The Federal Reserve Board wants to clamp down on credit scoring, proposing that banks take several steps to ensure that their models work.
A Dec. 22 commentary would require bankers to compare their models against loan performance to verify that the program accurately predicts credit risks.
It also would require bankers to rate senior citizens at both their actual age and at 61 years old - the year before a person qualifies for a protected class under civil-rights laws. This would determine if the models unfairly regard age as a factor.
The public has until Feb. 28 to comment on the proposal.
"These are needed clarifications," said James McLaughlin, the director of agency relations at the American Bankers Association. "As more and more banks move into credit scoring, more guidance is needed on how to conform with Reg. B," which implements the Equal Credit Opportunity Act.
Banks, fearing lending-discrimination charges, see credit scoring as their salvation because personal biases can't affect the results.
The problem: Banks are only as safe as the accuracy of their models. The new Fed staff commentary is aimed at ensuring accuracy.
Mr. McLaughlin said the age-discrimination section could provide some trouble for the industry.
"This could produce some administrative difficulties for banks," he said. "One of the advantages of credit scoring is that it is quick and inexpensive. Now they are going to have to flag these over-62 applications."
That could defeat credit scoring's benefits, he added.
The staff commentary also would not protect credit-scoring banks from Justice Department fair-lending probes, said Andrew Sandler, a partner at Skadden, Arps, Slate, Meagher & Flom.
"The commentary reflects the increased scrutiny on credit scoring by the bank regulators," he said. "It would be prudent for a lender to anticipate enforcement activities."
The Fed also made several technical revisions. It said information entered directly into a computer is still considered a written application.
It also said banks can limit the types of credit references they will accept, provided the restrictions are applied equally. But it created a loophole. Applicants can demand that a bank look at another source if it provides information missing from a credit bureau report.
The Fed also said bankers may only consider the credit history of the applicant, even if the spouse has a poor credit history. And, it adopted the same definition of refinancing as used in the Truth in Lending and Home Mortgage Disclosure Act rules.
"Everything I see here seems reasonable," said Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America. "Most of what I read here didn't seem to be surprising or new."
