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November 10, 1999

Ms. Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20^th Street and Constitution Avenue, N.W.
Washington, D.C. 20551

Re: Equal Credit Opportunity Act 64 FR 44582 (August 16, 1999) Docket No. R-1008

Dear Ms. Johnson:

America’s Community Bankers (ACB) is pleased to comment on a proposal issued by the Board of Governors of the Federal Reserve System (Board) to revise Regulation B, the implementing regulation for the Equal Credit Opportunity Act (ECOA). ACB is the national trade association of choice for progressive community banks of all sizes.

The Board of Directors of ACB has adopted a Statement of Principles clearly stating that, among other things, ACB member institutions strongly endorse the goals of the laws and regulations aimed at combating discrimination of any form in home mortgage lending or in the delivery of other financial services and products. ECOA makes it unlawful for creditors to discriminate against an applicant in any aspect of a credit transaction on the basis of race, color, religion, national origin, marital status, sex, age, and other specified bases. We support the goals of ECOA and ACB and its member institutions are committed to ensuring that credit is available to all segments of society on a fair and equitable basis. Attached to this letter as Appendix A is the Statement of Principles adopted by ACB’s Board of Directors.

Nevertheless, ACB is opposed to the major changes to Regulation B contained in the proposal. In particular, we believe that lifting the prohibition on the collection of prohibited basis information in nonmortgage transactions would not further the goals of ECOA or Regulation B. In fact, we suggest that the negative impact of the removal of the prohibition would far outweigh any perceived benefits. At a time when Congress and the regulators alike are working to reduce the regulatory burden on insured institutions, this proposal would add significant administrative burdens to those placed on institutions choosing to collect the data. Because the data would not be protected under the self-testing privilege, the institution would be subject to potential litigation. Finally, the quality of the data would be suspect. Each institution collecting data would collect different information and because consumers can refuse to provide information there would be no consistency across a voluntary system.

The collection and notation of the data would not lead to additional applicants obtaining credit. It may perversely lead to a reduction in credit availability as resources are diverted to administering the data collection.

The Board proposes:

1. removal of the general prohibition against the notation of prohibited basis information;

2. required record retention for preapproved credit solicitations; and

3. extension of the record retention period for certain business credit applications.

In 1977, the Board promulgated a version of Regulation B that prohibited creditors from collecting data on the race, sex, marital status, color, religion, or national origin of loan applicants. The purpose of the prohibition was to ensure that such information would not be used in a discriminatory fashion to deny the extension of credit or to extend credit on different terms. It was thought that the collection of such data would lead creditors to make credit decisions based on the information.

Since then, proponents of the data collection have determined that having the data will help to alleviate what is perceived to be illegal discrimination in several product areas, including small business lending. Proponents also argue that for competitive market reasons, financial service providers should have access to the information so that they may market to all segments of their communities.

We disagree that the collection of the data will assist in marketing efforts while at the same time helping to identify discrimination. Further, ACB notes that when the Board considered, but decided against, lifting the prohibition in 1995, it clearly stated that this decision was best left to Congress. ACB agrees with the Board’s 1995 conclusion and urges the Board not to abandon its earlier judgment.

ECOA makes it unlawful for creditors to consider any of the prohibited bases of discrimination in a credit transaction. The general prohibition against collection of data in Regulation B was intended by the Board to discourage discrimination and comply with the statute, based on the premise that if creditors’ loan files did not contain prohibited information, it could not enter into the creditor’s decision of whether to extend credit or the terms of credit extended.

The collection of this information is problematic for several reasons. Each creditor can determine whether to collect the information, what pieces of the information should be noted, and the method of collection to be used. The consumer may refuse to respond when questioned and guesswork by the loan officer does not lead to accuracy. With the development of technology allowing individuals to apply for and close consumer loans without ever appearing in person, additional issues arise. Without some type of uniform data collection requirements, the information will not be useful for comparative purposes.

Especially in the context of small business lending, even without the use of developing technology that would permit remote applications, the question arises of who the actual applicant is. If the applicant is more than one person, whether as part of a partnership or other joint ownership, inaccurate information may be collected unless information on all members of the group is collected. Thus the results are further skewed and the usefulness of the data is limited.

The Board believes that voluntary data collection under this proposal does not qualify for the self-testing privilege under the ECOA. ACB strongly disagrees.

Regulation B defines a "self-test" as any program, practice or study that creates data or factual information that is not available and cannot be derived from loan or application files or other records related to credit transactions. The Official Staff Commentary to Regulation B states that "the primary attribute of self-testing is that it constitutes a voluntary undertaking by the creditor to produce new data or factual information that otherwise would not be available and could not be derived from loan or application files or other records related to credit transactions." Here, the data proposed to be collected would not be available routinely and could not be derived from loan or application files or other records unless the creditor "volunteered" to collect the data. Clearly, the data collection envisioned by the proposal would constitute a self-test under Regulation B.

Further, Regulation B provides that any report or results of a self-test that a creditor "voluntarily" conducts are privileged. On the other hand, Regulation B provides that data collection "required" by law or by any governmental authority is not a voluntary self-test. Clearly, the Board’s regulation differentiates and applies the self-test privilege according to whether the data collected was done so voluntarily or by mandate. Under the Board’s proposal, the data collected would be done so voluntarily, not by regulatory requirement, and should be considered privileged.

Should the Board lift the prohibition, ACB strongly believes that any information derived from an institution opting to collect this data should be privileged and beyond the reach of any party outside the institution. To hold otherwise would be to defeat the purpose of lifting the prohibition: to permit institutions to identify underserved groups and better serve unmet credit needs. If this data is not determined to be privileged, it is not likely that many institutions will avail themselves of this ability to self-examine and identify unmet credit needs. Therefore, the public policy considerations in amending Regulation B as proposed would be thwarted.

Lastly, when the Board and the Department of Housing and Urban Development initially formulated their respective fair lending self-testing privilege, the basis of the privilege was that the information collected was derived from outside the credit process and apart from the loan file. Here, the proposal clearly states that a bank must not consider this data in making its credit decision. This prohibition removes the data from the credit file and, thus, qualifies for the self-test privilege under Regulation B. However, should the Board determine that the data collected do relate back to the loan file, the Board in this instance could carve out an exception to its privilege qualifications and protect this data by virtue of the voluntary nature by which the data is both provided by the consumer and collected by the creditor.

An ever increasing amount of information pertaining to individuals is being disseminated and shared. The public has become justifiably concerned about privacy.

Customers are unwilling to provide information which should have no bearing on a loan decision because the inquiry is viewed as an invasion of privacy. Because the Board proposes to deny institutions collecting this data any privilege from having to share this data with third parties, the collecting institution can not offer the customer any assurance that this information would remain private.

The business climate within which insured institutions currently operate suggests more, not less, privacy is what the public desires. The Board’s proposal to lift the prohibition of the collection of personal characteristics and then make that information available to third parties is contrary to the recently enacted privacy requirements as part of the financial modernization legislation. That legislation requires, among other things, development and implementation of privacy principles by all depository institutions.

Although collection of this data will be technically "voluntary" under the Board’s proposal, the effect for insured depository institutions likely will result in there being little choice but to collect the information. Examiners, responsible for monitoring and enforcing fair lending laws, may impose a "best practice" on institutions under their supervision, establishing a de facto requirement for collection of this information. Further, the information so collected will have little meaning to the examiner unless one institution can be accurately compared to another. This being the case, the examiners will likely impose further "best practices" in an effort to form specific, standardized methods of notation and collection of this information.

Consumer activist groups will also use the lifting of the prohibition to pressure institutions to "voluntarily" collect and share this data. The failure to do so for some or all of an institution’s product lines may be perceived and/or touted by these groups as evidence of illegal discriminatory practices. Likewise, should an institution exercise its right to discontinue this collection and then later choose to resume the collection, these groups might cite such decisions as evidence of illegal discriminatory practices.

Not only will insured depository institutions be facing increased regulatory burden and compliance costs, they will also be facing increased exposure to liability and administrative enforcement should mistakes be made in collecting and recording information from what was initially intended to be a "voluntary" activity.

ACB supports the Board’s decision not to expand Regulation B’s coverage to prescreened credit solicitations. ECOA and Regulation B make it illegal for a creditor to discriminate against a loan applicant on a prohibited basis. Prescreening and other preapplication marketing activities do not involve a request or application for credit. Unlike a loan application, prescreening is a practice initiated by the lender, not the borrower.

However, ACB opposes the Board’s proposal to require creditors to retain certain records related to preapproved credit solicitations. The proposal requires creditors to retain (for 25 months after a creditor solicits potential applicants for credit) certain information related to preapproved credit solicitations: the list of criteria used to select potential customers, the text of the solicitation mailing, correspondence (to and from selected potential customers) related to complaints, whether formal or informal, about the solicitation, and the portion of the marketing plan (including any response model) to which the solicitation relates.

The Board cites the need to monitor creditors’ solicitation practices to ensure that they do not result in violation of ECOA and Regulation B. The Board believes that the proposed record retention requirements pose little or no additional burden on creditors because these records are of the type that the creditor would typically retain for its own purposes and/or are already being retained due to the requirements of the Fair Credit Reporting Act (FCRA).

We believe that any additional burden in the form of mandated record retention imposed on a creditor is unwarranted and serves only to increase the cost of credit for consumers and reduce credit availability. While it is true that some of the information to be retained under the proposal is already retained as a matter of course by creditors or is required by the FCRA, the Board’s proposal to mandate retention of these records imposes significant and unnecessary regulatory burden on creditors. In particular, the proposed requirement to retain correspondence related to complaints poses a significant burden and substantial potential for liability for creditors. Creditors retain, to the best of their ability, all complaints submitted to the institution. However, informal correspondence could be any scribbled note written on the back of an unrelated document and handed to a teller or bank clerk far removed from the credit solicitation.

Clearly, mandating the retention of every complaint, no matter how delivered or in what form, presents not only a significant compliance burden on creditors wishing to engage in preapplication marketing activities, but also places the creditor at significant risk of liability for noncompliance. Further, it is unclear from the Board’s proposal whether a creditor would have to maintain a single copy of the solicitation text and marketing plan or a duplicate copy of each for each loan file and for each mailing. Lastly, while many creditors engaged in preapplication marketing activities currently may retain as a matter of course much of the information identified by the Board in its proposal, any mandate unnecessarily adds to a creditor’s regulatory compliance obligation and liability for noncompliance. Before taking this step, some showing must be made on the inadequacy of data retained in the ordinary course of business for supervisory purposes.

Regulation B requires creditors to retain business credit applications and other records for 12 months. The Board is proposing to increase the business credit application record retention period from 12 to 25 months for businesses with gross revenues of $1 million or less. ACB member institutions typically retain these records for 25 months since 25 months is the Regulation B record retention requirement for non-business loan applications, the majority of community banks’ loan requests.

ACB takes this opportunity to urge the Board to consider adopting one consistent record retention requirement for all its consumer protection regulations. Given the numerous and complex nature of consumer protection regulations facing today’s community banks, uniformity of compliance requirements where possible, such as in the case of record retention time requirements, would serve to greatly reduce regulatory burden and streamline compliance operations. Therefore, increasing the record retention requirement for some business credit applications from 12 to 25 months as proposed does not pose a significant burden.

However, on a related matter, the Board proposes requiring creditors to disclose to all declined business credit applicants, regardless of size, their right to receive a written statement of reasons for adverse action. While ACB member institutions often provide this notice as a matter of course regardless of the type or size of applicant, ACB believes that justification of a different standard of protection due large, sophisticated business credit applicants is as persuasive today as at the inception of these rules. While ACB member institutions continue to streamline and standardize their operations where possible (such as by notifying all applicants for credit of their right to receive a written statement of reasons for adverse action), ACB opposes this proposal.

Preapproved Loans. ACB concurs with the Board’s proposed treatment under the ECOA and Regulation B of requests for preapproved loans. A request for a preapproved loan under procedures in which a creditor issues creditworthy persons a written commitment to extend credit up to a designated amount that is valid for a designated period of time, even if subject to conditions, is tantamount to an application under Regulation B. A preapproval without procedures involving a written commitment should be treated as a mere prequalification for purposes of Regulation B.

Prequalifications. ACB supports the Board’s proposed clarification that prequalifications are subject to the test currently applicable to inquiries. Under that test, a creditor prequalifying an applicant is to provide an adverse action notice if the creditor communicates a denial to the applicant. ACB agrees with the Board’s reasoning that given the changes in technology, and creditors’ use of varying procedures and mechanisms to deliver credit products, the flexibility of the current test is appropriate in the case of prequalifications.

Liability For The Acts of Other Creditors. ACB supports the Board’s retention of the "reasonable notice" standard when a creditor may be responsible for the discriminatory acts of other creditors’ inquiries. While creditors’ loan product and service distribution systems have significantly expanded in recent years, often involving multiple creditors in a single transaction, ACB believes that it is not feasible to specify by regulation with particularity the circumstances under which a creditor may or may not be liable for a violation committed by another creditor. Attempting to specify the circumstances which would give rise to liability would have the negative consequence of thwarting the development of some desirable loan programs, while failing to reach the undesirable practices of other programs as intended by the ECOA and Regulation B.

Clear and Conspicuous Standards. The proposal contains new clear and conspicuous and retention standards for Regulation B inquiries. ACB supports these Board’s proposed standards. ACB notes that these standards are part of the various consumer protection regulations promulgated and administered by the Board. As such, ACB member institutions currently incorporate the "clear and conspicuous and retention" standard of other Board regulations into their notifications and disclosures required by Regulation B.

Appendices B and C to Part 202 - Model Application Forms. The Board proposes to revise Appendix B to reflect the proposed lifting of Regulation B’s prohibition against data collection. The Board proposes to replace the "Residential loan application" model form with an updated "Uniform residential loan application" form (FHLMC 65 / FNMA 1003). The Board proposes to revise Appendix C to also reflect the proposed lifting of Regulation B’s prohibition against data collection. The Board proposes to add a new model form to provide disclosure requirements for creditors who request information voluntarily on applicant characteristics. As stated above, ACB strongly opposes the lifting of Regulation B’s prohibition against data collection. Therefore, ACB opposes the Board’s proposed revisions to Appendices B and C which would implement the proposal to lift the prohibition.

While ACB and its member institutions strongly believe in the goals of ECOA and its implementing regulation, we do not agree with the Board that the proposal will help further those goals. Lifting the prohibition against collecting the prohibited basis information may create opportunities for insured institutions to serve unmet needs, but the operational burden of collecting and maintaining the data will direct resources away from the granting of credit. The differences in the data collected from institution-to-institution will enhance the risks of litigation. Finally, the decision of the Board that the data should not be privileged under the self-testing provisions makes the collection of the data an unlikely activity for an insured lender if the system is truly voluntary. The likelihood of it becoming de facto mandatory is substantial. Such a change should be made by the Congress in the context of an overall review of the statute.

ACB appreciates the opportunity to comment on the Board’s proposed revisions to Regulation B. Should you have any questions regarding this letter, please contact Glenn Gimble at 202-857-3148.

Sincerely,

Charlotte M. Bahin
Regulatory Counsel

Enclosure: ACB’s Statement of Principles

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