Joint Letter To Federal Reserve Board

Jennifer J. Johnson
Secretary of the Board
Board of Governors of the
Federal Reserve System
20^th Street and Constitution Ave., N.W.
Washington, DC 20551

Dear Ms. Johnson:

We are submitting this comment in response to the Board's notice of proposed rulemaking with respect to Regulation B, which implements the Equal Credit Opportunity Act (ECOA).

As we stated in our comment to the Board's advance notice of proposed rulemaking, we strongly support and encourage the Board to amend Regulation B to allow lenders voluntarily to collect information about the race and gender of applicants for non-mortgage credit, as it has proposed.

The current regulatory prohibition inhibits the ability of financial service providers to learn about and respond to market opportunities to provide credit for underserved communities. The prohibition makes it difficult for institutions to know whether products intended to expand access to credit, including to minorities, reach their intended customer base. Allowing creditors to collect race, gender and certain other data for business and consumer loans will likely lead to innovation and increased access to credit, a greater level of voluntary compliance, and more effective fair lending enforcement.

We also support additional changes to Regulation B concerning pre-application marketing practices.

We are enclosing more detailed comments and supporting attachments.

Sincerely,

Lawrence H. Summers
Secretary of the Treasury

Janet Reno
Attorney General

Andrew Cuomo
Secretary of Housing and Urban Development

John D. Hawke
Comptroller of the Currency

Ellen Seidman
Director, Office of Thrift Supervision

Robert Pitofsky
Chairman, by direction of the Federal Trade Commission

Aida Alvarez
Administrator, Small Business Administration

Armando Falcon, Jr.
Director, Office of Federal Housing Enterprise Oversight

• Voluntary Data Collection

  The Department of the Treasury, the Department of Justice, the Department of Housing and Urban Development, the Federal Trade Commission, the Comptroller of the Currency, the Office of Thrift Supervision, the Office of Federal Housing Enterprise Oversight, and the Small Business Administration ("the agencies") join in welcoming and supporting the Federal Reserve Board's proposal to amend Regulation B to permit creditors to collect data concerning the race, color, religion, sex, or national origin of loan applicants. Permitting collection of such data will enable creditors to increase credit availability to economically disadvantaged groups and will facilitate private sector and government detection of discriminatory practices.

  1. Experience with Mortgage Loans Shows that Data Collection Has Not Been Used to Discriminate and Has in Fact Increased Access to Credit

     In 1977, the Board revised Regulation B, which implements the Equal Credit Opportunity Act (ECOA), to prohibit creditors from collecting data on the race, sex, marital status, color, religion or national origin of loan applicants, in order to avoid discriminatory use of such data. However, the Board made an exception to this general prohibition by requiring creditors to collect such information on home mortgage loans. At that time, specific detailed information was not known about the nature and scope of ongoing lending discrimination. Since then, much has been learned about mortgage lending discrimination. The fear that race, national origin and gender data collected under the Home Mortgage Disclosure Act (HMDA) would be used for discriminatory purposes has not been realized. Instead, the requirement for recording and reporting applicant data has contributed to increased access to credit for minority loan applicants, assisted creditors in complying with the law and in developing innovative products, and aided federal supervisory and enforcement efforts.

     Recent data suggest that HMDA's disclosure requirements play an important role in expanding access to credit. During the 1990s, lending to minorities has increased dramatically relative to non-minorities, and in 1998, total home purchase loans (conventional and government-backed) to both blacks and Hispanics reached record high levels. Between 1993 and 1998, mortgage originations for Hispanics and blacks grew by 87 percent and 72 percent, respectively, more than twice as rapidly as the 31 percent increase registered for the market as a whole. Though minority home ownership rates remain low relative to non-minorities, the gap is diminishing.

  2. Lifting the Prohibition For Other Types of Loans Would Eliminate an Unnecessary Regulatory Restriction and Foster Innovation that Would Expand Access to Business and Consumer Credit

     In today's competitive financial services market, a creditor cannot afford to be subject to a regulatory prohibition that limits its ability to have the information it needs to be responsive to the demands of its potential customers. The current prohibition in Regulation B on the collection of race, gender, and certain other data of loan applicants for non-mortgage credit results in an unfortunate, and in our view, unnecessary restriction on how a bank, thrift or other creditor conducts its business. The restriction has the unintended consequence of limiting a creditor's ability to expand its customer base because it lacks important information necessary to identify potential new markets or to develop innovative products to serve those markets. In particular, it inhibits the ability of creditors to meet the needs of underserved communities with innovative new financial products and marketing programs, by making it difficult to determine whether new products or marketing programs in fact expand minority access to credit. Collecting, processing, and analyzing race, gender, and other data would help creditors meet the credit needs of particular communities.

     Permitting creditors to collect race and gender data from applicants for non-mortgage credit would also enhance access to credit, by enabling creditors to identify gaps in their efforts to serve customers. For example, Regulation B sets out a limited exception to its general prohibition in order to permit creditors to establish "special purpose credit programs" to serve economically disadvantaged persons, including members of a prohibited basis group. However, to adopt such a program under this exception, a creditor must follow a written plan that addresses the credit needs documented by the creditor in establishing the program. Because creditors are currently prohibited from collecting race, gender, and certain other information from applicants for non-mortgage credit, creditors do not have access to data that would enable them to implement appropriate and effective programs that respond to the credit needs of particular applicants. Indeed, our experience has been that the special purpose credit program provision of Regulation B is underused. In our judgment, permitting creditors to collect race, gender, and certain other information from applicants for non-mortgage credit would better fulfill ECOA's goals by increasing the ability of creditors to serve the different credit needs of minorities, women, and other economically disadvantaged persons.

     Institutions that have made commitments to lend to underserved markets have expressed a desire to gather information relating to loan applicants that would enable them to determine the number and dollar volume of loans originated to minority or female borrowers.

     With voluntary data collection, creditors would have maximum flexibility to collect and use applicant data. The creditor might choose not to collect data on all non-mortgage loan products; creditors could focus data collection, for example, on high-volume loan products that involve personal dealings with customers or on particular small business product lines. Creditors would also be free to disclose statistical information publicly, if they believed that such disclosure would be useful, or not to disclose such information.

     Lifting the Prohibition Would Facilitate Private Sector and Government Monitoring of Creditor Performance as well as Detection and Prevention of Discrimination

     We agree with the Board's assessment that removing the prohibition on data collection for nonmortgage credit would allow issues of credit discrimination to be better addressed.

     1. Evidence Indicates That Discrimination in Business and Consumer Lending Remains a Serious Problem

        There is much evidence that discrimination remains a significant barrier in non-mortgage credit markets, based upon both anecdotal information and studies that indicate disparate treatment in business and consumer lending. See Attachment A.

     2. Allowing Voluntary Data Collection Would Permit Creditors to Monitor Their Own Performance

        The supervisory and enforcement agencies consistently have encouraged institutions to conduct self-evaluations of their lending practices. However, creditors cannot conduct fair lending self-evaluations for non-mortgage lending without appropriate monitoring information. Many institutions, therefore, have sought permission from supervisory agencies to collect such information in order to monitor their fair lending compliance. Analyses of monitoring data will permit upper-level managers to assess more accurately whether front-line decision-makers are following non-discrimination policies.

        To be fully effective, self-evaluation and subsequent corrective action for problems found require documentation of loan applicant data such as the race, ethnicity, sex, and age of applicants. Without the data that creditors are currently prohibited from collecting under Regulation B, creditors currently have no systematic way to evaluate their own fair lending performance in these markets, or to defend themselves with hard data against any charges of biased lending practices.

     3. Allowing Voluntary Data Collection Would Improve Substantially the Ability of the Agencies to Detect and Deter Unlawful Discrimination

        The prohibition on data collection also inhibits effective government monitoring and enforcement of ECOA. Without the necessary data, enforcement agencies must rely on other investigative techniques that may be less efficient, accurate, or complete. By way of comparison, in the home mortgage area, data collected under HMDA is critical to the decision whether or not to delve deeper into an institution's lending practices when complaints are raised. Indeed, the prohibition has the effect of skewing enforcement efforts toward regulated creditors in the home mortgage market, because the enforcement agencies do not have sufficient information to enforce ECOA effectively with respect to business and consumer loans, particularly those made by non-depository institutions. Moreover, when evidence of discriminatory lending practices is found, self-evaluation -- which could include the voluntary collection of monitoring data -- and prompt corrective actions by the lender, as needed, are considered as substantial mitigating factors by the agencies when they determine appropriate remedies. See Policy Statement on Discrimination in Lending, 59 Fed. Reg. 18,266, 18, 270 (April 15, 1994). Yet such voluntary data collection is prohibited.

     4. Pre-application Marketing Practices

        Citing the potential for discrimination in preapplication marketing practices, the Board's 1998 Advance Notice of Proposed Rulemaking requested comment on the concept of extending Regulation B expressly to prohibit such discrimination. In the discussion accompanying the Board's proposed revisions to the regulation, the Board noted that all of the federal financial regulatory agencies are aware of pre-application marketing practices that could be discriminatory, although not currently in the purview of Regulation B. For example, the Board noted that some creditors, primarily credit card issuers, have at times used age to identify potential recipients of preapproved credit and zip codes to exclude credit solicitations in low-income areas that are predominantly minority neighborhoods. However, the Board suggests that the application of Regulation B's anti-discrimination rules to pre-application marketing practices is not warranted at this time. Instead, the Board proposes to make additional information available to the federal financial regulatory agencies on discriminatory pre-application marketing by requiring creditors to retain certain information about "preapproved" credit solicitations that constitute "firm offers of credit" under the Fair Credit Reporting Act.⁽¹⁾

        While we welcome and support the Board's proposal to enact this information retention requirement, which should improve monitoring of marketing practices without placing a substantial additional burden on creditors, we believe that the proposal should also address discrimination on prohibited bases in pre-application marketing. Although requiring information retention should allow us to determine the extent of prescreening on prohibited bases, unless the Board clarifies that Regulation B covers discriminatory prescreening practices, the federal agencies with enforcement responsibilities under ECOA will not have a clear regulation upon which to rely to require creditors to stop discriminating in prescreening. As we stated in our May 28, 1998 comment in response to the Advance Notice of Proposed Rulemaking, in our opinion, the Regulation would be more effective in addressing discrimination in pre-application solicitations if the Board clarified that the consideration of one or more prohibited bases in deciding to whom solicitations for credit will be sent constitutes discouraging prospective applicants in violation of 12 C.F.R. § 202.5(a) (proposed § 202.4(b)).

        The Board has stated concerns about the unintended consequences of broader coverage of credit solicitations. However, we believe that it is feasible to promulgate a rule that would prohibit invidious discrimination that restricts a group's access to credit while permitting benign targeting practices, so long as such practices were not merely an effort to circumvent the purposes of Regulation B and ECOA. We recommend that, at a minimum, the Board also clarify that considering one or more prohibited bases in selecting potential applicants in a prescreened solicitation constitutes discouragement of prospective applicants in violation of existing § 202.5(a). Appropriate exceptions could be created for affirmative marketing programs or programs that qualify as special purpose credit programs designed to expand the availability of credit to certain groups.

     5. III. Special Purpose Credit Programs

        The Board has proposed a revision to § 202.8 (a)-5 of its commentary to clarify how creditors may determine the need for establishing special purpose credit programs. Specifically, the Board proposes to add that "a creditor might design new products to reach consumers who would not meet, or have not met, its traditional standards of creditworthiness due to such factors as credit inexperience or the use of credit sources that may not report to consumer reporting agencies." We support the addition of this provision. Expressly permitting creditors to establish special purpose credit programs to reach such consumers will encourage the provision of credit to the many consumers who are being adversely affected by their limited credit experience. The provision will also help address concerns raised about the practice of some subprime creditors of not reporting credit information of certain customers.

¹ We recommend that the Board replace the term "preapproved" with "prescreened" because use of the term "preapproved" may be deceptive when used by creditors in marketing prescreened offers (or "firm offers of credit") now allowed under the FCRA. Prescreening is the practice by which a creditor may obtain from a credit bureau a list of names of consumers that meet certain criteria for use in making credit offers. Under the 1996 FCRA amendments, Congress permitted prescreening, but also allowed "postscreening" of applicants based on predetermined criteria. Thus, a consumer who receives a credit offer based on a creditor's "prescreening" may not ultimately be approved for the credit offered, and the use of the term "preapproved" therefore may be deceptive when used to describe such credit offers.