WASHINGTON - Bankers have until Feb. 15 to comment on the Federal Reserve's new road map for compliance with the Equal Credit Opportunity Act.
The Fed's proposed staff commentary attempts to clarify some of the most controversial parts of Regulation B, including disparate treatment and credit scoring. The new instructions were published in the Dec. 29 Federal Register.
Equal credit opportunity laws, along with the Fair Housing Act and the Home Mortgage Disclosure Act, make up the fair-lending laws that have been driving bankers wild lately.
The Reg B commentary, which only addresses equal credit, is designed to answer some of the industry's compliance questions.
For the first time, the staff gives specific guidance on disparate impact as it relates to lending discrimination.
The Fed clarifies that disparate treatment is illegal, whether or not it results from a conscious intent to discriminate. The commentary gives two examples of such conduct:
* A minority applicant is required to provide greater documentation to obtain a loan than a similarly situated nonminority applicant.
* Credit standards are waived or relaxed for a nonminority applicant but not for a similarly situated minority applicant.
The staff also addresses the relationship between disparate treatment and credit scoring, which is the analysis a bank does to determine if someone qualifies for credit. In general, the Fed said, such analysis inherently treats applicants objectively and avoids unintentional discrimination.
A banker using an empirically derived and statistically sound scoring system may use age as a factor as long as an elderly applicant is not treated negatively, the Fed said.
However, the agency warned that other prohibitive bases, such as race or gender, may not be used in the analysis.
The Fed warned that although most credit scoring is safe, if a bank employee overrides the results with a judgment call, it could alter the accuracy of the analysis. In such a case, disparate treatment could occur and the bank would be in violation of Reg B, the staff said.
The central bank wanted to make bankers more comfortable with credit scoring, according to a staff attorney. But in cases where bankers go beyond the scope of the statistical analysis, "You're bringing subjective judgment into what is supposed to be an objective system," she said.
While these explanations don't represent the about-face by the regulators that many in the industry hoped for after the Republican takeover of Congress, they do help bankers better understand what is expected of them, said Karen Shaw, president of ISD/Shaw Inc., Washington.
"The law and the rule have been so ambiguous it's been hard for bankers to chart a course without damaging their profits," Ms. Shaw said.
Bankers should be especially pleased, she said, to see a clarification on special-purpose lending.
The proposal says that such programs, aimed at low-income minority borrowers, would be permitted if they increase access to credit, but not if they take credit opportunities away from others.
The commentary also makes clear that a banker offering joint credit may not take the applicants' marital status into account in credit evaluations. Applicants may not be treated differently based on the existence, the absence, or the likelihood of a marriage between applicants, the central bank said.
Appraisal notices were another main area covered by the Reg B commentary. Bankers had asked the Fed to explain exactly what constitutes an appraisal report, the staff attorney said.
According to the Fed, examples are: a report prepared by an appraiser (licensed or not), including written comments and other documents submitted to the banker in support of the appraiser's estimate of value; a document prepared by the bank staff that assigns value to the property if a third- party appraisal report has not been used; or an internal review document indicating that the value assigned by a third-party appraiser is incorrect.
Some confusion arose over the fact that not all documents relating to the value of an applicant's property are appraisal reports, the attorney said.
When there is more than one applicant, the notice about the appraisal report needs to be given to just one applicant, the staff said.