[Federal Register Volume 60, Number 249 (Thursday, December 28, 1995)]
[Proposed Rules]
[Pages 67097-67100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31363]



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FEDERAL RESERVE SYSTEM

12 CFR Part 202

[Regulation B; Docket No. R-0910]


Equal Credit Opportunity

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; official staff interpretation.

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SUMMARY: The Board is publishing for comment proposed revisions to its 
official staff commentary to Regulation B (Equal Credit Opportunity). 
The commentary applies and interprets the requirements of Regulation B 
and substitutes for individual staff interpretations. The proposed 
revisions to the commentary provide guidance on issues that the Board 
has been asked to clarify, including credit scoring and spousal 
signature rules.

DATES: Comments must be received on or before February 28, 1996.

ADDRESSES: Comments should refer to Docket No. R-0910, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments also may be delivered to Room B-2222 
of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to 
the guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments 
received will be available for inspection in Room MP-500 of the Martin 
Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided 
in 12 CFR 261.8 of the Board's rules regarding the availability of 
information.

FOR FURTHER INFORMATION CONTACT: Jane Jensen Gell, Sheilah A. Goodman, 
or Natalie E. Taylor, Staff Attorneys, Division of Consumer and 
Community Affairs, Board of Governors of the Federal Reserve System, at 
(202) 452-3667 or 452-2412. For users of the Telecommunications Device 
for the Deaf, contact Dorothea Thompson at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691-1691f, 
makes it unlawful for creditors to discriminate in any aspect of a 
credit transaction on the basis of race, color, religion, national 
origin, sex, marital status, or age (provided the applicant has the 
capacity to contract), because all or part of an applicant's income 
derives from public assistance, or because the applicant has in good 
faith exercised any right under the Consumer Credit Protection Act. 
This statute is implemented by the Board's Regulation B (12 CFR Part 
202). The Board also has an official staff commentary (12 CFR Part 202 
(Supp. I)) that interprets the regulation. The commentary provides 
general guidance to creditors in applying Regulation B to various 
credit transactions, and is updated periodically to address significant 
questions that arise.

II. Explanation of Proposed Commentary

Section 202.2--Definitions

2(p)  Empirically Derived and Other Credit Scoring Systems
    Comment 2(p)-2 would be revised to provide guidance on revalidation 
requirements for credit scoring systems.

Section 202.5--Rules Concerning Taking of Applications

5(e)  Written Applications
    Comment 5(e)-3 would be revised to cross-reference the proposed 
comments to section 202.13(b), which address applications submitted 
through an electronic medium.

Section 202.6--Rules Concerning Evaluation of Applications

6(b)  Specific Rules Concerning Use of Information
6(b)(2)
    Comment 6(b)(2)-2 would be revised to address the use of age in 
credit scoring systems that use scorecards for different age groups 
based on characteristics that are predictive for each group. Each 
scorecard considers the correlation among the predictive variables 
(representing characteristics such as income, length of residence, and 
credit history) for the age group. Each predictive variable is assigned 
the appropriate weight given the impact of the other predictive 
variables in that age group, so that comparable scores for each group 
reflect the same level of risk.
    Under the ECOA and Regulation B, if a creditor considers age--
whether by directly assigning a value to age or by some other means 
such as establishing scorecards for different age groups--the age of an 
elderly applicant must not be assigned a negative value. The Board 
believes that, to ensure that the treatment accorded applicants age 62 
or older complies with the law, elderly applicants who do not qualify 
for credit under the factors assigned to the scorecard for their age 
group must be rescored under the factors assigned to the scorecards for 
all other age groups in the system. Comment 6(b)(2)-2 would be revised 
to incorporate this concept.
    Proposed comment 6(b)(2)-4 addresses the use of age in a reverse 
mortgage transaction. A reverse mortgage is a home-secured loan in 
which the borrower receives payments from the creditor, and the 
repayment of these amounts does not become due until the borrower dies, 
moves permanently from the home, or transfers title to the home. The 
proposed comment clarifies that using age, as a proxy for life 
expectancy, in a reverse mortgage transaction to determine the line of 
credit or monthly payment amount that a borrower will receive does not 
violate the regulation.
6(b)(6)
    Comment 6(b)(6)-1 would be revised to clarify that if a creditor 
considers credit history, it must consider information presented by the 
applicant that is not included in the credit report, if it is the type 
the creditor normally considers on a credit report. The comment also 
clarifies that when one spouse is applying for individual credit, the 
creditor must consider information presented by the applicant that 
would 

[[Page 67098]]
tend to show that a credit history appearing in the name of both 
spouses is not reflective of the applicant's individual 
creditworthiness.

Section 202.7--Rules Concerning Extensions of Credit

7(d)  Signature of Spouse or Other Person
7(d)(2)
    Proposed comment 7(d)(2)-1 clarifies that in determining the value 
of an applicant's interest in property, a creditor must look to the 
actual form of ownership of the property prior to or at consummation.
    Regulation B requires that if an applicant is not individually 
creditworthy and the creditor seeks the signature of a co-owner of 
property relied upon to establish creditworthiness, the signature may 
be required only on the documents that are reasonably necessary, under 
state law, to make the property available in the event of death or 
default of the applicant. In some states, a signature on the debt 
instrument itself may be necessary. In other states, a creditor may be 
able to protect its interest with a signature on an instrument that 
creates a limited obligation--a document allowing the creditor to reach 
the nonapplicant signatory's interest only in the property at issue in 
the event of default. Examples of such instruments include a security 
agreement, mortgage, deed of trust, or limited guarantee. The creditor 
could also consider requesting a signature on a document sometimes 
referred to as a status statement. This document ascertains the 
character of property that will be used in the credit decision; affirms 
the purpose of the loan (if a business purpose, affirms or disclaims 
any interest or participation in the business); and attests to or 
disclaims the non-applicant's desire to be an applicant or guarantor of 
the requested credit.
    The Board proposes to revise comment 7(d)(2)-1 to clarify that 
where an individual applicant jointly owns property in a form and 
amount sufficient to establish creditworthiness, a creditor may not 
require the nonapplicant joint owner of the property to execute any 
instrument that forfeits or conveys that person's interest in the 
property to the applicant or other owners as a condition of credit. For 
example, a creditor could not require a non-applicant spouse to 
quitclaim their interest in jointly owned property relied upon to 
establish creditworthiness if the applicant spouse's interest in the 
property, and other resources, are sufficient to support the credit 
requested.
7(d)(6)
    Proposed comment 7(d)(6)-1 clarifies that a creditor may require 
that the partners, officers or directors of a creditworthy business 
personally guarantee an extension of credit to the business, as long as 
a guarantee is not required on a prohibited basis--e.g., only those 
businesses owned by women or minorities.
    Comment 7(d)(6)-2 would be revised to clarify that when the 
circumstances of a business loan require the guarantee of a spouse with 
no interest in the business, the creditor could ask the disinterested 
spouse to sign a limited guarantee.

Section 202.13--Information for Monitoring Purposes

13(a)  Information To Be Requested
    Comment 13(a)-6 would be revised to clarify that a refinancing 
involves the satisfaction of an existing obligation that is replaced by 
a new obligation undertaken by the same borrower. The proposed 
clarification is consistent with the definition of ``refinancing'' in 
other Board regulations, such as Regulation C (Home Mortgage 
Disclosure), 12 CFR 203, and Regulation Z (Truth in Lending), 12 CFR 
226.
13(b)  Obtaining of Information
    Proposed comment 13(b)-4 addresses the collection of monitoring 
information for applications submitted through an electronic medium 
that does not permit the creditor to view the applicant. In these 
instances, the creditor should treat the application as if it were 
accepted by mail or telephone.
    Proposed comment 13(b)-5 addresses the collection of monitoring 
information for applications submitted through an interactive video 
process. Regulation B requires a creditor to ask home mortgage loan 
applicants for monitoring information and, if the applicant chooses not 
to provide the information, requires the creditor to note the 
information on the application on the basis of visual observation or 
surname. There is an exception for telephone or mail applications. 
Where the creditor has the capability to view the applicant during the 
process, however, such as with an interactive video, the Board believes 
the application is like an in-person application. Thus, a creditor must 
ask the applicant for monitoring information and enter the information 
provided on the application form. If the applicant does not provide the 
information, the creditor must note the information to the extent the 
video display makes it possible to do so.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-0910. The Board 
requests that, when possible, comments be prepared using a standard 
courier typeface with a type size of 10 or 12 characters per inch. This 
will enable the Board to convert the text into machine-readable form 
through electronic scanning, and will facilitate automated retrieval of 
comments for review. Comments may also be submitted on computer 
diskettes, using either the 3.5'' or 5.25'' size, in any IBM-compatible 
DOS-based format. Comments on computer diskettes must be accompanied by 
a paper version.

List of Subjects in 12 CFR Part 202

    Aged, Banks, banking, Civil rights, Consumer protection, Credit, 
Discrimination, Federal Reserve System, Marital status discrimination, 
Penalties, Religious discrimination, Reporting and recordkeeping 
requirements, Sex discrimination.
    Certain conventions have been used to highlight the proposed 
changes to the staff commentary. New language is shown inside bold-
faced arrows, while language that would be removed is set off with 
brackets.
    For the reasons set forth in the preamble, the Board proposes to 
amend 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. In Supplement I to Part 202, under Section 202.2 Definitions, 
under 2(p) Empirically derived and other credit scoring systems., three 
new sentences would be added at the end of paragraph 2 to read as 
follows:

Supplement I to Part 202--Official Staff Interpretations

* * * * *

Section 202.2 Definitions

* * * * *

2(p) Empirically derived and other credit scoring systems.

* * * * *
    2. * * * <rt-triang>To ensure that predictive ability is being 
maintained, the performance of the system should be monitored. This 
could be done, for example, by analyzing the loan portfolio to 
determine the delinquency rate for each score interval. If these 
data indicate that the system is no longer identifying risk as 
predicted, the system must 

[[Page 67099]]
be revalidated and the variables for each score interval adjusted 
accordingly.<lf-triang>
* * * * *
    3. In Supplement I to Part 202, under Section 202.5 Rules 
Concerning Taking of Applications, under 5(e) Written applications., 
paragraph 3. would be revised to read as follows:
 * * * * *

Section 202.5 Rules Concerning Taking of Applications

 * * * * *

5(e) Written applications.

 * * * * *
    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 section 202.13(b) 
<rt-triang>, Applications through electronic media and Applications 
through interactive video<lf-triang>.)
 * * * * *
    4. In Supplement I to Part 202, Section 202.6 Rules Concerning 
Evaluation of Applications would be amended as follows:
    a. Under Paragraph 6(b)(2), paragraph 2. would be revised; 
paragraphs 4. and 5. would be redesignated as paragraphs 5. and 6., 
respectively; and new paragraph 4. would be added; and
    b. Paragraph 6(b)(6) would be revised.
    The additions and revisions would read as follows:
 * * * * *

Section 202.6--Rules Concerning Evaluation of Applications

 * * * * *
    Paragraph 6(b)(2)
 * * * * *
    2. Consideration of age in a credit scoring system. Age may be 
taken directly into account in a credit scoring system that is 
``demonstrably and statistically sound,'' as defined in 
Sec. 202.2(p), with one limitation: an applicant who is 62 years or 
older must be treated at least as favorably as anyone who is under 
62. <rt-triang>For example, an applicant who is 62 years or older 
may not be denied credit if an applicant under age 62 with the same 
characteristics would be approved for credit under the scoring 
system. Thus, a creditor using an age-based credit scoring system 
must ensure that elderly applicants who do not qualify under the 
factors assigned to elderly age groups are rescored using the 
factors or weights assigned to all other age groups in the 
system.<lf-triang>
 * * * * *
    <rt-triang> 4. Consideration of age in a reverse mortgage. A 
reverse mortgage is a home-secured loan in which the borrower 
receives payments from the creditor, and does not become obligated 
to repay these amounts until the expiration of a term or when the 
borrower dies, moves permanently from the home, or transfers title 
to the home. Disbursements to the borrower under a reverse mortgage 
typically are determined by considering the value of the borrower's 
home, the current interest rate, and the borrower's life expectancy. 
Age may be directly taken into account in setting the terms of a 
reverse mortgage without violating the regulation B.<lf-triang>
 * * * * *
    Paragraph 6(b)(6)
    1. [Types of credit references.] <rt-triang>Evaluating credit 
history.<lf-triang> 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 applicants 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.
    <rt-triang>i. At the applicant's request, a creditor must 
consider credit information of the same type that the creditor would 
consider if reported through a credit bureau. For example, if a 
creditor normally considers car loan payments, and the consumer 
presents credible information (such as cancelled checks or money-
order receipts) about payment history on a car loan from a finance 
company that did not report to a credit bureau, the creditor must 
consider this information in its evaluation of credit history.
    ii. At the applicant's request, a creditor must consider 
information that a credit history reported in both spouses' names 
does not accurately reflect the applicant's ability or willingness 
to repay. For example, assume an applicant applies for individual 
credit and the credit bureau report shows late payments on a 
mortgage obligation held jointly with a former spouse. If the 
applicant can demonstrate that the former spouse alone was 
responsible for the late payments (such as by a transfer of title to 
the former spouse and a document from the mortgage creditor that 
released the applicant from liability for the debt) the creditor 
must disregard both the mortgage debt and the late payments in 
determining the applicant's creditworthiness.<lf-triang>
 * * * * *
    5. In Supplement I to Part 202, Section 202.7--Rules Concerning 
Extensions of Credit, would be amended as follows:
    a. Under Paragraph 7(d)(2), paragraph 1. would be revised; and
    b. Paragraph 7(d)(6) would be revised.
    The revisions would read as follows:
 * * * * *

Section 202.7--Rules Concerning Extensions of Credit

 * * * * *
    Paragraph 7(d)(2)
    1. Jointly owned property. <rt-triang>a. Valuation of 
applicant's interest.<lf-triang> In determining the value of [the] 
<rt-triang>an<lf-triang> applicant's interest in jointly owned 
property, a creditor may consider factors such as the [form of 
ownership and the] property's susceptibility to attachment, 
execution, severance, or partition and the cost of such action. 
<rt-triang>This determination must be based on the actual form of 
ownership of the property prior to or at consummation, and not on 
the possibility of a subsequent change in the form of ownership. For 
example, in determining whether a married applicant's interest in 
property is sufficient to satisfy the creditor's standards of 
creditworthiness for individual credit, a creditor may not obtain 
the signature of the nonapplicant spouse based on the possibility 
that the applicant's separately-held property may be transferred 
into tenancy by the entirety after consummation. Similarly, a 
creditor may not routinely require a nonapplicant joint owner to 
execute any document (such as a quitclaim deed) that would change 
the nonapplicant joint owner's interest in property offered by the 
applicant to support the extension of credit.
    b. Other options to support credit.<lf-triang> If the 
applicant's interest in the property does not support the amount and 
terms of credit sought, the creditor may give the applicant some 
other option of providing additional support for the extension of 
credit[, f] <rt-triang>. F<lf-triang>or example[--]<rt-triang>:
    i.<lf-triang> [r]<rt-triang>R<lf-triang>equiring an additional 
party under Sec. 202.7(d)(5)<rt-triang>;
    ii.<lf-triang> [o]<rt-triang>O<lf-triang>ffering to grant the 
applicant's request on a secured credit basis<rt-triang>; or
    iii.<lf-triang> [a]<rt-triang>A<lf-triang>sking for the 
signature of the co-owner of the property on an instrument that 
ensures access to the property but does not impose personal 
liability unless necessary under state law<rt-triang> (which could 
include, for example, a security agreement, deed of trust, mortgage, 
limited guarantee, quitclaim deed, or status statement from the 
nonapplicant owner).<lf-triang>
 * * * * *
    Paragraph 7(d)(6)
    1. Guarantees. A guarantee on an extension of credit is part of 
a credit transaction and therefore subject to the regulation. 
<rt-triang>A creditor may require the personal guarantee of the 
partners, directors, or officers of a business even if the business 
itself is creditworthy. The guarantee must be based on the 
guarantor's relationship with the business, however, and not on a 
prohibited basis.
    2. Spousal guarantees. The rules in Sec. 202.7(d) bar a creditor 
from requiring the signature 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 corporate loan, 
the creditor may not automatically 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, however, the creditor may require the signature of a 
spouse in appropriate circumstances--for example, if the property 
relied upon to meet the creditor's standards is held jointly. In 
such a case, the creditor could ask the spouse to sign an instrument 
that provides for liability to the extent of the spouse's interest 
in the property relied upon to support the credit (such as a limited 
guarantee).<lf-triang>
* * * * * 

[[Page 67100]]

    6. In Supplement I to Part 202, Section 202.13--Information for 
Monitoring purposes, would be amended as follows:
    a. Under 13(a) Information to be requested., paragraph 6. would be 
revised; and
    b. Under 13(b) Obtaining of information., paragraphs 4. and 5. 
would be redesignated as paragraphs 6. and 7. respectively, and new 
paragraphs 4. and 5. would be added.
    The revisions and additions would read as follows:
* * * * *

Section 202.13 Information for Monitoring purposes

13(a) Information to be requested.

* * * * *
    6. Refinancings. <rt-triang> A refinancing occurs when an 
existing obligation is satisfied and replaced by a new obligation 
undertaken by the same borrower. <lf-triang> A creditor that 
receives an application to [change the terms and conditions of] 
<rt-triang>refinance<lf-triang> 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 required to do 
so if it was obtained in the earlier transaction.
* * * * *

13(b) Obtaining of information.

* * * * *
    <rt-triang>4. Applications through electronic media. If an 
applicant applies through an electronic medium (for example, via the 
Internet or by facsimile) without any face-to-face interactive video 
capability, the creditor should treat the application as if it were 
accepted by mail or telephone.<lf-triang>
    <rt-triang>5. Applications through interactive video. If a 
creditor takes an application through an interactive application 
process with video capabilities, and the creditor can see the 
applicant, the creditor should treat these applications as taken in 
person and collect the monitoring information.<lf-triang>
* * * * *
    By order of the Secretary of the Board, acting pursuant to 
delegated authority for the Board of Governors of the Federal 
Reserve System, December 21, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-31363 Filed 12-27-95; 8:45 am]
BILLING CODE 6210-01-P