Full text of Federal Reserve Bank of New York Circulars : 8450. Equal Credit Opportunity

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FED ER A L RESERVE BANK
O F NEW YORK
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Circular No. 8 4501
November 8, 1978 j

EQUAL CREDIT O PPO R TU N ITY
Proposed Am endm ents to Regulation B
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To A ll Member Banks, and Others Concerned,
in the Second Federal Reserve District:

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F ollow in g is the tex t o f a statem ent issued by

the B oard o f

G overnors o f

the Federal Reserve

S y s te m :

The Federal Reserve Board today [October 23, 1978] proposed to make several changes in its Regu­
l a t i o n B (Equal Credit Opportunity) that would broaden the scope of the regulation.
The Board requested comment by December 26. 1978.
The Board proposed:
1. To bring arrangers of credit within the scope of the regulation. An example would be real estate
brokers, who select the creditor or creditors with whom a credit application will be filed.
The regulation currently applies to extenders of credit.
2.
To eliminate the exemption in the regulation of business credit from the record-keeping and notifi­
cation requirements in certain transactions under $100,000. The regulation now provides that in case of adverse
action an applicant for business credit may request written notification of the applicant’s right under the Equal
Credit Opportunity Act and a statement of reasons for the adverse action, but will not receive them automatically. Further, the proposal would require business credit applications under the same dollar limit to be kept
for 25 months. They may now be discarded in 90 days unless retention is requested.
3.
To eliminate the exemption of business credit from the general bar in the regulation against asking
the applicant’s marital status.
The proposal would also, as a clarification, incorporate in the regulation an official staff interpretation
requiring creditors to give applicants for business credit some notice, oral or written, of action taken on an
application or an existing account within a reasonable time.

P rinted below is the tex t o f the proposed am endm ents. C om m ents on the proposals should be
subm itted by D ecem ber 26 and m ay be sent to our Consum er A ffa irs D ivision .
P aul A. V olcker,

President.
FEDERAL RESERVE SYSTEM
[12 CFR Part 202]
[Reg. B ; Docket No. R-0185J
Equal Credit Opportunity
Proposed Rulemaking

AGENCY: B oard of G o vernors of th e
F ed eral R eserve S ystem .
A C T IO N : Proposed rules.

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SUMMARY: T h e B oard proposes
a m e n d m e n ts to R e g u latio n B th a t
w ould ; 1) bring w ith in th e scope of th e
re g u la tio n persons such as real e sta te
b rokers who select th e cred ito r(s) to
w h ich a credit ap p lica tio n will be su b ­
m itted ; (2) elim in a te th e ex em p tio n of
b u sin ess cred it from th e recordkeeping
and n o tific a tio n re q u ire m e n ts in c e r­
ta in tra n sa c tio n s u n d e r $100,000; an d
(3) elim in a te th e ex e m p tio n of busi-




G o v ern o rs of th e F ed era l R eserve
ness cre d it from th e m a rita l s ta tu s in ­
S ystem , W ash in g to n , D.C. 20551,
fo rm a tio n bar. T h e proposed am en d ­
202-452-2412.
m en t reg ard in g b usiness cred it would
also clarify th e ex istin g ex em p tio n as
it applies to n o tific atio n req u irem en ts. S U P PL E M E N T A R Y IN F O R M A T IO N :
1. C red it A rrangers
DATE: C o m m en ts m u st be received on
or before D ecem ber 26, 1978.
The Board’s Regulation B, which im­
A D D R ESS; S ecre tary , B oard of G ov­ plements the Equal Credit Opportuni­
ern o rs of th e F ed eral R eserve System , ty Act, applies to all persons who are
W ash in g to n , D.C. 20551. All com m ents creditors, as that term is defined by
the regulation. The existing §202.2(1)
sh o u ld re fe r to docket No. R-0185.

definition provides that a creditor is a

FOR
FURTHER
IN F O R M A T IO N person who in the ordinary course of
CONTACT:
business “regularly participates in the
D olores S. S m ith , S ection C hief, D i­ decision of whether or not to extend
vision of C o n su m er A ffairs, B oard of credit.”

The staff of the Federal Trade Com­
mission has urged the Board to amend
that definition, to include persons who
in the ordinary course of business reg­
ularly "arrange for the extension of
credit.” The FTC staff expresses con­
cern that real estate brokers may not
be covered by Regulation B, since os­
tensibly they do not participate in the
credit decision. The FTC staff points
out that, by their participation in the
credit application process, real estate
brokers may nevertheless be in a posi­
tion to influence the outcome. They
cite a recent HUD report1 in support
of the proposition that discriminatory
“steering” by real estate brokers is the
cause of serve problems faced by mem­
bers of minority groups in obtaining
housing and that credit discrimination
may exacerbate this problem. The
FTC staff believes there is authority
for making the regulation applicable
to these persons based on the statuto­
ry definition of “creditor,” which in­
cludes persons who regularly arrange
for the extension of credit.
The proposed amendment would
define “creditor,” which includes per­
sons who regularly arrange for the ex­
tension of credit.
The proposed amendment would
define “creditor” in regulation B to in­
clude persons who in the ordinary
course of business regularly arrange
for the extension of credit. “Arrange
for the extension of the credit” would
mean to refer applicants to sources of
credit, or to select the creditors to
which applications are to be submit­
ted. Under the proposed language, ar­
rangers of credit would be subject to
the basic antidiscrimination rules of
Regulation B. They would not be sub­
ject to its “mechanical” provisions,
such as the notification and record­
keeping requirements and the rules
concerning applications.
If this proposal were adopted, per­
sons and organizations such as build­
ers, auto dealers, and loan brokers
would become creditors to the extent
that they engage in referral activities.
Groups that regularly refer persons to
financing sources, such as neighbor­
hood service centers or State depart­
ments of economic development,
would also fall within the definition.
The Board invites comments on the
following aspects of the proposal in
particular:
1. Should arrangers who do not par­
ticipate in the credit decision be sub­
ject to
2. If so, should they be subject to
provisions different from those pro­
posed?
3. Should the text of the amend­
ment be drawn more narrowly, and if
so, how?
2.

R ecordkeeping and N o tific a tio n
R eq u irem en ts in B u s in e s s C r ed it
T ransactions

The second and third proposals
1“Housing Market Practices Survey,” pre­
pared Jointly by the Department of Housing
and Urban Development and the National
Committee Against Discrimination, April
1978.




relate to the notification and record
retention exemptions for business
credit provided by Regulation B.
In a consumer credit transaction, a
creditor must give the applicant notice
of the action it takes and retain its
records regarding the credit applica­
tion for 25 months. Where adverse
action occurs, creditors must provide
written notice about an applicant’s
ECOA rights, together with a state­
ment of the reasons or of the right to
request the reasons for the denial.
Existing § 202.3(e) partially exempts
business credit transactions from the
record retention and adverse action re­
quirements. That is, an applicant for
business credit may request written
notice of reasons for adverse action,
but does not receive it automatically.
Similarly, the business applicant can
request to have the records of the
transaction retained for 25 months. If
there is no such request, the creditor
may discard its records 90 days after it
takes adverse action.
The Board has been urged to modify
these regulatory exemptions. The FTC
staff and the President’s Interagency
Task Force on Women Business
Owners have expressed concern about
enforcement of the ECOA in business
credit transactions. The FTC staff and
the Task Force contend that, without
notification by the creditor, women
and minority group members who own
small businesses may not realize that
the ECOA applies to business credit.
When credit is denied, they may not
know of their right to obtain the rea­
sons for the denial. Thus, they may
not protect their rights‘when unlawful
discrimination occurs. In addition, the
FTC relies on complaints to guide its
enforcement efforts, and the FTC
staff is concerned that applicants
might not complain to the FTC or to
other Federal enforcement agencies
about
discriminatory
treatment.
Record retention is similarly consid­
ered important to enforcement, in
order that documentary evidence be

available to both private litigants and
enforcement agencies.
The proposed amendments would
eliminate the business credit exemp­
tions for notification and record-keep­
ing in transactions involving direct
loans where the total amount of credit
extended by the creditor to the appli­
cant is less than $100,000. In the case
of an application, the amount of the
loan applied for would be added to
loans previously granted in determin­
ing whether the exception applies.
As proposed, the amendments re­
garding notification and record-keep­
ing would affect identical classes of
business credit transactions. They are,
however, separate proposals and will
be dealt with accordingly when the
Board takes final action.
If these amendments are adopted,
business creditors would be required to
comply routinely with the notification
and record-keeping provisions in trans­
actions falling within the specified
dollar cutoff. The proposal is limited

to direct loans to avoid Imposing
record-keeping and notification re­
quirements on suppliers, who may
extend trade credit as an incident to
their primary business.
The Board is particularly interested
in comments on the following points:
1. What proportion of loan applica­
tions are made by business whose out­
standing obligations to the creditor ag­
gregate to $25,000 or less, and what
proportion of these are declined?
$50,000 or less? $75,000 or less?
$100,000 or less?
2. What proportion of these busi­
nesses have a net worth of more than
$ 100, 000?

3. What would it cost to generate an
adverse action notice regarding an ap­
plication for & business loan?
4. When a business loan application
is denied, what records do lenders nor­
mally retain, and for how long? When
an application is granted, what records
are retained?
5. What would the incremental cost
be of retaining the records of business
loan applications as necessary to
comply with the proposed record-keep­
ing requirements?
6. Is the $100,000 limitation in .the
proposal a reasonable criterion in
terms of defining a class of businesses
that may need additional protection
under Regulation B; if not, what other
criterion would be better?
3. C larification of notification re ­
quirem en ts GENERALLY

Aside from the changes discussed
above, the proposed amendment to
§ 202.3(e) would also clarify the notifi­
cation responsibilities of creditors to
whom the existing business credit ex­
emption applies. Official Staff Inter­
pretation EC-0009 states that, while
the full notification requirements of
§ 202.9 do not apply automatically, a
creditor nevertheless must give busi­
ness applicants some notice, oral or
written, of action taken regarding an
application or existing account, within
a reasonable time. Despite the issu­
ance of this official staff interpreta­
tion, however, the Board's staff con­
tinues to receive questions on this
matter. The Board proposes to amend
the business credit provisions (see pro­
posed § 202.3(e)(l)(ii» so as to incorpo­
rate the substance of EC-0009.
4. M artial status information bar
FOR BUSINESS CREDIT.

Under Regulation B, a creditor who
receives an application for business
credit is exempt from the restrictions
on asking the applicant’s martial
status that apply in certain consumer
credit applications. The Interagency
Task Force on Women Business
Owners expresses concern that this
exemption is contrary to the congres­
sional intent in enacting the ECOA.
They believe it dilutes the protection
of the ECOA for women business
owners.
The proposed amendment would
eliminate the exemption. Business

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cre d it w ould th e n be su b je c t to all th e
sam e re stric tio n s on so licitatio n of in ­
fo rm a tio n as co n su m er credit.
T h e B oard is p a rtic u la rly in te re ste d
in com m ents add ressin g th e follow ing
issues:
1. To w h at e x te n t w ould ch an g es in
form s (such as ap p lica tio n form s and
financial s ta te m e n ts ) be required?
2. S h o u ld th e ex e m p tio n be e lim in a t­
ed only as to c e rta in classes of busi­
ness credit tran sa ctio n s, as is proposed
reg arding n o tific atio n an d rec o rd k e ep ­
ing; and if so, would th e sam e c rite ria
be ap p ro p riate?
3. W h a t p erc en ta g e of business
cred it ap p lica tio n s is for c re d it to be
secured by th e o w n er’s assets?
To aid in th e co n sid eratio n of th e se
p roposals by th e B oard, in te re ste d p e r­
sons are invited to su b m it rele v an t
d ata, views, com m ents, o r arg u m e n ts.
All such m a te ria l sh o u ld be su b m itte d
in w riting to th e S e c re ta ry , B oard of
G overnors of th e F e d e ra l R eserve
S ystem , W ash in g to n , D.C. 20551, to be
received n o t la te r th a n D ecem ber 26,
1978. All m a te ria l su b m itte d sh o u ld
re fe r to docket No. R-0185. S u ch in fo r­
m a tio n will be m ade av ailab le fo r in ­
sp ection and copying upon req u est,
ex cep t as provided in § 261.6(a) pf th e
B o ard's rules reg ard in g availab ility of
in fo rm atio n (12 C F R 261.6(a)).
T his notice is p u b lish ed p u rs u a n t to
section 553(b) of T itle 5 U n ited S ta te s
Code and § 262.2(a) of th e ru les of pro­
cedure of th e B oard of G o v ern o rs of
th e F ed era l R eserve S y stem (12 C F R
262.2(a)).
P u rsu a n t to th e a u th o rity g ra n te d in
section 703(a) of th e ECOA (15 U.S.C.
1691b(a)), th e B oard proposes to
am end R egu latio n B. 12 C F R p a rt 202,
as follows:
1. S ection 202.2(1) would be am en d ­
ed to read:

3 202.2 Definitions
tion.

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in th e o rd in ary course of business reg ­
u larly p a rtic ip a te s in th e decision of
w h e th e r or n o t to ex ten d cred it. T h e
te rm includes an assignee, tra n sfe re e ,
or subrogee of an original cre d ito r w ho
so p articip a tes: b u t an assignee, tr a n s ­
feree, subrogee, or o th e r c re d ito r is
not a cre d ito r reg ard in g any violation
of th e Act or th is p a rt co m m itted by
th e original or a n o th e r cre d ito r unless
th e assignee, tran sfe re e, subrogee, or
o th e r cre d ito r knew or h ad reaso n ab le
notice of th e act, policy, or p ractice
th a t c o n stitu te d th e violation before
its involvem ent w ith th e cred it tr a n s ­
action. T h e te rm also includes any
person w ho in th e o rd in ary course of
business reg u la rly arran g e s fo r th e e x ­
ten sio n of cre d it b u t does n o t p a rtic i­
p ate in th e cre d it decision, ex cep t th a t
such persons sh a ll be ex em p t from th e
re q u ire m e n ts of §§ 202.5(b) th ro u g h (e)
concernin g ap p licatio n s, 202.9 rela tin g
to n o tificatio n s, 202.10 re la tin g to f u r­
nish in g of cre d it in fo rm atio n , 202.12
re la tin g to record re te n tio n , and
202.13 re la tin g to in fo rm atio n for
m on ito rin g purposes. Arrange fo r the
extension o f credit m ean s to re fe r a p ­
p lican ts or prospective a p p lica n ts to
o th e r cred ito rs, or to select or offer to
select cred ito rs to w hich req u ests for
cred it m ay be m ade. T h e te rm cre d ito r
does n o t include a p erso n w hose only
p a rtic ip a tio n in a cred it tra n sa c tio n in ­
volves h o n o rin g a cred it card.

(1) Section 202.9(a) relating to notifi­
cations, except that:
(1) This exemption is not available
regarding applications for or existing
extensions of direct loans Where the
aggregate of the amounts owed by the
applicant to the creditor and any
amount applied for is less than
$100,000; and
(ii) In the case of any application or
account where this exemption is avail­
able, the creditor nevertheless shall
notify the applicant, orally or in writ­
ing, within a reasonable time of any
action taken regarding the application
or account; and if the applicant,
within 30 days after a notification of
adverse action is given, requests in
writing the reasons for such action,
the creditor shall furnish a written
statement of specific reasons for the
adverse action and the ECOA notice
within 30 days of such a request, in ac­
cordance with § 202.9(b);
(2) Section 202.10 relating to fur­
nishing of credit information; and
(3) Section 202.12(b) relating to
record retention, except that:
(i) This exemptipn is not available
regarding applications for or existing
extensions of direct loans where the
aggregate of the amounts owed by the
applicant to the creditor and any
amount applied for is less than
$100,000; and

2. S ectio n 202.3(e) would be am en d ­
ed by d eletin g p a ra g ra p h (1), by re ­
n u m b erin g ex istin g p a ra g ra p h s (2),
(3), an d (4) as p a ra g ra p h s (1), (2), and
(3), respectively, and by revising th e
(ii) In the case of any application or
p a ra g ra p h s ren u m b e re d (1) an d (3):
account where this exemption is avail­
§ 202.3 Special treatment
classes of transactions.

for

certain

and rules of construc­

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(1) Creditor m eans any p erso n who

provisions of this part shall not apply
to extensions of credit of the type de­
scribed in subsection (aX4):

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able, the creditor nevertheless shall
comply with § 202.12(b) if the appli­
cant, within 90 days after adverse
action has been taken, requests in
writing that the records relating to
the application or account be retained.

(e) B u sin ess credit. T h e follow ing

FEDERAL REGISTER, VOL 43, NO. 204— THURSDAY, OCTOKR 26, 197$

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