The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BANK OF DALLAS
DALLAS. TE X A S
75222
C irc u la r No. 79-81
A p ril 30, 1979
REGULATION B— EQUAL CREDIT O PPO RTUNITY
Amendment Expanding Coverage and a Request fo r Comment
on Rules R egarding C re d it Scoring
TO A L L BANKS, OTHER CREDITO RS,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE D IS T R IC T :
Effective May 21, 1979, the Board of G overnors of the Federal
Reserve System is amending Regulation B, Equal C re d it O p p o rtu n ity, to
c la rify that it covers persons who re g u la rly re fe r applicants o r prospective
applicants to cred ito rs o r who select the cred ito rs to whom requests w ill be
made. Regulation B now w ill co ver real estate b ro k e rs , auto d e a le rs , home
b u ild e rs , and others who a re engaged in c re d it re fe rra l practices as a p art
of th e ir business. T h e gen eral prohibitions against discrim ination and d is
couraging applications on p ro h ib ited bases w ill app ly to the new category
of " c re d ito rs ," but recordkeeping and notification requirem ents w ill not a p p ly .
A t the same tim e, the Board is requesting comment through June 20,
1979, on how the specific rules of Regulation B should app ly to c re d it scoring
systems. T h e comments solicited a re in the areas o f assigning num erical
scores to the num ber of jobs o r sources of income an ap p lican t has, not
assigning a score to income from p a rt-tim e em ploym ent, pension o r alim ony,
and g iv in g judgm ental o r model statement reasons fo r denial when a c re d it
scoring system is used. Comments should be submitted in w ritin g to the
S e c re ta ry , Board of G overnors of the Federal Reserve System , W ashington,
D .C . 20551 , and should re fe r to Docket No. R -203 .
P rin ted on the re v e rs e of this c irc u la r is a copy of the amendment.
Member banks and others that m aintain Regulations B inders should file the
amendment in th e ir b in d e rs . Enclosed is the Board's o rd e r re g ard in g these
two matters as it appeared in the Federal R e g ister . A ny questions reg ard in g
the Board's action should be d irected to our Consumer A ffairs Section of the
Bank S u p ervisio n and Regulations D epartm ent, E x t. 6171.
S in c e re ly y o u rs ,
Robert H . Boykin
F irs t V ice President
Enclosure
Banks and others are encouraged to use the follow ing incoming W A T S numbers in contacting this Bank:
1-8 0 0 -4 9 2 -4 4 0 3 (intrastate) and 1 -8 00 -527 -49 70 (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)
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
EQUAL CREDIT OPPORTUNITY
AMENDMENT TO REGULATION Bf
Effective May 21, 1979, Section 202.2(1) is
amended to read as follows:
S EC TIO N 202.2 — D E F IN IT IO N S A N D
RU LES O F C O N S T R U C T IO N
*
*
*
*
*
(1) Creditor means a person who, in the ordi
nary course o f business, regularly participates in
the decision o f whether or not to extend credit.
The term includes a creditor’s assignee, transferee,
or subrogee who so participates. For purposes of
Sections 202.4 and 202.5(a), the term also includes
a person who, in the ordinary course o f business,
regularly refers applicants or prospective appli
cants to creditors, or selects or offers to select
creditors to whom requests fo r credit may be
made. A person is not a creditor regarding any
violations o f the A ct or this Part committed by
another creditor unless the person knew or had
reasonable notice o f the act, policy, or practice
that constituted the violation before its involvement
with the credit transaction. The term does not in
clude a person whose only participation in a credit
transaction involves honoring a credit card.
tF o r this Regulation t o be complete as amended effective M ay 21, 1979, retain:
1) Printed Pamphlet as amended effective M arch 23, 1977;
2 ) Amendment effective M arch 13, 1978;
3 ) Amendment effective A p ril 21, 1978; and
4) This slip sheet.
5-21-79
28885
FOR FURTHER INFORMATION CONTACT:
Dolores S. Smith, Section Chiet Division
of Consumer Affairs, Board of
Governors of the Federal Reserve
System, Washington, D.C. 20551 (202
452-2412).
E x trac t from
Federal R eg ister
V O L . HU, N O . 79
p p . 23865 - 23868
FEDERAL RESERVE SYSTEM
[12 CFR Part 202]
Equal Credit Opportunity; Application
to Credit Scoring
AGENCY: Board of Governors of the
Federal Reserve System.
a c tio n : Proposed rulemaking.
SUMMARY: The Board solicits comment
on how the specific rules of Regulation B
should apply to the following credit
scoring system practices: (1) scoring
number of jobs or number of sources of
income; (2) not scoring the amount of an
applicant’s income from part-time
employment, pension, or alimony; (3]
selecting the reasons for adverse action
judgmentally; and (4) using reasons for
adverse action from the model
statement when they do not correspond
to the characteristics scored.
DATE: Comments must be received on or
before June 20,1979.
a d d r e s s : Secretary, Board of Governors
of the Federal Reserve System,
Washington, D.C. 20551. All comments
should refer to docket number R-203.
SUPPLEMENTARY INFORMATION: The
Equal Credit Opportunity Act (ECOA)
and its implementing Regulation B
differentiate between "demonstrably
and statistically sound, empirically
derived credit systems'' and
“judgmental systems” of credit analysis.
Credit scoring systems that meet
specified tests of statistical validity
qualify as demonstrably and
statistically sound, empirically derived
credit system. All other types of credit
analysis constitute judgmental systems.
Regulations B’s specific rules
represent the Board's judgment about
the general effect of selected credit
practices on the population at large.
When adopting the specific rules, the
Board focused principally upon
discriminatory practices of judgmental
systems. Accordingly, the proper
application of the specific rules to credit
scoring systems remains unclear.
The Board invites comment on the
four issues enumerated in the Summary.
Resolving them could entail a variety of
regulatory action, including amending
Regulation B and issuing official
interpretations. Before considering any
extensive changes, the Board wishes to
encourage a thorough public discussion
that will address both the impact of
possible changes and the need for any
change at all. The options described for
each issue are not mutually exclusive
and do not constitute the only possible
responses. The Board also solicits
comment pn the general subject of
applying Regulation B's specific rules to
credit scoring systems. After analysis of
the comments received, the Board will
determine what issues, if any, warrant
its further consideration and what
regulatory action appears appropriate.
1.
In developing and using a credit
scoring system, what constitutes
discounting o f in com e and what
consitutes exclusion o f consideration o f
incom e?
Section 202.6(b)(5) provides that a
"creditor shall not discount or exclude
from consideration the income of an
applicant. . , because the income is
derived from part-time employment
. . .” However, the "creditor may
consider the amount and probable
continuance of any income.. . ." The
Board adopted this rule to prevent
discrimination against married women,
many of whom work only part-time, and
to curtail the practice of arbitrarily
23888
discounting the wife’s income on joint
applications. For. a judgmental system,
the rule means that the credit officer
must accord reliable amounts of part
time income the same treatment given
income from any other source. The
Board did not consider how the rule
should affect credit scoring systems.
la . For example, may a credit scoring
system score the fact that an applicant
has more than one job or multiple
sources of income, and may it score
secondary income differently from
primary income?
Assuming that “number of jobs"
contributes to a system’s predictive
power, may the system assign fewer
points or less weight to applicants
holding multiple jobs (e.g., one— 10, two
or more— 5 points]? Related issues
include the proper treatment of the
number of income sources and of the
amount of income from different types
of sources (earned, alimony, pension,
dividend, etc.]. Thq Board recognizes
that these issues involve competing
considerations and that how the
question is phrased to some extent
dictates the answer.
For example, those who would
prohibit assigning negative points for
multiple jobs argue that this practice has
the effect of disadvantaging several
protected classes of applicants. In
addition, the literal text of the
i 202.6(b)(5) rule could be interpreted to
preclude discounting part-time income
by type, as well as amount Finally, to
penalize an applicant for fully
completing the application (e.g.,
providing information about part-time
employment) may simply seem
undesirable when selective omissions
(e.g., not providing part-time
employment information) would confer
a greater probability of obtaining credit.
Conversely, proponents of the practice
might show that “number of jobs"
predicts creditworthiness. Prohibiting its
use reduces system accuracy and
therefore increases the aggregate risk of
extending credit. Further, the regulation
refers to the amount of part-time
income, not its mere existence. Finally,
the practice of assigning less weight to
second jobs may not have the effect of
discriminating on a prohibited basis
since all manner of applicants
“moonlights."
The Board hopes that public
comments wiH bring additional
considerations to its attention. At
present, it contemplates one or more of
the following options for addressing this
issue.
A. Interpreting { 202.6(b)(5) as applying
only to judgmental systems, thereby
authorizing scoring number of jobs.
B- Interpreting the rule to prohibit scoring
number of jobs, number o f sources of income,
or amount of income from Afferent source#.
C. Interpreting the rule as not per «e
prohibiting the practice, but allowing ECOA
enforcement agencies tadetemine on a case
by case basis whether scaring number of jobs
or sources of income has the<effect of
impermissibly discriminating against an
applicant on a prohibited basis.
lb- How must a scoring system
consider the amount of an applicant’s
income from part-time employment,
pension, or cdimony?
Section 202.6(bX5)'s prohibition on
exluding part-time income from
consideration also applies to pension
and alimony income. These additional
provisions seek to protect divorced
women and the elderly from
discrimination unrelated to their
creditworthiness. When adopting them,
the Board concentrated on arbitrary
behavior by judgmental creditors. It now
solicits comment on how this specific
rule should apply to credit scoring
systfemB.
Development of a scoring system
typically uses statistical techniques to
select the characteristics that, taken
together, predict the repayment
performance of the creditor’s recent
applicants. A properly designed
development process may examine and
reject other characteristics as
nonpredictive. If secondary income does
not contribute to the crsditworthlnass
prediction, must the system score it
anyway, or would having inchided
secondary income as a trial
characteristic during the intial phases of
the development procedure suffice?
Proponents of scoring nonpredictive
secondary income interpret § 202.6(b)(5)
as requiring explicit treatment of these
types of secondary income. They also
point out that the section contemplates
an individual analysis of the particular
applicant's income and precludes
assumptions based upon the experience
with similar income of prior applicants.
Thus, the creditor must consider the fact
that a particular applicant can prove the
regular receipt of alimony, even if most
applicants' alimony does not arrive on
schedule.
Opponents object to this
interpretation as overliteral. The Board
adopted the rule to deter credit officers
from using stereotypes in lieu of
individual analysis when dealing with
divorcees, the elderly, and marriied
women. A scoring system, however,
uses only the combination of
characteristics that best associate with
creditworthiness. If secondary income
does not statistically associate with
creditworthiness, the government should
not make it do so. Requiring a creditor to
score a nonpredictive characteristic
distorts the validity of the credit
analysis process. This increases the
creditor's overall risk of doing business
and may result in less credit to
economically disadvantaged applicants.
The Board invites-comment on the
issue of how a scoring system should
consider the amount of an applicant’s
income from part-time employment
pension, or alimony, and on possible
alternatives for addressing it, including:
A.Exempting credit scoring from the
"consideration" rule in $ 202.0(b)(5).
B.Deeming inclusion of secondary income
as a trial characteristic in the system
development process to constitute sufficient
consideration.
C. Requiring that any scoring of amount of
income include all types of income as a single
characteristic.
D. Requiring that scoring systems have a
judgmental override that considers secondary
income.
E. Requiring positive allocation of points to
secondary income regardless of its predictive
power.
F. Requiring systems to inclue a subsystem
that predicts the reliability of the particular
applicant’s secondary income.
2. How must a creditor using a scoring
system select the “specific” reasons for
adverse action?
The ECOA and Regulation B provide
that when a creditor takes “adverse
action" (e.g., by rejecting a credit
request), it must give the applicant
either the specific reasons for the action
or a disclosure of the right to receive the
reasons. Section 202.9(b)(2] of the
regulation requires that a statement of
reasons suffices if “specific and
indicates the principal reasons for the
adverse.” A statement that the applicant
failed to achieve a passing score does
not suffice as a specific reason.
Receiving the reasons f8r adverse action
gives applicants an opportunity to take
remedial action, correct erroneous
assumptions of the creditor, and reapply
when a mutable attribute changes (e.g.,
when income increases).
Recent FTC consent decrees contain a
requirement that users of scoring
systems select their adverse action using
a specified mathematical formula. Under
these decrees, the creditor must
examine the scoring sheet for the
rejected application,-subtract the
applicant’s score from the median score
for each characteristic, and disclose the
four characteristics having the largest
differences. The Board's staff, on the
other hand, has unofficially interpreted
S 202.9(b)(2) to perinit judgmental
selection of reasons for adverse action,
even by creditors using scoring. Thus,
the credit officer may select the reasons
23867
from all the information on the
application.
Proponents of the former
interpretation argue that the scored
characteristics alone contribute to the
credit decision, and that therefore they
comprise the real reasons for adverse
action. Permitting the creditor to
disclose unscored characteristics from
the balance of an application does not
provide information the applicant can
use to take remedial action. ECOA
enforcement agencies also suggest that
some creditors use judgmental selection
of reasons to conceal discriminatory
credit analysis practices. By manually
selecting among all the information on
the application, they intentionally
mislead applicants about the true
reasons for their rejection.
Opponents of the mathematical
process reason that under a judgmental
system the credit officer makes the
credit decision and selects the reasons
manually. The same officer can also
select the reasons where a scoring
system makes the initial decision. In
addition, some important reasons occur
too infrequently for inclusion on the
scoring sheet (e.g., bankruptcy), but
would be selected by judgmental
systems as critical. Finally, a suitable
method for selecting reasons for adverse
action will vary from case to case,
depending upon the nature of the
particular credit analysis process. A
fixed, mathematical procedure may
prove unsuitable in certain cases. For
example, a scoring system that allocates
half of its possible points for a single
characteristic would select this
characteristic as the reason so
frequently as to obscure its specificity
as a reason.
The Board hopes that public comment
will more fully explore these
considerations. It suggests the
availability of a variety of approaches to
the problem.
A. Authorizing either mathematical or
judgmental selection of reasons for adverse
action.
B. Requiring judgmental selection.
C. Requiring that applicants with similar
financial characteristics receive similar
reasons, but not specifying the method for
selecting them.
D. Specifying the exact formula for relating
scored characteristics to selection of reasons
for adverse action.
3. Under what circumstances may a
cred itor em ploying a cred it scoring
system use the reasons fo r adverse
action from Regulation B ’s m odel
statement?
As noted above, the statute and
§ 202.9(b)(2) require disclosure of
“specific" reasons for adverse action.
Section 202.9(b)(2) also provides a
model "statement of credit denial,
termination, or change,” proper use of
which satisfies this requirement. The
model statement contains twenty
categories of reasons for adverse action,
including "other, specify.” The Board
adopted the model statement to
facilitate compliance by small creditors.
ECOA enforcement agencies have
experienced some difficulties in the
specificity with which model reasons
must correspond to scored
characteristics while still amounting to
proper use. The problem arises because
scored characteristics have greater
specificity than the "pertinent elements
of creditworthiness” used in a typical
judgmental system. For example, a
creditor might score: finance company
loand, yes-0, no-15; bank loans, yes-6,
no— 1; or credit cards from prestigious
department stores, none-0, one-4, two
or more-16. None of the reasons on the
model notice relate closely to any of
these specific characteristics. Instead of
filling in the "other, specify" line, a
creditor may check whichever reason
seems to be closest (e.g., insufficient
credit references).
Critics of this practice suggest that
forcing specific characteristics into
model categories of reasons violates the
requirement of specificity. The practice
of discounting finance company loans
relates only indirectly to insufficient
credit references. In addition, this
mi8characterization or lack of specificity
deprives rejected applicants of the
opportunity to remedy their credit
deficiencies. The critics argue that it
therefore constitutes a misuse of the
model statement and does not satisfy
the specific rule’s requirements. Finally,
ECOA enforcement agencies suggest
that some creditors use the model
reasons to mislead applicants about the
characteristics scored in order to
conceal discriminatory practices. The
agencies believe that precise restrictions
on proper use of the model statement
will reduce this abuse.
Conversely, the legislative history
accompanying ECOA indicates that the
Congress contemplated only the most
general statement of reasons. One of the
examples in the legislative history
contains only seven reasons. Requiring
that disclosed reasons for adverse
action correspond exactly to scored
characteristics will also disrupt the
present operations of creditors that use
scoring. Changing procedures and forms
will entail extra compliance costs. In
addition, increased specificity will mean
greater uncertainty as creditors grope to
comply with a new standard that lacks
precise quantifioation. How specific is
“specific”? Finally, using the model
statement to evade the regulation
presently constitutes a violation, and the
enforcement tools for dealing with such
practices already exist.
The Board perceives the question as
being one of degree. Consider a system
that scores the number of credit
references froqi banks. An. applicant
with six references from stores, finance
companies, and thrift institutions
receives no points for them. Checking
"insufficient credit references" on the
adverse action notice seems
insufficiently specific. Diclosing “no
bank references" probably would
suffice. What intermediate levels of
specificity also comply with the
requirements of a statement of specific
reasons for adverse action, and how can
the Board precisely articulate them? The
Board envisions one or more of the
following alternatives.
A. Increasing the number of reasons on the
model statement
B. Prohibiting creditors that use scoring
systems from utilizing tbe model statement
C. Deeming “specific” to be the general
standard and leaving it to each enforcement
authority to determine whether a particular
reason conforms to this standard.
D. Promulgating more precise standards for
relating scored characteristics to specificity
of reasons for advene action, but leaving the
model statement unchanged.
E. Requiring creditors that use scoring
systems to disclose that they use scoring, the
exact characteristics scored, and the four
characteristics for which the applicant lost
the most points, in lieu of using the model
statement.
Pursuant its authority under § 703 of
ECOA, the Board proposes to adopt one
or more of the following amendments to
Regulation B. The amendments appear
sequentially by issue and option. The
proposed new language is in italics.
Issue la: Section 202.6(b)(5) would be
amended to read:
Option A: In a Judgmental system, a
creditor shall not discount or exclude from
consideration.. . .
Option B: A creditor shall not discount or
exclude from consideration the income of an
applicant or the spouse of an applicant
because of a prohibited basis or beoause o f
the amount or type o f income derived from
part-time employment.. . .
Option C: A creditor shall not discount or
exclude from consideration the amount of
income of an applicant or.. . .
Issue lb: Section 202.6(b)(5) would be
amended to read:
Option A: In a judgmental system, a
creditor shall not discount or exclude from
consideration.. . .
Option B: . . . in evaluating an applicant’s
creditworthiness. A demonstrably and
statistically sound, empirically derived credit
system mOy consider this income by
including it as a trial characteristic during
23868
the system construction process. Where an
applicant relies.. . .
Option C: In a judgmental system, a
creditor shall not discount or exclude from
consideration.. . .In a demonstrably and
statistically sound, empirically derived credit
system that considers the amount o f income
o f an applicant or the spouse o f an applicant,
the creditor shall consider all reliable
income as a single characteristic. Where an
applicant relies.. . .
Option D : . . . in evaluating an applicant's
creditworthiness. A demonstrably and
statistically sound, empirically derived credit
system shall comply with this requirement by
using a judgmental override that considers
such income. Where an applicant relies.. . .
Option E: . . . in evaluating an applicant's
creditworthiness. A demonstrably and
statistically sound, empirically derived credit
system shall comply with this requirement by
allocating at least x per cent o f the possible
total points to receipt o f such income.
Issue 2: Section 202.9(b)(2) would be
amended to add a new sentence at its end:
Option A: A creditor may select the
reasons either judgmentally or by using a
mathematical formula.
Option B: A creditor using a demonstrably
and statistically sound, empirically derived
credit system shall select the reason(s)
judgmentally.
Option C: A creditor using a demonstrably
and statistically sound, empirically derived
credit system shall select the reason(s) using
a procedure that will result in applicants
with similar financial characteristics
receiving identical reasons.
Option D: A creditor using a demonstrably
and statistically sound, empirically derived
credit system shall select as reasons up to
four characteristics on which the applicant's
score differed most from the maximum
possible score.
Issue 3: Section 202.9(b)(2) would be
amended as follows:
Option B :. . . for the adverse action. A
judgmental creditor may use all or a portion
of the sample form printed below. . . .
Option D :. . . for the adverse action. A
statement's reasons are specific i f a
reasonable consumer receives sufficient
information to determine the changes in
characteristics that would have resulted in
approval o f the application. A creditor may
formulate.. . .
Option E :. . . for the adverse action. A
judgmental creditor may formulate its own
statement of reasons.. . . A creditor using a
demonstrably and statistically sound,
empirically derived credit system must
disclose the use of the system, the manner o f
its operation, the applicant's score, the
passing score, the maximum possible score,
and the characteristics scored.
*
*
*
*
*
By order of the Board of Governors, April
13, 1979.
Theodora E. Allison,
Secretary of-the Board.
(Rag- B; Docket No. R-203J
|FR Doc 79-12515 Filed 4-20-79: 8:45
MiUNO COOC
E x trac t from
Federal R eg ister
V O L . 44, NO . 79
p p . 23813 - 23814
FEDERAL RESERVE SYSTEM
12 CFR Part 202
Definition of Creditor
AGENCY: Board o f Governors o f the
Federal Reserve System.
a c tio n : Final rule.
summary: The Board is amending its
Regulation B, Equal Credit Opportunity,
to clarify that it covers persons, such as
real estate brokers, home builders, and
automobile dealers, w h o regularly refer
applicants or prospective applicants to
creditors, or w h o select or offer to select
creditors to w hom requests for credit
m ay b e made. The amendment provides
that those persons are creditors, but
only for the purposes o f the regulation's
general prohibitions o f discrimination
against credit applicants or discouraging
applications on a prohibited basis.
Those persons are not subject to the
mechanical requirements o f the
regulation, such as those relating to
notices and record retention.
EFFECTIVE DATE: M a y 21,1979.
FOR FURTHER INFORMATION CONTACT:
Dolores S. Smith, Section Chief, Division
o f Consum er Affairs, Board of
Governors o f the Federal Reserve
System, W ashington, D.C. 20551 (202
452-2412)*.
SUPPLEMENTARY INFORMATION: The
Board’s Regulation B, which implements
the the Equal Credit Opportunity Act,
applies to all persons w h o are creditors,
as that term is defined by the regulation.
The existing $ 202.2(1] definition
provides that a creditor is a person w h o
in the. ordinary course o f business
“regularly participates in the decision o f
whether or not to extent credit.”
The staff o f the Federal Trade
Commission has urged the B oard to
amend that definition to include persons
w ho in the ordinary course o f business
regularly “arrange for the extension o f
credit.” The F T C staff expressed
concern that real estate brokers m ay not
b e covered b y Regulation B since
ostensibly they do not regularly
participate in credit decisions. The FTC
staff points out that, b y their
participation in the credit application
process, real estate brokers nevertheless
m ay be in a position to influence the
outcome. The F T C staff cites a recent
H U D study 1in support o f the
proposition that discriminatory
“steering” b y real estate brokers is the
cause o f severe problem s faced by
members o f minority groups in obtaining
housing and that credit discrimination
m ay exacerbate this problem. The FTC
staff believes there is authority for
making the regulation applicable to
steerers based on the statutory
definition o f “creditor,” which includes
“any person w h o regularly arranges for
the extension” o f credit (S 702(e), 15
U.S.C. 1691a(e)).
In response to the FT C s ta ffs request,
the B oard published for comment on
O ctober 26,1978 (43 FR 49987), along
with other proposals,1 a proposed
amendment to $ 202.2(e) o f Regulation B
that, if adopted, w o u ld expressly include
within the definition o f creditor “ any
person w h o in the ordinary course o f
business regularly arranges for the
extension o f credit but dbes not
participate in the credit decision * *
The proposal defined “arranges for the
extension o f Credit” as meaning "to refer
applicants or prospective applicants to
other creditors, or to select or offer to
select creditors to which requests for
credit m ay be m ade.”
Comments on the proposed creditor
definition amendment contain
conflicting view s on the need for any
change and the form that a change
should take. Real estate industry
commenters strongly deny the existence
o f significant discriminatory steering
w h en assisting customers in obtaining
home financing. T hey point out that self
interest (the receipt o f a commission)
dictates that a broker make every
1“Housing Market Practices Survey," prepared
Jointly by the Department of Housing and Urban
Development and the National Committee Against
Discrimination. April 1978.
’ The other proposals published for comment will
be considered in the Board's review of Regulation B
pursuant to its regulatory improvement project.
reason able effort to assure that a
potential purchaser finds both a house
and a source o f credit O n the other
hand, commenters representing minority
groups and public interest organizations
assert that discrimination in credit
referrals is a serious problem and that
minority group applicants need to b e
protected from credit steering tow ard
available, but more onerous, credit
terms. Industry commenters also noted
that the E C O A applies only to
“applicants” and does not reach
prospective applicants such as persons
still looking at houses to buy. Other
commenters observed, however, that the
statute expressly covers “arrangers,”
regardless of w h en the formal
application process begins.
T he extent to which possible
discriminatory practices b y brokers may
b e barred b y other law s, such as the
Fair H ousing A ct (42 U.S.C. 3601-3819),
is not clear. That statute covers brokers
in their selling and leasing activities, but
not necessarily in their referral o f clients
to credit sources. Several commenters,
including the Department o f Housing
and U rb an Development and the Federal
H om e Loan Bank Board, therefore
emphasized the desirability o f amending
Regulation B even if it might duplicate
coverage under other anti
discrimination la w s since the E C O A
provides for both private and public
enforcement initiatives.
H aving carefully considered the
comments and the arguments for and
against the proposed change in the
definition o f creditor, the Board has
decided expressly to include within the
definition persons w h o regularly in the
ordinary course o f their business refer
applicants to creditors or select
creditors to w hom credit applications
w ill b e submitted. In adopting that
change, the B oard has simplified the
amendment, without altering its
intended purpose. The proposal used the
phrase “arranges for the extension of
credit” and then defined that phrase to
mean “to refer applicants or prospective
applicants to other creditors, or to select
or offer to select creditors to which
requests for credit m ay b e m ade.” A s
adopted, the amendment eliminates the
“arranges for the extension o f credit”
phrase and substitutes the explanation
(with a fe w minor, stylistic changes) of
w hat constitutes arranging for the
extension o f credit, thereby avoiding a
proliferation o f definitions.
Like the original proposal, the final
amendment provides that persons w ho
become creditors under the Regulation B
definition solely because they regularly
refer applicants or submit applications
to other creditors w ho m ay extend
23814
credit are not subject to the so-called
"m echanical" regulatory requirements
relating to applications (§ 202.5(b)
through (e)), notices (§ 202.9), credit
reporting [§ 202.10). record retention
(§ 202.12), and collection o f monitoring
information (§ 202.13). H ow ever, instead
of expressing the limited nature.of the
regulation's coverage in terms o f the
provisions from which those who engage
in credit referral activities are exempt,
as w as done in the original proposal, the
final amendment specifies the coverage
simply and positively. They are subject
to only two sections: the general ban on
discrimination against applicants on a
prohibited basis found in § 202.4 and the
ban on discouraging applicants on a
prohibited basis from applying for credit
found in § 202.5(a).
The B oard elected not to subject
persons w h o engage in credit referral
activities to the regulation's mechanical
requirements because those rules w ere
not designed to apply in a pre
application context. For example, a real
estate broker, in assisting a buyer to
find appropriate housing, may have a
legitimate need for more information
about the buyer and the buyer's family
than § 202.5 of Regulation B w ould
permit a credit extender to obtain.
Furthermore, since the credit extender to
whom a referral is m ade w ould have to
comply with the mechanical rules, there
appears to b e little point in placing
essentially duplicative notice, record
retention, and monitoring information
gathering requirements on a person
solely engaged in referral activities.
Finally, the amendment, as adopted,
modifies the definition o f creditor to
make clear that a creditor to whom an
applicant or application has been
referred is not liable for any violation of
the ECOA or Regulation B committed by
the person who made the referral unless
the creditor receiving the referral knew
or had reasonable notice of the violation
before its involvement with the
transaction. This is the same protection
accorded under the regulation to
assignees, transferees, subrogees, and
similar parties.
The effect o f the amendment is
twofold. First, it expressly bars
discrimination against credit applicants
on a prohibited basis by persons who
regularly as part o f their business
channel applicants or applications to
credit sources. Second, it clearly places
those creditors under the administrative
enforcement jurisdiction of the agencies
specified in § 704 o f the E C O A ,
principally the FTC, and makes
available to applicants and the
Department o f Justice the civil suit
remedies set forth in § 706 o f the A ct (15
U.S.C. 1691c and 1691e).
The Board decided to adopt the
amendment for two reasons. First, it
believes that persons w h o regularly
engage in credit referral activities in
effect may participate in decisions of
whether or not to extend credit as that
standard is used in S 202.2(e) of
Regulation B and therefore may be
creditors for purposes o f the regulation.
From that perspective, the change
merely clarifies the pre-amendment
coverage of the regulation.
Second, to the extent that a person
engaged in credit referral activities does
not participate in credit decisions and
therefore w ould not be considered a
creditor absent the amendment, the
Board believes that that person should
b e covered, at least to the extent o f the
basic proscriptions on discrimination, as
a person "w h o regularly arranges for the
extension" o f credit as that phrase is
used in the E C O A . Since persons
making credit referrals w ould not be
subject to any mechanical requirements,
the Board s a w no reason not to make
clear that all parties involved in the
credit application process, even those
w ho only refer applicants or
applications to credit sources, are
barred from discriminating against
applicants on a prohibited basis. A s the
B oard recently stated in connection with
its consumer and civil rights compliance
program: “The Board believes that any
type of discrimination prohibited by the
civil rights law s is detrimental to the
nation and to society.”
Accordingly, for the reasons stated
above and pursuant to § 703(a) o f the
E C O A (15 U.S.C. 1691b(a)), the Board
amends 12 CFR 202.2(1) as follows:
§§ 202.2 Definition* and rules of
construction.
*
*
*
*
*
(1) Creditor means a person who, in
the ordinary course of business,
regularly participates in the decision o f
whether or not to extend credit. The
term includes a creditor's assignee,
transferee, or subrogee w ho so
participates. For purposes of §§ 202.4
and 202.5(a), the term also includes a
person who, in the ordinary course of
business, regularly refers applicants or
prospective applicants to creditors, or
selects or offers to select creditors to
whom requests for credit may be made.
A person is not a creditor regarding any
violation o f the A ct or this Part
committed b y another creditor unless
the person knew or had reasonable
notice o f the act, policy, or practice that
constituted the violation before its
involvement with the credit transaction.
The term does not include a person
w hose only participation in a credit
transaction involves honoring a credit
card.
*
*
*
*
*
By order of the Board of Governors, April
11,1979.
Theodora E , A lliso n ,
Secretary o f the Board.
[Reg. B : Docket No. R-0185]
{FR Doc. 79-12516 Filed 4-20-79; B:45 amj
BILLING CODE 6210-01-M
@FedFRASER