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FEDERAL RESERVE SYSTEM 12 CFR 202 Regulation B; Docket No. R-1168 Equal Credit Opportunity AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed Rule. ________________________________________________________________________ SUMMARY: The Board is proposing to amend Regulation B, which implements the Equal Credit Opportunity Act, and the staff commentary to the regulation. Regulation B would be revised to define more specifically the standard for providing —clear and conspicuous“ disclosures, and to provide a more uniform standard among the Board‘s regulations. The staff commentary would be revised to include examples of how to meet this standard. Similar proposed revisions to Regulations E, M, Z and DD appear elsewhere in today‘s Federal Register. These revisions are intended to help ensure that consumers receive noticeable and understandable information that is required by law in connection with obtaining consumer financial products and services. In addition, consistency among the regulations should facilitate compliance by institutions. DATES: Comments must be received on or before January 30, 2004. ADDRESSES: Comments should refer to Docket No. R-1168 and should be mailed to Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551. However, because paper mail in the Washington area and at the Board of Governors is subject to delay, please consider submitting your comments by e-mail to regs.comments@federalreserve.gov, or faxing them to the Office of the Secretary at (202) 452-3819 or 452-3102. Members of the public may inspect comments in Room MP-500 of the Martin Building between 9:00 a.m. and 5:00 p.m. on weekdays pursuant to § 261.12, except as provided in § 261.14, of the Board‘s Rules Regarding Availability of Information, 12 CFR 261.12 and 261.14. FOR FURTHER INFORMATION CONTACT: Minh-Duc Le, Senior Attorney, and David A. Stein, Counsel, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412; for users of Telecommunications Device for the Deaf (—TDD“) only, contact (202) 263-4869. 2 SUPPLEMENTARY INFORMATION: I. Background The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691-1691f, makes it unlawful for a creditor to discriminate against an applicant in any aspect of a credit transaction on the basis of the applicant‘s national origin, marital status, religion, sex, color, race, age (provided the applicant has the capacity to contract), receipt of public assistance benefits, or the good faith exercise of a right under the Consumer Credit Protection Act (15 U.S.C. 1601 et seq.). In addition to a general prohibition against discrimination, the regulation contains specific rules concerning: the taking and evaluation of credit applications, how credit history information is reported on accounts used by spouses, procedures and notices for credit denials and other adverse action, and limitations on requiring signatures of persons other than the applicant on credit documents. The act also excepts certain types of credit (such as securities credit) from some requirements, and provides model forms for optional use by creditors. The ECOA is implemented by the Board‘s Regulation B (12 CFR part 202). An official staff commentary interprets the requirements of Regulation B (12 CFR part 202 (Supp. I)). II. Proposed Revisions Section 202.2–Definitions 2(bb) Clear and Conspicuous The ECOA does not address a standard for the form of disclosures. Regulation B, however, requires creditors to disclose information provided in writing in a clear and conspicuous manner. See § 202.4(d). Guidance on how creditors may comply with the clear and conspicuous standard is contained in the staff commentary. See comment 4(d)-1. Consumer financial services and fair lending laws and the Board regulations that implement them contain similar but not identical standards for providing disclosures that consumers will notice and understand. Generally, disclosures must be —clear and conspicuous“ under Regulations B (Equal Credit Opportunity), M (Consumer Leasing), Regulation P (Privacy of Consumer Financial Information), Z (Truth in Lending) and DD (Truth in Savings), and —clear and readily understandable“ under Regulation E (Electronic Fund Transfers). In interpreting the —clear and conspicuous“ standard, the staff commentaries to Regulations B, M and Z provide that disclosures must be —in a reasonably understandable“ form; similarly, under Regulation DD disclosures must be in a format that allows consumers —to readily understand the terms of their account.“ For purposes of the disclosures provided with credit card solicitations and applications, the commentary to Regulation Z provides more specifically that those disclosures must also be —readily noticeable to the consumer.“ In contrast, the Board‘s Regulation P (Privacy of Consumer Financial Information) defines the —clear and conspicuous“ standard to 3 mean that a disclosure is —reasonably understandable and designed to call attention to the nature and significance of the information“ in the disclosure. 12 CFR § 216.3(b)(1). Regulation P also provides examples of how to satisfy the standard. 12 CFR § 216.3(b)(2). The Board believes that the recently implemented standard in Regulation P (65 FR 35162, June 1, 2000), articulates with greater precision than the other regulations the concepts underlying the duty to provide disclosures that consumers will notice and understand. Therefore, to provide consistent guidance on the clear and conspicuous standard among its regulations, the Board is proposing to amend Regulation B by adding a definition of —clear and conspicuous“ in § 202.2(bb), consistent with the —clear and conspicuous“ definition in Regulation P. The staff commentary to Regulation B also would be revised to add comments 2(bb)-1 and -2, consistent with Regulation P‘s examples of how to meet the clear and conspicuous standard. Similar proposed revisions to Regulations E, M, Z and DD appear elsewhere in today‘s Federal Register. These revisions are intended to help ensure that consumers receive noticeable and understandable information that is required by law in connection with obtaining consumer financial products and services. In addition, consistency among the regulations should facilitate compliance by institutions. Comment 2(bb)-3 would be added to clarify that the —clear and conspicuous“ standard does not prohibit adding other terms to the federally required disclosures (such as contractual provisions or state-required disclosures); nor does it prohibit sending promotional material with the disclosures. Proposed comment 2(bb)-3 also would clarify, however, that the presence of other information may be a factor in determining whether the —clear and conspicuous“ standard is met. Generally, segregating federally mandated disclosures from other information is more likely to satisfy the clear and conspicuous standard. The Board also proposes to adopt for Regulations B, E, M, Z and DD, guidance concerning type-sizes that are deemed to meet the —clear and conspicuous“ standard and those that would likely be too small (this guidance currently applies only to credit card solicitations and applications under Regulation Z). See proposed comment 2(bb)-2(ii). The proposal does not add special format requirements to the regulation where none currently exist. Accordingly, even though the revisions clarify that type size can be one factor to consider in determining whether a disclosure is conspicuous, the proposal would not add a specific type-size requirement. To eliminate redundancy with proposed § 202.2(bb) and its accompanying commentary, the Board also proposes to revise comment 4(d)-1. Guidance regarding the —clear and conspicuous“ standard for disclosures transmitted by electronic communication will be considered in the context of rulemakings dealing specifically with electronic delivery of disclosures. 4 III. Form of Comment Letters Comment letters should refer to Docket No. R-1168 and, when possible, should use a standard typeface with a font size of 10 or 12; this will enable the Board to convert text submitted in paper form to machine-readable form through electronic scanning, and will facilitate automated retrieval of comments for review. Comments may be mailed electronically to regs.comments@federalreserve.gov. IV. Solicitation of Comments Regarding the Use of —Plain Language“ Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the Board to use —plain language“ in all proposed and final rules published after January 1, 2000. The Board invites comments on whether the proposed rules are clearly stated and effectively organized, and how the Board might make the proposed text easier to understand. V. Initial Regulatory Flexibility Analysis In accordance with section 3(a) of the Regulatory Flexibility Act, the Board has reviewed the proposed amendments to Regulation B. The proposed amendments are not expected to have any significant impact on small entities. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period. VI. Paperwork Reduction Act In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule under the authority delegated to the Board by the Office of Management and Budget. The Federal Reserve may not conduct or sponsor, and an organization is not required to respond to, this information collection unless it displays a currently valid OMB control number. The OMB control number is 7100-0201. The collection of information that is revised by this rulemaking is found in 12 CFR part 202. This collection is mandatory to evidence compliance with the requirements of 15 U.S.C. 1691b(a)(1) and Public Law 104-208, § 2302(a), and also to ensure that credit is made available to all creditworthy customers without discrimination on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), receipt of public assistance income, or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act (15 U.S.C. 1600 et seq.). Regulation B applies to all types of creditors, not just state member banks. However, under the Paperwork Reduction Act, the Federal Reserve accounts for the burden of the paperwork associated with the regulation only for entities that are supervised by the Federal Reserve. Appendix A of Regulation B defines these creditors as state member banks, branches and agencies of foreign banks (other than federal branches, federal agencies, and insured state branches of foreign banks), commercial 5 lending companies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act. Other agencies account for the paperwork burden for the institutions they supervise. Creditors are required to retain records for 12 to 25 months as evidence of compliance. The proposed revisions would provide creditors with a more uniform definition of providing —clear and conspicuous“ disclosures and examples of how to satisfy the clear and conspicuous standard. While the proposal would amend Regulation B and the staff commentary, it is expected that these revisions would not increase the paperwork burden of creditors. The estimated annual burden for entities supervised by the Federal Reserve is approximately 175,711 hours for the 1,312 creditors that are —respondents“ for purposes of the Paperwork Reduction Act. Because the records would be maintained at state member banks and the notices are not provided to the Federal Reserve, no issue of confidentiality arises under the Freedom of Information Act. Comments on the collection of information should be sent to the Office of Management and Budget, Paperwork Reduction Project (7100-0201), Washington, DC 20503, with copies of such comments sent to Cynthia Ayouch, Federal Reserve Board Clearance Officer, Division of Research and Statistics, Mail Stop 41, Board of Governors of the Federal Reserve System, Washington, DC 20551. Text of Proposed Revisions Certain conventions have been used to highlight the proposed revisions. New language is shown inside bold-faced arrows while language that would be deleted is set off with bold-faced brackets. List of Subjects in 12 CFR Part 202 Aged, Banks, banking, Civil rights, Consumer protections, Credit, Discrimination, Federal Reserve System, Marital status discrimination, Penalties, Religious discrimination, Reporting and record keeping requirements, Sex discrimination. For the reasons set forth in the preamble, the Board proposes to amend Regulation B, 12 CFR part 202, as set forth below: PART 202 ― EQUAL CREDIT OPPORTUNITY (REGULATION B) 1. The authority citation for part 202 continues to read as follows: Authority: 15 U.S.C. 1691-1691f. 2. Section 202.2 is amended by adding a new paragraph (bb) to read as follows. 6 § 202.2 Definitions. For the purposes of this regulation, unless the context indicates otherwise, the following definitions apply. ***** ►(bb) Clear and conspicuous means that a disclosure is reasonably understandable and designed to call attention to the nature and significance of the information in the disclosure. ◄ ***** 3. In Supplement I to Part 202: a. Under Section 202.2 Definitions, a new paragraph title (bb) Clear and conspicuous is added, and new paragraphs (bb) 1. through (bb) 3. are added. b. Under Section 202.4–General Rules, under 4(d) Form of Disclosures, paragraph 1. is revised. SUPPLEMENT I TO PART 230―OFFICIAL STAFF INTERPRETATIONS Section 202.2 Definitions ***** ►2(bb) Clear and conspicuous 1. Reasonably understandable. Examples of disclosures that are reasonably understandable include disclosures that: i. Present the information in the disclosure in clear, concise sentences, paragraphs, and sections; ii. Use short explanatory sentences or bullet lists whenever possible; iii. Use definite, concrete, everyday words and active voice whenever possible; iv. Avoid multiple negatives; v. Avoid legal and highly technical business terminology whenever possible; and vi. Avoid explanations that are imprecise and readily subject to different interpretations. 2. Designed to call attention. Examples of disclosures that are designed to call attention to the nature and significance of the information include disclosures that: 7 i. Use a plain-language heading to call attention to the disclosure; ii. Use a typeface and type size that are easy to read. Disclosures in 12-point type generally meet this standard. Disclosures printed in less than 12-point type do not automatically violate the standard; however, disclosures in less than 8-point type would likely be too small to satisfy the standard; iii. Provide wide margins and ample line spacing; iv. Use boldface or italics for key words; and v. In a document that combines disclosures with other information, use distinctive type size, style, and graphic devices, such as shading or sidebars, to call attention to the disclosures. 3. Other information. Except as otherwise provided, the clear and conspicuous standard does not prohibit adding to the required disclosures such items as contractual provisions, explanations of contract terms, state disclosures, and translations; or sending promotional material with the required disclosures. However, the presence of this other information may be a factor in determining whether the clear and conspicuous standard is met.◄ ***** Section 202.4–General Rules 4(d) Form of Disclosures 1. Clear and conspicuous. ►See § 202.2(bb) and accompanying comments.◄ [This standard requires that disclosures be presented in a reasonably understandable format in a way that does not obscure the required information. No minimum type size is mandated, but the disclosures must be legible, whether typewritten, handwritten, or printed by computer.] ***** By order of the Board of Governors of the Federal Reserve System, November 25, 2003. Jennifer J. Johnson (signed) Jennifer J. Johnson, Secretary of the Board