Federal Fair Lending Regulations and Statutes
Equal Credit Opportunity (Regulation B)
Background
The Equal Credit Opportunity Act (ECOA) of 1974,
which is implemented by the
Board’s Regulation B,
applies to all
creditors. The statute requires finan-
cial institutions and other firms engaged in the
extension of
credit to ‘‘make credit equally available
to all
creditworthy customers without regard to sex
or marital status.’’
Moreover, the statute makes it
unlawful for
‘‘any creditor to discriminate against
any applicant with
respect to any aspect of a credit
transaction (1) on the basis of race,
color, religion,
national origin, sex or marital status, or age
(provided the applicant has the capacity to
con-
tract); (2) because all or part of the applicant’s
income derives from any public assistance
pro-
gram; or (3) because the applicant has in good
faith
exercised any right under the Consumer
Credit Protection Act.’’ In keeping with the broad
reach of the prohibition, the regulation covers
creditor activities before, during, and after the
extension of
credit.
Under the ECOA, the Federal Reserve Board is
responsible for drafting and interpreting the imple-
menting
regulation. Enforcement responsibility, how-
ever, rests with a creditor’s functional regulator or,
for any category not so assigned, with the Federal
Trade Commission. A synopsis of some of the more
important points of Regulation B follows.
Prohibited Practices
Regulation B contains two basic and comprehen-
sive prohibitions against discriminatory lending
practices (section 202.4):
• A creditor shall not discriminate against an
applicant on a prohibited basis
regarding any
aspect of a
credit transaction.
• A creditor shall not make any oral or written
statement, in advertising or otherwise, to
appli-
cants or prospective applicants that would
discourage, on a prohibited basis, a
reasonable
person from making or pursuing an application.
Note that the regulation is concerned not only with
the
treatment of persons who have initiated the
application process, but also with lender behavior
before the application is even taken. Lending
officers and employees must be careful to take no
action that would, on a prohibited basis,
discour-
age anyone from applying for a loan. For example,
a bank may not advertise its
credit services and
practices in ways that would tend to encourage
some types of borrowers and discourage others on
a prohibited basis. In addition, a bank may not use
prescreening tactics likely to discourage potential
applicants on a prohibited basis. Instructions to
loan
officers or brokers to use scripts, rate quotes,
or other means to discourage minority applicants
from applying for
credit are also prohibited.
The prohibition against discouraging applicants
applies to in-person oral and telephone inquiries as
well as to written applications. Lending
officers
must
refrain from requesting prohibited information
in conversations with applicants during the
pre-
interview phase (that is,
before the application is
taken) as well as when taking the written application.
To prevent discrimination in the credit-granting
process, the
regulation imposes a delicate balance
between the
creditor’s need to know as much as
possible about a prospective borrower and the
borrower’s right not to disclose information
irrel-
evant to the
credit transaction. To this end, the
regulation prescribes rules for taking, evaluating,
and acting on applications as well as rules for
furnishing and maintaining
credit information.
Rules for Taking Applications—
Section 202.5
Regulation B prohibits creditors from requesting
and collecting specific personal information about
an applicant that has no bearing on the applicant’s
ability or willingness to
repay the credit requested
and could be used to discriminate against the
applicant.
Applicant Characteristics
Creditors may not request or collect information
about an applicant’s race,
color, religion, national
origin, or sex. Exceptions to this rule generally
involve situations in which the information is
necessary to test for compliance with fair lending
rules or is
required by a state or federal regulatory
agency or other government entity for a particular
purpose, such as to determine eligibility for a
particular program. For example, a
creditor may
request prohibited information
• In connection with a self-test being conducted
by the
creditor (provided that the self-test meets
certain
requirements)
• For monitoring purposes in relation to credit
secured by real estate
• To determine an applicant’s eligibility for special-
purpose
credit programs
Consumer Compliance Handbook Reg. B • 1 (1/06)
Fair Lending: Equal Credit Opportunity
Information about a Spouse or
Former Spouse (§ 202.5(c))
A bank may not request information about an
applicant’s spouse or former spouse except under
the following
circumstances:
• The non-applicant spouse will be a user of or
joint obligor on the account. (Note: The term
‘‘user’’ applies only to open-end accounts.)
• The non-applicant spouse will be contractually
liable on the account.
• The applicant is relying on the spouse’s income,
at least in part, as a
source of repayment.
• The applicant resides in a community property
state, or the property upon which the applicant is
relying as a basis for repayment of the credit
requested is located in such a state.
• The applicant is relying on alimony, child sup-
port, or separate maintenance income as a basis
for obtaining the
credit.
Marital status
(§§ 202.5(d)(1) and 202.5(d)(3))
Individual Credit
When an applicant applies for individual credit, the
bank may not ask the applicant’s marital status.
There are two exceptions to this rule:
• If the credit transaction is to be secured, the
bank may ask the applicant’s marital status. (This
information may be necessary to determine what
would be
required to gain access to the collateral
in the event of default.)
• If the applicant either resides in a community
property state or lists assets to support the debt
that
are located in such a state, the bank may
ask the applicant’s marital status. (In community
property states, assets owned by a married
individual may also be owned by the spouse,
thus complicating the accessibility of the
collat-
eral in the event of default.)
Joint Credit
When a request for credit is joint (made by two or
more individuals who will be primarily liable), the
bank may ask the applicant’s marital status,
regardless of whether the credit is to be secured or
unsecured, but may use only the terms ‘‘married,’’
‘‘unmarried,’’ and ‘‘separated.’’ This requirement
applies to oral as well as written
requests for marital
status information.
‘‘Unmarried’’ may be defined to
include
divorced, widowed, or never married, but
the application must not be
structured in such a
way as to encourage the applicant to distinguish
among these.
2 (1/06) • Reg. B Consumer Compliance Handbook
Alimony, Child Support, or Separate
Maintenance Income (§ 202.5(d)(2))
A bank may ask if an applicant is receiving alimony,
child support, or separate maintenance payments.
However, the bank must first disclose to the
applicant that such income need not be
revealed
unless the applicant wishes to
rely on that income
in the determination of
creditworthiness. An appro-
priate notice to that
effect must be given whenever
the bank makes a general
request concerning
income and the
source of that income. Therefore, a
bank either must ask questions designed to solicit
only information about specific income (for
exam-
ple,
‘‘salary,’’ ‘‘wages,’’ ‘‘employment,’’ or other
specified categories of income) or must state that
disclosure of alimony, child support, or separate
maintenance payments is not
required.
Residency and Immigration Status
(§ 202.5(e))
The bank may inquire about the applicant’s perma-
nent
residence and immigration status in order to
determine
creditworthiness.
Rules for Evaluating Applications—
Section 202.6
General Rule
A creditor may consider any information in evaluat-
ing applicants, so long as the use of the information
does not have the intent or the
effect of discrimi-
nating against an applicant on a prohibited basis.
Generally, a creditor may not
• Consider any of the prohibited bases, including
age (providing the applicant is old enough,
under state
law, to enter into a binding contract)
and the
receipt of public assistance
• Use childbearing or childrearing information,
assumptions, or statistics to determine whether
an applicant’s income may be interrupted or
decreased
• Consider whether there is a telephone listing in
the applicant’s name (but the
creditor may
consider whether
there is a telephone in the
applicant’s home)
• Discount or exclude part-time income from an
applicant or the spouse of an applicant
Systems for Analyzing Credit
Regulation B neither requires nor endorses any
particular method of
credit analysis. Creditors may
use traditional methods, such as judgmental
sys-
tems that
rely on a credit officer’s subjective
evaluation of an applicant’s
creditworthiness, or
Fair Lending: Equal Credit Opportunity
they may use more-objective, statistically devel-
oped techniques such as
credit scoring.
Credit Scoring Systems
Section 202.2(p) of Regulation B prescribes the
standards that a credit scoring system must meet
to qualify as an
‘‘empirically derived, demonstrably
and statistically sound,
credit system.’’ All forms of
credit analysis that do not meet the standards are
automatically classified as
‘‘judgmental’’ systems.
This distinction is important because
creditors that
use a
‘‘demonstrably and statistically sound’’
system may take applicant age
directly into
account as a
predictive variable, whereas judgmen-
tal systems may not.
Judgmental Evaluation Systems
Any system other than one that is empirically
derived and demonstrably and statistically sound
is a judgmental system (including any
credit
scoring system that does not meet the
prescribed
technical
standards). Such a system may not take
applicant age
directly into account in evaluating
creditworthiness. The act and the regulation do,
however, permit a creditor to consider the appli-
cant’s age for the purpose of evaluating other
applicant information that has a demonstrable
relationship to creditworthiness.
Rules for Extensions of Credit—
Section 202.7
Section 202.7 of Regulation B provides a set of
rules proscribing certain discriminatory practices
regarding the creation and continuation of credit
accounts.
Signature Requirements
The primary purpose of the signature requirements
is to permit
creditworthy individuals (particularly
women) to obtain
credit on their own. Two general
rules apply:
• A bank may not require a signature other than the
applicant’s or joint applicant’s if under the bank’s
standards of creditworthiness the applicant quali-
fies for the amount and terms of the
credit
requested.
• A bank has more latitude in seeking signatures
on instruments necessary to
reach property used
as
security, or in support of the customer’s
creditworthiness, than it has in obtaining the
signatures of persons other than the applicant on
documents that establish the contractual
obliga-
tion to
repay.
Consumer Compliance Handbook Reg. B • 3 (1/06)
The subsections dealing with signatures have
been, for many
creditors, some of the most
commonly misunderstood provisions of Regulation
B. For that reason, and to increase examiners’
ability to facilitate lender compliance and
deter-
mine whether a particular
signature practice is or is
not a violation of the
regulation, additional guid-
ance is provided in CA Letter 02-1, Clarifying
Signature Provisions under Sec. 202.7(d) of Regu-
lation B. Examiners should consult that CA letter
when assessing the level of a bank’s compliance
with the
signature requirements.
Special-Purpose Credit Programs—
Section 202.8
The ECOA and Regulation B allow creditors to
establish special-purpose
credit programs for appli-
cants who meet certain eligibility
requirements.
Generally, these programs target an economically
disadvantaged class of individuals and
are autho-
rized by federal or state
law. Some are offered by
not-for-profit organizations that meet certain IRS
guidelines, and some by
for-profit organizations
that meet specific tests outlined in section 202.8.
Experience has shown that creditors rarely seek
to use section 202.8.
Additionally, as stated in the
commentary (supplement I
to the regulation), the
Federal Reserve
‘‘does not determine whether
individual programs qualify for special-purpose
credit status, or whether a particular program
benefits an ‘economically disadvantaged class of
persons.’ The agency or
creditor administering or
offering the loan program must make these deci-
sions
regarding the status of its program.’’ Conse-
quently, examiners are encouraged, if an issue
arises
regarding such a program, to consult with
Board staff.
Notifications—Section 202.9
A bank must notify an applicant of action taken on
the applicant’s
request for credit, whether favor-
able or adverse, within thirty days after
receiving a
completed application. Notice of approval may be
expressly stated or implied (for example, the bank
may give the applicant the
credit card, money,
property, or services for which the applicant
applied). Notification of adverse action taken on an
existing account must also be made within thirty
days.
Under at least two circumstances, the bank need
not comply with the thirty-day notification rule:
• The bank must notify an applicant of adverse
action within ninety days after making a
counter-
offer unless the applicant accepts or uses the
credit during that time.
Fair Lending: Equal Credit Opportunity
• The bank may not have to notify an applicant of
adverse action if the application was incomplete
and the bank sent the applicant a notice of
incompleteness that met certain
requirements
set forth in section 202.9(c).
Adverse Action Notice (§ 202.9(a)(2))
A notification of adverse action must be in writing
and must contain certain information, including the
name and
address of the bank and the nature of the
action that was taken. In addition, the bank must
provide an ECOA notice that includes the identity of
the federal agency
responsible for enforcing com-
pliance with the act for that bank. This notice is
generally included on the notification of adverse
action. The bank must also either provide the
applicant with the specific principal
reason for the
action taken or disclose that the applicant has the
right to
request the reason(s) for denial within sixty
days of
receipt of the bank’s notification, along with
the name,
address, and telephone number of the
person who can provide the specific
reason(s) for
the adverse action. The
reason may be given orally
if the bank also advises the applicant of the right to
obtain the
reason in writing upon request.
Incomplete Applications (§ 202.9(c))
When a bank receives an incomplete application, it
may send one of two alternative notifications to the
applicant. One is a notice of adverse action; the
other is a notice of incompleteness. The notice of
incompleteness must be in writing and must
specify the information the bank needs if it is to
consider the application; it must also provide a
reasonable period of time for the applicant to
furnish the missing information.
Applications Submitted
through a
Third Party (§ 202.9(g))
When more than one bank is involved in a
transaction and adverse action is taken with
respect to the application for credit by all the banks
involved, each bank that took such action must
provide a notice of action taken. The notification
may be given by a
third party; however, the notice
must disclose the identity of each bank on whose
behalf the notice is given. If one of the banks
approves the application, the banks that took
adverse action need not provide notification.
Notification to Business Credit
Applicants (§ 202.9(a)(3))
The notification requirements for business credit
applicants
are different from those for consumer
credit applicants and are more extensive if the
4 (1/06) • Reg. B Consumer Compliance Handbook
business had gross revenues of $1,000,000 or less
in the
preceding fiscal year. Extensions of trade
credit, credit incident to a factoring agreement, and
similar types of
credit are subject to the same rules
as those that apply to businesses that had gross
revenues of more than $1,000,000.
Generally, a bank must comply with the same
notification
requirements for business credit appli-
cants with gross
revenues of $1,000,000 or less as
it does for consumer
credit applicants. However,
the bank has
more options when dealing with these
business
credit applicants. First, the bank may tell
the business
credit applicant orally of the action
taken. Second, if the bank chooses to provide a
notice informing the business
credit applicant of
the right to
request the reason for action taken, it
may, rather than disclose the reason itself, provide
the notice at the time of application. If the bank
chooses to inform the applicant of the right to
request a reason, however, it must provide a
disclosure with an ECOA notice that is in retainable
form and that gives the applicant the same
information that must be provided to consumer
credit applicants when this option is used (see
section 202.9(a)2)(ii)).
Finally, if the application was
made
entirely over the phone, the bank may
provide an oral statement of action taken and of the
applicant’s right to a statement of
reasons for
adverse action.
The notification requirements for business credit
applicants with gross
revenues of more than
$1,000,000
are relatively simple. The bank must
notify the applicant of the action taken within a
reasonable time period. The notice may be oral or
in writing; a written statement of the
reasons for
adverse action and the ECOA notice need be
provided only if the applicant makes a written
request within sixty days of the bank’s notification
of the action taken.
Designation of Accounts—
Section 202.10(a)
A creditor that furnishes credit information to a
consumer
reporting agency must designate
• Any new account to reflect the participation of
both spouses if the applicant’s spouse is
permit-
ted to use or is contractually liable on the
account
• Any existing account to reflect the participation
of both spouses within ninety days after
receiv-
ing a written
request to do so from one of the
spouses
If a creditor furnishes credit information to a
consumer
reporting agency, the creditor must
furnish the information in the name of the spouse
about whom the information was
requested.
Fair Lending: Equal Credit Opportunity
Record Retention—Section 202.12
Applications
In general, a bank must preserve all written or
recorded information connected with an applica-
tion for twenty-five months (twelve months for
business
credit) after the date on which the bank
informed the applicant of action taken on an
application or of incompleteness of an application.
Prohibited Information
A bank may retain information in its files that it may
not use in evaluating applications.
However, the
information must have been obtained inadvertently
or in
accordance with federal or state law or
regulation.
Existing Accounts
A bank must preserve any written or recorded
information concerning adverse action on an
existing account as well as any written statement
submitted by the applicant alleging a violation of
the ECOA or Regulation B. This evidence must be
kept for twenty-five months (twelve months for
business
credit).
Prescreened Solicitations
The twenty-five-month retention rule also applies
when a bank makes an
offer of credit to potential
customers. In such cases, the bank must
retain for
twenty-five months following the date of the
solici-
tation
• The text of any prescreened solicitation,
• The list of criteria the creditor used to select
potential
recipients of the solicitation, and
• Any correspondence related to complaints (for-
mal or informal) about the solicitation.
Rules for Providing Appraisal
Reports—Section 202.14
Regulation B requires that banks provide a copy of
the appraisal
report used in connection with an
application for
credit to be secured by a lien on a
dwelling. A bank may provide the copy either
routinely (whether or not
credit is granted or the
application is withdrawn) or upon an applicant’s
written
request. If the bank provides an appraisal
report only upon request, it must inform the
applicant in writing of the right to
receive a copy of
the
report.
Consumer Compliance Handbook Reg. B • 5 (1/06)
Incentives for Self-Testing and
Self-Correction—Section 202.15
A self-test, as discussed in section 202.15 of
Regulation B, must meet two criteria. First, it must
be a program, practice, or study that a lender
designs and uses specifically to determine the
extent or
effectiveness of its compliance with the
regulation. Second, the results of the self-test must
create data or factual information that is otherwise
not available and cannot be derived from loan or
application files or other
records related to credit
transactions. The findings of a self-test that is
conducted voluntarily by a
creditor and that
meets the conditions set forth in section 202.15
are privileged against discovery or use by (1) a
government agency in any examination or
investi-
gation
related to the ECOA or Regulation B or (2) a
government agency or an applicant in any legal
proceeding involving an alleged violation of the
ECOA or Regulation B. Privileged information
includes the
report or results of the test; data or
other information
created by the test; and any
analysis, opinions, or conclusions
regarding the
results of the test. The privilege does not cover
information about whether a test was conducted;
the
methodology, scope, time period, or dates
covered by the test; loan or application files or
other business
records; and information derived
from such files and
records, even if aggregated,
summarized, or
reorganized.
Requirements for Electronic
Communication—Section 202.16
Subject to the specific provisions of section 202.16
regarding disclosures, consumer consent, redeliv-
ery, electronic signatures, and exceptions, a credi-
tor may provide by electronic communication any
disclosure otherwise required by the regulation to
be in writing.
Enforcement, Penalties, and
Liabilities—Section 202.17
In addition to actual damages, Regulation B
provides for punitive damages of up to $10,000 in
individual lawsuits and up to the lesser of $500,000
or 1
percent of the bank’s net worth in class action
suits. Successful complainants
are also entitled to
an
award of court costs and attorney’s fees.
A bank is not liable for failure to comply with the
notification
requirements of section 202.9 if the
failure was caused by an inadvertent error and the
bank, after discovering the
error, (1) corrects the
error as soon as possible and (2) begins
compli-
ance with the
requirements of the regulation.
‘‘Inadvertent errors’’ include mechanical, elec-
Fair Lending: Equal Credit Opportunity
tronic, and clerical errors that the bank can show
(1) were not intentional and (2) occurred despite
the fact that the bank maintains
procedures
reasonably adapted to avoid such errors. Similarly,
failure to comply with sections 202.6(b)(6), 202.10,
202.12, and 202.13 is not considered a violation if it
results from an inadvertent error and the bank takes
the
corrective action noted above. Errors involving
sections 202.12 and 202.13 may be
corrected
prospectively by the bank.
6 (1/06) • Reg. B Consumer Compliance Handbook
