November 10, 1999
American Financial Services Association
Comment Letter to Federal Reserve
Regarding Changes to Regulation B
November 10, 1999
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Re: Docket No. R-1008; Proposed Rule on Regulation B
Dear Ms. Johnson:
The American Financial Services Association (AFSA*) appreciates this opportunity to comment on the Federal Reserve Board’s Proposed Rule regarding Regulation B. The proposed revisions to Regulation B cover issues of significant importance to the financial services industry—many of these issues were covered in a May 29, 1998 comment letter from AFSA in response to the Board’s Advance Notice of Proposed Rulemaking regarding Regulation B. As discussed in that letter, we consider the proposals to change the definition of “creditor”, the voluntary collection of data in connection with nonmortgage credit products and the mandatory record retention requirements for prescreened credit solicitations to be especially significant for the financial services industry, and will therefore address these first.
Section 202.2(1) — Definition of Creditor.
The proposed rule would change the definition of creditor from “a person who, in the ordinary course of business, regularly participates in the decision of whether or not to extend credit” to “a person who, in the ordinary course of business, regularly participates in a credit decision.” The Supplementary Information says that the change clarifies that “the definition of ‘creditor’ applies to a person who regularly participates in making a credit decision, including setting terms. (FR 44583) The Commentary should make clear that a potential assignee that establishes terms of general applicability for transactions that it may acquire, but does not otherwise participate in the setting of terms for individual transactions, is not a creditor. The Commentary should also make clear that a third party that provides promotional funds to a seller that are applied to reduce annual percentage rates that the seller offers its customers does not set terms and is therefore not a creditor. This could be accomplished perhaps by clarifying that a creditor is a person who, in the ordinary course of business, regularly participates in credit decisions made for individual transactions.
The definition retains the provision that a person is not a creditor regarding any violation committed by another creditor unless he knew or had reasonable notice of the act, policy, or practice that constituted the violation. The Supplementary Information appears to confuse the issue, however, by contradicting the plain language of the Regulation and issuing an ill-defined warning that “depending on the circumstances, the ‘reasonable notice’ standard may carry with it the need for a creditor to exercise some degree of diligence with respect to third parties’ involvement in credit transactions, such as brokers or the originators of loans.” (FR 44590) The Board should make clear that, consistent with the common understanding of “reasonable notice,” creditors have no duty to monitor the actions of third parties.
Section 202.5 – Rules concerning taking of applications.
AFSA continues to strongly oppose the Board’s proposal to permit creditors to request information concerning an applicant’s race, color, religion, national origin, or sex in non-mortgage credit transactions that fall outside of Sec. 226.13(a). In our May 29, 1998 letter on this same issue in Docket No. R-1008; Advance Notice of Proposed Rulemaking on Regulation B, AFSA stated:
When the Board considered the issue of voluntary data collection in 1995 and 1996, it concluded that the issue was “more appropriate for the Congress to consider.” 61 Fed. Reg. 68,689 (December 30, 1996). In support of its conclusion, the Board cited the history of Congressional interest in the issue, and the significance of the policy issues involved in any decision to remove the prohibition. In a statement at the time of the Board’s decision, then-Governor Lawrence Lindsey noted that the alternatives before the Board were reflective of different philosophies of whether the country should be a race-blind or a race-conscious society and stated that the issue should be left to the legislative process.
AFSA believes that the policy issues are no less significant today, and that the Board’s prior conclusion on this matter remains correct.
AFSA continues to strongly oppose the proposal primarily on policy grounds—expanding information collection requirements about prohibited bases unnecessarily exacerbates the focus on the differences between human beings without providing any offsetting benefit.
We also oppose the change because we view this change as an inevitable step to requiring creditors to obtain such information. While the voluntary nature of creditor requests for this information is premised on proposed new Sec. 202.5(a)(4), a number of drawbacks remain for creditors who decide to seek such information in credit transactions that are not covered by Sec. 202.13(a). For example, newly designated Sec. 202.5(c) continues to impose current restrictions on requests for applicants’ marital status, creating a trap for unwary creditors who might negligently conclude that these restrictions have been eliminated.
Further, this capability under proposed new Sec. 202.5(a)(4) is contingent on applicants being informed, orally or in writing, that providing such information is optional and that this information or the applicant’s refusal to provide it will not be taken into account in any aspect of a credit transaction. Disputes as to whether these last referenced disclosures were provided orally will virtually dictate that they be furnished in writing, adding a further administrative expense to creditors who are willing to take the risks involved in asking for this information.
Finally, since the collection of this information will be voluntary with respect to both the creditor and the applicant, the data will be subject to the biases of both creditor and the applicant. The results will be data that is not statistically sound and that should not be used to make any significant policy decisions.
Having made these points, since it presumably is the Board’s intention that the disclosure provisions of Secs. 202.5(a)(4)(i) and (ii) should apply even if the creditor does not request all of the applicant characteristics listed in the first sentence of Sec. 202.5(a)(4), the beginning of the second sentence of this section should be changed to read “A creditor that requests information on any of these applicant characteristics . . . .”
Section 202.9 – Notifications
AFSA disagrees with the new wording that the Board proposes to add to Comment 9(b)(2)-7 relating to a combined credit scoring and judgmental application evaluation system. This new wording states that if an application is not approved or denied as a result of credit scoring but is then denied after the creditor performs a judgmental review of the application, the reasons disclosed must come from both components of the system. It is our opinion that this new wording imposes an unreasonable burden on creditors and it also forces them to disclose more information than is likely to be understandable to denied applicants.
Sec. 202.9(b)(2) prevents creditors from stating that the applicant “failed to achieve the qualifying score on the creditor’s credit scoring system” because they are required to disclose reasons that are “specific and indicate the principal reason(s) for the adverse action.” Creditors must do this in accordance with the dictates of Comment 9(b)(2)-1 that disclosure of more than four reasons is not likely to be helpful to the applicant. Under these existing standards, the proposed new wording in Comment 9(b)(2)-7 to give reasons from both components of a combined evaluation system becomes unworkable as a practical matter.
In addition, a prior bankruptcy is not grounds for automatic denial under many credit scoring systems developed in compliance with Sec. 202.2(p), although it could be under a combined credit scoring and judgmental evaluation system. In such combined systems, where applicants are not approved or denied by the credit scoring components but are denied under the judgmental components, the proposed new wording in Comment 9(b)(2)-7 appears to be contradictory to the direction in Comment 9(b)(2)-8 in instances when applicants with prior bankruptcies are automatically denied under a combined evaluation system.
Notices of adverse action to businesses with gross revenues in excess of $1 million: The proposed rule would continue to require creditors to give notices of adverse action and allow creditors to give the notices orally and in writing. This approach does not impose burdens on creditors because the requirement is almost self-executing. The addition, however, of a requirement to notify businesses with revenues in excess of $1 million, after adverse action has been taken, of a right to a written statement of reasons would require that creditors adopt a more formal, and therefore, burdensome and costly, procedure for giving adverse action notices. The burden of the requirement is exacerbated by the difference between the requirements for businesses with revenues in excess of $1 million and businesses with revenues of $1 million and below. The rule should allow creditors to comply by giving notice of the right to a statement of reasons at the time of application, as the current rule permits in connection with businesses with revenues of $1million or less.
Section 202.12 – Record Retention
With respect to proposed new Sec. 202.12(b)(7), AFSA questions the need for creating a new Regulation B requirement for record keeping of prescreening information when the retention of this kind of information is already required by Sec. 615(d)(3) of the federal Fair Credit Reporting Act (“FCRA”).
While the Board justifies this additional record keeping requirement as a means of assisting federal regulatory agencies in monitoring and enforcing ECOA, duplicating such record retention requirements under a second federal law makes no sense to us since we cannot understand why relevant information is not already available under FCRA Sec. 615(d)(3).
More importantly, both the ECOA and FCRA provide for significant civil liability as well as court costs and attorney’s fees in case of successful legal proceedings against persons “who fail to comply with any requirement imposed under this title.” We are aware of no statutory or regulatory provision or principle or law that would prevent [[a government enforcement agency or]] an aggrieved private individual or class of individuals from seeking duplicate monetary recovery under both the FCRA and ECOA for deficiencies in record keeping relating to creditor prescreening.
Further, in spite of proposed Comment 12(b)(7)-3, the description of the material that would have to be retained under proposed Sec. 202.12(b)(7)(ii) is so vague as to provide creditors with no assurance that they would be in compliance with the last requirement of this proposed section.
Record retention requirements for credit applications involving businesses with gross revenues of $1 million or less. Advance in electronic storage technology have not been applied on a sufficiently widespread basis to warrant doubling the retention period for records relating to businesses with revenues of $1 million or less. Establishment of a revenue-based differential for record keeping obligations introduces a burdensome layer of complexity.
Section 202.13 – Information for Monitoring Purposes
For the reasons discussed in the following point, AFSA does not believe that the Board should delete Comment 13(b)-7 relating to inadvertently obtaining monitoring information in dwelling-related credit transactions not covered by Sec. 202.13.
Section 202.14 – Enforcement, Penalties and Liabilities
In the opinion of AFSA it would be a mistake to eliminate the third sentence of Sec. 202.14(c), which states that a creditor who inadvertently obtains monitoring information regarding the race or national origin and sex of an applicant in a dwelling related transaction not covered by Sec. 226.13 may act on and retain the application without violating Regulation B.
In its discussion of this change in Part III of the Federal Register material, the Board states that this deletion would “reflect the Board’s proposal to remove the Regulation B prohibition against the collection of certain information,” meaning the collection of information about the applicant’s race, color, religion, national origin or sex that would be authorized if the Board adopted Sec. 202.5(a)(4) in its proposed form.
However, this position overlooks the fact that many creditors who are required to gather certain personal characteristic information for mortgage-related transactions under Sec. 202.13(a) will not be interested in and will make no effort to obtain equivalent information for other kinds of credit transactions under proposed Sec. 202.5(a)(4). This will result from a variety of reasons including their desire to avoid the additional time and expense of making the disclosures required by Secs. 202.5(a)(4)(i) and (ii).
Accordingly, for these creditors, the Board should retain the protections now provided by the third sentence of Sec. 202.14(c) since we do not believe the Board should eliminate protections which Regulation B or the Regulation B Commentary now extends to any creditors.
In closing, AFSA appreciates the opportunity to state its comments on the Board’s latest proposals to revise Regulation B and the Regulation B Commentary.
Robert E. McKew
Vice President and General Counsel
*AFSA is the nation’s largest trade association representing market-funded providers of consumer financial services. Organized in 1916, AFSA represents 367 companies which extend approximately 20% of all consumer credit throughout the United States. These companies range from independently-owned consumer finance offices to the nation’s largest diversified financial services companies.