Fed Adopts Changes to Reg B
The Federal Reserve has adopted two changes to Regulation B, the regulation that implements the Equal Credit Opportunity Act (ECOA). The first change creates a limited exception to the general ban against collecting data about a loan applicant's race, gender or national origin for non-mortgage loans. The second change requires lenders that use prescreened solicitations for loan applicants to retain certain records for a longer period.
The ECOA bans creditors from considering an applicant's race, gender or national origin when making credit decisions. Under the Home Mortgage Disclosure Act (HMDA), Congress required mortgage lenders to collect and report race, gender and other data for home mortgage and home improvement loans in order to monitor compliance and serve as a tool for fair lending enforcement. However, the Fed's Reg B banned the collection of such data for other types of lending to prevent the data from contaminating lending decisions. Consumer activists, though, have been pushing the Fed to require lenders to collect the data for nonmortgage loans to provide a tool to ferret out lending discrimination.
After a thorough review of Regulation B, the Fed has taken what it calls a "middle ground." The general ban on collection of race and gender data for nonmortgage loans will continue. However, lenders will now be allowed to collect the data on a voluntary basis to assess their own fair lending compliance. Provided the lender follows the mandates of the self-test privilege established in 1996, the information will remain confidential. The privilege requires lenders not to disclose the information and to promptly correct any deficiencies discovered during the self-test. While the data remains confidential under the self-test privilege, examiners and litigants can discover the methodology and scope of the test.
The final rule offers lenders a model form that can be used to collect the data. Applicants must be informed that providing the data is voluntary, that it is being collected to measure fair lending compliance, but will not be used in connection with the credit decision. The rule requires lenders to keep any information collected separate from the loan file.
The revised Regulation B also requires lenders that use prescreened solicitations for loan applicants to retain certain records for 25 months. The extended record retention period is designed to allow examiners to ensure that any prescreening does not violate fair lending requirements by improperly using prohibited factors to target applicants.
Both rules take effect on April 15, 2003, although compliance is voluntary until April 15, 2004. Lenders that wish to collect data may begin doing so immediately. Additional information is available at www.federalreserve.gov.