Comment Letter to Federal Reserve re: Regulation B

December 6, 1999
House Banking Committee Republicans
Comment Letter to Federal Reserve
Regarding Changes to Regulation B

Congress of the United States

Washington, DC 20515

December 6, 1999

Ms Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

RE: Docket No. R-1008: Proposed Rule on Regulation B

Dear Ms. Johnson:

As members of the House Committee on Banking and Financial Services, we are writing to express our concern that the proposed change to the Equal Credit Opportunity Act, Regulation B (concerning the collection of data on race, sex, religion, color, and national origin) has come at the most inopportune time. Consideration should be postponed if not rejected outright. In light of the passage of S. 900, the financial modernization bill, the issue of consumer financial privacy has taken on greater importance. Since public confidence in the financial system is a primary concern and because the rule change would open up fears of abuse by affiliate sharing and other ramifications not considered at the time the proposal was promulgated, the proposed rule should be withdrawn.

A primary concern would be that the collection of data would change from voluntary to mandatory. Since only uniform data would allow accurate use of the data, the proposal moves down the slippery slope toward mandatory collection and categorization of consumers based on factors unrelated to their creditworthiness. Consumers should choose what personal data they wish to share, when and under what conditions.

The ECOA currently prohibits a creditor from discriminating against a loan applicant on the basis of sex, marital status, race, color, religion, national origin, age, receipt of public assistance, or good faith exercise of a right under the Consumer Credit Protection Act (including discouraging applicants on these bases). Unfortunately, the Home Mortgage Disclosure Act (HMDA) requires the collection of such personal information–even if an individual consumer affirmatively marks a box choosing not to disclose it.

The collection of data would add another regulatory burden on banks and a cost to consumers–not only the monetary cost passed on to them but a real cost to their privacy. Even the voluntary collection of data would put financial institutions under government-sponsored pressure, according to the attorney general and the regulators. Such pressure would open the door to charges of political manipulation such as the recent attempt by the Office of Comptroller of the Currency to intimidate banks in an effort to influence the debate on the Community Reinvestment Act.

The potential use of the Home Mortgage Disclosure Act (HMDA) as a model raises serious issues of regulatory burden and unintended consequences. The cost of compliance falls disproportionately hardest on smaller institutions. For each $1 million in assets, banks under $30 million in assets incur almost three times the compliance cost of banks between $30-65 million in assets; this regulation almost quadruples costs on smaller institutions to almost four times when compared to banks over $65 million in assets, according to “Regulatory Burden: The Cost to Community Banks,” a study prepared for the then Independent Bankers Association of America by Grant Thorton, January 1993. These findings were consistent for both equity capital and net income measurements. In the study, respondents rated the HMDA the least beneficial and useful regulation studied, second only to the Community Reinvestment Act.

The Federal Reserve’s own Staff Study 171, “The Cost of Bank Regulation: A Review of the Evidence,” by Gregory Elliehausen, April 1998, concurs with the Grant Thorton study, “The basic conclusion is similar for all of the studies of economies of scale: Average compliance costs for regulations are substantially greater for banks at low levels of output than for banks at moderate or high levels of output.” A 1992 survey of regulatory costs by the Independent Bankers Association of Texas, the largest state association of community banks, showed that the compliance costs to deposits was 70 basis points for banks with deposits of $20 million or less but only 4 basis points or fewer for institutions with deposits of $60 million or more.

This disproportionate regulatory burden contributes to the concentration of assets in the financial sector and increases our concerns of “too big to fail.” That an exemption is made for the smallest institutions (under $29 million) under HMDA demonstrates the recognition of these concerns. The rule would encourage the “skimming off the cream” in traditionally underserved areas, such as inner cities, which would jeopardize the safety and soundness of those smaller institutions which cater to underserved markets.

We should address the privacy-violating aspects of current regulations before generating further problems. Data collection is often unreliable concerning mixed race applicants, guesses of ethnicity based on surnames, and guesses of information when consumers specifically “opt out” of such requests. In addition, telephone and Internet transactions make accurate data collection difficult. The potential for increased lawsuits based on erroneous data adds to cost concerns.

In summary, we hope that the Board will demonstrate the same wisdom it showed in 1995 when it determined that these same questions are best left to Congress. To that end, we would hope that you would reconsider the proposed change to Regulation B. We must show increased concern that any unintended consequence of our actions would jeopardize consumer financial privacy.


Ron Paul (R, TX)
Bob Barr (R, GA)
Tom Campbell (R, CA)
Walter Jones (R, NC)
Sue Kelly (R, NY)
Jack Metcalf (R, WA)
Jim Ryun (R, KS)
Bill McCollum (R, FL)
Judy Biggert (R, IL)
Mark Green (R, WI)
Ed Royce (R, CA)
Lee Terry (R, NE)
Marge Roukema (R, NJ)
Richard Baker (R, LA)
Spencer Bachus (R, AL)
Pat Toomey (R, PA)
Frank Lucas (R, OK)
Dave Weldon (R, FL)
Merrill Cook (R, UT)
Steven LaTourette (R, OH)
Bob Ney (R, OH)
Virgil Goode, Jr. (D, VA)
John Sweeney (R, NY)
Peter King (R, NY)
Paul Ryan (R, WI)


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