Full text of Federal Reserve Bank of New York Circulars : Official Staff Commentary on Regulation B "Equal Credit Opportunity"

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FEDERAL RESERVE BANK
OF NEW YO RK

To All Depository Institutions in the Second Federal Reserve
District, and Others Maintaining Sets of Board Regulations:

Enclosed is a copy of the Official Staff Commentary on Regulation B, “Equal Credit
Opportunity,” effective September 30, 1996.
The revised pamphlet supersedes the previous printing o f this Commentary and any
subsequent amendments thereto.
This pamphlet has been punched with an additional hole so that it can be inserted into
two-volume 8-1/2 x 11 size binders.




Public Information Department

Board of Governors of the Federal Reserve System

o
Official Staff Commentary
on Regulation B
Equal Credit Opportunity
As amended effective September 30, 1996

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Any inquiry relating to Regulation B should be addressed to the Federal Reserve Bank of
the District in which the inquiry arises.
November 1996




Contents

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Page
Introduction ............................................ 1
Section 202.1—Authority, scope, and
purpose................................................ 1
Section 202.2—Definitions....................... 1
Section 202.3—Limited exceptions for
certain classes of transactions............... 5
Section 202.4—General rule prohibiting
discrimination...................................... 5
Section 202.5—Rules concerning taking
of applications...................................... 6
Section 202.5a—Rules on providing
appraisal reports.................................... 7
Section 202.6—Rules concerning
evaluation of applications..................... 8
Section 202.7—Rules concerning
extensions of credit........................... 11

Page
Section 202.8—Special-purpose credit
programs............................................ 14
Section 202.9—Notifications................... 16
Section 202.10—Furnishing of credit
information........................................ 19
Section 202.11—Relation to state law . . . 19
Section 202.12—Record retention........... 20
Section 202.13—Information for
monitoring purposes........................... 21
Section 202.14—Enforcement, penalties,
and liabilities...................................... 22
Appendix B—Model application forms. . . 22
Appendix C—Sample notification forms . 23

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Official Staff Commentary
on Regulation B
As amended effective September 30, 1996

Following is an official staff interpretation of
Regulation B issued under authority delegated
by the Federal Reserve Board to officials in
the Division of Consumer and Community Af­
fairs. References are to sections of the regula­
tion or the Equal Credit Opportunity Act (15
USC 1601 et seq.).
INTRODUCTION
1. Official status. Section 706(e) of the Equal
Credit Opportunity Act protects a creditor
from civil liability for any act done or omitted
in good faith in conformity with an interpreta­
tion issued by a duly authorized official of the
Federal Reserve Board. This commentary is
the means by which the Division of Consumer
and Community Affairs of the Federal Re­
serve Board issues official staff interpretations
of Regulation B. Good faith compliance with
this commentary affords a creditor protection
under section 706(e) of the act.
2. Issuance of interpretations. Under appendix
D to the regulation, any person may request
an official staff interpretation. Interpretations
will be issued at the discretion of designated
officials and incorporated in this commentary
following publication for comment in the
Federal Register. Except in unusual circum­
stances, official staff interpretations will be is­
sued only by means of this commentary.
3. Status of previous interpretations. Interpre­
tations of Regulation B previously issued by
the Federal Reserve Board and its staff have
been incorporated into this commentary as ap­
propriate. All other previous Board and staff
interpretations, official and unofficial, are su­
perseded by this commentary.
4. Footnotes. Footnotes in the regulation have
the same legal effect as the text of the regula­
tion, whether they are explanatory or illustra­
tive in nature.
5. Comment designations. The comments are
designated with as much specificity as possi­
ble according to the particular regulatory pro­
vision addressed. Each comment in the com­




mentary is identified by a number and the
regulatory section or paragraph that it inter­
prets. For example, comments to section
202.2(c) are further divided by subparagraph,
such as comment 2(c)(l)(ii)-l and comment
2(c)(2)(ii)-l.
SECTION 202.1—Authority, Scope, and
Purpose
1(a) Authority and Scope
1. Scope. The Equal Credit Opportunity Act
and Regulation B apply to all credit—
commercial as well as personal—without re­
gard to the nature or type of the credit or the
creditor. If a transaction provides for the
deferral of the payment of a debt, it is credit
covered by Regulation B even though it may
not be a credit transaction covered by Regula­
tion Z (Truth in Lending). Further, the defini­
tion of creditor is not restricted to the party or
person to whom the obligation is initially pay­
able, as is the case under Regulation Z. More­
over, the act and regulation apply to all meth­
ods of credit evaluation, whether performed
judgmentally or by use of a credit scoring
system.
2. Foreign applicability. Regulation B gener­
ally does not apply to lending activities that
occur outside the United States. The regula­
tion does apply to lending activities that take
place within the United States (as well as the
Commonwealth of Puerto Rico and any terri­
tory or possession of the United States),
whether or not the applicant is a citizen.
3. Board. The term “Board,” as used in this
regulation, means the Board of Governors of
the Federal Reserve System.
SECTION 202.2—Definitions
2(c) Adverse Action
Paragraph 2(c)(l)(i)
1. Application for credit. A refusal to refi1

§ 202.2

nance or extend the term of a business or
other loan is adverse action if the applicant
applied in accordance with the creditor’s
procedures.
Paragraph 2(c)(l)(ii)
1. Move from service area. If a credit card
issuer terminates the open-end account of a
customer because the customer has moved out
of the card issuer’s service area, the termina­
tion is “adverse action” for purposes of the
regulation unless termination on this ground
was explicitly provided for in the credit agree­
ment between the parties. In cases where ter­
mination is adverse action, notification is re­
quired under section 202.9.
2. Termination based on credit limit. If a
creditor terminates credit accounts that have
low credit limits (for example, under $400)
but keeps open accounts with higher credit
limits, the termination is adverse action and
notification is required under section 202.9.

Regulation B Commentary

ulation. For example, denial at point of sale is
not adverse action in the following situations:
• A credit cardholder presents an expired
card or a card that has been reported to the
card issuer as lost or stolen.
• The amount of a transaction exceeds a cash
advance or credit limit.
• The circumstances (such as excessive use
of a credit card in a short period of time)
suggest that fraud is involved.
• The authorization facilities are not func­
tioning.
• Billing statements have been returned to
the creditor for lack of a forwarding
address.
2. Application for increase in available credit.
A refusal or failure to authorize an account
transaction at the point of sale or loan is not
adverse action, except when the refusal is a
denial of an application, submitted in accor­
dance with the creditor’s procedures, for an
increase in the amount of credit.
Paragraph 2(c)(2)(v)

Paragraph 2(c)(2)(H)

1. Terms of credit versus type of credit of­
1. Default—exercise of due-on-sale clause. If fered. When an applicant applies for credit
a mortgagor sells or transfers mortgaged prop­ and the creditor does not offer the credit terms
erty without the consent of the mortgagee, and requested by the applicant (for example, the
the mortgagee exercises its contractual right to interest rate, length of maturity, collateral, or
accelerate the mortgage loan, the mortgagee amount of downpayment), a denial of the ap­
may treat the mortgagor as being in default. plication for that reason is adverse action (un­
An adverse-action notice need not be given to less the creditor makes a counteroffer that is
the mortgagor or the transferee. (See comment accepted by the applicant) and the applicant is
2(e)-1 for treatment of a purchaser who re­ entitled to notification under section 202.9.
quests to assume the loan.)
2. Current delinquency or default. The term 2(e) Applicant
“adverse action” does not include a creditor’s 1. Request to assume loan. If a mortgagor
termination of an account when the account- sells or transfers the mortgaged property and
holder is currently in default or delinquent on the buyer makes an application to the creditor
that account. Notification in accordance with to assume the mortgage loan, the mortgagee
section 202.9 of the regulation generally is re­ must treat the buyer as an applicant unless its
quired, however, if the creditor’s action is policy is not to permit assumptions.
based on a past delinquency or default on the
account.
2(f) Application
Paragraph 2(c)(2)(iii)
1. Point-of-sale transactions. Denial of credit
at point of sale is not adverse action except
under those circumstances specified in the reg2




1. General. A creditor has the latitude under
the regulation to establish its own application
process and to decide the type and amount of
information it will require from credit
applicants.

Regulation B Commentary

2. “Procedures established.” The term refers
to the actual practices followed by a creditor
for making credit decisions as well as its
stated application procedures. For example, if
a creditor’s stated policy is to require all ap­
plications to be in writing on the creditor’s
application form, but the creditor also makes
credit decisions based on oral requests, the
creditor’s established procedures are to accept
both oral and written applications.
3. When an inquiry becomes an application.
A creditor is encouraged to provide consumers
with information about loan terms. However,
if in giving information to the consumer the
creditor also evaluates information about the
applicant, decides to decline the request, and
communicates this to the applicant, the credi­
tor has treated the inquiry as an application
and must then comply with the notification re­
quirements under section 202.9. Whether the
inquiry becomes an application depends on
how the creditor responds to the applicant, not
on what the applicant says or asks.
O

D

4. Examples of inquiries that are not applica­
tions. The following examples illustrate situa­
tions in which only an inquiry has taken
place:
• When a consumer calls to ask about loan
terms and an employee explains the credi­
tor’s basic loan terms, such as interest
rates, loan-to-value ratio, and debt-toincome ratio.
• When a consumer calls to ask about inter­
est rates for car loans, and, in order to
quote the appropriate rate, the loan officer
asks for the make and sales price of the car
and the amount of the downpayment, then
gives the consumer the rate.
• When a consumer asks about terms for a
loan to purchase a home and tells the loan
officer her income and intended downpay­
ment, but the loan officer only explains the
creditor’s loan-to-value ratio policy and
other basic lending policies, without telling
the consumer whether she qualifies for the
loan.
• When a consumer calls to ask about terms
for a loan to purchase vacant land and
states his income and the sale price of the
property to be financed, and asks whether




§ 202.2

he qualifies for a loan, and the employee
responds by describing the general lending
policies, explaining that he would need to
look at all of the applicant’s qualifications
before making a decision, and offering to
send an application form to the consumer.
5. Completed application—diligence require­
ment. The regulation defines a completed ap­
plication in terms that give a creditor the lati­
tude to establish its own information
requirements. Nevertheless, the creditor must
act with reasonable diligence to collect infor­
mation needed to complete the application.
For example, the creditor should request infor­
mation from third parties, such as a credit re­
port, promptly after receiving the application.
If additional information is needed from the
applicant, such as an address or telephone
number needed to verify employment, the
creditor should contact the applicant promptly.
(But see comment 9(a)(l)-3, which discusses
the creditor’s option to deny an application on
the basis of incompleteness.)
2(g) Business Credit
1. Definition. The test for deciding whether a
transaction qualifies as business credit is one
of primary purpose. For example, an open-end
credit account used for both personal and bus­
iness purposes is not business credit unless
the primary purpose of the account is busi­
ness-related. A creditor may rely on an appli­
cant’s statement of the purpose for the credit
requested.
2(j) Credit
1. General. Regulation B covers a wider
range of credit transactions than Regulation Z
(Truth in Lending). For purposes of Regula­
tion B, a transaction is credit if there is a
right to defer payment of a debt—regardless
of whether the credit is for personal or com­
mercial purposes, the number of installments
required for repayment, or whether the trans­
action is subject to a finance charge.

2(1) Creditor
1. Assignees. The term “creditor” includes all
persons participating in the credit decision.
This may include an assignee or a potential
3

§ 202.2
purchaser of the obligation who influences the
credit decision by indicating whether or not it
will purchase the obligation if the transaction
is consummated.
2. Referrals to creditors. For certain purposes,
the term “creditor” includes persons such as
real estate brokers who do not participate in
credit decisions but who regularly refer appli­
cants to creditors or who select or offer to
select creditors to whom credit requests can
be made. These persons must comply with
section 202.4, the general mle prohibiting dis­
crimination, and with section 202.5(a), on dis­
couraging applications.
2(p) Empirically Derived and Other
Credit Scoring Systems
1. Purpose of definition. The definition under
section 202.2(p)(l)(i) through (iv) sets the cri­
teria that a credit system must meet in order
for the system to use age as a predictive fac­
tor. Credit systems that do not meet these cri­
teria are judgmental systems and may consider
age only for the purpose of determining a
“pertinent element of creditworthiness.” (Both
types of systems may favor an elderly appli­
cant. See section 202.6(b)(2).)
2. Periodic revalidation. The regulation does
not specify how often credit scoring systems
must be revalidated. To meet the requirements
for statistical soundness, the credit scoring
system must be revalidated frequently enough
to ensure that it continues to meet recognized
professional statistical standards. To ensure
that predictive ability is being maintained,
creditors must periodically review the per­
formance of the system. This could be done,
for example, by analyzing the loan portfolio
to determine the delinquency rate for each
score interval, or by analyzing population sta­
bility over time to detect deviations of recent
applications from the applicant population
used to validate the system. If this analysis
indicates that the system no longer predicts
risk with statistical soundness, the system
must be adjusted as necessary to reestablish
its predictive ability. A creditor is responsible
for ensuring its system is validated and revali­
dated based on the creditor’s own data when
it becomes available.
4




Regulation B Commentary

3. Pooled-data scoring systems. A scoring
system or the data from which to develop
such a system may be obtained from either a
single credit grantor or multiple credit grant­
ors. The resulting system will qualify as an
empirically derived, demonstrably and statisti­
cally sound, credit scoring system provided
the criteria set forth in paragraph (p)(l)(i)
through (iv) of this section are met.
4. Effects test and disparate treatment. An
empirically derived, demonstrably and statisti­
cally sound, credit scoring system may in­
clude age as a predictive factor (provided that
the age of an elderly applicant is not assigned
a negative factor or value). Besides age, no
other prohibited basis may be used as a varia­
ble. Generally, credit scoring systems treat all
applicants objectively and thus avoid problems
of disparate treatment. In cases where a credit
scoring system is used in conjunction with in­
dividual discretion, disparate treatment could
conceivably occur in the evaluation process.
In addition, neutral factors used in credit scor­
ing systems could nonetheless be subject to
challenge under the effects test. (See comment
6(a)-2 for a discussion of the effects test).
2(w) Open-End Credit
1. Open-end real estate mortgages. The term
“open-end credit” does not include negotiated
advances under an open-end real estate mort­
gage or a letter of credit.
2(z) Prohibited Basis
1. Persons associated with applicant. “Pro­
hibited basis” as used in this regulation refers
not only to characteristics—the race, color, re­
ligion, national origin, sex, marital status, or
age—of an applicant (or officers of an appli­
cant in the case of a corporation) but also to
the characteristics of individuals with whom
an applicant is affiliated or with whom the
applicant associates. This means, for example,
that under the general rule stated in section
202.4, a creditor may not discriminate against
an applicant because of that person’s personal
or business dealings with members of a cer­
tain religion, because of the national origin of
any persons associated with the extension of
credit (such as the tenants in the apartment

c '

§ 202.4

Regulation B Commentary

©

complex being financed), or because of the
race of other residents in the neighborhood
where the property offered as collateral is
located.
2. National origin. A creditor may not refuse
to grant credit because an applicant comes
from a particular country but may take the
applicant’s immigration status into account. A
creditor may also take into account any appli­
cable law, regulation, or executive order re­
stricting dealings with citizens (or the govern­
ment) of a particular country or imposing
limitations regarding credit extended for their
use.
3. Public assistance program. Any federal,
state, or local governmental assistance pro­
gram that provides a continuing, periodic in­
come supplement, whether premised on enti­
tlement or need, is “public assistance” for
purposes of the regulation. The term includes
(but is not limited to) Aid to Families with
Dependent Children, food stamps, rent and
mortgage supplement or assistance programs,
Social Security and Supplemental Security In­
come, and unemployment compensation. Only
physicians, hospitals, and others to whom the
benefits are payable need consider Medicare
and Medicaid as public assistance.
SECTION 202.3—Limited Exceptions
for Certain Classes of Transactions
1. Scope. This section relieves burdens with
regard to certain types of credit for which full
application of the procedural requirements of
the regulation is not needed. All classes of
transactions remain subject to the general rule
given in section 202.4, barring discrimination
on a prohibited basis, and to any other provi­
sion not specifically excepted.
3(a) Public-Utilities Credit
1. Definition. This definition applies only to
credit for the purchase of a utility service,
such as electricity, gas, or telephone service.
Credit provided or offered by a public utility
for some other purpose—such as for financing
the purchase of a gas dryer, telephone equip­
ment, or other durable goods, or for insulation
or other home improvements—is not excepted.




2. Security deposits. A utility company is a
creditor when it supplies utility service and
bills the user after the service has been pro­
vided. Thus, any credit term (such as a re­
quirement for a security deposit) is subject to
the regulation.
3. Telephone companies. A telephone com­
pany’s credit transactions qualify for the ex­
ceptions provided in section 202.3(a)(2) only
if the company is regulated by a government
unit or files the charges for service, delayed
payment, or any discount for prompt payment
with a government unit.
3(c) Incidental Credit
1. Examples. If a service provider (such as a
hospital, doctor, lawyer or retailer) allows the
client or customer to defer the payment of a
bill, this deferral of a debt is credit for pur­
poses of the regulation, even though there is
no finance charge and no agreement for pay­
ment in installments. Because of the excep­
tions provided by this section, however, these
particular credit extensions are excepted from
compliance with certain procedural require­
ments as specified in the regulation.
3(d) Government Credit
1. Credit to governments. The exception re­
lates to credit extended to (not by) govern­
mental entities. For example, credit extended
to a local government by a creditor in the pri­
vate sector is covered by this exception, but
credit extended to consumers by a federal or
state housing agency does not qualify for spe­
cial treatment under this category.
SECTION 202.4— General Rule
Prohibiting Discrimination
1. Scope of section. The general rule stated in
section 202.4 covers all dealings, without ex­
ception, between an applicant and a creditor,
whether or not addressed by other provisions
of the regulation. Other sections of the regula­
tion identify specific practices that the Board
has decided are impermissible because they
could result in credit discrimination on a basis
prohibited by the act. The general rale covers,
for example, application procedures, criteria
5

§ 202.4

used to evaluate creditworthiness, administra­
tion of accounts, and treatment of delinquent
or slow accounts. Thus, whether or not specif­
ically prohibited elsewhere in the regulation, a
credit practice that treats applicants differently
on a prohibited basis violates the law because
it violates the general rule. Disparate treat­
ment on a prohibited basis is illegal whether
or not it results from a conscious intent to
discriminate. Disparate treatment would be
found, for example, where a creditor requires
a minority applicant to provide greater docu­
mentation to obtain a loan than a similarly
situated nonminority applicant. Disparate treat­
ment also would be found where a creditor
waives or relaxes credit standards for a
nonminority applicant but not for a similarly
situated minority applicant. Treating applicants
differently on a prohibited basis is unlawful if
the creditor lacks a legitimate nondiscriminatory reason for its action, or if the asserted
reason is found to be a pretext for
discrimination.

SECTION 202.5—Rules Concerning
Taking of Applications
5(a) Discouraging Applications
1. Potential applicants. Generally, the regula­
tion’s protections apply only to persons who
have requested or received an extension of
credit. In keeping with the purpose of the
act—to promote the availability of credit on a
nondiscriminatory basis—section 202.5(a)
covers acts or practices directed at potential
applicants. Practices prohibited by this section
include—
• a statement that the applicant should not
bother to apply, after the applicant states
that he is retired
• use of words, symbols, models or other
forms of communication in advertising that
express, imply, or suggest a discriminatory
preference or a policy of exclusion in vio­
lation of the act
• use of interview scripts that discourage ap­
plications on a prohibited basis.
2. Affirmative advertising. A creditor may af­
firmatively solicit or encourage members of
6




Regulation B Commentary

traditionally disadvantaged groups to apply for
credit, especially groups that might not nor­
mally seek credit from that creditor.
5(b) General Rules Concerning Requests
for Information
1. Requests for information. This section gov­
erns the types of information that a creditor
may gather. Section 202.6 governs how infor­
mation may be used.
Paragraph 5(b)(2)
1. Local laws. Information that a creditor is
allowed to collect pursuant to a “state” stat­
ute or regulation includes information required
by a local statute, regulation, or ordinance.
2. Information required by Regulation C. Reg­
ulation C generally requires creditors covered
by the Home Mortgage Disclosure Act
(HMDA) to collect and report information
about the race or national origin and sex of
applicants for home-improvement loans and
home-purchase loans, including some types of
loans not covered by section 202.13. Certain
creditors with assets under $30 million,
though covered by HMDA, are not required to
collect and report these data; but they may do
so at their option under HMDA, without vio­
lating the ECOA or Regulation B.
3. Collecting information on behalf of credi­
tors. Loan brokers, correspondents, or other
persons do not violate the ECOA or Regula­
tion B if they collect information that they are
otherwise prohibited from collecting, where
the purpose of collecting the information is to
provide it to a creditor that is subject to the
Home Mortgage Disclosure Act or another
federal or state statute or regulation requiring
data collection.
5(d) Other Limitations on Information
Requests
Paragraph 5(d)(1)
1. Indirect disclosure of prohibited informa­
tion. The fact that certain credit-related infor­
mation may indirectly disclose marital status
does not bar a creditor from seeking such in-

Regulation B Commentary

formation. For example, the creditor may ask
about—
• the applicant’s obligation to pay alimony,
child support, or separate maintenance
• the source of income to be used as the ba­
sis for repaying the credit requested, which
could disclose that it is the income of a
spouse
• whether any obligation disclosed by the ap­
plicant has a co-obligor, which could dis­
close that the co-obligor is a spouse or
former spouse
• the ownership of assets, which could dis­
close the interest of a spouse
Paragraph 5(d)(2)
1. Disclosure about income. The sample ap­
plication forms in appendix B to the regula­
tion illustrate how a creditor may inform an
applicant of the right not to disclose alimony,
child support, or separate maintenance
income.

O

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2. General inquiry about source of income.
Since a general inquiry about the source of
income may lead an applicant to disclose ali­
mony, child support, or separate maintenance,
a creditor may not make such an inquiry on
an application form without prefacing the re­
quest with the disclosure required by this
paragraph.

§ 202.5a

are provided in appendix B to the regulation,
although use of a printed form of any kind is
not required. A creditor will satisfy the re­
quirement by writing down the information
that it normally considers in making a credit
decision. The creditor may complete the appli­
cation on behalf of an applicant and need not
require the applicant to sign the application.
2. Telephone applications. A creditor that ac­
cepts applications by telephone for dwellingrelated credit covered by section 202.13 can
meet the requirements for written applications
by writing down pertinent information that is
provided by the applicant(s).
3. Computerized entry. Information entered
directly into and retained by a computerized
system qualifies as a written application under
this paragraph. (See the commentary to sec­
tion 202.13(b), Applications through electronic
media and Applications through video.)

SECTION 202.5a—Rules on Providing
Appraisal Reports
5a(a) Providing Appraisals
1. Coverage. This section covers applications
for credit to be secured by a lien on a dwell­
ing, as that term is defined in section
202.5a(c), whether the credit is for a business
purpose (for example, a loan to start a busi­
ness) or a consumer purpose (for example, a
loan to finance a child’s education).

3. Specific inquiry about sources of income. A
creditor need not give the disclosure if the in­
quiry about income is specific and worded in
a way that is unlikely to lead the applicant to
disclose the fact that income is derived from 2. Renewals. If an applicant requests that a
alimony, child support, or separate mainte­ creditor renew an existing extension of credit,
nance payments. For example, an application and the creditor obtains a new appraisal report
form that asks about specific types of income to evaluate the request, this section applies.
such as salary, wages, or investment income This section does not apply to a renewal re­
need not include the disclosure.
quest if the creditor uses the appraisal report
previously obtained in connection with the de­
cision to grant credit.
5(e) Written Applications
1. Requirement for written applications. The
requirement of written applications for certain
types of dwelling-related loans is intended to
assist the federal supervisory agencies in mon­
itoring compliance with the ECOA and the
Fair Housing Act. Model application forms




Paragraph 5a(a)(2)(i) Notice
1. Multiple applicants. When an application
that is subject to this section involves more
than one applicant, the notice about the ap­
praisal report need only be given to one appli7

Regulation B Commentary

§ 202.5a

cant, but it must be given to the primary applicant where one is readily apparent.

SECTION 202.6—Rules Concerning
Evaluation of Applications

Paragraph 5a(a)(2)(ii) Delivery

6(a) General Rule Concerning Use of
Information

1. Reimbursement. Creditors may charge for
photocopy and postage costs incurred in pro­
viding a copy of the appraisal report, unless
prohibited by state or other law. If the con­
sumer has already paid for the report—for ex­
ample, as part of an application fee—the cred­
itor may not require additional fees for the
appraisal (other than photocopy and postage
costs).
5a(c) Definitions
1. Appraisal reports. Examples of appraisal
reports are—
1.

a report prepared by an appraiser (wheth­
er or not licensed or certified), including
written comments and other documents
submitted to the creditor in support of
the appraiser’s estimate or opinion of
value
ii. a document prepared by the creditor’s
staff which assigns value to the property,
if a third-party appraisal report has not
been used
iii. an internal review document reflecting
that the creditor’s valuation is different
from a valuation in a third party’s ap­
praisal report (or different from valua­
tions that are publicly available or
valuations such as manufacturers’ in­
voices for mobile homes)
2. Other reports. The term “appraisal report”
does not cover all documents relating to the
value of the applicant’s property. Examples of
reports not covered are—
i.

internal documents, if a third-party ap­
praisal report was used to establish the
value of the property
ii. governmental-agency statements of ap­
praised value
iii. valuations lists that are publicly available
(such as published sales prices or mort­
gage amounts, tax assessments, and retail
price ranges) and valuations such as man­
ufacturers’ invoices for mobile homes
8

*




1. General. When evaluating an application
for credit, a creditor generally may consider
any information obtained. However, a creditor
may not consider in its evaluation of
creditworthiness any information that it is
barred by section 202.5 from obtaining.
2. Effects test. The effects test is a judicial
doctrine that was developed in a series of em­
ployment cases decided by the Supreme Court
under title VII of the Civil Rights Act of 1964
(42 USC 2000e et seq.), and the burdens of
proof for such employment cases were codi­
fied by Congress in the Civil Rights Act of
1991 (42 USC 2000e-2). Congressional intent
that this doctrine apply to the credit area is
documented in the Senate Report that accom­
panied H.R. 6516, No. 94-589, pp. 4-5; and
in the House Report that accompanied H.R.
6516, No. 94-210, p. 5. The act and regulation
may prohibit a creditor practice that is dis­
criminatory in effect because it has a dispro­
portionately negative impact on a prohibited
basis, even though the creditor has no intent
to discriminate and the practice appears neu­
tral on its face, unless the creditor practice
meets a legitimate business need that cannot
reasonably be achieved as well by means that
are less disparate in their impact. For exam­
ple, requiring that applicants have incomes in
excess of a certain amount to qualify for an
overdraft line of credit could mean that wo­
men and minority applicants will be rejected
at a higher rate than men and nonminority ap­
plicants. If there is a demonstrable relation­
ship between the income requirement and
creditworthiness for the level of credit in­
volved, however, use of the income standard
would likely be permissible.
6(b) Specific Rules Concerning Use of
Information
Paragraph 6(b)(1)
1. Prohibited basis—marital status. A creditor
may not use marital status as a basis for de-

Regulation B Commentary

termining the applicant’s creditworthiness.
However, a creditor may consider an appli­
cant’s marital status for the purpose of ascer­
taining the creditor’s rights and remedies ap­
plicable to the particular extension of credit.
For example, in a secured transaction involv­
ing real property, a creditor could take into
account whether state law gives the appli­
cant’s spouse an interest in the property being
offered as collateral. Except to the extent nec­
essary to determine rights and remedies for a
specific credit transaction, a creditor that of­
fers joint credit may not take the applicants’
marital status into account in credit evalua­
tions. Because it is unlawful for creditors to
take marital status into account, creditors are
barred from applying different standards in
evaluating married and unmarried applicants.
In making credit decisions, creditors may not
treat joint applicants differently based on the
existence, the absence, or the likelihood of a
marital relationship between the parties.

3

3

2. Prohibited basis—special-purpose credit. In
a special-purpose credit program, a creditor
may consider a prohibited basis to determine
whether the applicant possesses a characteris­
tic needed for eligibility. (See section 202.8.)
Paragraph 6(b)(2)
1. Favoring the elderly. Any system of evalu­
ating creditworthiness may favor a credit ap­
plicant who is age 62 or older. A credit pro­
gram that offers more favorable credit terms
to applicants age 62 or older is also permissi­
ble; a program that offers more favorable
credit terms to applicants at an age lower than
62 is permissible only if it meets the specialpurpose credit requirements of section 202.8.

3

2. Consideration of age in a credit scoring
system. Age may be taken directly into ac­
count in a credit scoring system that is “de­
monstrably and statistically sound,” as defined
in section 202.2(p), with one limitation: appli­
cants 62 years old or older must be treated at
least as favorably as applicants who are under
age 62. If age is scored by assigning points to
an applicant’s age category, elderly applicants
must receive the same or a greater number of
points as the most favored class of nonelderly
applicants.




§ 202.6
i. Age-split scorecards. A creditor may seg­
ment the population into scorecards based on
the age of an applicant. In such a system, one
card covers a narrow age range (for example,
applicants in their twenties or younger) who
are evaluated under attributes predictive for
that age group. A second card covers all other
applicants who are evaluated under the attrib­
utes predictive for that broad class. When a
system uses a card covering a wide age range
that encompasses elderly applicants, the credit
scoring system does not score age. Thus, the
system does not raise the issue of assigning a
negative factor or value to the age of elderly
applicants. But if a system segments the popu­
lation by age into multiple scorecards, and in­
cludes elderly applicants in a narrower age
range, the credit scoring system does score
age. To comply with the act and regulation in
such a case, the creditor must ensure that the
system does not assign a negative factor or
value to the age of elderly applicants as a
class.
3. Consideration of age in a judgmental sys­
tem. In a judgmental system, defined in sec­
tion 202.2(t), a creditor may not take age di­
rectly into account in any aspect of the credit
transaction. For example, the creditor may not
reject an application or terminate an account
because the applicant is 60 years old. But a
creditor that uses a judgmental system may
relate the applicant’s age to other information
about the applicant that the creditor considers
in evaluating creditworthiness. For example:
• A creditor may consider the applicant’s oc­
cupation and length of time to retirement
to ascertain whether the applicant’s income
(including retirement income) will support
the extension of credit to its maturity.
• A creditor may consider the adequacy of
any security offered when the term of the
credit extension exceeds the life expectancy
of the applicant and the cost of realizing
on the collateral could exceed the appli­
cant’s equity. (An elderly applicant might
not qualify for a 5 percent down, 30-year
mortgage loan but might qualify with a
larger downpayment or a shorter loan
maturity.)
• A creditor may consider the applicant’s age
to assess the significance of the length of
9

§ 202.6
the applicant’s employment (a young appli­
cant may have just entered the job market)
or length of time at an address (an elderly
applicant may recently have retired and
moved from a long-term residence).
As the examples above illustrate, the evalua­
tion must be made in an individualized, caseby-case manner; and it is impermissible for a
creditor, in deciding whether to extend credit
or in setting the terms and conditions, to base
its decision on age or information related ex­
clusively to age. Age or age-related informa­
tion may be considered only in evaluating
other “pertinent elements of creditworthiness”
that are drawn from the particular facts and
circumstances concerning the applicant.
4. Consideration of age in a reverse mort­
gage. A reverse mortgage is a home-secured
loan in which the borrower receives payments
from the creditor and does not become obli­
gated to repay these amounts (other than in
the case of default) until the borrower dies,
moves permanently from the home, or trans­
fers title to the home, or upon a specified ma­
turity date. Disbursements to the borrower
under a reverse mortgage typically are deter­
mined by considering the value of the bor­
rower’s home, the current interest rate, and
the borrower’s life expectancy. A reverse
mortgage program that requires borrowers to
be age 62 or older is permissible under sec­
tion 202.6(b)(2)(iv). In addition, under section
202.6(b)(2)(iii), a creditor may consider a bor­
rower’s age to evaluate a pertinent element of
creditworthiness, such as the amount of the
credit or monthly payments that the borrower
will receive, or the estimated repayment date.
5. Consideration of age in a combined sys­
tem. A creditor using a credit scoring system
that qualifies as “empirically derived” under
section 202.2(p) may consider other factors
(such as a credit report or the applicant’s cash
flow) on a judgmental basis. Doing so will not
negate the classification of the credit scoring
component of the combined system as “de­
monstrably and statistically sound.” While age
could be used in the credit scoring portion,
however, in the judgmental portion age may
not be considered directly. It may be used
only for the purpose of determining a “perti10

i




Regulation B Commentary

nent element of creditworthiness.” (See com­
ment 6(b)(2)-3.)
6. Consideration of public assistance. When
considering income derived from a public as­
sistance program, a creditor may take into ac­
count, for example—
• the length of time an applicant will likely
remain eligible to receive such income
• whether the applicant will continue to qual­
ify for benefits based on the status of the
applicant’s dependents (such as Aid to
Families with Dependent Children or So­
cial Security payments to a minor)
• whether the creditor can attach or garnish
the income to assure payment of the debt
in the event of default
Paragraph 6(b)(5)
1. Consideration of an individual applicant. A
creditor must evaluate income derived from
part-time employment, alimony, child support,
separate maintenance, retirement benefits, or
public assistance (all referred to as “protected
income”) on an individual basis, not on the
basis of aggregate statistics, and must assess
its reliability or unreliability by analyzing the
applicant’s actual circumstances, not by ana­
lyzing statistical measures derived from a
group.
2. Payments consistently made. In determin­
ing the likelihood of consistent payments of
alimony, child support, or separate mainte­
nance, a creditor may consider factors such as
whether payments are received pursuant to a
written agreement or court decree; the length
of time that the payments have been received;
whether the payments are regularly received
by the applicant; the availability of court or
other procedures to compel payment; and the
creditworthiness of the payor, including the
credit history of the payor when it is available
to the creditor.
3. Consideration of income. A creditor need
not consider income at all in evaluating
creditworthiness. If a creditor does consider
income, there are several acceptable methods,
whether in a credit scoring or a judgmental
system:
• A creditor may score or take into account

Regulation B Commentary

the total sum of all income stated by the
applicant without taking steps to evaluate
the income.
A creditor may evaluate each component of
the applicant’s income, and then score or
take into account reliable income separately
from income that is not reliable, or the
creditor may disregard that portion of in­
come that is not reliable before aggregating
it with reliable income.
A creditor that does not evaluate all in­
come components for reliability must treat
as reliable any component of protected in­
come that is not evaluated.
In considering the separate components of an
applicant’s income, the creditor may not auto­
matically discount or exclude from considera­
tion any protected income. Any discounting or
exclusion must be based on the applicant’s ac­
tual circumstances.
4. Part-time employment, sources of income.
A creditor may score or take into account the
fact that an individual applicant has more than
one source of earned income—a full-time and
a part-time job or two part-time jobs. A credi­
tor may also score or treat earned income
from a secondary source differently than
earned income from a primary source. How­
ever, the creditor may not score or otherwise
take into account the number of sources for
protected income—for example, retirement in­
come, Social Security, alimony. Nor may the
creditor treat negatively the fact that an appli­
cant’s only earned income is derived from a
part-time job.

Paragraph 6(b)(6)
1. Types of credit references. A creditor may
restrict the types of credit history and credit
references that it will consider, provided that
the restrictions are applied to all credit appli­
cants without regard to sex, marital status, or
any other prohibited basis. However, on the
applicant’s request, a creditor must consider
credit information not reported through a
credit bureau when the information relates to
the same types of credit references and history
that the creditor would consider if reported
through a credit bureau.




§ 202.7

Paragraph 6(b)(7)
1. National origin—immigration status. The
applicant’s immigration status and ties to the
community (such as employment and contin­
ued residence in the area) could have a bear­
ing on a creditor’s ability to obtain repayment.
Accordingly, the creditor may consider and
differentiate, for example, between a nonciti
zen who is a long-time resident with perma­
nent resident status and a noncitizen who is
temporarily in this country on a student visa.
2. National origin—citizenship. Under the
regulation, a denial of credit on the ground
that an applicant is not a United States citizen
is not per se discrimination based on national
origin.

SECTION 202.7—Rules Concerning
Extensions of Credit

7(a) Individual Accounts
1. Open-end credit—authorized user. A credi­
tor may not require a creditworthy applicant
seeking an individual credit account to pro­
vide additional signatures. However, the credi­
tor may condition the designation of an au­
thorized user by the account holder on the
authorized user’s becoming contractually lia­
ble for the account, as long as the creditor
does not differentiate on any prohibited basis
in imposing this requirement.
2. Open-end credit—choice of authorized
user. A creditor that permits an account
holder to designate an authorized user may
not restrict this designation on a prohibited
basis. For example, if the creditor allows the
designation of spouses as authorized users, the
creditor may not refuse to accept a nonspouse
as an authorized user.
3. Overdraft authority on transaction ac­
counts. If a transaction account (such as a
checking account or NOW account) includes
an overdraft line of credit, the creditor may
require that all persons authorized to draw on
the transaction account assume liability for
any overdraft.

11

§ 202.7

7(b) Designation of Name
1. Single name on account. A creditor may
require that joint applicants on an account
designate a single name for purposes of ad­
ministering the account and that a single name
be embossed on any credit card(s) issued on
the account. But the creditor may not require
that the name be the husband’s name. (See
section 202.10 for rules governing the furnish­
ing of credit history on accounts held by
spouses.)
7(c) Action Concerning Existing OpenEnd Accounts
Paragraph 7(c)(1)
1. Termination coincidental with marital sta­
tus change. When an account holder’s marital
status changes, a creditor generally may not
terminate the account unless it has evidence
that the account holder is unable or unwilling
to repay. But the creditor may terminate an
account on which both spouses are jointly lia­
ble, even if the action coincides with a change
in marital status, when one or both spouses—
• repudiate responsibility for future charges
on the joint account
• request separate accounts in their own
names
• request that the joint account be closed
2. Updating information. A creditor may peri­
odically request updated information from ap­
plicants but may not use events related to a
prohibited basis—such as an applicant’s retire­
ment, reaching a particular age, or change in
name or marital status—to trigger such a
request.
Paragraph 7(c)(2)
1. Procedure pending reapplication. A credi­
tor may require a reapplication from a con­
tractually liable party, even when there is no
evidence of unwillingness or inability to re­
pay, if (1) the credit was based on the qualifi­
cations of a person who is no longer available
to support the credit and (2) the creditor has
information indicating that the account
holder’s income by itself may be insufficient
to support the credit. While a reapplication is
12




Regulation B Commentary

pending, the creditor must allow the account
holder full access to the account under the ex­
isting contract terms. The creditor may specify
a reasonable time period within which the ac­
count holder must submit the required
information.
7(d) Signature of Spouse or Other
Person
1. Qualified applicant. The signature rules en­
sure that qualified applicants are able to obtain
credit in their own names. Thus, when an ap­
plicant requests individual credit, a creditor
generally may not require the signature of an­
other person unless the creditor has first deter­
mined that the applicant alone does not qual­
ify for the credit requested.
2. Unqualified applicant. When an applicant
applies for individual credit but does not
alone meet a creditor’s standards, the creditor
may require a cosigner, guarantor or the
like—but cannot require that it be the spouse.
(See commentary to section 202.7(d)(5) and
(6 ).)

Paragraph 7(d)(1)
1. Joint applicant. The term “joint applicant”
refers to someone who applies contemporane­
ously with the applicant for shared or joint
credit. It does not refer to someone whose sig­
nature is required by the creditor as a condi­
tion for granting the credit requested.
Paragraph 7(d)(2)
1. Jointly owned property. If an applicant re­
quests unsecured credit, does not own suffi­
cient separate property, and relies on joint
property to establish creditworthiness, the
creditor must value the applicant’s interest in
the jointly owned property. A creditor may
not request that a nonapplicant joint owner
sign any instrument as a condition of the
credit extension unless the applicant’s interest
does not support the amount and terms of the
credit sought.
i. Valuation of applicant’s interest. In deter­
mining the value of an applicant’s interest in
jointly owned property, a creditor may con­
sider factors such as the form of ownership

C
c

Regulation B Commentary

O

O

and the property’s susceptibility to attachment,
execution, severance, or partition; the value of
the applicant’s interest after such action; and
the cost associated with the action. This deter­
mination must be based on the form of own­
ership prior to or at consummation, and not
on the possibility of a subsequent change. For
example, in determining whether a married
applicant’s interest in jointly owned property
is sufficient to satisfy the creditor’s standards
of creditworthiness for individual credit, a
creditor may not consider that the applicant’s
separate property may be transferred into ten­
ancy by the entirety after consummation. Sim­
ilarly, a creditor may not consider the possi­
bility that the couple may divorce.
Accordingly, a creditor may not require the
signature of the nonapplicant spouse in these
or similar circumstances.
ii. Other options to support credit. If the
applicant’s interest in jointly owned property
does not support the amount and terms of
credit sought, the creditor may offer the applicant other options to provide additional sup­
port for the extension of credit. For
example—
A. requesting an additional party (see section
202.7(d)(5));
B. offering to grant the applicant’s request
on a secured basis (see section
202.7(d)(4)); or
C. asking for the signature of the joint owner
on an instrument that ensures access to
the property in the event of the appli­
cant’s death or default, but does not im­
pose personal liability unless necessary
under state law (e.g., a limited guarantee).
A creditor may not routinely require,
however, that a joint owner sign an in­
strument (such as a quitclaim deed) that
would result in the forfeiture of the joint
owner’s interest in the property.
2. Need for signature—reasonable belief. A
creditor’s reasonable belief as to what instru­
ments need to be signed by a person other
than the applicant should be supported by a
thorough review of pertinent statutory and de­
cisional law or an opinion of the state attor­
ney general.




§ 202.7

Paragraph 7(d)(3)
1. Residency. In assessing the creditworthi­
ness of a person who applies for credit in a
community property state, a creditor may as­
sume that the applicant is a resident of the
state unless the applicant indicates otherwise.
Paragraph 7(d)(4)
1. Creation of enforceable lien. Some state
laws require that both spouses join in execut­
ing any instrument by which real property is
encumbered. If an applicant offers such prop­
erty as security for credit, a creditor may re­
quire the applicant’s spouse to sign the instru­
ments necessary to create a valid security
interest in the property. The creditor may not
require the spouse to sign the note evidencing
the credit obligation if signing only the mort­
gage or other security agreement is sufficient
to make the property available to satisfy the
debt in the event of default. However, if
under state law both spouses must sign the
note to create an enforceable lien, the creditor
may require them to do so.
2. Need for signature—reasonable belief.
Generally, a signature to make the secured
property available will only be needed on a
security agreement. A creditor’s reasonable
belief that, to ensure access to the property,
the spouse’s signature is needed on an instru­
ment that imposes personal liability should be
supported by a thorough review of pertinent
statutory and decisional law or an opinion of
the state attorney general.
3. Integrated instruments. When a creditor
uses an integrated instrument that combines
the note and the security agreement, the
spouse cannot be required to sign the inte­
grated instrument if the signature is only
needed to grant a security interest. But the
spouse could be asked to sign an integrated
instrument that makes clear—for example, by
a legend placed next to the spouse’s signa­
ture—that the spouse’s signature is only to
grant a security interest and that signing the
instrument does not impose personal liability.
Paragraph 7(d)(5)
1. Qualifications of additional parties. In es­
13

Regulation B Commentary

§ 202.7

tablishing guidelines for eligibility of guaran­
tors, cosigners, or similar additional parties, a
creditor may restrict the applicant’s choice of
additional parties buy may not discriminate on
the basis of sex, marital status or any other
prohibited basis. For example, the creditor
could require that the additional party live in
the creditor’s market area.
2. Reliance on income of another per­
son—individual credit. An applicant who re­
quests individual credit relying on the income
of another person (including a spouse in a
non-community property state) may be re­
quired to provide the signature of the other
person to make the income available to pay
the debt. In community property states, the
signature of a spouse may be required if the
applicant relies on the spouse’s separate in­
come. If the applicant relies on the spouse’s
future earnings that as a matter of state law
cannot be characterized as community prop­
erty until earned, the creditor may require the
spouse’s signature, but need not do so—even
if it is the creditor’s practice to require the
signature when an applicant relies on the fu­
ture earnings of a person other than a spouse.
(See section 202.6(c) on consideration of state
property laws.)

the married officers of a business or married
shareholders of a closely held corporation.
2. Spousal guarantees. The rules in section
202.7(d) bar a creditor from requiring a signa­
ture of a guarantor’s spouse just as they bar
the creditor from requiring the signature of an
applicant’s spouse. For example, although a
creditor may require all officers of a closely
held corporation to personally guarantee a cor­
porate loan, the creditor may not automati­
cally require that spouses of married officers
also sign the guarantee. If an evaluation of the
financial circumstances of an officer indicates
that an additional signature is necessary, how­
ever, the creditor may require the signature of
a spouse in appropriate circumstances in ac­
cordance with section 202.7(d)(2).
7(e) Insurance
1. Differences in terms. Differences in the
availability, rates, and other terms on which
credit-related casualty insurance or credit life,
health, accident, or disability insurance is of­
fered or provided to an applicant does not vi­
olate Regulation B.

3. Renewals. If the borrower’s creditworthi­
ness is reevaluated when a credit obligation is
renewed, the creditor must determine whether
an additional party is still warranted and, if
not, release the additional party.

2. Insurance information. A creditor may ob­
tain information about an applicant’s age, sex,
or marital status for insurance purposes. The
information may only be used, however, for
determining eligibility and premium rates for
insurance, and not in making the credit
decision.

Paragraph 7(d)(6)

SECTION 202.8—Special-Purpose Credit
Programs

1. Guarantees. A guarantee on an extension
of credit is part of a credit transaction and 8(a) Standards for Programs
therefore subject to the regulation. A creditor
1. Determining qualified programs. The Board
may require the personal guarantee of the
does not determine whether individual pro­
partners, directors, or officers of a business,
grams qualify for special-purpose credit status,
and the shareholders of a closely held corpo­
or whether a particular program benefits an
ration, even if the business or corporation is
“economically disadvantaged class of per­
creditworthy. The requirement must be based
sons.” The agency or creditor administering
on the guarantor’s relationship with the busi­
or offering the loan program must make these
ness or corporation, however, and not on a
decisions regarding the status of its program.
prohibited basis. For example, a creditor may
not require guarantees only for women-owned 2. Compliance with a program authorized by
or minority-owned businesses. Similarly, a federal or state law. A creditor does not vio­
creditor may not require guarantees only from late Regulation B when it complies in good
14



O

C

§ 202.8

Regulation B Commentary

O

faith with a regulation promulgated by a gov­
ernment agency implementing a special-pur­
pose credit program under section 202.8(a)(1).
It is the agency’s responsibility to promulgate
a regulation that is consistent with federal and
state law.
3. Expressly authorized. Credit programs au­
thorized by federal or state law include pro­
grams offered pursuant to federal, state, or lo­
cal statute, regulation or ordinance, or by
judicial or administrative order.
4. Creditor liability. A refusal to grant credit
to an applicant is not a violation of the act or
regulation if the applicant does not meet the
eligibility requirements under a special-pur­
pose credit program.

071

5. Determining need. In designing a specialpurpose program under section 202.8(a), a forprofit organization must determine that the
program will benefit a class of people who
would otherwise be denied credit or would re­
ceive it on less favorable terms. This determi­
nation can be based on a broad analysis using
the organization’s own research or data from
outside sources, including governmental re­
ports and studies. For example, a bank could
review Home Mortgage Disclosure Act data
along with demographic data for its assess­
ment area and conclude that there is a need
for a special-purpose credit program for lowincome minority borrowers.
6. Elements of the program. The written plan
must contain information that supports the
need for the particular program. The plan also
must either state a specific period of time for
which the program will last, or contain a
statement regarding when the program will be
reevaluated to determine if there is a continu­
ing need for it.

8(b) Rules in Other Sections
1. Applicability of rules. A creditor that re­
jects an application because the applicant does
not meet the eligibility requirements (common
characteristic or financial need, for example)
must nevertheless notify the applicant of ac­
tion taken as required by section 202.9.




8(c) Special Rule Concerning Requests
and Use of Information
1. Request of prohibited information. This
section permits a creditor to request and con­
sider certain information that would otherwise
be prohibited by sections 202.5 and 202.6 to
determine an applicant’s eligibility for a par­
ticular program.
2. Examples. Examples of programs under
which the creditor can ask for and consider
information related to a prohibited basis are—
• energy conservation programs to assist the
elderly, for which the creditor must consid­
er the applicant’s age
• programs under a Minority Enterprise
Small Business Investment Corporation, for
which a creditor must consider the appli­
cant’s minority status
8(d) Special Rule in the Case of
Financial Need
1. Request of prohibited information. This
section permits a creditor to request and con­
sider certain information that would otherwise
be prohibited by sections 202.5 and 202.6,
and to require signatures that would otherwise
be prohibited by section 202.7(d).
2. Examples. Examples of programs in which
financial need is a criterion are—
• subsidized housing programs for low- to
moderate-income households, for which a
creditor may have to consider the appli­
cant’s receipt of alimony or child support,
the spouse’s or parents’ income, etc.
• student loan programs based on the fami­
ly’s financial need, for which a creditor
may have to consider the spouse’s or par­
ents’ financial resources
3. Student loans. In a guaranteed student loan
program, a creditor may obtain the signature
of a parent as a guarantor when required by
federal or state law or agency regulation, or
when the student does not meet the creditor’s
standards of creditworthiness. (See sections
202.7(d)(1) and (5).) The creditor may not re­
quire an additional signature when a student
has a work or credit history that satisfies the
creditor’s standards.
15

Regulation B Commentary

§ 202.9

SECTION 202.9—Notifications
1. Use of the term “adverse action.” The reg­
ulation does not require that a creditor use the
term “adverse action” in communicating to an
applicant that a request for an extension of
credit has not been approved. In notifying an
applicant of adverse action as defined by sec­
tion 202.2(c)(1), a creditor may use any words
or phrases that describe the action taken on
the application.
2. Expressly withdrawn applications. When an
applicant expressly withdraws a credit applica­
tion, the creditor is not required to comply
with the notification requirements under sec­
tion 202.9. (The creditor must, however, com­
ply with the record-retention requirements of
the regulation. See section 202.12(b)(3).)
3. When notification occurs. Notification oc­
curs when a creditor delivers or mails a notice
to the applicant’s last known address or, in
the case of an oral notification, when the cred­
itor communicates the credit decision to the
applicant.
4. Location of notice. The notifications re­
quired under section 202.9 may appear on ei­
ther or both sides of a form or letter.
5. Prequalification and preapproval programs.
Whether a creditor must provide a notice of
action taken for a prequalification or preap­
proval request depends on the creditor’s re­
sponse to the request, as discussed in the
commentary to section 202.2(f). For instance,
a creditor may treat the request as an inquiry
if the creditor provides general information
such as loan terms and the maximum amount
a consumer could borrow under various loan
programs, explaining the process the consumer
must follow to submit a mortgage application
and the information the creditor will analyze
in reaching a credit decision. On the other
hand, a creditor has treated a request as an
application, and is subject to the adverseaction notice requirements of section 202.9 if,
after evaluating information, the creditor de­
cides that it will not approve the request and
communicates that decision to the consumer.
For example, if in reviewing a request for pre­
qualification, a creditor tells the consumer that
it would not approve an application for a
16

k



mortgage because of a bankruptcy in the con­
sumer’s record, the creditor has denied an ap­
plication for credit.
9(a) Notification of Action Taken,
ECOA Notice, and Statement of Specific
Reasons
Paragraph 9(a)(1)
1. Timing of notice—when an application is
complete. Once a creditor has obtained all the
information it normally considers in making a
credit decision, the application is complete
and the creditor has 30 days in which to no­
tify the applicant of the credit decision. (See
also comment 2(f)-5.)
2. Notification of approval. Notification of ap­
proval may be express or by implication. For
example, the creditor will satisfy the notifica­
tion requirement when it gives the applicant
the credit card, money, property, or services
requested.
3. Incompletion application—denial for in­
completeness. When an application is incom­
plete regarding matters that the applicant can
complete and the creditor lacks sufficient data
for a credit decision, the creditor may deny
the application giving as the reason for denial
that the application is incomplete. The creditor
has the option, alternatively, of providing a
notice of incompleteness under section
202.9(c).
4. Incomplete application—denial for reasons
other than incompleteness. When an applica­
tion is missing information but provides suffi­
cient data for a credit decision, the creditor
may evaluate the application and notify the
applicant under this section as appropriate. If
credit is denied, the applicant must be given
the specific reasons for the credit denial (or
notice of the right to receive the reasons); in
this instance the incompleteness of the appli­
cation cannot be given as the reason for the
denial.
5. Length of counteroffer. Section 202.9(a)
(l)(iv) does not require a creditor to hold a
counteroffer open for 90 days or any other
particular length of time.
6. Counteroffer combined with adverse-action

e

c

Regulation B Commentary

O

notice. A creditor that gives the applicant a
combined counteroffer and adverse-action no­
tice that complies with section 202.9(a)(2)
need not send a second adverse-action notice
if the applicant does not accept the counter
offer. A sample of a combined notice is con­
tained in form C-4 of appendix C to the
regulation.
7. Denial of a telephone application. When
an application is conveyed by means of tele­
phone and adverse action is taken, the creditor
must request the applicant’s name and address
in order to provide written notification under
this section. If the applicant declines to pro­
vide that information, then the creditor has no
further notification responsibility.
Paragraph 9(a)(3)

O

0

1. Coverage. In determining the rules in this
paragraph that apply to a given business-credit
application, a creditor may rely on the appli­
cant’s assertion about the revenue size of the
business. (Applications to start a business are
governed by the rules in section
202.9(a)(3)(i).) If an applicant applies for
credit as a sole proprietor, the revenues of the
sole proprietorship will determine which rules
in the paragraph govern the application. How­
ever, if an applicant applies for business-pur­
pose credit as an individual, the rules in para­
graph 9(a)(3)(i) apply unless the application is
for trade or similar credit.
2. Trade credit. The term “trade credit” gen­
erally is limited to a financing arrangement
that involves a buyer and a seller—such as a
supplier who finances the sale of equipment,
supplies, or inventory; it does not apply to an
extension of credit by a bank or other finan­
cial institution for the financing of such items.
3. Factoring. Factoring refers to a purchase of
accounts receivable and thus is not subject to
the act or regulation. If there is a credit exten­
sion incident to the factoring arrangement, the
notification rules in section 202.9(a)(3)(H) ap­
ply, as do other relevant sections of the act
and regulation.
4. Manner of compliance. In complying with
the notice provisions of the act and regulation,
creditors offering business credit may follow




§ 202.9

the rules governing consumer credit. Simi­
larly, creditors may elect to treat all business
credit the same (irrespective of revenue size)
by providing notice in accordance with section
202.9(a)(3)(i).
5. Timing of notification. A creditor subject to
section 202.9(a)(3)(ii)(A) is required to notify
a business credit applicant, orally or in writ­
ing, of action taken on an application within a
reasonable time of receiving a completed ap­
plication. Notice provided in accordance with
the timing requirements of section 202.9(a)(1)
is deemed reasonable in all instances.
9(b) Form of ECOA Notice and
Statement of Specific Reasons
Paragraph 9(b)(1)
1. Substantially similar notice. The ECOA
notice sent with a notification of a credit de­
nial or other adverse action will comply with
the regulation if it is “substantially similar”
to the notice contained in section 202.9(b)(1).
For example, a creditor may add a reference
to the fact that the ECOA permits age to be
considered in certain credit scoring systems,
or add a reference to a similar state statute or
regulation and to a state enforcement agency.
Paragraph 9(b)(2)
1. Number of specific reasons. A creditor
must disclose the principal reasons for deny­
ing an application or taking other adverse ac­
tion. The regulation does not mandate that a
specific number of reasons be disclosed, but
disclosure of more than four reasons is not
likely to be helpful to the applicant.
2. Source of specific reasons. The specific
reasons disclosed under section 202.9(a)(2)
and (b)(2) must relate to and accurately de­
scribe the factors actually considered or
scored by a creditor.
3. Description of reasons. A creditor need not
describe how or why a factor adversely af­
fected an applicant. For example, the notice
may say “length of residence” rather than
“too short a period of residence.”
4. Credit scoring system. If a creditor bases
the denial or other adverse action on a credit
17

Regulation B Commentary

§ 202.9

scoring system, the reasons disclosed must re­
late only to those factors actually scored in
the system. Moreover, no factor that was a
principal reason for adverse action may be ex­
cluded from disclosure. The creditor must dis­
close the actual reasons for denial (for exam­
ple, “ age of automobile” ) even if the
relationship of that factor to predicting
creditworthiness may not be clear to the
applicant.
5. Credit scoring—method for selecting rea­
sons. The regulation does not require that any
one method be used for selecting reasons for
a credit denial or other adverse action that is
based on a credit scoring system. Various
methods will meet the requirements of the
regulation. One method is to identify the fac­
tors for which the applicant’s score fell fur­
thest below the average score for each of
those factors achieved by applicants whose to­
tal score was at or slightly above the mini­
mum passing score. Another method is to
identify the factors for which the applicant’s
score fell furthest below the average score for
each of those factors achieved by all appli­
cants. These average scores could be calcu­
lated during the development or use of the
system. Any other method that produces re­
sults substantially similar to either of these
methods is also acceptable under the
regulation.
6. Judgmental system. If a creditor uses a
judgmental system, the reasons for the denial
or other adverse action must relate to those
factors in the applicant’s record actually re­
viewed by the person making the decision.
7. Combined credit scoring and judgmental
system. If a creditor denies an application
based on a credit evaluation system that em­
ploys both credit scoring and judgmental com­
ponents, the reasons for the denial must come
from the component of the system that the
applicant failed. For example, if a creditor ini­
tially credit scores an application and denies
the credit request as a result of that scoring,
the reasons disclosed to the applicant must re­
late to the factors scored in the system. If the
application passes the credit scoring stage but
the creditor then denies the credit request
based on a judgmental assessment of the ap18




plicant’s record, the reasons disclosed must
relate to the factors reviewed judgmentally,
even if the factors were also considered in the
credit scoring component.
8. Automatic denial. Some credit-decision
methods contain features that call for auto­
matic denial because of one or more negative
factors in the applicant’s record (such as the
applicant’s previous bad credit history with
that creditor, the applicant’s declaration of
bankruptcy, or the fact that the applicant is a
minor). When a creditor denies the credit re­
quest because of an automatic-denial factor,
the creditor must disclose that specific factor.
9. Combined ECOA-FCRA disclosures. The
ECOA requires disclosure of the principal rea­
sons for denying or taking other adverse ac­
tion on an application for an extension of
credit. The Fair Credit Reporting Act requires
a creditor to disclose when it has based its
decision in whole or in part on information
from a source other than the applicant or from
its own files. Disclosing that a credit report
was obtained and used to deny the applica­
tion, as the FCRA requires, does not satisfy
the ECOA requirement to disclose specific
reasons. For example, if the applicant’s credit
history reveals delinquent credit obligations
and the application is denied for that reason,
to satisfy section 202.9(b)(2) the creditor must
disclose that the application was denied be­
cause of the applicant’s delinquent credit obli­
gations. To satisfy the FCRA requirement, the
creditor must also disclose that a credit report
was obtained and used to deny credit. Sample
forms C-l through C-5 of appendix C of the
regulation provide for the two disclosures.
9(c) Incomplete Applications
Paragraph 9(c)(2)
1. Reapplication. If information requested by
a creditor is submitted by an applicant after
the expiration of the time period designated
by the creditor, the creditor may require the
applicant to make a new application.
6-196.8
Paragraph 9(c)(3)
1. Oral inquiries for additional information.

§ 202.11

Regulation B Commentary

If the applicant fails to provide the informa­
tion in response to an oral request, a creditor
must send a written notice to the applicant
within the 30-day period specified in section
202.9(c)(1) and (c)(2). If the applicant does
provide the information, the creditor shall take
action on the application and notify the appli­
cant in accordance with section 202.9(a).
9(g) Applications Submitted Through a
Third Party
1. Third parties. The notification of adverse
action may be given by one of the creditors to
whom an application was submitted. Alterna­
tively, the third party may be a noncreditor.
2. Third-party notice—enforcement agency. If
a single adverse action notice is being pro­
vided to an applicant on behalf of several
creditors and they are under the jurisdiction of
different federal enforcement agencies, the no­
tice need not name each agency; disclosure of
any one of them will suffice.
3. Third-party notice—liability. When a notice
is to be provided through a third party, a
creditor is not liable for an act or omission of
the third party that constitutes a violation of
the regulation if the creditor accurately and in
a timely manner provided the third party with
the information necessary for the notification
and maintains reasonable procedures adapted
to prevent such violations.

SECTION 202.10—Furnishing of Credit
Information
1. Scope. The requirements of section 202.10
for designating and reporting credit informa­
tion apply only to creditors that furnish credit
information to credit bureaus or to other credi­
tors. There is no requirement that a creditor
furnish credit information on its accounts.
2. Reporting on all accounts. The require­
ments of section 202.10 apply only to ac­
counts held or used by spouses. However, a
creditor has the option to designate all joint
accounts (or all accounts with an authorized
user) to reflect the participation of both par­
ties, whether or not the accounts are held by
persons married to each other.




3. Designating accounts. In designating ac­
counts and reporting credit information, a
creditor need not distinguish between accounts
on which the spouse is an authorized user and
accounts on which the spouse is a contractu­
ally liable party.
4. File and index systems. The regulation
does not require the creation or maintenance
of separate files in the name of each partici­
pant on a joint or user account, or require any
other particular system of recordkeeping or in­
dexing. It requires only that a creditor be able
to report information in the name of each
spouse on accounts covered by section 202.10.
Thus, if a creditor receives a credit inquiry
about the wife, it should be able to locate her
credit file without asking the husband’s name.
10(a) Designation of Accounts
1. New parties. When new parties who are
spouses undertake a legal obligation on an ac­
count, as in the case of a mortgage-loan as­
sumption, the creditor should change the des­
ignation on the account to reflect the new
parties and should furnish subsequent credit
information on the account in the new names.
2. Request to change designation of account.
A request to change the manner in which in­
formation concerning an account is furnished
does not alter the legal liability of either
spouse upon the account and does not require
a creditor to change the name in which the
account is maintained.

SECTION 202.11—Relation to State
Law
11(a) Inconsistent State Laws
1. Preemption determination—New York. Ef­
fective November 11, 1988, the Board has de­
termined that the following provisions in the
state law of New York are preempted by the
federal law:
• Article 15, Section 296a(l)(b)—Unlawful
discriminatory practices in relation to credit
on the basis of race, creed, color, national
19

§ 202.11
origin, age, sex, marital status, or disabili­
ty. This provision is preempted to the ex­
tent that it bars taking a prohibited basis
into account when establishing eligibility
for certain special-purpose credit programs.
• Article 15, Section 296a(l)(c)—Unlawful
discriminatory practice to make any record
or inquiry based on race, creed, color, na­
tional origin, age, sex, marital status, or
disability. This provision is preempted to
the extent that it bars a creditor from re­
questing and considering information re­
garding the particular characteristics (for
example, race, national origin, or sex) re­
quired for eligibility for special-purpose
credit programs.
2. Preemption determination—Ohio. Effective
July 23, 1990, the Board has determined that
the following provision in the state law of
Ohio is preempted by the federal law:
• Section 4112.021(B)(1)—Unlawful discrim­
inatory practices in credit transactions. This
provision is preempted to the extent that it
bars asking or favorably considering the
age of an elderly applicant; prohibits the
consideration of age in a credit scoring sys­
tem; permits without limitation the consid­
eration of age in real estate transactions;
and limits the consideration of age in spe­
cial-purpose credit programs to certain gov­
ernment-sponsored programs identified in
the state law.

Regulation B Commentary

credit applications only if permitted to do so
by section 202.6.

12(b) Preservation of Records
1. Copies. A copy of the original record in­
cludes carbon copies, photocopies, microfilm
or microfiche copies, or copies produced by
any other accurate retrieval system, such as
documents stored and reproduced by com­
puter. A creditor that uses a computerized or
mechanized system need not keep a written
copy of a document (for example, an adverse
action notice) if it can regenerate all pertinent
information in a timely manner for examina­
tion or other purposes.
2. Computerized decisions. A creditor that en­
ters information items from a written applica­
tion into a computerized or mechanized sys­
tem and makes the credit decision
mechanically, based only on the items of in­
formation entered into the system, may com­
ply with section 202.12(b) by retaining the in­
formation actually entered. It is not required
to store the complete written application, nor
is it required to enter the remaining items of
information into the system. If the transaction
is subject to section 202.13, however, the
creditor is required to enter and retain the data
on personal characteristics in order to comply
with the requirements of that section.

Paragraph 12(b)(3)
SECTION 202.12—Record Retention

12(a) Retention of Prohibited
Information
1. Receipt of prohibited information. Unless
the creditor specifically requested such infor­
mation, a creditor does not violate this section
when it receives prohibited information from a
consumer reporting agency.
2. Use of retained information. Although a
creditor may keep in its files prohibited infor­
mation as provided in section 202.12(a), the
creditor may use the information in evaluating
20



1. Withdrawn and brokered applications. In
most cases, the 25-month retention period for
applications runs from the date a notification
is sent to the applicant granting or denying
the credit requested. In certain transactions, a
creditor is not obligated to provide a notice of
the action taken. (See, for example, comment
9-2.) In such cases, the 25-month requirement
runs from the date of application, as when—
• an application is withdrawn by the appli­
cant
• an application is submitted to more than
one creditor on behalf of the applicant, and
the application is approved by one of the
other creditors

Regulation B Commentary

SECTION 202.13—Information for
Monitoring Purposes
13(a) Information to Be Requested
1. Natural person. Section 202.13 applies
only to applications from natural persons.
2. Principal residence. The requirements of
section 202.13 apply only if an application re­
lates to a dwelling that is or will be occupied
by the applicant as the principal residence. A
credit application related to a vacation home
or a rental unit is not covered. In the case of
a two- to four-unit dwelling, the application is
covered if the applicant intends to occupy one
of the units as a principal residence.
3. Temporary financing. An application for
temporary financing to construct a dwelling is
not subject to section 202.13. But an applica­
tion for both a temporary loan to finance con­
struction of a dwelling and a permanent mort­
gage loan to take effect upon the completion
of construction is subject to section 202.13.
4. New principal residence. A person can
have only one principal residence at a time.
However, if a person buys or builds a new
dwelling that will become that person’s princi­
pal residence within a year or upon comple­
tion of construction, the new dwelling is con­
sidered the principal residence for purposes of
section 202.13.
5. Transactions not covered. The informationcollection requirements of this section apply
to applications for credit primarily for the
purchase or refinancing of a dwelling that is
or will become the applicant’s principal resi­
dence. Therefore, applications for credit se­
cured by the applicant’s principal residence
but made primarily for a purpose other than
the purchase or refinancing of the principal
residence (such as loans for home improve­
ment and debt consolidation) are not subject
to the information-collection requirements. An
application for an open-end home equity line
of credit is not subject to this section unless it
is readily apparent to the creditor when the
application is taken that the primary purpose
of the line is for the purchase or refinancing
of a principal dwelling.
6. Refinancings. A refinancing occurs when




§ 202.13

an existing obligation is satisfied and replaced
by a new obligation undertaken by the same
borrower. A creditor that receives an applica­
tion to refinance an existing extension of
credit made by that creditor for the purchase
of the applicant’s dwelling may request the
monitoring information again but is not re­
quired to do so if it was obtained in the ear­
lier transaction.
7. Data collection under Regulation C. See
comment 5(b)(2)-2.
13(b) Obtaining of Information
1. Forms for collecting data. A creditor may
collect the information specified in section
202.13(a) either on an application form or on
a separate form referring to the application.
2. Written applications. The regulation re­
quires written applications for the types of
credit covered by section 202.13. A creditor
can satisfy this requirement by recording in
writing or by means of computer the informa­
tion that the applicant provides orally and that
the creditor normally considers in a credit
decision.
3. Telephone, mail applications. If an appli­
cant does not apply in person for the credit
requested, a creditor does not have to com­
plete the monitoring information. For
example:
• When a creditor accepts an application by
telephone, it does not have to request the
monitoring information.
• When a creditor accepts an application by
mail, it does not have to make a special
request to the applicant if the applicant
fails to complete the monitoring informa­
tion on the application form sent to the
creditor.
If it is not evident on the face of the applica­
tion that it was received by mail or telephone,
the creditor should indicate on the form or
other application record how the application
was received.
4. Applications through electronic media. If
an applicant applies through an electronic me­
dium (for example, the Internet or a facsimile)
without video capability that allows the credi­
21

§ 202.13

Regulation B Commentary

tor to see the applicant, the creditor may treat
the application as if it were received by mail
or telephone.

SECTION 202.14— Enforcement,
Penalties, and Liabilities

5. Applications through video. If a creditor
takes an application through a medium that
allows the creditor to see the applicant, the
creditor treats the application as taken in per­
son and must note the monitoring information
on the basis of visual observation or surname,
if the applicant chooses not to provide the
information.

14(c) Failure of Compliance

6. Applications through loan-shopping ser­
vices. When a creditor receives an application
through an unaffiliated loan-shopping service,
it does not have to request the monitoring in­
formation for purposes of the ECOA or Regu­
lation B. Creditors subject to the Home Mort­
gage Disclosure Act should be aware,
however, that data collection may be called
for under Regulation C, which generally re­
quires creditors to report, among other things,
the sex and race or national origin of an ap­
plicant on brokered applications or applica­
tions received through a correspondent.

1. Inadvertent errors. Inadvertent errors in­
clude, but are not limited to, clerical mistake,
calculation error, computer malfunction, and
printing error. An error of legal judgment is
not an inadvertent error under the regulation.
2. Correction of error. For inadvertent errors
that occur under sections 202.12 and 202.13,
this section requires that they be corrected
prospectively only.

APPENDIX B—Model Application
Forms

1. FHLMC/FNMA form—residential loan ap­
plication. The uniform residential loan appli­
cation form (FHLMC 65/FNMA 1003),
including supplemental form (FHLMC
65A/FNMA 1003A), prepared by the Federal
Home Loan Mortgage Corporation and the
Federal National Mortgage Association and
7. Inadvertent notation. If a creditor inadver­ dated May 1991 may be used by creditors
tently obtains the monitoring information in a
without violating this regulation even though
dwelling-related transaction not covered by
the form’s listing of race or national origin
section 202.13, the creditor may process and
categories in the “Information for Government
retain the application without violating the
Monitoring Purposes” section differs from the
regulation.
classifications currently specified in section
202.13(a)(1). The classifications used on the
13(c) Disclosure to Applicant(s)
FNMA-FHLMC form are those required by
1. Procedures for providing disclosures. The the U.S. Office of Management and Budget
disclosures to an applicant regarding the mon­ for notation of race and ethnicity by federal
itoring information may be provided in writ­ programs in their administrative reporting and
ing. Appendix B contains a sample disclosure. statistical activities. Creditors that are gov­
A creditor may devise its own disclosure so erned by the monitoring requirements of Reg­
long as it is substantially similar. The creditor ulation B (which limits collection to applica­
need not orally request the applicant to pro­ tions primarily for the purchase or refinancing
vide the monitoring information if it is re­ of the applicant’s principal residence) should
delete, strike, or modify the data-collection
quested in writing.
section on the form when using it for transac­
tions not covered by section 202.13(a) to en­
13(d) Substitute Monitoring Program
sure that they do not collect the information.
1. Substitute program. An enforcement Creditors that are subject to more extensive
agency may adopt, under its established collection requirements by a substitute moni­
rulemaking or enforcement procedures, a pro­ toring program under section 202.13(d) or by
gram requiring creditors under its jurisdiction the Home Mortgage Disclosure Act (HMDA)
to collect information in addition to that re­ may use the form as issued, in compliance
with that substitute program or HMDA.
quired by this section.
22




Appendix C

Regulation B Commentary

2. FHLMC/FNMA form—home-improvement
loan application. The home-improvement and
energy loan application form (FHLMC 703/
FNMA 1012), prepared by the Federal Home
Loan Mortgage Corporation and the Federal
National Mortgage Association and dated Oc­
tober 1986, complies with the requirements of
the regulation for some creditors but not
others because of the form’s section “Infor­
mation for Government Monitoring Pur­
poses.” Creditors that are governed by section
202.13(a) of the regulation (which limits col­
lection to applications primarily for the
purchase or refinancing of the applicant’s
principal residence) should delete, strike, or
modify the data-collection section on the form
when using it for transactions not covered by
section 202.13(a) to ensure that they do not
collect the information. Creditors that are sub­
ject to more extensive collection requirements
by a substitute monitoring program under sec­




tion 202.13(d) may use the form as issued, in
compliance with that substitute program.

APPENDIX C—Sample Notification
Forms
Form C-9
Creditors may design their own form, add to,
or modify the model form to reflect their indi
vidual policies and procedures. For example, a
creditor may want to add—
i.

a telephone number that applicants may
call to leave their name and the address
to which an appraisal report should be
sent
ii. a notice of the cost the applicant will be
required to pay the creditor for the ap­
praisal or a copy of the report

23