CUNA Comment Letter
Advance Notice of Proposed Rulemaking on Regulation B
May 29, 1998
Mr. William W. Wiles
Board of Governors of the
Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Re: Docket No. R-1008, Advance Notice of Proposed Rulemaking on Regulation B, Equal Credit Opportunity
Dear Mr. Wiles:
The Credit Union National Association appreciates the opportunity to comment on the Federal Reserve Board's Advance Notice of Proposed Rulemaking regarding Regulation B, Equal Credit Opportunity, which appeared in the Federal Register March 12, 1998. CUNA represents the nation's 11,200 state and federal credit unions which serve more than 72 million members.
CUNA commends the Board for undertaking its review of Regulation B to determine whether the rule should be revised to: address technological and other developments; identify areas in the regulation that could be revised to better balance consumer protections and industry burden; and delete obsolete provisions. The Board is seeking comments on several specific issues, which are addressed below.
Preapplication Marketing Practices
The Equal Credit Opportunity Act (the Act) and Regulation B prohibit discrimination by a creditor against an applicant (a person who has requested or received credit) on a prohibited basis with respect to any aspect of a credit transaction. In general, the Act has not been interpreted to apply to a creditor's preapplication marketing practices, such as the selection of persons to be solicited for a credit card.
The Board recognizes that prescreening using a prohibited basis may make it easier for creditors to identify potential customers and provide some consumers with greater access to credit, such as targeting older individuals for credit solicitations. However, the Board has found instances in which creditors, primarily in the credit card industry, have used age to exclude youth and elderly individuals from receiving such solicitations.
The Board seeks comments on how and to what extent creditors are using any prohibited bases in preapplication marketing. Because they are member-owned, credit unions want to make their services as widely available to individuals within their fields of membership as possible, and we are not aware of credit unions using prohibited bases in their marketing programs.
The Board's inquiry raises the question as to whether Regulation B should cover preapplication marketing. We agree with the Board's current interpretation that the Act's coverage is, in general, limited to those who seek credit information. However, under the Act it is illegal for any creditor to discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction, and advertisements which encourage or discourage potential borrowers on a prohibited basis are already impermissible under Regulation B. The Board's review of the applicability of Regulation B to preapplication marketing should fully consider whether the Act requires such coverage for individuals who are not seeking credit and whether the benefit to consumers outweighs the burden to creditors of additional Regulation B requirements.
Regulation B allows creditors to establish their own application procedures, including what and how much information to provide to consumers who request it before applying for credit. According to the Board, some creditors and others have expressed concern that the current distinction under Regulation B between an inquiry and an application, which is based on how the creditor responds to an applicant, is difficult to apply.
The Board asked for comments on whether the more formal the process of providing information, counseling, and assisting potential applicants, the more the process should be treated as an application.
While we believe consumers should receive all the disclosures to which they are entitled under Regulation B, changes to the Regulation and Commentary that would result in additional disclosure requirements for creditors should not be adopted unless they are required by the Act.
The Board has not provided sufficient justification at this point for the need to expand the definition of "application" to encompass information exchanges that do not currently meet the term's definition.
We believe that the current Regulation B Commentary to Sec. 202.2(f) (regarding the definition of the term "application") provides sufficient guidance to distinguish an application from an inquiry and that whether a creditor's actions constitutes an application should not be based on the degree of formality used by the creditor in providing information to the consumer. However, if the Board believes further assistance is necessary, we suggest the Board amend the Commentary to provide additional fact patterns illustrating when an application has occurred.
We agree with the Board's observation that lenders should be encouraged to provide information to potential borrowers. However, if a lender is concerned that in providing information, the exchange might be viewed as an application under Regulation B and inadvertently trigger additional regulatory requirements, it will constrain creditors' willingness to offer assistance and information that would otherwise be useful to consumers in comparing loan products.
The Board also raised a number of specific questions relevant to the distinction between an application and an inquiry which are listed below with our responses.
* Should the Board devise a different test for determining when an informal discussion becomes an application?
We do not think a different test would benefit consumers and could be confusing for front line financial institution staff if they have to be aware of and implement several tests as to when an inquiry becomes an application.
* Should the Board seek to establish a "bright-line" test? For example, should an inquiry become an application when a creditor evaluates or verifies credit information through third-party information (such as by obtaining a credit report or credit score)?
We are aware that some creditors favor a more clearly articulated test for determining when an information exchange becomes an application, even though others feel the current regulation and commentary provide sufficient guidance. If the Board proceeds in the development of such a "bright-line" test, we would not support a definition of "application" that would transform an inquiry into an application simply because the creditor has obtained preliminary credit information.
Under the regulation and commentary, an inquiry becomes an application when the creditor, in giving information to the consumer, evaluates information about the application, declines the request for credit and communicates the decision to the potential borrower. This approach emphasizes that the mere obtaining of credit or other relevant information and evaluation of that data is not an application unless the creditor also makes a decision based on the evaluation and informs the consumer. If the Board determines a new test is advisable, the concept of a multi-faceted approach to what is an application should be retained.
* When, if at all, would the use of an interactive loan-calculation tool, such as on an Internet Home Page, constitute an application?
Such tools provide important resources for consumers and creditors should be encouraged to provide them. As stated above, unless the creditor makes a decision that is communicated to the applicant, we do not believe an application has occurred.
* Is it possible or desirable to apply the current notification rules to home- ownership counseling programs? If not, how should the rules be designed to distinguish education-oriented counseling from advice offered by a lender, for example, to a consumer requesting a prequalification decision?
We do not believe programs that seek to educate consumers about the lending process and credit options they might pursue should be viewed as applications. If these types of educational efforts become subject to the notification rules, we believe it will discourage lenders from providing such programs.
* Are there some home-ownership counseling programs that have elements of both counseling and applications such that they should be distinguished from education-oriented counseling?
There may be programs which combine counseling with the application process, which could be beneficial to the consumer. Such programs should be distinguished from other programs in which an application is not part of the process such that creditors are clearly aware that at the point when an application has occurred, they must comply with the relevant Regulation B notification requirements regarding applications.
Voluntary Data Collection
Regulation B generally prohibits creditors from inquiring about an applicant's sex, marital status, race, color, religion, and national origin. However, exceptions to this prohibition have been included in Regulation B. For example, the regulation requires creditors to collect "monitoring information" (age, sex, marital status, and race or national origin) for mortgage loan applicants to help detect mortgage lending discrimination. The regulation also allows creditors to collect data if required by another regulation.
The Board is seeking comment on whether to consider amending Regulation B to remove the prohibition barring creditors from collecting certain information about applicants for nonmortgage credit products.
In June 1995, we filed a comment letter supporting an option for creditors to ask applicants to provide data on their race, color, sex, religion, and national origin on a voluntary basis, but only if Regulation B states that the collection of such data is strictly optional. We also said that regulators and examiners should not be permitted to make negative inferences about institutions that do not collect such data, and that applicants who are rejected should not be able to use the data against a creditor in an administrative or civil action. Our views on these points have not changed.
Definition of Creditor
According to the Board, as creditors expand their distribution systems for lending services and products, they have increasingly requested guidance about how the definition of "creditor" applies when a lender acts in conjunction with other parties and discrimination occurs.
Regulation B provides that a person (who may otherwise be a creditor) is not a creditor regarding a violation of the Act or the regulation committed by another creditor unless the person knew or had reasonable notice of the act that constituted the violation before it became involved in the transaction.
The Board solicits comment on whether it is desirable or feasible to provide further guidance in this area, such as the circumstances under which a creditor is deemed to have knowledge of the acts of other parties. The Board should amend the Commentary to provide examples of situations in which a creditor would be considered to have knowledge of the Regulation B violations of third parties.
The Board also asked for responses to the following questions:
* Should the current test--which relies on whether a person knew or had reasonable notice of an act of discrimination--be modified? If so, in what way?
The Act defines "creditor" as:
...any person who regularly extends...credit...or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.
Based on the statutory definition of "creditor" the Board should consider amending the test to provide that a creditor would be liable for the violations of another creditor only if the creditor knowingly participated in the violations.
* Should the regulation address whether, and under what circumstances, a creditor must monitor the pricing or other credit terms when another creditor (for example, a broker) participates in the transactions?
No. We do not believe that creditors are required by the Equal Credit Opportunity Act to monitor the practices of other creditors. Such a requirement would be a significant, ongoing burden for creditors, and would not result in an appreciable increase in protection for consumers.
Documentation for Business Credit
Currently, Regulation B requires written applications if the credit is primarily for the purchase or refinancing of an applicant's principal dwelling. This rule does not apply to business credit. Many requests for business credit are made orally or without a formal written application. Where the financial statement offered to support the business credit lists jointly held property and is signed by both owners, some creditors are treating the financial statement as a joint application.
We agree with the Board's analysis that a joint property owner's signature on a financial statement to attest to the accuracy of information is not definitive evidence of a joint application.
The Board has been asked to revise the regulation to provide guidance on what mechanisms may be used by creditors to establish a joint property owner's intent to apply for joint business credit.
We encourage the Board to provide such guidance in the Commentary. For example, the Commentary should state the a written, joint application, signed by both property owners, is evidence of the intent to apply for joint credit.
Business Credit Exemptions
The Act authorizes the Board to exempt certain transactions if the Board determines that the application of all or part of the regulation to such transactions would not contribute substantially to obtaining the purposes of the regulation. The Board has used this authority to exempt business credit from certain notification and record retention requirements if the business had gross revenues in excess of $1 million in its preceding fiscal year, or if the business requested an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit. We do not believe borrowers have been disadvantaged by these exemptions which afford a measure of regulatory relief for creditors.
The Board has asked for comments on other issues relating to Regulation B. We believe that the Board's review of this regulation is extremely important, and the broadest possible input from consumers and creditors alike should be sought as the Board considers what changes, if any, it should adopt to Regulation B. In that connection, we recommend the Board establish a Regulation B working group comprised of financial institution and consumer group representatives to consider the effectiveness and costs of the regulation and provide a report within 9 months, which would address recommendations for statutory as well as regulatory changes, to the Board's Consumer Advisory Council and to the Board.
Thank you for the opportunity to comment on issues relating to Regulation B.
Mary Mitchell Dunn
Associate General Counsel for