adverse a c t i o n
and the ECOA n o t i c e within 30 days of such a r e q u e s t , in accordance with s e c ti o n
20 2.9(b);
(2)
Section 202.10 r e l a t i n g to f u rn i s h i n g of c r e d i t information; and
(3)
Section 202.12(b) r e l a t i n g t o record r e t e n t i o n , except t h a t :
( i ) This exemption i s not a v a i l a b l e regarding a p p l i c a t i o n s f o r or
e x i s t i n g ext ensions of d i r e c t loans where th e aggregate of th e amounts owed by
t h e a p p l i c a n t to th e c r e d i t o r and any amount appli ed f o r i s l e s s than $100,000;
and
(ii)
In th e case of any a p p l i c a t i o n or account where t h i s exemption
is a v a i l a b l e , t h e c r e d i t o r n e v e r th e l e s s sh a l l comply with s e c t i o n 202.12(b) i f
t h e a p p l i c a n t , within 90 days a f t e r adverse a ct io n has been ta k en , re q ue sts in
w r it in g t h a t the records r e l a t i n g to th e a p p l i c a t i o n or account be r e t a i n e d .
★
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L is t of Subjects in 12 CFR Par t 202
Banks, banking; Civil r i g h t s ; Consumer p r o t e c t i o n ; C r e d i t ; Federal
Reserve System; Marital s t a t u s d i s c r i m i n a t i o n ; Minority groups; P e n a l t i e s ;
Religious d i s c r i m i n a t i o n ; Sex d i s c r i m i n a t i o n ; Women.
(4) A u t h o r i ty .
15 U.S.C. § 1691
By ord er of the Board of Governors of the Federal Reserve System,
May 25, 1982.
( s i g n e d ) William W Wiles
.
Wi l l i a m W Wi l e s
.
S e c r e ta r y of the Board
[SEAL]
@FedFRASER