- New Self-Testing Prescreening, and Recordkeeping under ECOA
- July 17, 2003
- Law Firm: Blank Rome LLP - Philadelphia Office
The Federal Reserve Board (the "Board") has approved a new rule amending Regulation B, which implements the Equal Credit Opportunity Act. Among other revisions to Reg B, major revisions brought on by the new rule include the ability to collect applicants' personal characteristics in connection with non-mortgage credit and new record retention requirements for prescreened solicitations.
ECOA prohibits discrimination on the basis of a credit applicant's national origin, marital status, religion, color, sex, race, age, receipt of public assistance benefits, or the exercise of rights under the Consumer Credit Protection Act.
In 1976, the Board adopted a general prohibition against creditors inquiring about, or noting, applicant characteristics such as race or national origin in connection with non-mortgage credit. The Board restricted access to this information in order to deter credit discrimination. However, this prohibition also limited the ability of creditors from examining their own lending policies and practices using applicant characteristics.
Therefore, the Board has created an exception that will allow creditors to collect personal characteristics in a self-test for compliance with ECOA. The Board's goal is to enable creditors to develop compliance programs that utilize applicant data in a controlled and targeted manner.
The self-test must meet certain standards. Under the new rule, a self-test is any program, practice, or study that:
(1) Is designed and used specifically to determine the extent or effectiveness of a creditor's compliance with ECOA and Reg B; and
(2) creates data or factual information that is not available and cannot be derived from loan or application files or other records related to credit transactions.
The new rule requires the creditor to take corrective action when the results of the self-test indicate that "it is more likely than not" that a violation occurred.
However, the results of a self-test can be made privileged, only if the creditor takes corrective action where appropriate. Failure to take such action annuls the privilege. Other information, such as whether a creditor conducted a self-test, the methodology used, or the scope of the self-test, is not privileged.
Creditors that conduct a self-test and request information about personal characteristics must disclose to applicants orally or in writing, at the time the information is requested, that:
(1) The applicant will not be required to provide the information;
(2) the creditor is requesting the information to monitor its compliance with ECOA;
(3) federal law prohibits the creditor from discriminating on the basis of this information, or on the basis of an applicant's decision not to furnish the information; and
(4) if applicable, certain information will be collected based on visual observation or surname if not provided by the applicant or other person.
In addition to creating the new self-test exception, another major revision to Reg B by the new rule, requires that creditors retain for 25 months certain records related to prescreened solicitations, such as the list of criteria used to select potential customers. The Board notes that the retention of these records is intended to allow the systematic review and analysis of creditors' possible use of race, age, national origin, and other prohibited bases of credit discrimination in connection with prescreened solicitations.
The new rule became effective April 15, 2003, however the mandatory compliance date is April 15, 2004.