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					                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                     To obtain the statement, please contact                    mentary to the regulation, which will be
                                                                     [name, address and telephone number of the                 amended periodically.
                                                                     person or office from which the statement of                 2. Requests for Issuance of Official Staff In-
                                                                     reasons can be obtained] within 60 days from               terpretations. A request for an official staff
                                                                     the date you are notified of our decision. We              interpretation should be in writing and ad-
                                                                     will send you a written statement of reasons               dressed to the Director, Division of Con-
                                                                     for the denial within 30 days of receiving                 sumer and Community Affairs, Board of Gov-
                                                                     your request for the statement.                            ernors of the Federal Reserve System, Wash-
                                                                       Notice: The federal Equal Credit Oppor-                  ington, DC 20551. The request should contain
                                                                     tunity Act prohibits creditors from discrimi-              a complete statement of all relevant facts
                                                                     nating against credit applicants on the basis              concerning the issue, including copies of all
                                                                     of race, color, religion, national origin, sex,            pertinent documents.
                                                                     marital status, age (provided the applicant                  3. Scope of Interpretations. No staff interpre-
                                                                     has the capacity to enter into a binding con-              tations will be issued approving creditors’
                                                                     tract); because all or part of the applicant’s             forms or statements. This restriction does
                                                                     income derives from any public assistance                  not apply to forms or statements whose use
                                                                     program; or because the applicant has in                   is required or sanctioned by a government
                                                                     good faith exercised any right under the Con-              agency.
                                                                     sumer Credit Protection Act. The federal
                                                                     agency that administers compliance with
                                                                                                                                  SUPPLEMENT I TO PART 202—OFFICIAL
                                                                     this law concerning this creditor is [name                        STAFF INTERPRETATIONS
                                                                     and address as specified by the appropriate                  Following is an official staff interpretation
                                                                     agency listed in appendix A].                              of Regulation B (12 CFR part 202) issued
                                                                       Form C–9—Sample Disclosure of Right To                   under authority delegated by the Federal Re-
                                                                           Receive a Copy of an Appraisal                       serve Board to officials in the Division of
                                                                                                                                Consumer and Community Affairs. Ref-
                                                                       You have the right to a copy of the ap-                  erences are to sections of the regulation or
                                                                     praisal report used in connection with your                the Equal Credit Opportunity Act (15 U.S.C.
                                                                     application for credit. If you wish a copy,                1601 et seq.).
                                                                     please write to us at the mailing address we
                                                                     have provided. We must hear from you no                                       Introduction
                                                                     later than 90 days after we notify you about                  1. Official status. Section 706(e) of the Equal
                                                                     the action taken on your credit application                Credit Opportunity Act protects a creditor
                                                                     or you withdraw your application.                          from civil liability for any act done or omit-
                                                                       [In your letter, give us the following infor-            ted in good faith in conformity with an in-
                                                                     mation:]                                                   terpretation issued by a duly authorized offi-
                                                                                                                                cial of the Federal Reserve Board. This com-
                                                                         Form C–10—Sample Disclosure About
                                                                                                                                mentary is the means by which the Division
                                                                              Voluntary Data Notation
                                                                                                                                of Consumer and Community Affairs of the
                                                                       We are requesting the following informa-                 Federal Reserve Board issues official staff
                                                                     tion to monitor our compliance with the fed-               interpretations of Regulation B. Good-faith
                                                                     eral Equal Credit Opportunity Act, which                   compliance with this commentary affords a
                                                                     prohibits unlawful discrimination. You are                 creditor protection under section 706(e) of
                                                                     not required to provide this information. We               the Act.
                                                                     will not take this information (or your deci-                 2. Issuance of interpretations. Under Appen-
                                                                     sion not to provide this information) into ac-             dix D to the regulation, any person may re-
                                                                     count in connection with your application or               quest an official staff interpretation. Inter-
                                                                     credit transaction. The law provides that a                pretations will be issued at the discretion of
                                                                     creditor may not discriminate based on this                designated officials and incorporated in this
                                                                     information, or based on whether or not you                commentary following publication for com-
                                                                     choose to provide it. [If you choose not to                ment in the FEDERAL REGISTER. Except in
                                                                     provide the information, we will note it by                unusual circumstances, official staff inter-
                                                                     visual observation or surname].                            pretations will be issued only by means of
                                                                                                                                this commentary.
                                                                      APPENDIX D TO PART 202—ISSUANCE OF                           3. Status of previous interpretations. Inter-
                                                                           STAFF INTERPRETATIONS                                pretations of Regulation B previously issued
                                                                                                                                by the Federal Reserve Board and its staff
                                                                       1. Official Staff Interpretations. Officials in          have been incorporated into this com-
                                                                     the Board’s Division of Consumer and Com-                  mentary as appropriate. All other previous
                                                                     munity Affairs are authorized to issue offi-               Board and staff interpretations, official and
                                                                     cial staff interpretations of this regulation.             unofficial, are superseded by this com-
                                                                     These interpretations provide the protection               mentary.
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                                                                     afforded under section 706(e) of the Act. Ex-                 4. Footnotes. Footnotes in the regulation
                                                                     cept in unusual circumstances, such inter-                 have the same legal effect as the text of the
                                                                     pretations will not be issued separately but               regulation, whether they are explanatory or
                                                                     will be incorporated in an official com-                   illustrative in nature.


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                        5. Comment designations. The comments are               but keeps open accounts with higher credit
                                                                     designated with as much specificity as pos-                limits, the termination is adverse action and
                                                                     sible according to the particular regulatory               notification is required under § 202.9.
                                                                     provision addressed. Each comment in the
                                                                     commentary is identified by a number and                                  Paragraph 2(c)(2)(ii)
                                                                     the regulatory section or paragraph that it                  1. Default—exercise of due-on-sale clause. If a
                                                                     interprets. For example, comments to                       mortgagor sells or transfers mortgaged prop-
                                                                     § 202.2(c) are further divided by subparagraph,            erty without the consent of the mortgagee,
                                                                     such as comment 2(c)(1)(ii)–1 and comment                  and the mortgagee exercises its contractual
                                                                     2(c)(2)(ii)–1.                                             right to accelerate the mortgage loan, the
                                                                     Section 202.1—Authority, Scope, and Purpose                mortgagee may treat the mortgagor as being
                                                                                                                                in default. An adverse action notice need not
                                                                       1(a) Authority and scope.                                be given to the mortgagor or the transferee.
                                                                       1. Scope. The Equal Credit Opportunity Act               (See comment 2(e)–1 for treatment of a pur-
                                                                     and Regulation B apply to all credit—com-                  chaser who requests to assume the loan.)
                                                                     mercial as well as personal—without regard                   2. Current delinquency or default. The term
                                                                     to the nature or type of the credit or the                 adverse action does not include a creditor’s
                                                                     creditor. If a transaction provides for the de-            termination of an account when the
                                                                     ferral of the payment of a debt, it is credit              accountholder is currently in default or de-
                                                                     covered by Regulation B even though it may                 linquent on that account. Notification in ac-
                                                                     not be a credit transaction covered by Regu-               cordance with § 202.9 of the regulation gen-
                                                                     lation Z (Truth in Lending) (12 CFR part                   erally is required, however, if the creditor’s
                                                                     226). Further, the definition of creditor is not           action is based on a past delinquency or de-
                                                                     restricted to the party or person to whom                  fault on the account.
                                                                     the obligation is initially payable, as is the
                                                                     case under Regulation Z. Moreover, the Act                               Paragraph 2(c)(2)(iii)
                                                                     and regulation apply to all methods of credit
                                                                                                                                  1. Point-of-sale transactions. Denial of credit
                                                                     evaluation, whether performed judgmentally
                                                                                                                                at point of sale is not adverse action except
                                                                     or by use of a credit scoring system.
                                                                                                                                under those circumstances specified in the
                                                                       2. Foreign applicability. Regulation B gen-
                                                                                                                                regulation. For example, denial at point of
                                                                     erally does not apply to lending activities
                                                                                                                                sale is not adverse action in the following
                                                                     that occur outside the United States. The
                                                                     regulation does apply to lending activities
                                                                                                                                  i. A credit cardholder presents an expired
                                                                     that take place within the United States (as
                                                                                                                                card or a card that has been reported to the
                                                                     well as the Commonwealth of Puerto Rico
                                                                                                                                card issuer as lost or stolen.
                                                                     and any territory or possession of the United
                                                                                                                                  ii. The amount of a transaction exceeds a
                                                                     States), whether or not the applicant is a
                                                                                                                                cash advance or credit limit.
                                                                                                                                  iii. The circumstances (such as excessive
                                                                       3. Board. The term Board, as used in this
                                                                                                                                use of a credit card in a short period of time)
                                                                     regulation, means the Board of Governors of
                                                                                                                                suggest that fraud is involved.
                                                                     the Federal Reserve System.
                                                                                                                                  iv. The authorization facilities are not
                                                                                 Section 202.2—Definitions                      functioning.
                                                                                                                                  v. Billing statements have been returned
                                                                       2(c) Adverse action.                                     to the creditor for lack of a forwarding ad-
                                                                                     Paragraph 2(c)(1)(i)
                                                                                                                                  2. Application for increase in available credit.
                                                                       1. Application for credit. If the applicant ap-          A refusal or failure to authorize an account
                                                                     plied in accordance with the creditor’s proce-             transaction at the point of sale or loan is not
                                                                     dures, a refusal to refinance or extend the                adverse action except when the refusal is a
                                                                     term of a business or other loan is adverse                denial of an application, submitted in ac-
                                                                     action.                                                    cordance with the creditor’s procedures, for
                                                                                                                                an increase in the amount of credit.
                                                                                    Paragraph 2(c)(1)(ii)
                                                                                                                                               Paragraph 2(c)(2)(v)
                                                                        1. Move from service area. If a credit card
                                                                     issuer terminates the open-end account of a                   1. Terms of credit versus type of credit offered.
                                                                     customer because the customer has moved                    When an applicant applies for credit and the
                                                                     out of the card issuer’s service area, the ter-            creditor does not offer the credit terms re-
                                                                     mination is adverse action unless termi-                   quested by the applicant (for example, the
                                                                     nation on this ground was explicitly pro-                  interest rate, length of maturity, collateral,
                                                                     vided for in the credit agreement between                  or amount of downpayment), a denial of the
                                                                     the parties. In cases where termination is ad-             application for that reason is adverse action
                                                                     verse action, notification is required under               (unless the creditor makes a counteroffer
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                                                                     § 202.9.                                                   that is accepted by the applicant) and the
                                                                        2. Termination based on credit limit. If a cred-        applicant is entitled to notification under
                                                                     itor terminates credit accounts that have                  § 202.9.
                                                                     low credit limits (for example, under $400)                   2(e) Applicant.


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                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                       1. Request to assume loan. If a mortgagor                be financed, and asks whether he qualifies
                                                                     sells or transfers the mortgaged property                  for a loan; the employee responds by describ-
                                                                     and the buyer makes an application to the                  ing the general lending policies, explaining
                                                                     creditor to assume the mortgage loan, the                  that he would need to look at all of the con-
                                                                     mortgagee must treat the buyer as an appli-                sumer’s qualifications before making a deci-
                                                                     cant unless its policy is not to permit as-                sion, and offering to send an application
                                                                     sumptions.                                                 form to the consumer.
                                                                       2(f) Application.                                           5. Examples of an application. An applica-
                                                                       1. General. A creditor has the latitude                  tion for credit includes the following situa-
                                                                     under the regulation to establish its own ap-              tions:
                                                                     plication process and to decide the type and                  i. A person asks a financial institution to
                                                                     amount of information it will require from                 ‘‘preapprove’’ her for a loan (for example, to
                                                                     credit applicants.                                         finance a house or a vehicle she plans to buy)
                                                                       2. Procedures used. The term ‘‘procedures’’              and the institution reviews the request
                                                                     refers to the actual practices followed by a               under a program in which the institution,
                                                                     creditor for making credit decisions as well               after a comprehensive analysis of her credit-
                                                                     as its stated application procedures. For ex-              worthiness, issues a written commitment
                                                                     ample, if a creditor’s stated policy is to re-             valid for a designated period of time to ex-
                                                                     quire all applications to be in writing on the             tend a loan up to a specified amount. The
                                                                     creditor’s application form, but the creditor              written commitment may not be subject to
                                                                     also makes credit decisions based on oral re-              conditions other than conditions that re-
                                                                     quests, the creditor’s procedures are to ac-               quire the identification of adequate collat-
                                                                     cept both oral and written applications.                   eral, conditions that require no material
                                                                       3. When an inquiry or prequalification request           change in the applicant’s financial condition
                                                                     becomes an application. A creditor is encour-              or creditworthiness prior to funding the
                                                                     aged to provide consumers with information                 loan, and limited conditions that are not re-
                                                                     about loan terms. However, if in giving infor-             lated to the financial condition or credit-
                                                                     mation to the consumer the creditor also                   worthiness of the applicant that the lender
                                                                     evaluates information about the consumer,                  ordinarily attaches to a traditional applica-
                                                                     decides to decline the request, and commu-                 tion (such as certification of a clear termite
                                                                     nicates this to the consumer, the creditor                 inspection for a home purchase loan, or a
                                                                     has treated the inquiry or prequalification                maximum mileage requirement for a used
                                                                     request as an application and must then                    car loan). But if the creditor’s program does
                                                                     comply with the notification requirements                  not provide for giving written commitments,
                                                                     under § 202.9. Whether the inquiry or                      requests for preapprovals are treated as
                                                                     prequalification request becomes an applica-               prequalification requests for purposes of the
                                                                     tion depends on how the creditor responds to               regulation.
                                                                     the consumer, not on what the consumer                        ii. Under the same facts as above, the fi-
                                                                     says or asks. (See comment 9–5 for further                 nancial institution evaluates the person’s
                                                                     discussion of prequalification requests; see               creditworthiness and determines that she
                                                                     comment      2(f)–5   for   a   discussion    of           does not qualify for a preapproval.
                                                                     preapproval requests.)                                        6. Completed application—diligence require-
                                                                       4. Examples of inquiries that are not applica-           ment. The regulation defines a completed ap-
                                                                     tions. The following examples illustrate situ-             plication in terms that give a creditor the
                                                                     ations in which only an inquiry has taken                  latitude to establish its own information re-
                                                                     place:                                                     quirements. Nevertheless, the creditor must
                                                                       i. A consumer calls to ask about loan                    act with reasonable diligence to collect in-
                                                                     terms and an employee explains the credi-                  formation needed to complete the applica-
                                                                     tor’s basic loan terms, such as interest rates,            tion. For example, the creditor should re-
                                                                     loan-to-value ratio, and debt-to-income                    quest information from third parties, such as
                                                                     ratio.                                                     a credit report, promptly after receiving the
                                                                       ii. A consumer calls to ask about interest               application. If additional information is
                                                                     rates for car loans, and, in order to quote the            needed from the applicant, such as an ad-
                                                                     appropriate rate, the loan officer asks for the            dress or a telephone number to verify em-
                                                                     make and sales price of the car and the                    ployment, the creditor should contact the
                                                                     amount of the downpayment, then gives the                  applicant promptly. (But see comment
                                                                     consumer the rate.                                         9(a)(1)–3, which discusses the creditor’s op-
                                                                       iii. A consumer asks about terms for a loan              tion to deny an application on the basis of
                                                                     to purchase a home and tells the loan officer              incompleteness.)
                                                                     her income and intended downpayment, but                      2(g) Business credit.
                                                                     the loan officer only explains the creditor’s                 1. Definition. The test for deciding whether
                                                                     loan-to-value ratio policy and other basic                 a transaction qualifies as business credit is
                                                                     lending policies, without telling the con-                 one of primary purpose. For example, an
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                                                                     sumer whether she qualifies for the loan.                  open-end credit account used for both per-
                                                                       iv. A consumer calls to ask about terms for              sonal and business purposes is not business
                                                                     a loan to purchase vacant land and states his              credit unless the primary purpose of the ac-
                                                                     income and the sales price of the property to              count is business-related. A creditor may


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                     rely on an applicant’s statement of the pur-               dated and revalidated based on the creditor’s
                                                                     pose for the credit requested.                             own data.
                                                                       2(j) Credit.                                                3. Pooled data scoring systems. A scoring sys-
                                                                       1. General. Regulation B covers a wider                  tem or the data from which to develop such
                                                                     range of credit transactions than Regulation               a system may be obtained from either a sin-
                                                                     Z (Truth in Lending). Under Regulation B, a                gle credit grantor or multiple credit
                                                                     transaction is credit if there is a right to               grantors. The resulting system will qualify
                                                                     defer payment of a debt—regardless of                      as an empirically derived, demonstrably and
                                                                     whether the credit is for personal or com-                 statistically sound, credit scoring system
                                                                     mercial purposes, the number of install-                   provided the criteria set forth in paragraph
                                                                     ments required for repayment, or whether                   (p)(1)(i) through (iv) of this section are met.
                                                                     the transaction is subject to a finance                    A creditor is responsible for ensuring its sys-
                                                                     charge.                                                    tem is validated and revalidated based on the
                                                                       2(l) Creditor.                                           creditor’s own data when it becomes avail-
                                                                       1. Assignees. The term creditor includes all             able.
                                                                     persons participating in the credit decision.                 4. Effects test and disparate treatment. An
                                                                     This may include an assignee or a potential                empirically derived, demonstrably and sta-
                                                                     purchaser of the obligation who influences                 tistically sound, credit scoring system may
                                                                     the credit decision by indicating whether or               include age as a predictive factor (provided
                                                                     not it will purchase the obligation if the                 that the age of an elderly applicant is not as-
                                                                     transaction is consummated.                                signed a negative factor or value). Besides
                                                                       2. Referrals to creditors. For certain pur-              age, no other prohibited basis may be used as
                                                                     poses, the term creditor includes persons                  a variable. Generally, credit scoring systems
                                                                     such as real estate brokers, automobile deal-              treat all applicants objectively and thus
                                                                     ers, home builders, and home-improvement                   avoid problems of disparate treatment. In
                                                                     contractors who do not participate in credit               cases where a credit scoring system is used
                                                                     decisions but who only accept applications                 in conjunction with individual discretion,
                                                                     and refer applicants to creditors, or select or            disparate treatment could conceivably occur
                                                                     offer to select creditors to whom credit re-               in the evaluation process. In addition, neu-
                                                                     quests can be made. These persons must                     tral factors used in credit scoring systems
                                                                     comply with § 202.4(a), the general rule pro-              could nonetheless be subject to challenge
                                                                     hibiting discrimination, and with § 202.4(b),              under the effects test. (See comment 6(a)–2
                                                                     the general rule against discouraging appli-               for a discussion of the effects test).
                                                                     cations.                                                      2(w) Open-end credit.
                                                                       2(p) Empirically derived and other credit scor-             1. Open-end real estate mortgages. The term
                                                                     ing systems.                                               ‘‘open-end credit’’ does not include negotiated
                                                                       1. Purpose of definition. The definition                 advances under an open-end real estate
                                                                     under § 202.2(p)(1)(i) through (iv) sets the cri-          mortgage or a letter of credit.
                                                                     teria that a credit system must meet in                       2(z) Prohibited basis.
                                                                     order to use age as a predictive factor. Credit               1. Persons associated with applicant. As used
                                                                     systems that do not meet these criteria are                in this regulation, prohibited basis refers not
                                                                     judgmental systems and may consider age                    only to characteristics—the race, color, reli-
                                                                     only for the purpose of determining a ‘‘perti-             gion, national origin, sex, marital status, or
                                                                     nent element of creditworthiness.’’ (Both                  age—of an applicant (or officers of an appli-
                                                                     types of systems may favor an elderly appli-               cant in the case of a corporation) but also to
                                                                     cant. See § 202.6(b)(2).)                                  the characteristics of individuals with whom
                                                                       2. Periodic revalidation. The regulation does            an applicant is affiliated or with whom the
                                                                     not specify how often credit scoring systems               applicant associates. This means, for exam-
                                                                     must be revalidated. The credit scoring sys-               ple, that under the general rule stated in
                                                                     tem must be revalidated frequently enough                  § 202.4(a), a creditor may not discriminate
                                                                     to ensure that it continues to meet recog-                 against an applicant because of that person’s
                                                                     nized professional statistical standards for               personal or business dealings with members
                                                                     statistical soundness. To ensure that pre-                 of a certain religion, because of the national
                                                                     dictive ability is being maintained, the cred-             origin of any persons associated with the ex-
                                                                     itor must periodically review the perform-                 tension of credit (such as the tenants in the
                                                                     ance of the system. This could be done, for                apartment complex being financed), or be-
                                                                     example, by analyzing the loan portfolio to                cause of the race of other residents in the
                                                                     determine the delinquency rate for each                    neighborhood where the property offered as
                                                                     score interval, or by analyzing population                 collateral is located.
                                                                     stability over time to detect deviations of                   2. National origin. A creditor may not
                                                                     recent applications from the applicant popu-               refuse to grant credit because an applicant
                                                                     lation used to validate the system. If this                comes from a particular country but may
                                                                     analysis indicates that the system no longer               take the applicant’s immigration status into
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                                                                     predicts risk with statistical soundness, the              account. A creditor may also take into ac-
                                                                     system must be adjusted as necessary to re-                count any applicable law, regulation, or ex-
                                                                     establish its predictive ability. A creditor is            ecutive order restricting dealings with citi-
                                                                     responsible for ensuring its system is vali-               zens (or the government) of a particular


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                                                                     Federal Reserve System                                                                       Pt. 202, Supp. I
                                                                     country or imposing limitations regarding                  tended to a local government is covered by
                                                                     credit extended for their use.                             this exception, but credit extended to con-
                                                                       3. Public assistance program. Any federal,               sumers by a federal or state housing agency
                                                                     state, or local governmental assistance pro-               does not qualify for special treatment under
                                                                     gram that provides a continuing, periodic in-              this category.
                                                                     come supplement, whether premised on enti-
                                                                     tlement or need, is ‘‘public assistance’’ for                          Section 202.4—General Rules
                                                                     purposes of the regulation. The term in-
                                                                                                                                                  Paragraph 4(a)
                                                                     cludes (but is not limited to) Temporary Aid
                                                                     to Needy Families, food stamps, rent and                      1. Scope of rule. The general rule stated in
                                                                     mortgage supplement or assistance pro-                     § 202.4(a) covers all dealings, without excep-
                                                                     grams, social security and supplemental se-                tion, between an applicant and a creditor,
                                                                     curity income, and unemployment com-                       whether or not addressed by other provisions
                                                                     pensation. Only physicians, hospitals, and                 of the regulation. Other provisions of the
                                                                     others to whom the benefits are payable need               regulation identify specific practices that
                                                                     consider Medicare and Medicaid as public as-               the Board has decided are impermissible be-
                                                                     sistance.                                                  cause they could result in credit discrimina-
                                                                                                                                tion on a basis prohibited by the Act. The
                                                                         Section 202.3—Limited Exceptions for                   general rule covers, for example, application
                                                                            Certain Classes of Transactions                     procedures, criteria used to evaluate credit-
                                                                       1. Scope. Under this section, procedural re-             worthiness, administration of accounts, and
                                                                     quirements of the regulation do not apply to               treatment of delinquent or slow accounts.
                                                                     certain types of credit. All classes of trans-             Thus, whether or not specifically prohibited
                                                                     actions remain subject to § 202.4(a), the gen-             elsewhere in the regulation, a credit practice
                                                                     eral rule barring discrimination on a prohib-              that treats applicants differently on a pro-
                                                                     ited basis, and to any other provision not                 hibited basis violates the law because it vio-
                                                                     specifically excepted.                                     lates the general rule. Disparate treatment
                                                                       3(a) Public-utilities credit.                            on a prohibited basis is illegal whether or
                                                                       1. Definition. This definition applies only to           not it results from a conscious intent to dis-
                                                                     credit for the purchase of a utility service,              criminate.
                                                                     such as electricity, gas, or telephone service.               2. Examples.
                                                                     Credit provided or offered by a public utility                i. Disparate treatment would exist, for ex-
                                                                     for some other purpose—such as for financ-                 ample, in the following situations:
                                                                     ing the purchase of a gas dryer, telephone                    A. A creditor provides information only on
                                                                     equipment, or other durable goods, or for in-              ‘‘subprime’’ and similar products to minority
                                                                     sulation or other home improvements—is                     applicants who request information about
                                                                     not excepted.                                              the creditor’s mortgage products, but pro-
                                                                       2. Security deposits. A utility company is a             vides information on a wider variety of
                                                                     creditor when it supplies utility service and              mortgage products to similarly situated non-
                                                                     bills the user after the service has been pro-             minority applicants.
                                                                     vided. Thus, any credit term (such as a re-                   B. A creditor provides more comprehensive
                                                                     quirement for a security deposit) is subject               information to men than to similarly situ-
                                                                     to the regulation’s bar against discrimina-                ated women.
                                                                     tion on a prohibited basis.                                   C. A creditor requires a minority applicant
                                                                       3. Telephone companies. A telephone com-                 to provide greater documentation to obtain a
                                                                     pany’s credit transactions qualify for the ex-             loan than a similarly situated nonminority
                                                                     ceptions provided in § 202.3(a)(2) only if the             applicant.
                                                                     company is regulated by a government unit                     D. A creditor waives or relaxes credit
                                                                     or files the charges for service, delayed pay-             standards for a nonminority applicant but
                                                                     ment, or any discount for prompt payment                   not for a similarly situated minority appli-
                                                                     with a government unit.                                    cant.
                                                                       3(c) Incidental credit.                                     ii. Treating applicants differently on a pro-
                                                                       1. Examples. If a service provider (such as a            hibited basis is unlawful if the creditor lacks
                                                                     hospital, doctor, lawyer, or merchant) allows              a legitimate nondiscriminatory reason for
                                                                     the client or customer to defer the payment                its action, or if the asserted reason is found
                                                                     of a bill, this deferral of debt is credit for             to be a pretext for discrimination.
                                                                     purposes of the regulation, even though
                                                                                                                                                  Paragraph 4(b)
                                                                     there is no finance charge and no agreement
                                                                     for payment in installments. Because of the                  1. Prospective applicants. Generally, the reg-
                                                                     exceptions provided by this section, however,              ulation’s protections apply only to persons
                                                                     these particular credit extensions are ex-                 who have requested or received an extension
                                                                     cepted from compliance with certain proce-                 of credit. In keeping with the purpose of the
                                                                     dural requirements as specified in § 202.3(c).             Act—to promote the availability of credit on
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                                                                       3(d) Government credit.                                  a nondiscriminatory basis—§ 202.4(b) covers
                                                                       1. Credit to governments. The exception re-              acts or practices directed at prospective ap-
                                                                     lates to credit extended to (not by) govern-               plicants that could discourage a reasonable
                                                                     mental entities. For example, credit ex-                   person, on a prohibited basis, from applying


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                     for credit. Practices prohibited by this sec-                ii. In contrast, if an applicant is physically
                                                                     tion include:                                              present in the creditor’s office, and accesses
                                                                       i. A statement that the applicant should                 a credit application electronically, such as
                                                                     not bother to apply, after the applicant                   via a terminal or kiosk (or if the applicant
                                                                     states that he is retired.                                 uses a terminal or kiosk located on the
                                                                       ii. The use of words, symbols, models or                 premises of an affiliate or third party that
                                                                     other forms of communication in advertising                has arranged with the creditor to provide ap-
                                                                     that express, imply, or suggest a discrimina-              plications to consumers), the creditor may
                                                                     tory preference or a policy of exclusion in                provide disclosures in either electronic or
                                                                     violation of the Act.                                      paper form, provided the creditor complies
                                                                       iii. The use of interview scripts that dis-              with the timing, delivery, and retainability
                                                                     courage applications on a prohibited basis.                requirements of the regulation.
                                                                       2. Affirmative advertising. A creditor may af-
                                                                     firmatively solicit or encourage members of                Section 202.5—Rules Concerning Requests for
                                                                     traditionally disadvantaged groups to apply                               Information
                                                                     for credit, especially groups that might not                 5(a) General rules.
                                                                     normally seek credit from that creditor.
                                                                                                                                                Paragraph 5(a)(1)
                                                                                        Paragraph 4(c)
                                                                                                                                  1. Requests for information. This section
                                                                       1. Requirement for written applications.
                                                                                                                                governs the types of information that a cred-
                                                                     Model application forms are provided in Ap-
                                                                                                                                itor may gather. Section 202.6 governs how
                                                                     pendix B to the regulation, although use of a
                                                                                                                                information may be used.
                                                                     printed form is not required. A creditor will
                                                                     satisfy the requirement by writing down the                                Paragraph 5(a)(2)
                                                                     information that it normally considers in
                                                                     making a credit decision. The creditor may                   1. Local laws. Information that a creditor is
                                                                     complete an application on behalf of an ap-                allowed to collect pursuant to a ‘‘state’’ stat-
                                                                     plicant and need not require the applicant to              ute or regulation includes information re-
                                                                     sign the application.                                      quired by a local statute, regulation, or ordi-
                                                                       2. Telephone applications. A creditor that               nance.
                                                                     accepts applications by telephone for dwell-                 2. Information required by Regulation C. Reg-
                                                                     ing-related credit covered by § 202.13 can                 ulation C generally requires creditors cov-
                                                                     meet the requirement for written applica-                  ered by the Home Mortgage Disclosure Act
                                                                     tions by writing down pertinent information                (HMDA) to collect and report information
                                                                     that is provided by the applicant.                         about the race, ethnicity, and sex of appli-
                                                                       3. Computerized entry. Information entered               cants for home-improvement loans and
                                                                     directly into and retained by a computerized               home-purchase loans, including some types
                                                                     system qualifies as a written application                  of loans not covered by § 202.13.
                                                                     under this paragraph. (See the commentary                    3. Collecting information on behalf of credi-
                                                                     to § 202.13(b), Applications through electronic            tors. Persons such as loan brokers and cor-
                                                                     media and Applications through video.)                     respondents do not violate the ECOA or Reg-
                                                                                                                                ulation B if they collect information that
                                                                                        Paragraph 4(d)                          they are otherwise prohibited from col-
                                                                       1. Clear and conspicuous. This standard re-              lecting, where the purpose of collecting the
                                                                     quires that disclosures be presented in a rea-             information is to provide it to a creditor
                                                                     sonably understandable format in a way that                that is subject to the Home Mortgage Disclo-
                                                                     does not obscure the required information.                 sure Act or another federal or state statute
                                                                     No minimum type size is mandated, but the                  or regulation requiring data collection.
                                                                     disclosures must be legible, whether type-                   5(d) Other limitations on information requests.
                                                                     written, handwritten, or printed by com-                                   Paragraph 5(d)(1)
                                                                       2. Form of disclosures. Whether the disclo-                1. Indirect disclosure of prohibited informa-
                                                                     sures required to be on or with an applica-                tion. The fact that certain credit-related in-
                                                                     tion must be in electronic form depends upon               formation may indirectly disclose marital
                                                                     the following:                                             status does not bar a creditor from seeking
                                                                       i. If an applicant accesses a credit applica-            such information. For example, the creditor
                                                                     tion electronically (other than as described               may ask about:
                                                                     under ii below), such as online at a home                    i. The applicant’s obligation to pay ali-
                                                                     computer, the creditor must provide the dis-               mony, child support, or separate mainte-
                                                                     closures in electronic form (such as with the              nance income.
                                                                     application form on its website) in order to                 ii. The source of income to be used as the
                                                                     meet the requirement to provide disclosures                basis for repaying the credit requested,
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                                                                     in a timely manner on or with the applica-                 which could disclose that it is the income of
                                                                     tion. If the creditor instead mailed paper dis-            a spouse.
                                                                     closures to the applicant, this requirement                  iii. Whether any obligation disclosed by
                                                                     would not be met.                                          the applicant has a co-obligor, which could


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                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                     disclose that the co-obligor is a spouse or                parate in their impact. For example, requir-
                                                                     former spouse.                                             ing that applicants have income in excess of
                                                                       iv. The ownership of assets, which could                 a certain amount to qualify for an overdraft
                                                                     disclose the interest of a spouse.                         line of credit could mean that women and
                                                                                                                                minority applicants will be rejected at a
                                                                                      Paragraph 5(d)(2)                         higher rate than men and nonminority appli-
                                                                       1. Disclosure about income. The sample ap-               cants. If there is a demonstrable relationship
                                                                     plication forms in appendix B to the regula-               between the income requirement and credit-
                                                                     tion illustrate how a creditor may inform an               worthiness for the level of credit involved,
                                                                     applicant of the right not to disclose ali-                however, use of the income standard would
                                                                     mony, child support, or separate mainte-                   likely be permissible.
                                                                     nance income.                                                6(b) Specific rules concerning use of informa-
                                                                       2. General inquiry about source of income.               tion.
                                                                     Since a general inquiry about the source of
                                                                                                                                                Paragraph 6(b)(1)
                                                                     income may lead an applicant to disclose ali-
                                                                     mony, child support, or separate mainte-                     1. Prohibited basis—special purpose credit. In
                                                                     nance income, a creditor making such an in-                a special purpose credit program, a creditor
                                                                     quiry on an application form should preface                may consider a prohibited basis to determine
                                                                     the request with the disclosure required by                whether the applicant possesses a char-
                                                                     this paragraph.                                            acteristic needed for eligibility. (See § 202.8.)
                                                                       3. Specific inquiry about sources of income. A
                                                                     creditor need not give the disclosure if the                               Paragraph 6(b)(2)
                                                                     inquiry about income is specific and worded                   1. Favoring the elderly. Any system of eval-
                                                                     in a way that is unlikely to lead the appli-               uating creditworthiness may favor a credit
                                                                     cant to disclose the fact that income is de-               applicant who is age 62 or older. A credit pro-
                                                                     rived from alimony, child support, or sepa-                gram that offers more favorable credit terms
                                                                     rate maintenance payments. For example, an                 to applicants age 62 or older is also permis-
                                                                     application form that asks about specific                  sible; a program that offers more favorable
                                                                     types of income such as salary, wages, or in-              credit terms to applicants at an age lower
                                                                     vestment income need not include the disclo-               than 62 is permissible only if it meets the
                                                                     sure.                                                      special-purpose credit requirements of § 202.8.
                                                                                                                                   2. Consideration of age in a credit scoring sys-
                                                                      Section 202.6—Rules Concerning Evaluation
                                                                                                                                tem. Age may be taken directly into account
                                                                                    of Applications
                                                                                                                                in a credit scoring system that is ‘‘demon-
                                                                       6(a) General rule concerning use of informa-             strably and statistically sound,’’ as defined in
                                                                     tion.                                                      § 202.2(p), with one limitation: applicants age
                                                                       1. General. When evaluating an application               62 years or older must be treated at least as
                                                                     for credit, a creditor generally may consider              favorably as applicants who are under age 62.
                                                                     any information obtained. However, a cred-                 If age is scored by assigning points to an ap-
                                                                     itor may not consider in its evaluation of                 plicant’s age category, elderly applicants
                                                                     creditworthiness any information that it is                must receive the same or a greater number
                                                                     barred by § 202.5 from obtaining or from                   of points as the most favored class of non-
                                                                     using for any purpose other than to conduct                elderly applicants.
                                                                     a self-test under § 202.15.                                   i. Age-split scorecards. Some credit systems
                                                                       2. Effects test. The effects test is a judicial          segment the population and use different
                                                                     doctrine that was developed in a series of                 scorecards based on the age of an applicant.
                                                                     employment cases decided by the U.S. Su-                   In such a system, one card may cover a nar-
                                                                     preme Court under Title VII of the Civil                   row age range (for example, applicants in
                                                                     Rights Act of 1964 (42 U.S.C. 2000e et seq.), and          their twenties or younger) who are evaluated
                                                                     the burdens of proof for such employment                   under attributes predictive for that age
                                                                     cases were codified by Congress in the Civil               group. A second card may cover all other ap-
                                                                     Rights Act of 1991 (42 U.S.C. 2000e–2). Con-               plicants, who are evaluated under the at-
                                                                     gressional intent that this doctrine apply to              tributes predictive for that broader class.
                                                                     the credit area is documented in the Senate                When a system uses a card covering a wide
                                                                     Report that accompanied H.R. 6516, No. 94–                 age range that encompasses elderly appli-
                                                                     589, pp. 4–5; and in the House Report that ac-             cants, the credit scoring system is not
                                                                     companied H.R. 6516, No. 94–210, p.5. The Act              deemed to score age. Thus, the system does
                                                                     and regulation may prohibit a creditor prac-               not raise the issue of assigning a negative
                                                                     tice that is discriminatory in effect because              factor or value to the age of elderly appli-
                                                                     it has a disproportionately negative impact                cants. But if a system segments the popu-
                                                                     on a prohibited basis, even though the cred-               lation by age into multiple scorecards, and
                                                                     itor has no intent to discriminate and the                 includes elderly applicants in a narrower age
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                                                                     practice appears neutral on its face, unless               range, the credit scoring system does score
                                                                     the creditor practice meets a legitimate                   age. To comply with the Act and regulation
                                                                     business need that cannot reasonably be                    in such a case, the creditor must ensure that
                                                                     achieved as well by means that are less dis-               the system does not assign a negative factor


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                     or value to the age of elderly applicants as a             qualifies as ‘‘empirically derived’’ under
                                                                     class.                                                     § 202.2(p) may consider other factors (such as
                                                                        3. Consideration of age in a judgmental sys-            a credit report or the applicant’s cash flow)
                                                                     tem. In a judgmental system, defined in                    on a judgmental basis. Doing so will not ne-
                                                                     § 202.2(t), a creditor may not decide whether              gate the classification of the credit scoring
                                                                     to extend credit or set the terms and condi-               component of the combined system as ‘‘de-
                                                                     tions of credit based on age or information                monstrably and statistically sound.’’ While
                                                                     related exclusively to age. Age or age-related             age could be used in the credit scoring por-
                                                                     information may be considered only in eval-                tion, however, in the judgmental portion age
                                                                     uating other ‘‘pertinent elements of credit-               may not be considered directly. It may be
                                                                     worthiness’’ that are drawn from the par-                  used only for the purpose of determining a
                                                                     ticular facts and circumstances concerning                 ‘‘pertinent element of creditworthiness.’’ (See
                                                                     the applicant. For example, a creditor may                 comment 6(b)(2)–3.)
                                                                     not reject an application or terminate an ac-                 6. Consideration of public assistance. When
                                                                     count because the applicant is 60 years old.               considering income derived from a public as-
                                                                     But a creditor that uses a judgmental sys-                 sistance program, a creditor may take into
                                                                     tem may relate the applicant’s age to other                account, for example:
                                                                     information about the applicant that the                      i. The length of time an applicant will
                                                                     creditor considers in evaluating credit-                   likely remain eligible to receive such in-
                                                                     worthiness. As the following examples illus-               come.
                                                                     trate, the evaluation must be made in an in-                  ii. Whether the applicant will continue to
                                                                     dividualized, case-by-case manner:                         qualify for benefits based on the status of
                                                                        i. A creditor may consider the applicant’s              the applicant’s dependents (as in the case of
                                                                     occupation and length of time to retirement                Temporary Aid to Needy Families, or social
                                                                     to ascertain whether the applicant’s income                security payments to a minor).
                                                                     (including retirement income) will support                    iii. Whether the creditor can attach or gar-
                                                                     the extension of credit to its maturity.                   nish the income to assure payment of the
                                                                        ii. A creditor may consider the adequacy of             debt in the event of default.
                                                                     any security offered when the term of the
                                                                     credit extension exceeds the life expectancy                               Paragraph 6(b)(5)
                                                                     of the applicant and the cost of realizing on
                                                                     the collateral could exceed the applicant’s                  1. Consideration of an individual applicant. A
                                                                     equity. An elderly applicant might not qual-               creditor must evaluate income derived from
                                                                     ify for a 5 percent down, 30-year mortgage                 part-time employment, alimony, child sup-
                                                                     loan but might qualify with a larger down-                 port, separate maintenance payments, re-
                                                                     payment or a shorter loan maturity.                        tirement benefits, or public assistance on an
                                                                        iii. A creditor may consider the applicant’s            individual basis, not on the basis of aggre-
                                                                     age to assess the significance of length of                gate statistics; and must assess its reli-
                                                                     employment (a young applicant may have                     ability or unreliability by analyzing the ap-
                                                                     just entered the job market) or length of                  plicant’s actual circumstances, not by ana-
                                                                     time at an address (an elderly applicant may               lyzing statistical measures derived from a
                                                                     recently have retired and moved from a long-               group.
                                                                     term residence).                                             2. Payments consistently made. In deter-
                                                                        4. Consideration of age in a reverse mortgage.          mining the likelihood of consistent pay-
                                                                     A reverse mortgage is a home-secured loan                  ments of alimony, child support, or separate
                                                                     in which the borrower receives payments                    maintenance, a creditor may consider fac-
                                                                     from the creditor, and does not become obli-               tors such as whether payments are received
                                                                     gated to repay these amounts (other than in                pursuant to a written agreement or court de-
                                                                     the case of default) until the borrower dies,              cree; the length of time that the payments
                                                                     moves permanently from the home, or trans-                 have been received; whether the payments
                                                                     fers title to the home, or upon a specified                are regularly received by the applicant; the
                                                                     maturity date. Disbursements to the bor-                   availability of court or other procedures to
                                                                     rower under a reverse mortgage typically are               compel payment; and the creditworthiness of
                                                                     determined by considering the value of the                 the payor, including the credit history of the
                                                                     borrower’s home, the current interest rate,                payor when it is available to the creditor.
                                                                     and the borrower’s life expectancy. A reverse                3. Consideration of income.
                                                                     mortgage program that requires borrowers                     i. A creditor need not consider income at
                                                                     to be age 62 or older is permissible under                 all in evaluating creditworthiness. If a cred-
                                                                     § 202.6(b)(2)(iv).    In     addition,     under           itor does consider income, there are several
                                                                     § 202.6(b)(2)(iii), a creditor may consider a              acceptable methods, whether in a credit
                                                                     borrower’s age to evaluate a pertinent ele-                scoring or a judgmental system:
                                                                     ment of creditworthiness, such as the                        A. A creditor may score or take into ac-
                                                                     amount of the credit or monthly payments                   count the total sum of all income stated by
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                                                                     that the borrower will receive, or the esti-               the applicant without taking steps to evalu-
                                                                     mated repayment date.                                      ate the income for reliability.
                                                                        5. Consideration of age in a combined system.             B. A creditor may evaluate each compo-
                                                                     A creditor using a credit scoring system that              nent of the applicant’s income, and then


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                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                     score or take into account income deter-                   cant or joint applicant for the purpose of
                                                                     mined to be reliable separately from other                 ascertaining the creditor’s rights and rem-
                                                                     income; or the creditor may disregard that                 edies applicable to the particular extension
                                                                     portion of income that is not reliable when it             of credit. For example, in a secured trans-
                                                                     aggregates reliable income.                                action involving real property, a creditor
                                                                       C. A creditor that does not evaluate all in-             could take into account whether state law
                                                                     come components for reliability must treat                 gives the applicant’s spouse an interest in
                                                                     as reliable any component of protected in-                 the property being offered as collateral.
                                                                     come that is not evaluated.
                                                                       ii. In considering the separate components                Section 202.7—Rules Concerning Extensions
                                                                     of an applicant’s income, the creditor may                                  of Credit
                                                                     not automatically discount or exclude from                   7(a) Individual accounts.
                                                                     consideration any protected income. Any                      1. Open-end credit—authorized user. A cred-
                                                                     discounting or exclusion must be based on                  itor may not require a creditworthy appli-
                                                                     the applicant’s actual circumstances.                      cant seeking an individual credit account to
                                                                       4. Part-time employment, sources of income. A            provide additional signatures. But the cred-
                                                                     creditor may score or take into account the                itor may condition the designation of an au-
                                                                     fact that an applicant has more than one                   thorized user by the account holder on the
                                                                     source of earned income—a full-time and a                  authorized user’s becoming contractually
                                                                     part-time job or two part-time jobs. A cred-               liable for the account, as long as the creditor
                                                                     itor may also score or treat earned income                 does not differentiate on any prohibited
                                                                     from a secondary source differently than                   basis in imposing this requirement.
                                                                     earned income from a primary source. The                     2. Open-end credit—choice of authorized user.
                                                                     creditor may not, however, score or other-                 A creditor that permits an account holder to
                                                                     wise take into account the number of                       designate an authorized user may not re-
                                                                     sources for income such as retirement in-                  strict this designation on a prohibited basis.
                                                                     come, social security, supplemental security               For example, if the creditor allows the des-
                                                                     income, and alimony. Nor may the creditor                  ignation of spouses as authorized users, the
                                                                     treat negatively the fact that an applicant’s              creditor may not refuse to accept a non-
                                                                     only earned income is derived from, for ex-                spouse as an authorized user.
                                                                     ample, a part-time job.                                      3. Overdraft authority on transaction ac-
                                                                                      Paragraph 6(b)(6)                         counts. If a transaction account (such as a
                                                                                                                                checking account or NOW account) includes
                                                                       1. Types of credit references. A creditor may            an overdraft line of credit, the creditor may
                                                                     restrict the types of credit history and credit            require that all persons authorized to draw
                                                                     references that it will consider, provided                 on the transaction account assume liability
                                                                     that the restrictions are applied to all credit            for any overdraft.
                                                                     applicants without regard to sex, marital                    7(b) Designation of name.
                                                                     status, or any other prohibited basis. On the                1. Single name on account. A creditor may
                                                                     applicant’s request, however, a creditor must              require that joint applicants on an account
                                                                     consider credit information not reported                   designate a single name for purposes of ad-
                                                                     through a credit bureau when the informa-                  ministering the account and that a single
                                                                     tion relates to the same types of credit ref-              name be embossed on any credit cards issued
                                                                     erences and history that the creditor would                on the account. But the creditor may not re-
                                                                     consider if reported through a credit bureau.              quire that the name be the husband’s name.
                                                                                                                                (See § 202.10 for rules governing the fur-
                                                                                      Paragraph 6(b)(7)
                                                                                                                                nishing of credit history on accounts held by
                                                                       1. National origin—immigration status. The               spouses.)
                                                                     applicant’s immigration status and ties to                   7(c) Action concerning existing open-end ac-
                                                                     the community (such as employment and                      counts.
                                                                     continued residence in the area) could have a
                                                                     bearing on a creditor’s ability to obtain re-                              Paragraph 7(c)(1)
                                                                     payment. Accordingly, the creditor may con-                  1. Termination coincidental with marital sta-
                                                                     sider immigration status and differentiate,                tus change. When an account holder’s marital
                                                                     for example, between a noncitizen who is a                 status changes, a creditor generally may not
                                                                     long-time resident with permanent resident                 terminate the account unless it has evidence
                                                                     status and a noncitizen who is temporarily                 that the account holder is now unable or un-
                                                                     in this country on a student visa.                         willing to repay. But the creditor may termi-
                                                                       2. National origin—citizenship. A denial of              nate an account on which both spouses are
                                                                     credit on the ground that an applicant is not              jointly liable, even if the action coincides
                                                                     a United States citizen is not per se discrimi-            with a change in marital status, when one or
                                                                     nation based on national origin.                           both spouses:
wwoods2 on DSK1DXX6B1PROD with CFR

                                                                                                                                  i. Repudiate responsibility for future
                                                                                      Paragraph 6(b)(8)
                                                                                                                                charges on the joint account.
                                                                      1. Prohibited basis—marital status. A creditor              ii. Request separate accounts in their own
                                                                     may consider the marital status of an appli-               names.


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                       iii. Request that the joint account be                   application affirming applicants’ intent to
                                                                     closed.                                                    apply for joint credit may be used to estab-
                                                                       2. Updating information. A creditor may pe-              lish intent to apply for joint credit. (See Ap-
                                                                     riodically request updated information from                pendix B). The method used to establish in-
                                                                     applicants but may not use events related to               tent must be distinct from the means used
                                                                     a prohibited basis—such as an applicant’s re-              by individuals to affirm the accuracy of in-
                                                                     tirement or reaching a particular age, or a                formation. For example, signatures on a
                                                                     change in name or marital status—to trigger                joint financial statement affirming the ve-
                                                                     such a request.                                            racity of information are not sufficient to es-
                                                                                                                                tablish intent to apply for joint credit.
                                                                                      Paragraph 7(c)(2)
                                                                                                                                                Paragraph 7(d)(2)
                                                                       1. Procedure pending reapplication. A cred-
                                                                     itor may require a reapplication from an ac-                  1. Jointly owned property. If an applicant re-
                                                                     count holder, even when there is no evidence               quests unsecured credit, does not own suffi-
                                                                     of unwillingness or inability to repay, if (1)             cient separate property, and relies on joint
                                                                     the credit was based on the qualifications of              property to establish creditworthiness, the
                                                                     a person who is no longer available to sup-                creditor must value the applicant’s interest
                                                                     port the credit and (2) the creditor has infor-            in the jointly owned property. A creditor
                                                                     mation indicating that the account holder’s                may not request that a nonapplicant joint
                                                                     income may be insufficient to support the                  owner sign any instrument as a condition of
                                                                     credit. While a reapplication is pending, the              the credit extension unless the applicant’s
                                                                     creditor must allow the account holder full                interest does not support the amount and
                                                                     access to the account under the existing con-              terms of the credit sought.
                                                                     tract terms. The creditor may specify a rea-                  i. Valuation of applicant’s interest. In deter-
                                                                     sonable time period within which the ac-                   mining the value of an applicant’s interest in
                                                                     count holder must submit the required infor-               jointly owned property, a creditor may con-
                                                                     mation.                                                    sider factors such as the form of ownership
                                                                       7(d) Signature of spouse or other person.                and the property’s susceptibility to attach-
                                                                       1. Qualified applicant. The signature rules              ment, execution, severance, or partition; the
                                                                     ensure that qualified applicants are able to               value of the applicant’s interest after such
                                                                     obtain credit in their own names. Thus,                    action; and the cost associated with the ac-
                                                                     when an applicant requests individual credit,              tion. This determination must be based on
                                                                     a creditor generally may not require the sig-              the existing form of ownership, and not on
                                                                     nature of another person unless the creditor               the possibility of a subsequent change. For
                                                                     has first determined that the applicant alone              example, in determining whether a married
                                                                     does not qualify for the credit requested.                 applicant’s interest in jointly owned prop-
                                                                       2. Unqualified applicant. When an applicant              erty is sufficient to satisfy the creditor’s
                                                                     requests individual credit but does not meet               standards of creditworthiness for individual
                                                                     a creditor’s standards, the creditor may re-               credit, a creditor may not consider that the
                                                                     quire a cosigner, guarantor, endorser, or                  applicant’s separate property could be trans-
                                                                                                                                ferred into tenancy by the entirety after
                                                                     similar partie—but cannot require that it be
                                                                                                                                consummation. Similarly, a creditor may
                                                                     the spouse. (See commentary to § 202.7(d)(5)
                                                                                                                                not consider the possibility that the couple
                                                                     and (6).)
                                                                                                                                may divorce. Accordingly, a creditor may
                                                                                      Paragraph 7(d)(1)                         not require the signature of the nonapplicant
                                                                                                                                spouse in these or similar circumstances.
                                                                       1. Signature of another person. It is imper-                ii. Other options to support credit. If the ap-
                                                                     missible for a creditor to require an appli-               plicant’s interest in jointly owned property
                                                                     cant who is individually creditworthy to pro-              does not support the amount and terms of
                                                                     vide a cosigner—even if the creditor applies               credit sought, the creditor may offer the ap-
                                                                     the requirement without regard to sex, mar-                plicant other options to qualify for the ex-
                                                                     ital status, or any other prohibited basis.                tension of credit. For example:
                                                                     (But see comment 7(d)(6)–1 concerning guar-                   A. Providing a co-signer or other party
                                                                     antors of closely held corporations.)                      (§ 202.7(d)(5));
                                                                       2. Joint applicant. The term ‘‘joint appli-                 B. Requesting that the credit be granted
                                                                     cant’’ refers to someone who applies contem-               on a secured basis (§ 202.7(d)(4)); or
                                                                     poraneously with the applicant for shared or                  C. Providing the signature of the joint
                                                                     joint credit. It does not refer to someone                 owner on an instrument that ensures access
                                                                     whose signature is required by the creditor                to the property in the event of the appli-
                                                                     as a condition for granting the credit re-                 cant’s death or default, but does not impose
                                                                     quested.                                                   personal liability unless necessary under
                                                                       3. Evidence of joint application. A person’s             state law (such as a limited guarantee). A
                                                                     intent to be a joint applicant must be evi-                creditor may not routinely require, however,
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                                                                     denced at the time of application. Signatures              that a joint owner sign an instrument (such
                                                                     on a promissory note may not be used to                    as a quitclaim deed) that would result in the
                                                                     show intent to apply for joint credit. On the              forfeiture of the joint owner’s interest in the
                                                                     other hand, signatures or initials on a credit             property.


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                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                       2. Need for signature—reasonable belief. A               the creditor could require that the addi-
                                                                     creditor’s reasonable belief as to what in-                tional party live in the creditor’s market
                                                                     struments need to be signed by a person                    area.
                                                                     other than the applicant should be supported                 2. Reliance on income of another person—in-
                                                                     by a thorough review of pertinent statutory                dividual credit. An applicant who requests in-
                                                                     and decisional law or an opinion of the state              dividual credit relying on the income of an-
                                                                     attorney general.                                          other person (including a spouse in a non-
                                                                                                                                community property state) may be required
                                                                                      Paragraph 7(d)(3)                         to provide the signature of the other person
                                                                       1. Residency. In assessing the creditworthi-             to make the income available to pay the
                                                                     ness of a person who applies for credit in a               debt. In community property states, the sig-
                                                                     community property state, a creditor may                   nature of a spouse may be required if the ap-
                                                                     assume that the applicant is a resident of                 plicant relies on the spouse’s separate in-
                                                                     the state unless the applicant indicates oth-              come. If the applicant relies on the spouse’s
                                                                     erwise.                                                    future earnings that as a matter of state law
                                                                                                                                cannot be characterized as community prop-
                                                                                      Paragraph 7(d)(4)                         erty until earned, the creditor may require
                                                                                                                                the spouse’s signature, but need not do so—
                                                                       1. Creation of enforceable lien. Some state
                                                                                                                                even if it is the creditor’s practice to require
                                                                     laws require that both spouses join in exe-
                                                                                                                                the signature when an applicant relies on the
                                                                     cuting any instrument by which real prop-
                                                                                                                                future earnings of a person other than a
                                                                     erty is encumbered. If an applicant offers
                                                                                                                                spouse. (See § 202.6(c) on consideration of
                                                                     such property as security for credit, a cred-
                                                                                                                                state property laws.)
                                                                     itor may require the applicant’s spouse to
                                                                                                                                  3. Renewals. If the borrower’s creditworthi-
                                                                     sign the instruments necessary to create a
                                                                                                                                ness is reevaluated when a credit obligation
                                                                     valid security interest in the property. The
                                                                                                                                is renewed, the creditor must determine
                                                                     creditor may not require the spouse to sign                whether an additional party is still war-
                                                                     the note evidencing the credit obligation if               ranted and, if not warranted, release the ad-
                                                                     signing only the mortgage or other security                ditional party.
                                                                     agreement is sufficient to make the property
                                                                     available to satisfy the debt in the event of                              Paragraph 7(d)(6)
                                                                     default. However, if under state law both
                                                                     spouses must sign the note to create an en-                   1. Guarantees. A guarantee on an extension
                                                                     forceable lien, the creditor may require the               of credit is part of a credit transaction and
                                                                     signatures.                                                therefore subject to the regulation. A cred-
                                                                       2. Need for signature—reasonable belief. Gen-            itor may require the personal guarantee of
                                                                     erally, a signature to make the secured prop-              the partners, directors, or officers of a busi-
                                                                     erty available will only be needed on a secu-              ness, and the shareholders of a closely held
                                                                                                                                corporation, even if the business or corpora-
                                                                     rity agreement. A creditor’s reasonable be-
                                                                                                                                tion is creditworthy. The requirement must
                                                                     lief that, to ensure access to the property,
                                                                                                                                be based on the guarantor’s relationship
                                                                     the spouse’s signature is needed on an in-
                                                                                                                                with the business or corporation, however,
                                                                     strument that imposes personal liability
                                                                                                                                and not on a prohibited basis. For example,
                                                                     should be supported by a thorough review of
                                                                                                                                a creditor may not require guarantees only
                                                                     pertinent statutory and decisional law or an
                                                                                                                                for women-owned or minority-owned busi-
                                                                     opinion of the state attorney general.
                                                                                                                                nesses. Similarly, a creditor may not require
                                                                       3. Integrated instruments. When a creditor
                                                                                                                                guarantees only of the married officers of a
                                                                     uses an integrated instrument that combines
                                                                                                                                business or the married shareholders of a
                                                                     the note and the security agreement, the
                                                                                                                                closely held corporation.
                                                                     spouse cannot be asked to sign the inte-                      2. Spousal guarantees. The rules in § 202.7(d)
                                                                     grated instrument if the signature is only                 bar a creditor from requiring the signature
                                                                     needed to grant a security interest. But the               of a guarantor’s spouse just as they bar the
                                                                     spouse could be asked to sign an integrated                creditor from requiring the signature of an
                                                                     instrument that makes clear—for example,                   applicant’s spouse. For example, although a
                                                                     by a legend placed next to the spouse’s signa-             creditor may require all officers of a closely
                                                                     ture—that the spouse’s signature is only to                held corporation to personally guarantee a
                                                                     grant a security interest and that signing                 corporate loan, the creditor may not auto-
                                                                     the instrument does not impose personal li-                matically require that spouses of married of-
                                                                     ability.                                                   ficers also sign the guarantee. If an evalua-
                                                                                      Paragraph 7(d)(5)                         tion of the financial circumstances of an of-
                                                                                                                                ficer indicates that an additional signature
                                                                       1. Qualifications of additional parties. In es-          is necessary, however, the creditor may re-
                                                                     tablishing guidelines for eligibility of guar-             quire the signature of another person in ap-
                                                                     antors, cosigners, or similar additional par-              propriate circumstances in accordance with
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                                                                     ties, a creditor may restrict the applicant’s              § 202.7(d)(2).
                                                                     choice of additional parties but may not dis-                 7(e) Insurance.
                                                                     criminate on the basis of sex, marital status,                1. Differences in terms. Differences in the
                                                                     or any other prohibited basis. For example,                availability, rates, and other terms on which


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                                                                     Pt. 202, Supp. I                                                         12 CFR Ch. II (1–1–11 Edition)
                                                                     credit-related casualty insurance or credit                need for the particular program. The plan
                                                                     life, health, accident, or disability insurance            also must either state a specific period of
                                                                     is offered or provided to an applicant does                time for which the program will last, or con-
                                                                     not violate Regulation B.                                  tain a statement regarding when the pro-
                                                                        2. Insurance information. A creditor may ob-            gram will be reevaluated to determine if
                                                                     tain information about an applicant’s age,                 there is a continuing need for it.
                                                                     sex, or marital status for insurance purposes.                8(b) Rules in other sections.
                                                                     The information may only be used for deter-                   1. Applicability of rules. A creditor that re-
                                                                     mining eligibility and premium rates for in-               jects an application because the applicant
                                                                     surance, however, and not in making the                    does not meet the eligibility requirements
                                                                     credit decision.                                           (common characteristic or financial need,
                                                                                                                                for example) must nevertheless notify the
                                                                         Section 202.8—Special Purpose Credit                   applicant of action taken as required by
                                                                                       Programs                                 § 202.9.
                                                                       8(a) Standards for programs.                                8(c) Special rule concerning requests and use
                                                                       1. Determining qualified programs. The Board             of information.
                                                                     does not determine whether individual pro-                    1. Request of prohibited basis information.
                                                                     grams qualify for special purpose credit sta-              This section permits a creditor to request
                                                                     tus, or whether a particular program bene-                 and consider certain information that would
                                                                     fits an ‘‘economically disadvantaged class of              otherwise be prohibited by §§ 202.5 and 202.6
                                                                     persons.’’ The agency or creditor admin-                   to determine an applicant’s eligibility for a
                                                                     istering or offering the loan program must                 particular program.
                                                                     make these decisions regarding the status of                  2. Examples. Examples of programs under
                                                                     its program.                                               which the creditor can ask for and consider
                                                                       2. Compliance with a program authorized by               information about a prohibited basis are:
                                                                     federal or state law. A creditor does not vio-                i. Energy conservation programs to assist
                                                                     late Regulation B when it complies in good                 the elderly, for which the creditor must con-
                                                                     faith with a regulation promulgated by a                   sider the applicant’s age.
                                                                     government agency implementing a special                      ii. Programs under a Minority Enterprise
                                                                     purpose credit program under § 202.8(a)(1). It             Small Business Investment Corporation, for
                                                                     is the agency’s responsibility to promulgate               which a creditor must consider the appli-
                                                                     a regulation that is consistent with federal               cant’s minority status.
                                                                     and state law.                                                8(d) Special rule in the case of financial need.
                                                                       3. Expressly authorized. Credit programs au-                1. Request of prohibited basis information.
                                                                     thorized by federal or state law include pro-              This section permits a creditor to request
                                                                     grams offered pursuant to federal, state, or               and consider certain information that would
                                                                     local statute, regulation or ordinance, or                 otherwise be prohibited by §§ 202.5 and 202.6,
                                                                     pursuant to judicial or administrative order.              and to require signatures that would other-
                                                                       4. Creditor liability. A refusal to grant credit         wise be prohibited by § 202.7(d).
                                                                     to an applicant is not a violation of the Act                 2. Examples. Examples of programs in
                                                                     or regulation if the applicant does not meet               which financial need is a criterion are:
                                                                     the eligibility requirements under a special                  i. Subsidized housing programs for low- to
                                                                     purpose credit program.                                    moderate-income households, for which a
                                                                       5. Determining need. In designing a special              creditor may have to consider the appli-
                                                                     purpose credit program under § 202.8(a), a for-            cant’s receipt of alimony or child support,
                                                                     profit organization must determine that the                the spouse’s or parents’ income, etc.
                                                                     program will benefit a class of people who                    ii. Student loan programs based on the
                                                                     would otherwise be denied credit or would re-              family’s financial need, for which a creditor
                                                                     ceive it on less favorable terms. This deter-              may have to consider the spouse’s or par-
                                                                     mination can be based on a broad analysis                  ents’ financial resources.
                                                                     using the organization’s own research or                      3. Student loans. In a guaranteed student
                                                                     data from outside sources, including govern-               loan program, a creditor may obtain the sig-
                                                                     mental reports and studies. For example, a                 nature of a parent as a guarantor when re-
                                                                     creditor might design new products to reach                quired by federal or state law or agency reg-
                                                                     consumers who would not meet, or have not                  ulation, or when the student does not meet
                                                                     met, its traditional standards of credit-                  the creditor’s standards of creditworthiness.
                                                                     worthiness due to such factors as credit inex-             (See § 202.7(d)(1) and (5).) The creditor may
                                                                     perience or the use of credit sources that                 not require an additional signature when a
                                                                     may not report to consumer reporting agen-                 student has a work or credit history that
                                                                     cies. Or, a bank could review Home Mortgage                satisfies the creditor’s standards.
                                                                     Disclosure Act data along with demographic
                                                                                                                                            Section 202.9—Notifications
                                                                     data for its assessment area and conclude
                                                                     that there is a need for a special purpose                   1. Use of the term adverse action. The regula-
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                                                                     credit program for low-income minority bor-                tion does not require that a creditor use the
                                                                     rowers.                                                    term adverse action in communicating to an
                                                                       6. Elements of the program. The written plan             applicant that a request for an extension of
                                                                     must contain information that supports the                 credit has not been approved. In notifying an


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                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                     applicant of adverse action as defined by                  for a credit decision, the creditor may deny
                                                                     § 202.2(c)(1), a creditor may use any words or             the application giving as the reason for de-
                                                                     phrases that describe the action taken on                  nial that the application is incomplete. The
                                                                     the application.                                           creditor has the option, alternatively, of pro-
                                                                        2. Expressly withdrawn applications. When               viding a notice of incompleteness under
                                                                     an applicant expressly withdraws a credit ap-              § 202.9(c).
                                                                     plication, the creditor is not required to                    4. Incomplete application—denial for reasons
                                                                     comply with the notification requirements                  other than incompleteness. When an applica-
                                                                     under § 202.9. (The creditor must comply,                  tion is missing information but provides suf-
                                                                     however, with the record retention require-                ficient data for a credit decision, the cred-
                                                                     ments of the regulation. See § 202.12(b)(3).)              itor may evaluate the application, make its
                                                                        3. When notification occurs. Notification oc-           credit decision, and notify the applicant ac-
                                                                     curs when a creditor delivers or mails a no-               cordingly. If credit is denied, the applicant
                                                                     tice to the applicant’s last known address or,             must be given the specific reasons for the
                                                                     in the case of an oral notification, when the              credit denial (or notice of the right to re-
                                                                     creditor communicates the credit decision to               ceive the reasons); in this instance missing
                                                                     the applicant.                                             information or ‘‘incomplete application’’ can-
                                                                        4. Location of notice. The notifications re-            not be given as the reason for the denial.
                                                                     quired under § 202.9 may appear on either or                  5.    Length     of   counteroffer.    Section
                                                                     both sides of a form or letter.                            202.9(a)(1)(iv) does not require a creditor to
                                                                        5. Prequalification requests. Whether a cred-           hold a counteroffer open for 90 days or any
                                                                     itor must provide a notice of action taken                 other particular length of time.
                                                                     for a prequalification request depends on the                 6. Counteroffer combined with adverse action
                                                                     creditor’s response to the request, as dis-                notice. A creditor that gives the applicant a
                                                                     cussed in comment 2(f)–3. For instance, a                  combined counteroffer and adverse action
                                                                     creditor may treat the request as an inquiry               notice that complies with § 202.9(a)(2) need
                                                                     if the creditor evaluates specific information
                                                                                                                                not send a second adverse action notice if
                                                                     about the consumer and tells the consumer
                                                                                                                                the     applicant     does   not    accept    the
                                                                     the loan amount, rate, and other terms of
                                                                                                                                counteroffer. A sample of a combined notice
                                                                     credit the consumer could qualify for under
                                                                                                                                is contained in form C–4 of Appendix C to the
                                                                     various loan programs, explaining the proc-
                                                                     ess the consumer must follow to submit a
                                                                                                                                   7. Denial of a telephone application. When an
                                                                     mortgage application and the information
                                                                                                                                application is made by telephone and adverse
                                                                     the creditor will analyze in reaching a credit
                                                                                                                                action is taken, the creditor must request
                                                                     decision. On the other hand, a creditor has
                                                                     treated a request as an application, and is                the applicant’s name and address in order to
                                                                     subject to the adverse action notice require-              provide written notification under this sec-
                                                                     ments of § 202.9 if, after evaluating informa-             tion. If the applicant declines to provide that
                                                                     tion, the creditor decides that it will not ap-            information, then the creditor has no further
                                                                     prove the request and communicates that de-                notification responsibility.
                                                                     cision to the consumer. For example, if the                                Paragraph 9(a)(3)
                                                                     creditor tells the consumer that it would not
                                                                     approve an application for a mortgage be-                     1. Coverage. In determining which rules in
                                                                     cause of a bankruptcy in the consumer’s                    this paragraph apply to a given business
                                                                     record, the creditor has denied an applica-                credit application, a creditor may rely on
                                                                     tion for credit.                                           the applicant’s assertion about the revenue
                                                                        9(a) Notification of action taken, ECOA no-             size of the business. (Applications to start a
                                                                     tice, and statement of specific reasons.                   business are governed by the rules in
                                                                                                                                § 202.9(a)(3)(i).) If an applicant applies for
                                                                                      Paragraph 9(a)(1)                         credit as a sole proprietor, the revenues of
                                                                       1. Timing of notice—when an application is               the sole proprietorship will determine which
                                                                     complete. Once a creditor has obtained all the             rules govern the application. However, if an
                                                                     information it normally considers in making                applicant applies for business credit as an in-
                                                                     a credit decision, the application is complete             dividual, the rules in § 202.9(a)(3)(i) apply un-
                                                                     and the creditor has 30 days in which to no-               less the application is for trade or similar
                                                                     tify the applicant of the credit decision. (See            credit.
                                                                     also comment 2(f)–6.)                                         2. Trade credit. The term trade credit gen-
                                                                       2. Notification of approval. Notification of             erally is limited to a financing arrangement
                                                                     approval may be express or by implication.                 that involves a buyer and a seller—such as a
                                                                     For example, the creditor will satisfy the no-             supplier who finances the sale of equipment,
                                                                     tification requirement when it gives the ap-               supplies, or inventory; it does not apply to
                                                                     plicant the credit card, money, property, or               an extension of credit by a bank or other fi-
                                                                     services requested.                                        nancial institution for the financing of such
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                                                                       3. Incomplete application—denial for incom-              items.
                                                                     pleteness. When an application is incomplete                  3. Factoring. Factoring refers to a purchase
                                                                     regarding information that the applicant can               of accounts receivable, and thus is not sub-
                                                                     provide and the creditor lacks sufficient data             ject to the Act or regulation. If there is a


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                     credit extension incident to the factoring ar-             worthiness may not be clear to the appli-
                                                                     rangement,       the   notification   rules   in           cant.
                                                                     § 202.9(a)(3)(ii) apply, as do other relevant                5. Credit scoring—method for selecting rea-
                                                                     sections of the Act and regulation.                        sons. The regulation does not require that
                                                                        4. Manner of compliance. In complying with              any one method be used for selecting reasons
                                                                     the notice provisions of the Act and regula-               for a credit denial or other adverse action
                                                                     tion, creditors offering business credit may               that is based on a credit scoring system.
                                                                     follow the rules governing consumer credit.                Various methods will meet the requirements
                                                                     Similarly, creditors may elect to treat all                of the regulation. One method is to identify
                                                                     business credit the same (irrespective of rev-             the factors for which the applicant’s score
                                                                     enue size) by providing notice in accordance               fell furthest below the average score for each
                                                                     with § 202.9(a)(3)(i).                                     of those factors achieved by applicants
                                                                        5. Timing of notification. A creditor subject           whose total score was at or slightly above
                                                                     to § 202.9(a)(3)(ii)(A) is required to notify a            the minimum passing score. Another method
                                                                     business credit applicant, orally or in writ-              is to identify the factors for which the appli-
                                                                     ing, of action taken on an application within              cant’s score fell furthest below the average
                                                                     a reasonable time of receiving a completed                 score for each of those factors achieved by
                                                                     application. Notice provided in accordance                 all applicants. These average scores could be
                                                                     with the timing requirements of § 202.9(a)(1)              calculated during the development or use of
                                                                     is deemed reasonable in all instances.                     the system. Any other method that produces
                                                                                                                                results substantially similar to either of
                                                                        9(b) Form of ECOA notice and statement of
                                                                                                                                these methods is also acceptable under the
                                                                     specific reasons.
                                                                                      Paragraph 9(b)(1)                           6. Judgmental system. If a creditor uses a
                                                                                                                                judgmental system, the reasons for the de-
                                                                       1. Substantially similar notice. The ECOA no-            nial or other adverse action must relate to
                                                                     tice sent with a notification of a credit de-              those factors in the applicant’s record actu-
                                                                     nial or other adverse action will comply with              ally reviewed by the person making the deci-
                                                                     the regulation if it is ‘‘substantially similar’’          sion.
                                                                     to the notice contained in § 202.9(b)(1). For                7. Combined credit scoring and judgmental
                                                                     example, a creditor may add a reference to                 system. If a creditor denies an application
                                                                     the fact that the ECOA permits age to be                   based on a credit evaluation system that em-
                                                                     considered in certain credit scoring systems,              ploys both credit scoring and judgmental
                                                                     or add a reference to a similar state statute              components, the reasons for the denial must
                                                                     or regulation and to a state enforcement                   come from the component of the system that
                                                                     agency.                                                    the applicant failed. For example, if a cred-
                                                                                                                                itor initially credit scores an application and
                                                                                      Paragraph 9(b)(2)                         denies the credit request as a result of that
                                                                                                                                scoring, the reasons disclosed to the appli-
                                                                       1. Number of specific reasons. A creditor                cant must relate to the factors scored in the
                                                                     must disclose the principal reasons for deny-              system. If the application passes the credit
                                                                     ing an application or taking other adverse                 scoring stage but the creditor then denies
                                                                     action. The regulation does not mandate                    the credit request based on a judgmental as-
                                                                     that a specific number of reasons be dis-                  sessment of the applicant’s record, the rea-
                                                                     closed, but disclosure of more than four rea-              sons disclosed must relate to the factors re-
                                                                     sons is not likely to be helpful to the appli-             viewed judgmentally, even if the factors
                                                                     cant.                                                      were also considered in the credit scoring
                                                                       2. Source of specific reasons. The specific              component. If the application is not ap-
                                                                     reasons disclosed under §§ 202.9(a)(2) and                 proved or denied as a result of the credit
                                                                     (b)(2) must relate to and accurately describe              scoring, but falls into a gray band, and the
                                                                     the factors actually considered or scored by               creditor performs a judgmental assessment
                                                                     a creditor.                                                and denies the credit after that assessment,
                                                                       3. Description of reasons. A creditor need               the reasons disclosed must come from both
                                                                     not describe how or why a factor adversely                 components of the system. The same result
                                                                     affected an applicant. For example, the no-                applies where a judgmental assessment is the
                                                                     tice may say ‘‘length of residence’’ rather                first component of the combined system. As
                                                                     than ‘‘too short a period of residence.’’                  provided in comment 9(b)(2)–1, disclosure of
                                                                       4. Credit scoring system. If a creditor bases            more than a combined total of four reasons
                                                                     the denial or other adverse action on a credit             is not likely to be helpful to the applicant.
                                                                     scoring system, the reasons disclosed must                   8. Automatic denial. Some credit decision
                                                                     relate only to those factors actually scored               methods contain features that call for auto-
                                                                     in the system. Moreover, no factor that was                matic denial because of one or more negative
                                                                     a principal reason for adverse action may be               factors in the applicant’s record (such as the
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                                                                     excluded from disclosure. The creditor must                applicant’s previous bad credit history with
                                                                     disclose the actual reasons for denial (for ex-            that creditor, the applicant’s declaration of
                                                                     ample, ‘‘age of automobile’’) even if the rela-            bankruptcy, or the fact that the applicant is
                                                                     tionship of that factor to predicting credit-              a minor). When a creditor denies the credit


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                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                     request because of an automatic-denial fac-                upon in taking the adverse action—clearly
                                                                     tor, the creditor must disclose that specific              indicating which reasons relate to which
                                                                     factor.                                                    creditor.
                                                                        9. Combined ECOA-FCRA disclosures. The                    2. Third party notice—enforcement agency. If
                                                                     ECOA requires disclosure of the principal                  a single adverse action notice is being pro-
                                                                     reasons for denying or taking other adverse                vided to an applicant on behalf of several
                                                                     action on an application for an extension of               creditors and they are under the jurisdiction
                                                                     credit. The Fair Credit Reporting Act                      of different federal enforcement agencies,
                                                                     (FCRA) requires a creditor to disclose when                the notice need not name each agency; dis-
                                                                     it has based its decision in whole or in part              closure of any one of them will suffice.
                                                                     on information from a source other than the                  3. Third-party notice—liability. When a no-
                                                                     applicant or its own files. Disclosing that a              tice is to be provided through a third party,
                                                                     credit report was obtained and used in the                 a creditor is not liable for an act or omission
                                                                     denial of the application, as the FCRA re-                 of the third party that constitutes a viola-
                                                                     quires, does not satisfy the ECOA require-                 tion of the regulation if the creditor accu-
                                                                     ment to disclose specific reasons. For exam-               rately and in a timely manner provided the
                                                                     ple, if the applicant’s credit history reveals             third party with the information necessary
                                                                     delinquent credit obligations and the appli-               for the notification and maintains reason-
                                                                     cation is denied for that reason, to satisfy               able procedures adapted to prevent such vio-
                                                                     § 202.9(b)(2) the creditor must disclose that              lations.
                                                                     the application was denied because of the ap-
                                                                     plicant’s delinquent credit obligations. To                     Section 202.10—Furnishing of Credit
                                                                     satisfy the FCRA requirement, the creditor                                  Information
                                                                     must also disclose that a credit report was
                                                                                                                                   1. Scope. The requirements of § 202.10 for
                                                                     obtained and used in the denial of the appli-
                                                                                                                                designating and reporting credit information
                                                                     cation. Sample forms C–1 through C–5 of Ap-
                                                                                                                                apply only to consumer credit transactions.
                                                                     pendix C of the regulation provide for the
                                                                                                                                Moreover, they apply only to creditors that
                                                                     two disclosures.
                                                                                                                                opt to furnish credit information to credit
                                                                        9(c) Incomplete applications.
                                                                                                                                bureaus or to other creditors; there is no re-
                                                                                      Paragraph 9(c)(1)                         quirement that a creditor furnish credit in-
                                                                                                                                formation on its accounts.
                                                                       1. Exception for preapprovals. The require-                 2. Reporting on all accounts. The require-
                                                                     ment to provide a notice of incompleteness                 ments of § 202.10 apply only to accounts held
                                                                     does not apply to preapprovals that con-                   or used by spouses. However, a creditor has
                                                                     stitute applications under § 202.2(f).                     the option to designate all joint accounts (or
                                                                                      Paragraph 9(c)(2)                         all accounts with an authorized user) to re-
                                                                                                                                flect the participation of both parties,
                                                                       1. Reapplication. If information requested               whether or not the accounts are held by per-
                                                                     by a creditor is submitted by an applicant                 sons married to each other.
                                                                     after the expiration of the time period des-                  3. Designating accounts. In designating ac-
                                                                     ignated by the creditor, the creditor may re-              counts and reporting credit information, a
                                                                     quire the applicant to make a new applica-                 creditor need not distinguish between ac-
                                                                     tion.                                                      counts on which the spouse is an authorized
                                                                                                                                user and accounts on which the spouse is a
                                                                                      Paragraph 9(c)(3)                         contractually liable party.
                                                                        1. Oral inquiries for additional information. If           4. File and index systems. The regulation
                                                                     an applicant fails to provide the information              does not require the creation or maintenance
                                                                     in response to an oral request, a creditor                 of separate files in the name of each partici-
                                                                     must send a written notice to the applicant                pant on a joint or user account, or require
                                                                     within the 30-day period specified in                      any other particular system of record-
                                                                     § 202.9(c)(1) and (2). If the applicant provides           keeping or indexing. It requires only that a
                                                                     the information, the creditor must take ac-                creditor be able to report information in the
                                                                     tion on the application and notify the appli-              name of each spouse on accounts covered by
                                                                     cant in accordance with § 202.9(a).                        § 202.10. Thus, if a creditor receives a credit
                                                                        9(g) Applications submitted through a third             inquiry about the wife, it should be able to
                                                                     party.                                                     locate her credit file without asking the hus-
                                                                        1. Third parties. The notification of adverse           band’s name.
                                                                     action may be given by one of the creditors                   10(a) Designation of accounts.
                                                                     to whom an application was submitted, or by                   1. New parties. When new parties who are
                                                                     a noncreditor third party. If one notification             spouses undertake a legal obligation on an
                                                                     is provided on behalf of multiple creditors,               account, as in the case of a mortgage loan
                                                                     the notice must contain the name and ad-                   assumption, the creditor must change the
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                                                                     dress of each creditor. The notice must ei-                designation on the account to reflect the
                                                                     ther disclose the applicant’s right to a state-            new parties and must furnish subsequent
                                                                     ment of specific reasons within 30 days, or                credit information on the account in the new
                                                                     give the primary reasons each creditor relied              names.


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                       2. Request to change designation of account.             or microfiche copies, or copies produced by
                                                                     A request to change the manner in which in-                any other accurate retrieval system, such as
                                                                     formation concerning an account is fur-                    documents stored and reproduced by com-
                                                                     nished does not alter the legal liability of ei-           puter. A creditor that uses a computerized or
                                                                     ther spouse on the account and does not re-                mechanized system need not keep a paper
                                                                     quire a creditor to change the name in which               copy of a document (for example, of an ad-
                                                                     the account is maintained.                                 verse action notice) if it can regenerate all
                                                                                                                                pertinent information in a timely manner
                                                                         Section 202.11—Relation to State Law                   for examination or other purposes.
                                                                       11(a) Inconsistent state laws.                             2. Computerized decisions. A creditor that
                                                                       1. Preemption determination—New York. The                enters information items from a written ap-
                                                                     Board has determined that the following pro-               plication into a computerized or mechanized
                                                                     visions in the state law of New York are pre-              system and makes the credit decision me-
                                                                     empted by the federal law, effective Novem-                chanically, based only on the items of infor-
                                                                     ber 11, 1988:                                              mation entered into the system, may comply
                                                                       i. Article 15, section 296a(1)(b)—Unlawful               with § 202.12(b) by retaining the information
                                                                     discriminatory practices in relation to credit             actually entered. It is not required to store
                                                                     on the basis of race, creed, color, national or-           the complete written application, nor is it
                                                                     igin, age, sex, marital status, or disability.             required to enter the remaining items of in-
                                                                                                                                formation into the system. If the transaction
                                                                     This provision is preempted to the extent
                                                                                                                                is subject to § 202.13, however, the creditor is
                                                                     that it bars taking a prohibited basis into
                                                                                                                                required to enter and retain the data on per-
                                                                     account when establishing eligibility for cer-
                                                                                                                                sonal characteristics in order to comply with
                                                                     tain special-purpose credit programs.
                                                                                                                                the requirements of that section.
                                                                       ii. Article 15, section 296a(1)(c)’Unlawful
                                                                     discriminatory practice to make any record                                 Paragraph 12(b)(3)
                                                                     or inquiry based on race, creed, color, na-
                                                                     tional origin, age, sex, marital status, or dis-             1. Withdrawn and brokered applications. In
                                                                     ability. This provision is preempted to the                most cases, the 25-month retention period
                                                                     extent that it bars a creditor from request-               for applications runs from the date a notifi-
                                                                     ing and considering information regarding                  cation is sent to the applicant granting or
                                                                     the particular characteristics (for example,               denying the credit requested. In certain
                                                                     race, national origin, or sex) required for eli-           transactions, a creditor is not obligated to
                                                                     gibility for special-purpose credit programs.              provide a notice of the action taken. (See,
                                                                       2. Preemption determination—Ohio. The                    for example, comment 9–2.) In such cases, the
                                                                     Board has determined that the following pro-               25-month requirement runs from the date of
                                                                     vision in the state law of Ohio is preempted               application, as when:
                                                                     by the federal law, effective July 23, 1990:                 i. An application is withdrawn by the ap-
                                                                       i. Section 4112.021(B)(1)—Unlawful dis-                  plicant.
                                                                     criminatory practices in credit transactions.                ii. An application is submitted to more
                                                                                                                                than one creditor on behalf of the applicant,
                                                                     This provision is preempted to the extent
                                                                                                                                and the application is approved by one of the
                                                                     that it bars asking or favorably considering
                                                                                                                                other creditors.
                                                                     the age of an elderly applicant; prohibits the
                                                                                                                                  12(b)(6) Self-tests
                                                                     consideration of age in a credit scoring sys-
                                                                                                                                  1. The rule requires all written or recorded
                                                                     tem; permits without limitation the consid-
                                                                                                                                information about a self-test to be retained
                                                                     eration of age in real estate transactions;
                                                                                                                                for 25 months after a self-test has been com-
                                                                     and limits the consideration of age in spe-
                                                                                                                                pleted. For this purpose, a self-test is com-
                                                                     cial-purpose credit programs to certain gov-               pleted after the creditor has obtained the re-
                                                                     ernment-sponsored programs identified in                   sults and made a determination about what
                                                                     the state law.                                             corrective action, if any, is appropriate.
                                                                            Section 202.12—Record Retention                     Creditors are required to retain information
                                                                                                                                about the scope of the self-test, the method-
                                                                       12(a) Retention of prohibited information.               ology used and time period covered by the
                                                                       1. Receipt of prohibited information. Unless             self-test, the report or results of the self-test
                                                                     the creditor specifically requested such in-               including any analysis or conclusions, and
                                                                     formation, a creditor does not violate this                any corrective action taken in response to
                                                                     section when it receives prohibited informa-               the self-test.
                                                                     tion from a consumer reporting agency.                       12(b)(7) Preapplication marketing informa-
                                                                       2. Use of retained information. Although a               tion.
                                                                     creditor may keep in its files prohibited in-                1. Prescreened credit solicitations. The rule
                                                                     formation as provided in § 202.12(a), the cred-            requires creditors to retain copies of
                                                                     itor may use the information in evaluating                 prescreened credit solicitations. For pur-
                                                                     credit applications only if permitted to do so             poses of this regulation, a prescreened solici-
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                                                                     by § 202.6.                                                tation is an ‘‘offer of credit’’ as described in 15
                                                                       12(b) Preservation of records.                           U.S.C. 1681a(1) of the Fair Credit Reporting
                                                                       1. Copies. Copies of the original record in-             Act. A creditor complies with this rule if it
                                                                     clude carbon copies, photocopies, microfilm                retains a copy of each solicitation mailing


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                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                     that contains different terms, such as the                 the purchase or refinancing of a principal
                                                                     amount of credit offered, annual percentage                dwelling.
                                                                     rate, or annual fee.                                         6. Refinancings. A refinancing occurs when
                                                                       2. List of criteria. A creditor must retain the          an existing obligation is satisfied and re-
                                                                     list of criteria used to select potential recipi-          placed by a new obligation undertaken by
                                                                     ents. This includes the criteria used by the               the same borrower. A creditor that receives
                                                                     creditor both to determine the potential re-               an application to refinance an existing ex-
                                                                     cipients of the particular solicitation and to             tension of credit made by that creditor for
                                                                     determine who will actually be offered cred-               the purchase of the applicant’s dwelling may
                                                                     it.                                                        request the monitoring information again
                                                                       3. Correspondence. A creditor may retain                 but is not required to do so if it was obtained
                                                                     correspondence relating to consumers’ com-                 in the earlier transaction.
                                                                     plaints about prescreened solicitations in                   7. Data collection under Regulation C. See
                                                                     any manner that is reasonably accessible                   comment 5(a)(2)–2.
                                                                     and is understandable to examiners. There is                 13(b) Obtaining of information.
                                                                     no requirement to establish a separate data-                 1. Forms for collecting data. A creditor may
                                                                     base or set of files for such correspondence,              collect the information specified in § 202.13(a)
                                                                     or to match consumer complaints with spe-                  either on an application form or on a sepa-
                                                                     cific solicitation programs.                               rate form referring to the application. The
                                                                                                                                applicant must be offered the option to se-
                                                                      Section 202.13—Information for Monitoring                 lect more than one racial designation.
                                                                                       Purposes                                   2. Written applications. The regulation re-
                                                                                                                                quires written applications for the types of
                                                                        13(a) Information to be requested.                      credit covered by § 202.13. A creditor can sat-
                                                                        1. Natural person. Section 202.13 applies               isfy this requirement by recording on paper
                                                                     only to applications from natural persons.                 or by means of computer the information
                                                                        2. Principal residence. The requirements of             that the applicant provides orally and that
                                                                     § 202.13 apply only if an application relates to           the creditor normally considers in a credit
                                                                     a dwelling that is or will be occupied by the              decision.
                                                                     applicant as the principal residence. A credit               3. Telephone, mail applications.
                                                                     application related to a vacation home or a                  i. A creditor that accepts an application by
                                                                     rental unit is not covered. In the case of a               telephone or mail must request the moni-
                                                                     two- to four-unit dwelling, the application is             toring information.
                                                                     covered if the applicant intends to occupy                   ii. A creditor that accepts an application
                                                                     one of the units as a principal residence.                 by mail need not make a special request for
                                                                        3. Temporary financing. An application for              the monitoring information if the applicant
                                                                     temporary financing to construct a dwelling                has failed to provide it on the application
                                                                     is not subject to § 202.13. But an application             form returned to the creditor.
                                                                     for both a temporary loan to finance con-                    iii. If it is not evident on the face of an ap-
                                                                     struction of a dwelling and a permanent                    plication that it was received by mail, tele-
                                                                     mortgage loan to take effect upon the com-                 phone, or via an electronic medium, the
                                                                     pletion of construction is subject to § 202.13.            creditor should indicate on the form or other
                                                                        4. New principal residence. A person can                application record how the application was
                                                                     have only one principal residence at a time.               received.
                                                                     However, if a person buys or builds a new                    4. Video and other electronic-application proc-
                                                                     dwelling that will become that person’s prin-              esses.
                                                                     cipal residence within a year or upon com-                   i. If a creditor takes an application
                                                                     pletion of construction, the new dwelling is               through an electronic medium that allows
                                                                     considered the principal residence for pur-                the creditor to see the applicant, the cred-
                                                                     poses of § 202.13.                                         itor must treat the application as taken in
                                                                        5. Transactions not covered. The informa-               person. The creditor must note the moni-
                                                                     tion-collection requirements of this section               toring information on the basis of visual ob-
                                                                     apply to applications for credit primarily for             servation or surname, if the applicant choos-
                                                                     the purchase or refinancing of a dwelling                  es not to provide the information.
                                                                     that is or will become the applicant’s prin-                 ii. If an applicant applies through an elec-
                                                                     cipal residence. Therefore, applications for               tronic medium without video capability, the
                                                                     credit secured by the applicant’s principal                creditor treats the application as if it were
                                                                     residence but made primarily for a purpose                 received by mail.
                                                                     other than the purchase or refinancing of the                5. Applications through loan-shopping serv-
                                                                     principal residence (such as loans for home                ices. When a creditor receives an application
                                                                     improvement and debt consolidation) are not                through an unaffiliated loan-shopping serv-
                                                                     subject to the information-collection re-                  ice, it does not have to request the moni-
                                                                     quirements. An application for an open-end                 toring information for purposes of the ECOA
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                                                                     home equity line of credit is not subject to               or Regulation B. Creditors subject to the
                                                                     this section unless it is readily apparent to              Home Mortgage Disclosure Act should be
                                                                     the creditor when the application is taken                 aware, however, that data collection may be
                                                                     that the primary purpose of the line is for                called for under Regulation C (12 CFR part


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                     203), which generally requires creditors to re-            ing written comments and other documents
                                                                     port, among other things, the sex and race of              submitted to the creditor in support of the
                                                                     an applicant on brokered applications or ap-               appraiser’s estimate or opinion of the prop-
                                                                     plications received through a correspondent.               erty’s value.
                                                                       6. Inadvertent notation. If a creditor inad-               ii. A document prepared by the creditor’s
                                                                     vertently obtains the monitoring informa-                  staff that assigns value to the property, if a
                                                                     tion in a dwelling-related transaction not                 third-party appraisal report has not been
                                                                     covered by § 202.13, the creditor may process              used.
                                                                     and retain the application without violating                 iii. An internal review document reflecting
                                                                     the regulation.                                            that the creditor’s valuation is different
                                                                       13(c) Disclosure to applicants.                          from a valuation in a third party’s appraisal
                                                                       1. Procedures for providing disclosures. The             report (or different from valuations that are
                                                                     disclosure to an applicant regarding the                   publicly available or valuations such as
                                                                     monitoring information may be provided in                  manufacturers’ invoices for mobile homes).
                                                                     writing. Appendix B contains a sample dis-                   2. Other reports. The term ‘‘appraisal report’’
                                                                     closure. A creditor may devise its own dis-                does not cover all documents relating to the
                                                                     closure so long as it is substantially similar.            value of the applicant’s property. Examples
                                                                     The creditor need not orally request the                   of reports not covered are:
                                                                     monitoring information if it is requested in                 i. Internal documents, if a third-party ap-
                                                                     writing.                                                   praisal report was used to establish the value
                                                                       13(d) Substitute monitoring program.                     of the property.
                                                                       1. Substitute program. An enforcement agen-                ii. Governmental agency statements of ap-
                                                                     cy may adopt, under its established rule-                  praised value.
                                                                     making or enforcement procedures, a pro-                     iii. Valuations lists that are publicly avail-
                                                                     gram requiring creditors under its jurisdic-
                                                                                                                                able (such as published sales prices or mort-
                                                                     tion to collect information in addition to in-
                                                                                                                                gage amounts, tax assessments, and retail
                                                                     formation required by this section.
                                                                                                                                price ranges) and valuations such as manu-
                                                                     Section 202.14—Rules on Providing Appraisal                facturers’ invoices for mobile homes.
                                                                                                                                 Section 202.15—Incentives for Self-Testing
                                                                       14(a) Providing appraisals.                                          and Self-Correction
                                                                       1. Coverage. This section covers applica-
                                                                     tions for credit to be secured by a lien on a                15(a) General rules.
                                                                     dwelling, as that term is defined in § 202.14(c),            15(a)(1) Voluntary self-testing and correction.
                                                                     whether the credit is for a business purpose                 1. Activities required by any governmental
                                                                     (for example, a loan to start a business) or a             authority are not voluntary self-tests. A
                                                                     consumer purpose (for example, a loan to fi-               governmental authority includes both ad-
                                                                     nance a child’s education).                                ministrative and judicial authorities for fed-
                                                                       2. Renewals. This section applies when an                eral, state, and local governments.
                                                                     applicant requests the renewal of an existing                15(a)(2) Corrective action required.
                                                                     extension of credit and the creditor obtains a               1. To qualify for the privilege, appropriate
                                                                     new appraisal report. This section does not                corrective action is required when the re-
                                                                     apply when a creditor uses the appraisal re-               sults of a self-test show that it is more likely
                                                                     port previously obtained to evaluate the re-               than not that there has been a violation of
                                                                     newal request.                                             the ECOA or this regulation. A self-test is
                                                                       14(a)(2)(i) Notice.                                      also privileged when it identifies no viola-
                                                                       1. Multiple applicants. When an application              tions.
                                                                     that is subject to this section involves more                2. In some cases, the issue of whether cer-
                                                                     than one applicant, the notice about the ap-               tain information is privileged may arise be-
                                                                     praisal report need only be given to one ap-               fore the self-test is complete or corrective
                                                                     plicant, but it must be given to the primary               actions are fully under way. This would not
                                                                     applicant where one is readily apparent.                   necessarily prevent a creditor from asserting
                                                                       14(a)(2)(ii) Delivery.                                   the privilege. In situations where the self-
                                                                       1. Reimbursement. Creditors may charge for               test is not complete, for the privilege to
                                                                     photocopy and postage costs incurred in pro-               apply the lender must satisfy the regula-
                                                                     viding a copy of the appraisal report, unless              tion’s requirements within a reasonable pe-
                                                                     prohibited by state or other law. If the con-              riod of time. To assert the privilege where
                                                                     sumer has already paid for the report—for                  the self-test shows a likely violation, the
                                                                     example, as part of an application fee—the                 rule requires, at a minimum, that the cred-
                                                                     creditor may not require additional fees for               itor establish a plan for corrective action
                                                                     the appraisal (other than photocopy and                    and a method to demonstrate progress in im-
                                                                     postage costs).                                            plementing the plan. Creditors must take ap-
                                                                       14(c) Definitions.                                       propriate corrective action on a timely basis
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                                                                       1. Appraisal reports. Examples of appraisal              after the results of the self-test are known.
                                                                     reports are:                                                 3. A creditor’s determination about the
                                                                       i. A report prepared by an appraiser                     type of corrective action needed, or a finding
                                                                     (whether or not licensed or certified), includ-            that no corrective action is required, is not


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                                                                     Federal Reserve System                                                                      Pt. 202, Supp. I
                                                                     conclusive in determining whether the re-                    2. The privilege does not protect a credi-
                                                                     quirements of this paragraph have been sat-                tor’s analysis performed as part of proc-
                                                                     isfied. If a creditor’s claim of privilege is              essing or underwriting a credit application.
                                                                     challenged, an assessment of the need for                  A creditor’s evaluation or analysis of its
                                                                     corrective action or the type of corrective                loan files, Home Mortgage Disclosure Act
                                                                     action that is appropriate must be based on                data, or similar types of records (such as
                                                                     a review of the self-testing results, which                broker or loan officer compensation records)
                                                                     may require an in camera inspection of the                 does not produce new information about a
                                                                     privileged documents.                                      creditor’s compliance and is not a self-test
                                                                       15(a)(3) Other privileges.                               for purposes of this section. Similarly, a sta-
                                                                       1. A creditor may assert the privilege es-               tistical analysis of data derived from exist-
                                                                     tablished under this section in addition to                ing loan files is not privileged.
                                                                     asserting any other privilege that may                       15(b)(3) Types of information not privileged.
                                                                     apply, such as the attorney-client privilege
                                                                     or the work-product privilege. Self-testing                              Paragraph 15(b)(3)(i)
                                                                     data may be privileged under this section
                                                                     whether or not the creditor’s assertion of an-               1. The information listed in this paragraph
                                                                     other privilege is upheld.                                 is not privileged and may be used to deter-
                                                                       15(b) Self-test defined.                                 mine whether the prerequisites for the privi-
                                                                       15(b)(1) Definition.                                     lege have been satisfied. Accordingly, a cred-
                                                                                                                                itor might be asked to identify the self-test-
                                                                                    Paragraph 15(b)(1)(i)                       ing    method,      for    example,   whether
                                                                                                                                preapplication testers were used or data were
                                                                       1. To qualify for the privilege, a self-test             compiled by surveying loan applicants. In-
                                                                     must be sufficient to constitute a determina-              formation about the scope of the self-test
                                                                     tion of the extent or effectiveness of the                 (such as the types of credit transactions ex-
                                                                     creditor’s compliance with the Act and Reg-                amined, or the geographic area covered by
                                                                     ulation B. Accordingly, a self-test is only                the test) also is not privileged.
                                                                     privileged if it was designed and used for
                                                                     that purpose. A self-test that is designed or                            Paragraph 15(b)(3)(ii)
                                                                     used to determine compliance with other
                                                                     laws or regulations or for other purposes is                 1. Property appraisal reports, minutes of
                                                                     not privileged under this rule. For example,               loan committee meetings or other docu-
                                                                     a self-test designed to evaluate employee ef-              ments reflecting the basis for a decision to
                                                                     ficiency or customers’ satisfaction with the               approve or deny an application, loan policies
                                                                     level of service provided by the creditor is               or procedures, underwriting standards, and
                                                                     not privileged even if evidence of discrimina-             broker compensation records are examples of
                                                                     tion is uncovered incidentally. If a self-test             the types of records that are not privileged.
                                                                     is designed for multiple purposes, only the                If a creditor arranges for testers to submit
                                                                     portion designed to determine compliance                   loan applications for processing, the records
                                                                     with the ECOA is eligible for the privilege.               are not related to actual credit transactions
                                                                                                                                for purposes of this paragraph and may be
                                                                                    Paragraph 15(b)(1)(ii)                      privileged self-testing records.
                                                                       1. The principal attribute of self-testing is              15(c) Appropriate corrective action.
                                                                     that it constitutes a voluntary undertaking                  1. The rule only addresses the corrective
                                                                     by the creditor to produce new data or fac-                actions required for a creditor to take advan-
                                                                     tual information that otherwise would not                  tage of the privilege in this section. A cred-
                                                                     be available and could not be derived from                 itor may be required to take other actions or
                                                                     loan or application files or other records re-             provide additional relief if a formal finding
                                                                     lated to credit transactions. Self-testing in-             of discrimination is made.
                                                                     cludes, but is not limited to, the practice of               15(c)(1) General requirement.
                                                                     using fictitious applicants for credit (test-                1. Appropriate corrective action is required
                                                                     ers), either with or without the use of                    even though no violation has been formally
                                                                     matched pairs. A creditor may elect to test                adjudicated or admitted by the creditor. In
                                                                     a defined segment of its business, for exam-               determining whether it is more likely than
                                                                     ple, loan applications processed by a specific             not that a violation occurred, a creditor
                                                                     branch or loan officer, or applications made               must treat testers as if they are actual appli-
                                                                     for a particular type of credit or loan pro-               cants for credit. A creditor may not refuse to
                                                                     gram. A creditor also may use other methods                take appropriate corrective action under
                                                                     of generating information that is not avail-               this section because the self-test used ficti-
                                                                     able in loan and application files, such as                tious loan applicants. The fact that a test-
                                                                     surveying mortgage loan applicants. To the                 er’s agreement with the creditor waives the
                                                                     extent permitted by law, creditors might                   tester’s legal right to assert a violation does
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                                                                     also develop new methods that go beyond                    not eliminate the requirement for the cred-
                                                                     traditional pre-application testing, such as               itor to take corrective action, although no
                                                                     hiring testers to submit fictitious loan appli-            remedial relief for the tester is required
                                                                     cations for processing.                                    under paragraph 15(c)(3).


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                                                                     Pt. 202, Supp. I                                                        12 CFR Ch. II (1–1–11 Edition)
                                                                       15(c)(2) Determining the scope of appropriate                          Paragraph 15(c)(3)(iii)
                                                                     corrective action.
                                                                       1. Whether a creditor has taken or is tak-                 1. A creditor is not required to provide re-
                                                                     ing corrective action that is appropriate will             medial relief to an applicant that would not
                                                                     be determined on a case-by-case basis. Gen-                be available by law. An applicant might also
                                                                     erally, the scope of the corrective action                 be ineligible for certain types of relief due to
                                                                     that is needed to preserve the privilege is                changed circumstances. For example, a cred-
                                                                     governed by the scope of the self-test. For                itor is not required to offer credit to a denied
                                                                     example, a creditor that self-tests mortgage               applicant if the applicant no longer qualifies
                                                                     loans and discovers evidence of discrimina-                for the credit due to a change in financial
                                                                     tion may focus its corrective actions on                   circumstances, although some other type of
                                                                     mortgage loans, and is not required to ex-                 relief might be appropriate.
                                                                     pand its testing to other types of loans.                    15(d)(1) Scope of privilege.
                                                                       2. In identifying the policies or practices                1. The privilege applies with respect to any
                                                                     that are a likely cause of the violation, a                examination, investigation or proceeding by
                                                                     creditor might identify inadequate or im-                  federal, state, or local government agencies
                                                                     proper lending policies, failure to implement              relating to compliance with the Act or this
                                                                     established policies, employee conduct, or                 regulation. Accordingly, in a case brought
                                                                     other causes. The extent and scope of a like-              under the ECOA, the privilege established
                                                                     ly violation may be assessed by determining                under this section preempts any inconsistent
                                                                     which areas of operations are likely to be af-             laws or court rules to the extent they might
                                                                     fected by those policies and practices, for ex-            require disclosure of privileged self-testing
                                                                     ample, by determining the types of loans and               data. The privilege does not apply in other
                                                                     stages of the application process involved                 cases (such as in litigation filed solely under
                                                                     and the branches or offices where the viola-               a state’s fair lending statute). In such cases,
                                                                     tions may have occurred.                                   if a court orders a creditor to disclose self-
                                                                       3. Depending on the method and scope of                  test results, the disclosure is not a voluntary
                                                                     the self-test and the results of the test, ap-
                                                                                                                                disclosure or waiver of the privilege for pur-
                                                                     propriate corrective action may include one
                                                                                                                                poses of paragraph 15(d)(2); a creditor may
                                                                     or more of the following:
                                                                                                                                protect the information by seeking a protec-
                                                                       i. If the self-test identifies individuals
                                                                                                                                tive order to limit availability and use of the
                                                                     whose applications were inappropriately
                                                                     processed, offering to extend credit if the ap-            self-testing data and prevent dissemination
                                                                     plication was improperly denied and compen-                beyond what is necessary in that case. Para-
                                                                     sating such persons for out-of-pocket costs                graph 15(d)(1) precludes a party who has ob-
                                                                     and other compensatory damages;                            tained privileged information from using it
                                                                       ii. Correcting institutional policies or pro-            in a case brought under the ECOA, provided
                                                                     cedures that may have contributed to the                   the creditor has not lost the privilege
                                                                     likely violation, and adopting new policies                through voluntary disclosure under para-
                                                                     as appropriate;                                            graph 15(d)(2).
                                                                       iii. Identifying and then training and/or                  15(d)(2) Loss of privilege.
                                                                     disciplining the employees involved;
                                                                       iv. Developing outreach programs, mar-                                 Paragraph 15(d)(2)(i)
                                                                     keting strategies, or loan products to serve                 1. A creditor’s corrective action, by itself,
                                                                     more effectively segments of the lender’s                  is not considered a voluntary disclosure of
                                                                     markets that may have been affected by the
                                                                                                                                the self-test report or results. For example, a
                                                                     likely discrimination; and
                                                                                                                                creditor does not disclose the results of a
                                                                       v. Improving audit and oversight systems
                                                                                                                                self-test merely by offering to extend credit
                                                                     to avoid a recurrence of the likely viola-
                                                                                                                                to a denied applicant or by inviting the ap-
                                                                                                                                plicant to reapply for credit. Voluntary dis-
                                                                       15(c)(3) Types of relief.
                                                                                                                                closure could occur under this paragraph,
                                                                                    Paragraph 15(c)(3)(ii)                      however, if the creditor disclosed the self-
                                                                                                                                test results in connection with a new offer of
                                                                       1. The use of pre-application testers to                 credit.
                                                                     identify policies and practices that illegally
                                                                                                                                  2. The disclosure of self-testing results to
                                                                     discriminate does not require creditors to re-
                                                                                                                                an independent contractor acting as an audi-
                                                                     view existing loan files for the purpose of
                                                                                                                                tor or consultant for the creditor on compli-
                                                                     identifying and compensating applicants
                                                                                                                                ance matters does not result in loss of the
                                                                     who might have been adversely affected.
                                                                       2. If a self-test identifies a specific appli-
                                                                     cant who was discriminated against on a pro-                             Paragraph 15(d)(2)(ii)
                                                                     hibited basis, to qualify for the privilege in
                                                                     this section the creditor must provide appro-                 1. The privilege is lost if the creditor dis-
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                                                                     priate remedial relief to that applicant; the              closes privileged information, such as the re-
                                                                     creditor is not required to identify other ap-             sults of the self-test. The privilege is not lost
                                                                     plicants who might also have been adversely                if the creditor merely reveals or refers to the
                                                                     affected.                                                  existence of the self-test.


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                                                                     Federal Reserve System                                                                               § 203.1
                                                                                   Paragraph 15(d)(2)(iii)                      others because of the form’s section ‘‘Infor-
                                                                                                                                mation for Government Monitoring Pur-
                                                                       1. A creditor’s claim of privilege may be
                                                                                                                                poses.’’ Creditors that are governed by
                                                                     challenged in a court or administrative law
                                                                                                                                § 202.13(a) of the regulation (which limits col-
                                                                     proceeding with appropriate jurisdiction. In
                                                                     resolving the issue, the presiding officer may             lection to applications primarily for the pur-
                                                                     require the creditor to produce privileged in-             chase or refinancing of the applicant’s prin-
                                                                     formation about the self-test.                             cipal residence) should delete, strike, or
                                                                                                                                modify the data-collection section on the
                                                                     Paragraph 15(d)(3) Limited use of privileged in-           form when using it for transactions not cov-
                                                                     formation                                                  ered by § 202.13(a) to ensure that they do not
                                                                       1. A creditor may be required to produce                 collect the information. Creditors that are
                                                                     privileged documents for the purpose of de-                subject to more extensive collection require-
                                                                     termining a penalty or remedy after a viola-               ments by a substitute monitoring program
                                                                     tion of the ECOA or Regulation B has been                  under § 202.13(d) may use the form as issued,
                                                                     formally adjudicated or admitted. A credi-                 in compliance with that substitute program.
                                                                     tor’s compliance with such a requirement
                                                                     does not evidence the creditor’s intent to                   APPENDIX C—SAMPLE NOTIFICATION FORMS
                                                                     forfeit the privilege.
                                                                                                                                  1. Form C–9. Creditors may design their
                                                                      Section 202.16—Enforcement, Penalties, and                own form, add to, or modify the model form
                                                                                      Liabilities                               to reflect their individual policies and proce-
                                                                                                                                dures. For example, a creditor may want to
                                                                       17(c) Failure of compliance.
                                                                       1. Inadvertent errors. Inadvertent errors in-
                                                                     clude, but are not limited to, clerical mis-                 i. A telephone number that applicants may
                                                                     take, calculation error, computer malfunc-                 call to leave their name and the address to
                                                                     tion, and printing error. An error of legal                which an appraisal report should be sent.
                                                                     judgment is not an inadvertent error under                   ii. A notice of the cost the applicant will
                                                                     the regulation.                                            be required to pay the creditor for the ap-
                                                                       2. Correction of error. For inadvertent errors           praisal or a copy of the report.
                                                                     that occur under §§ 202.12 and 202.13, this sec-           [Reg. B, 68 FR 13161, Mar. 18, 2003, as amend-
                                                                     tion requires that they be corrected prospec-              ed at 72 FR 63451, Nov. 9, 2007; 72 FR 71057,
                                                                     tively.                                                    Dec. 14, 2007]
                                                                        APPENDIX B—MODEL APPLICATION FORMS
                                                                       1. Freddie Mac/Fannie Mae form—residential                   PART 203—HOME MORTGAGE
                                                                     loan application. The uniform residential loan                 DISCLOSURE (REGULATION C)
                                                                     application form (Freddie Mac 65/Fannie Mae
                                                                     1003), including supplemental form (Freddie                Sec.
                                                                     Mac 65A/Fannie Mae 1003A), prepared by the
                                                                                                                                203.1 Authority, purpose, and scope.
                                                                     Federal Home Loan Mortgage Corporation
                                                                     and the Federal National Mortgage Associa-                 203.2 Definitions.
                                                                     tion and dated October 1992 may be used by                 203.3 Exempt institutions.
                                                                     creditors without violating this regulation.               203.4 Compilation of loan data.
                                                                     Creditors that are governed by the moni-                   203.5 Disclosure and reporting.
                                                                     toring requirements of this regulation                     203.6 Enforcement.
                                                                     (which limits collection to applications pri-              APPENDIX A TO PART 203—FORM AND INSTRUC-
                                                                     marily for the purchase or refinancing of the                 TIONS FOR COMPLETION OF HMDA LOAN/
                                                                     applicant’s principal residence) should de-                   APPLICATION REGISTER
                                                                     lete, strike, or modify the data-collection
                                                                                                                                APPENDIX B TO PART 203—FORM AND INSTRUC-
                                                                     section on the form when using it for trans-
                                                                                                                                   TIONS FOR DATA COLLECTION ON ETH-
                                                                     actions not covered by § 202.13(a) to ensure
                                                                                                                                   NICITY, RACE, AND SEX
                                                                     that they do not collect the information.
                                                                     Creditors that are subject to more extensive               SUPPLEMENT I TO PART 203—STAFF COM-
                                                                     collection requirements by a substitute mon-
                                                                     itoring program under § 202.13(d) or by the                  AUTHORITY: 12 U.S.C. 2801–2810.
                                                                     Home Mortgage Disclosure Act (HMDA) may
                                                                     use the form as issued, in compliance with                  SOURCE: Reg. C, 67 FR 7236, Feb. 15, 2002,
                                                                     the substitute program or HMDA.                            unless otherwise noted.
                                                                       2. FHLMC/FNMA form—home improvement
                                                                     loan application. The home-improvement and                 § 203.1     Authority, purpose, and scope.
                                                                     energy loan application form (FHLMC 703/
                                                                                                                                  (a) Authority. This regulation is
                                                                     FNMA 1012), prepared by the Federal Home
                                                                                                                                issued by the Board of Governors of the
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                                                                     Loan Mortgage Corporation and the Federal
                                                                     National Mortgage Association and dated                    Federal Reserve System (‘‘Board’’) pur-
                                                                     October 1986, complies with the requirements               suant to the Home Mortgage Disclo-
                                                                     of the regulation for some creditors but not               sure Act (‘‘HMDA’’) (12 U.S.C. 2801 et


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