Joint Comment Letter to Federal Reserve Regarding Changes to Regulation B

May 28, 1998
Joint Comment Letter to Federal Reserve
Regarding Changes to Regulation B

May 28, 1998


William W. Wiles
Board of Governors of the
Federal Reserve System
20th Street and Constitution Ave., N.W.
Washington, D.C. 20551

Dear Mr. Wiles:

We are submitting this comment in response to the Board’s advance notice of proposed rulemaking with respect to Regulation B, which implements the Equal Credit Opportunity Act (ECOA).

In particular, we are writing to express our strong support and encouragement for the Board to propose an amendment to Regulation B to allow lenders voluntarily to collect information about the race and gender of applicants for non-mortgage credit. While the Board recently considered the issue, we believe that its importance warrants a fresh look.

The current regulatory prohibition needlessly inhibits the ability of financial service providers to learn about and respond to market opportunities to better serve underserved communities. The prohibition makes it difficult for institutions to know whether products intended to expand access to credit, including to minorities, reach their intended customer base. Allowing creditors to collect data for business and consumer loans will likely lead to innovation and increased access to credit, a greater level of voluntary compliance, and more effective fair lending enforcement.

We also support additional changes to Regulation B concerning pre-application marketing practices.

We are enclosing more detailed comments and supporting attachments.



Robert E. Rubin
Secretary of the Treasury
Janet Reno
Attorney General
Andrew Cuomo
Secretary of Housing and Urban
Julie Williams
Acting Comptroller of the Currency Development
Ellen Seidman
Director, Office of Thrift Supervision
Robert Pitofsky
Chairman, by direction of the Federal Trade Commission
Aida Alvarez
Administrator, Small Business Administration




I. Voluntary Data Collection
A. Data Collected on Mortgage Loans Have Not Been Used to Discriminate and Have Increased Access to Credit for Home Mortgages

In 1977, the Board published a revision of Regulation B, which implements the Equal Credit Opportunity Act (ECOA), to prohibit creditors from collecting data on the race, sex, marital status, color, religion or national origin of loan applicants, in order to avoid discriminatory use of such data. However, the Board made an exception to this general prohibition by requiring creditors to collect such information on home mortgage loans. At that time, little was known (but assumptions were made) about the nature and scope of lending discrimination. Since then, much has been learned about mortgage lending discrimination. The original fear that race, national origin and gender data collected under the Home Mortgage Disclosure Act (HMDA) would be used for discriminatory purposes has not been realized. Instead, the requirement for recording and reporting applicant data has contributed to increased access to credit for minority loan applicants, assisted creditors in complying with the law and in developing innovative products, and aided federal supervisory and enforcement efforts.

Recent data suggest that HMDA is having a salutary effect. During the 1990s, lending to minorities has increased dramatically relative to non-minorities, and in 1996, total home purchase loans (conventional and government-backed) to both blacks and Hispanics reached record high levels. Between 1993 and 1996, mortgage originations for Hispanics and blacks grew by 56 percent and 53 percent, respectively, more than three times as rapidly as the 14 percent increase registered for white borrowers. Though minority home ownership rates remain low relative to non-minorities, the gap is diminishing. As Chairman Greenspan has stated, “[o]ur experience with mortgage applications is one that underscores the role that free market competitive pressures can play in undermining discrimination and improving the profitability of business activity.”

B. Lifting The Prohibition For Other Types Of Loans Would Eliminate an Unnecessary Regulatory Restriction and Foster Innovation

In today’s competitive financial services market, a creditor cannot afford to be subject to a regulatory prohibition that limits its ability to have the information it needs to be responsive to the credit demands of its market. The current prohibition in Regulation B on the collection of the race and gender of loan applicants for non-mortgage credit results in an unfortunate, and in our view, unnecessary, restriction on how a bank, thrift or other creditor conducts its business. The restriction has the unintended consequence of limiting a creditor’s ability to expand its customer base because it lacks important information necessary to identify potential new markets or to develop innovative products to serve those markets. In particular, it inhibits the ability of financial service providers to meet the needs of underserved communities with innovative new financial products, by making it difficult for financial institutions to understand whether new products expand access to credit for minorities. Race and gender data would help to provide a creditor with the information it needs to help meet the credit needs of particular communities.

Permitting creditors to collect race and gender data from applicants for non-mortgage credit would also enhance access to credit, by enabling lenders to identify gaps in their efforts to serve customers. For example, Regulation B sets out a limited exception to its general prohibition in order to permit lenders to establish “special purpose credit programs” to serve economically disadvantaged persons, including members of a prohibited basis group. However, to use this exception, a lender must submit a written plan that supports the need for the program. Because lenders are currently prohibited from collecting race and gender information from applicants for non-mortgage credit, lenders often lack the supporting data that would enable them to take full advantage of the special purpose credit program exception. In our judgment, if creditors were permitted to collect race and gender information from applicants for non-mortgage credit, overall lending to minorities, women, and other economically disadvantaged persons would increase.

In addition, after the Board’s decision in December of 1996 not to eliminate the prohibition, institutions that have made commitments to lend to underserved markets have expressed a desire to monitor information relating to loan applicants that would enable them to determine the number and dollar volume of loans originated to minority or women borrowers. Eliminating the prohibition in Regulation B would enable these creditors to monitor their commitments.

With voluntary data collection, lenders would have maximum flexibility to collect and use applicant data. The creditor might choose not to collect data on all non-mortgage loan products; lenders could focus data collection, for example, on large volume loan products that involve personal dealings with customers or on particular small business product lines. Lenders would also be free to disclose statistical information publicly, if they believe that would be useful, or not to disclose such information.

C. Evidence Indicates That Discrimination in Business and Consumer Lending Remains a Serious Problem

There is much evidence that discrimination remains a significant barrier in non-mortgage credit markets, based upon both anecdotal information and studies that indicate disparate treatment in business and consumer lending. See Attachment A (background paper on studies of business and consumer credit discrimination and evidence that data collection can improve access to credit).

D. Allowing Voluntary Collection of Data Would Permit Creditors to Monitor Their Own Performance

The supervisory and enforcement agencies have consistently encouraged institutions to conduct self-evaluations of their lending practices. However, creditors cannot conduct fair lending self-evaluations for non-mortgage lending without appropriate monitoring information. Many institutions have sought permission from supervisory agencies to collect such information in order to monitor their fair lending compliance.

To be fully effective, self-evaluation and subsequent corrective action for problems found requires documentation of loan applicant data such as the race, ethnicity, sex, and age of applicants. Without the data that creditors are prohibited from collecting under Regulation B, lenders currently have no systematic way to evaluate their own fair lending performance in these markets, or to defend themselves with hard data against any charges of biased lending practices.

E. Without Monitoring Information, the Ability of the Agencies to Detect Discrimination on the Basis of Race or National Origin in Consumer or Business Loans is Limited

The prohibition also inhibits effective monitoring and enforcement of ECOA. Without the necessary data, enforcement agencies must rely on other investigative techniques that are less efficient, accurate, or complete. In the home mortgage area, data collected under the HMDA is critical to the decision whether or not to delve deeper into an institution’s lending practices when complaints are raised. Indeed, the prohibition has the effect of skewing enforcement efforts towards cases involving discrimination by regulated creditors in the home mortgage market, because the enforcement agencies do not have sufficient information to enforce the ECOA effectively with respect to business and consumer loans, particularly those made by non-depository institutions. Moreover, when evidence of discriminatory lending practices is found, self-evaluation – which would include the voluntary collection of monitoring data – and prompt corrective actions by the lender as needed will be considered as a substantial mitigating factor in considering any remedies. See Policy Statement on Discrimination in Lending, 59 Fed. Reg. 18,266-69 (April 15, 1994).

II. Pre-application Marketing Practices

We believe that the Board should clarify that creditors may not discriminate on a prohibited basis in their pre-application marketing practices. Pre-application marketing practices are becoming an increasingly significant factor in determining which consumers obtain credit, and at what price. This type of marketing is now frequently used to market special rates and terms for credit cards and increasingly, home equity and other types of loans. Regulation B should be amended to keep pace with the evolving marketing practices of the industry, by prohibiting discrimination on prohibited bases in marketing.

Regulation B should also prohibit creditors from considering prohibited bases in pre-screening solicitations for credit. Under the current regulation, a creditor could intentionally decide not to send credit card solicitations to individuals residing in areas in which the population is predominantly African American or Hispanic without violating Regulation B. As a result, such individuals are effectively discouraged from applying for those credit offers because they are denied the information that would cause them to approach the creditor and apply. We suggest that the Board address this issue by explaining that the consideration of one or more prohibited bases in deciding to whom to send solicitations for credit constitutes discouraging applicants in violation of 12 C.F.R. section 202.5(a), and that the consideration of factors that are close proxies for a prohibited basis may constitute evidence of such discouragement.

The Board notes in the advance notice of proposed rulemaking that in some instances pre-screening on a prohibited basis may facilitate the identification of potential customers and provide greater access to credit for some customers (e.g., using age to target older individuals or college students for credit solicitations and related financial services). We believe that the Board’s exception authority would enable it to allow such pre-screening where it serves to expand credit opportunities, while simultaneously prohibiting pre-screening where it limits access to credit on a prohibited basis. The ECOA authorizes the Board to exempt a class of transactions, or a particular type of transaction within a class, if the Board determines that the application of all or part of the regulation to such transactions would not contribute substantially to effectuating the purpose of the regulation. 15 U.S.C. section 1691b(a)(1).

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