Docket No. R-1008 Equal Credit Opportunity Act Amendments to Regulation B and Commentary

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1 10 November 1999 Ms. Jennifer J. Johnson Secretary Board of Governors of the Federal Reserve System 20 th Street and Constitution Avenue, NW Washington, D. C Dear Ms. Johnson, Docket No. R-1008 Equal Credit Opportunity Act Amendments to Regulation B and Commentary The American Bankers Association ( ABA ) is pleased to submit our comments on the Federal Reserve Board s ( Board ) proposal to amend Regulation B (the Equal Credit Opportunity Act) and its commentary published in the 16 August 1999 Federal Register. Major proposed revisions include removing the general prohibition against noting information about applicant characteristics such as national origin or sex; requiring creditors to retain records for certain prescreened credit solicitations; and extending the record retention period for certain business credit applications. The proposal contains many useful clarifications that will assist compliance, including an explanation of how preapproved loans should be treated under the regulation. ABA is most concerned about the proposal to remove the prohibition against collecting applicant characteristics and continues to oppose it. The Board has not explained the reasons for reversal of its earlier conclusion that Congress, not the Board, should determine whether creditors should be able to collect such data. As previously argued, we do not believe that removing the prohibition will advance fair lending. The data will not be useful in identifying or measuring illegal discrimination. Nevertheless, the proposal will be costly for banks as the data collection will not be voluntary as a practical matter because bank examiners, consumer activists, and the media will assume and allege illegal discrimination unless the data is collected. The Board has failed to address many of these arguments. ABA also opposes the proposed regulation coverage of prescreened solicitations. The statute applies to applicants, not recipients of credit offers, and

2 there is no justification for extending the regulation. The proposed record retention requirements for prescreened solicitations will be costly and provide little value. The ABA brings together all elements of the banking community to represent the interests of this rapidly changing industry. Its membership which includes community, regional, and money center banks and holding companies, as well as savings associations, trust companies, and savings banks makes ABA the largest banking trade association in the country Definitions. 2 (f) Application. PROPOSED CHANGES TO REGULATION B The Board is proposing to clarify when a request for a preapproved loan becomes an application subject to the adverse action requirements. It proposes to add to the regulation: The term includes a request for a preapproval under procedures in which a creditor will issue to creditworthy persons a written commitment for credit up to a specified amount that is valid for a designated period of time, even if the commitment is conditional. We agree with the Board's decision not to adopt a bright line test. Generally, we support the proposed addition, but suggest some clarification to ensure that applications do not cover other informal requests that consumers do not consider and do not want considered to be applications. The proposed language is consistent with the regulation s current flexible approach which we believe to be appropriate. We do not believe that there should be a bright line test for reasons explained in our 9 June 1999 comment letter on the Advance Notice of Proposed Rulemaking. As noted in that letter, our concern is that the regulation not inhibit tools useful to consumers when evaluating their credit qualifications and shopping for credit. Some banks prequalify consumers. Consumers supply basic information about income, assets, etc. to get a general idea of the amount for which they may qualify. This allows them to restrict their home or car search to those within an appropriate price range. However, the creditor does not verify the information supplied, but may provide, Assuming all information supplied is confirmed, you qualify for $X. This contrasts with a preapproval which is more similar to the process described in the proposed commentary and deemed to be an application. In that case, the creditor verifies information to evaluate the actual 2

3 creditworthiness of the person. The only conditions are related to matters undeterminable at the time, e.g., collateral value of property not yet selected and material change in the person s financial circumstances. We believe that the former should not be considered an application, but the latter should. Prequalifications should not be considered applications for a number of reasons. First, they are generally used as a preliminary guide to educate people about the amount of credit for which they may be eligible. There are often no application fees or long forms to complete associated with the request. Second, consumers may inquire with several lenders and do not want adverse actions noted in their credit reports. Finally, lenders, having not confirmed critical information, cannot approve the credit and comport with their underwriting standards. The proposal, however, could be interpreted to include prequalifications as described above. The proposal includes in the definition of application requests from creditworthy persons, but does not refer to the creditors determination of that creditworthiness. Rather, the consumer may be creditworthy, if the information given is true, but the lender does not know this until the information is actually verified. Equally, the person may be creditworthy by another lender s standards, but not by those of the lender receiving the request. Accordingly, we suggest that the Board modify the provision to read: The term includes a request for preapproval under procedures in which a creditor will confirm information supplied by the applicant necessary to determine creditworthiness in accordance with the creditor s procedures and will issue to persons deemed creditworthy according to the creditor s standard a written commitment for credit up to a specified amount that is valid for a designated period of time, even if the commitment is conditional. This allows continuation of preliminary inquires without the burden and annoyance of adverse actions, but appropriately treats serious requests as applications subject to the adverse action requirements. In addition, the approach is consistent with the current regulation, which references in its definition of application, requests for credit made in accordance with procedures established by a creditor Limited Exceptions for Certain Classes of Transactions. (c) Incidental Credit. The proposed rule would expand the exception for incidental credit to include incidental business credit. We agree with the Board that full regulatory 3

4 coverage of such credit does not contribute substantially to effectuating the purposes of the Act General Rule Prohibiting Discrimination. The Board is revising this section to incorporate general rules that are currently in other sections of the regulation. We believe that this proposed revision is appropriate and will facilitate compliance by making these provisions easier to find Rules Concerning Taking of Applications: Elimination of the prohibition against collecting certain data for non-mortgage Loans. The Board is again proposing to remove the general prohibition against noting information about applicant characteristics such as race, sex, national origin etc. ABA strongly supports elimination of illegal discrimination. Banks in the last decade have made great efforts and strides in promoting fair lending and reaching out to underserved people. However, ABA continues to strongly oppose the Board s proposal to remove the prohibition against collection of data for nonmortgage loans. We reiterate our previous reasons for our objection, most of which we believe the Board has failed to address. The Board is reversing its earlier position without explanation. The Board still has not explained why it is reversing its December 1996 decision that Congress, not the Board, should decide whether the prohibition should be lifted. In the supplementary information to the current proposal, the Board explains that in 1996, it decided that given the political sensitivity of the proposal, Congress, not the Board should make the decision. We are at a loss to understand why the Board now believes that the issue is not politically sensitive given the strong debate and industry opposition. The current proposal simply glosses over this inconsistency and reversal. Prohibition of data collection prevents illegal discrimination. Our previous letter noted that most banks logically believe that the best protection against illegal discrimination is minimizing the availability of information about race, gender, etc. in the lending process. This avoids overt illegal discrimination as well as any subconscious influence of these factors, particularly on marginal loans. Simply put, if the race, gender etc. of the applicants is not available to those making the lending decision, it cannot be used to discriminate. 4

5 The recent proposal does not address this very legitimate argument and why it should be ignored. Indeed, the Board s obvious implication is that there is little, if any, illegal discrimination in mortgage underwriting. Generally, underwriters making the credit decision only know an applicants race, for example, from the Home Mortgage Disclosures Act ( HMDA ) data. They never see or speak to the applicant. Thus, if there is discrimination on the basis of race in the underwriting process, it would generally have to be based on HMDA data. Since the Board does not believe that access to race data leads to discrimination and the only way an underwriter can know applicant s race is from the HMDA data, the Board must believe that, in general, there is no discrimination on the basis of race in mortgage underwriting process. The data will not be useful in identifying or measuring illegal discrimination. Our earlier letter explained that, as with HMDA data, the data will frequently be inaccurate or incomplete and will therefore be misleading, distorted, and misused. The distortions will multiply as more and more transactions are consummated without person to person contact. Again, the Board has failed to address this legitimate reason for opposing the proposal. Many mortgage applicants, particularly those the Equal Credit Opportunity Act ( ECOA ) is trying to protect, are reluctant to provide HMDA information out of suspicion that the information will be used against them in the loan process. Conversely, some applicants suspect that protected classes receive preferential treatment. Others are concerned about privacy. Accordingly, all three groups are likely to, and in fact do, leave the questions unanswered or worse, complete the form inaccurately. In addition, as electronic, mail, and telephone banking continue to grow, this personal information will be less informative and reliable because it is unlikely to be gathered, skewing the data collected. Yet, despite the fact the HMDA data is frequently inaccurate and incomplete and that even if accurate and complete, the data alone cannot show illegal discrimination, consumer groups, the media, and politicians continually showcase HMDA data as conclusive evidence of illegal discrimination, unfairly damaging reputations of innocent institutions. Based solely on the HMDA data, headlines blare that banks are discriminating, politicians rail against banks and threaten legislative punishments. Other studies that might offer other reasons to help explain disparities in lending that could actually assist in promoting lending to underserved groups, are ignored, overshadowed by the HMDA data-based incorrect conclusions. In fact, the proposal is focused, not on giving tools to banks to help identify and correct illegal discrimination, but in giving agencies and the Department of 5

6 Justice enforcement tools however misused the data or baseless the accusations of discrimination. Otherwise the Board would apply the self-testing privilege. Rather, the Board, in ignoring our earlier comment about the inaccuracy and misuse of HMDA data, appears to take an ends justifies the means approach - that while the data may be inaccurate or misleading and may be used incorrectly to support unfair, but widely publicized accusations of illegal discrimination, the general good of sensitizing lenders to illegal discrimination is advanced. Banks strongly support elimination of illegal discrimination. However, we do not believe that government encouragement of incorrect assertions of illegal discrimination is appropriate nor does it further the cause of fair lending. Data collection will not be voluntary. ABA has previously commented that though technically voluntary, data collection will in many cases become mandatory. Bank examiners and others will presume that those not collecting data are discriminating illegally. Examiners may use failure to collect data as a basis to downgrade Community Reinvestment Act ( CRA ) ratings. Again, the Board has failed to address this legitimate concern of unfair accusations and presumptions and increased burdens. At the very least, the final regulation should specifically provide that data collection for nonmortgage loan applications is strictly voluntary and that failure to collect the data should not be considered an indication of illegal discrimination or a basis to downgrade positive CRA rating. Banks will bear costs not borne by other creditors, Data collection will be very expensive and will put banks at a competitive disadvantage. Notwithstanding the illusory argument that because data collection is voluntary, there are no costs, many banks, as we have stated, will be compelled to collect the data. Collecting HMDA information is already very costly. Adding other consumer loans and business loans will multiply that cost by several times since the volume of nonmortgage loans greatly exceeds that of mortgage loans. Banking government agencies may not envisage that banks will collect data on products such as credit cards on the basis that it is not practical or useful. However, experience suggests that other regulators, examiners, and consumer activists will demand its collection. Unregulated creditors will not be under the same pressure to collect the data. Accordingly, banks will be put at a competitive disadvantage. 6

7 Privacy issues are ignored. Finally, we are baffled that the Board has suggested that banks collect sensitive data to be available to the government and the public at a time when consumers have expressed their increasing concern and alarm about personal information being shared with the government. As noted, many credit applicants are reluctant to provide information about their race, sex, etc. First, some fear, erroneously, that the information will affect their credit application negatively. Second, many object to these intrusive inquiries when the personal information unnecessary to the application review is being collected, let alone reported to the government, even when the reason for the collection is included. Under the proposal, applicants would be even more skeptical than they are about HMDA data since the law does not require the data collection. Commentary to Section (b)(3)(ii)-2 Incentives for Self-testing and Self-correction: Types of information not privileged. If the data collection is truly voluntary, the self-testing privilege should apply. The proposed commentary reflects the Board s interpretation that the selftesting privilege does not apply to any voluntary collection of applicant data about race, color, religion, national origin, and sex. In the supplementary information, the Board explains: A self-test is defined as a program, practice, or study that is designed and used specifically to determine compliance with the ECOA and Regulation B and creates data or factual information that it not available and cannot be derived from loan application files or other records related to credit transactions. If a self-test meets this definition, the results are privileged and cannot be obtained by a government agency in any examination or investigation, or by any agency or an application in any proceeding or civil action alleging a violation or Regulation B. The privilege may be lost or waived, however, under certain circumstances. Creditors that elect to collect information about credit applicants race or ethnicity, for example, will likely do so on the application form or in the application process. The Board believes that such collection of data in connection with nonmortgage credit, even though voluntary on the part of the creditor, is not a self-test privileged under the ECOA. The collection of information about an applicant s characteristics, standing alone or in combination with other information obtained or derived from loan application files or other records, does not qualify for the privilege. 7

8 We strongly disagree with this interpretation which contradicts the regulation and the Board s own explanation of the self-test privilege. We recommend that the commentary specifically state that the self-testing privilege does apply to voluntary collection of this data. The Board presents little more than a blanket denial of the application of the privilege, so we must reconstruct the Board's reasoning in reaching this conclusion. As noted above, the Board observes that a privileged self-test: (a) is a program, practice, or study (b) that is designed and used specifically to determine compliance with the ECOA and Regulation B (c) and creates data or factual information that is not available and cannot be derived from loan application files or other records related to credit transactions. This essentially restates the regulation which additionally provides that certain information is not privileged, including, "Loan and application files or other business records related to credit transactions, and information derived from such files and records, even if it has been aggregated, summarized, or reorganized to facilitate analysis." It seems unarguable that a creditor voluntarily collecting additional information from applicants is a "program, practice, or study." That the collection of race, color, religion, national origin, and sex data is "designed and used specifically to determine compliance with ECOA and Regulation B also seems self-evident. In fact, the Board clearly assumes that the data will be used to determine compliance with ECOA since the proposed notice that creditors collecting the data will be required to give applicants reads: "FORM C-10--SAMPLE DISCLOSURE ABOUT VOLUNTARY DATA NOTATION We are requesting the following information to monitor our compliance with the federal Equal Credit Opportunity Act...."(Emphasis added.) The Board apparently concludes that, while the first two tests of the privilege are met, the third is not because the data related to the applicant s characteristics would be part of the "loan application files or other records related to credit transactions." We believe such an analysis is legally, logically, and practically incorrect. In fact, its sole virtue is its political correctness. This conclusion is not consistent with other parts of the commentary. Paragraph 15(b)(1)(ii) of the commentary on the self-testing privilege, which the Board is not proposing to change, currently states: 8

9 1. The principal attribute of self-testing is that it constitutes a voluntary undertaking by the creditor to produce new data or factual information that otherwise would not be available and could not be derived from loan or application files or other records related to credit transactions. Self-testing includes, but is not limited to, the practice of using fictitious applicants for credit (testers), either with or without the use of matched pairs. A creditor may elect to test a defined segment of its business, for example, loan applications processed by a specific branch or loan officer, or applications made for a particular type of credit or loan program. A creditor also may use other methods of generating information that is not available in loan and application files, such as surveying mortgage loan applicants. [Emphasis added.] Thus, under the present law, a creditor may survey former applicants who have been declined or who have been extended credit and repaid the loan, in order to "self-test" for possible illegal discrimination. Since the regulation requires that the self-test be designed and used specifically for testing compliance with the ECOA or Regulation B, the information sought by such survey or investigation would have to include information about prohibited bases if the credit product were any product other than a mortgage. Or a creditor could hire investigators to go to applicants and collect by observation (not by inquiry) race, sex, and possibly other information about prohibited bases. Under the plain reading of the regulation and commentary, this information voluntarily collected by the creditor would be privileged. Under the Board's interpretation of the Regulation, this same information collected during the credit application process rather than after would not be privileged. There is no logical or legal basis for making this false, spurious distinction. The Board appears to be basing its interpretation on the assumption that voluntarily collected information about real credit transactions will be part of the loan or credit application files of those transactions. This is legally and logically incorrect. Under the Board's reading, any information collected about actual credit transactions would be available in or could be derived from the files if the information in any way could be connected by a file identifier as belonging to the file. This overly broad reading of the regulation defeats the privilege for any voluntary self-test of existing credit transactions, which is inconsistent with the intent and language of the statute and regulation. After all, the statute and regulation require that violations of the law discovered by the self-test be corrected. If voluntary information collected about a credit transaction is not privileged, then virtually no existing credit transaction will be tested, real violations will not be detected, and no correction will occur. We believe this contradicts the clear purpose of the statute to encourage correction and restitution of violations and is logically incorrect. 9

10 Further, the Board, through its repeated statement that it is proposing to remove the prohibition against noting an applicant s race, color, religion, national origin, and sex for nonmortgage credit products, may be confusing the issue. The Board appears to believe that this information will be collected and kept in the loan application files. There is no requirement that the personal information be collected on the application form and retained with the application file. In fact, we would recommend to our members that they take steps to ensure that any collection of information about prohibited bases be kept in a separate database or file system related only by loan application or file number in order to insulate the information from those making the credit decision. As we have stated previously, ABA members are concerned that the collection of this data might allow some individual employee to illegally discriminate if this information is collected and maintained in the loan application file. We also believe many applicants will be extremely reluctant to provide this information if they think it will be in the loan file for others to see. To address these concerns, we would encourage banks to collect this information outside of the loan processing system as much as possible. For example, creditors could voluntarily give applicants a card requesting the information upon which the loan officer has noted the loan application identifier. The applicant would be asked to fill out the card and seal it in a stamped pre-addressed envelope to the Internal audit section or the fair lending compliance division of the bank, and thus be assured that the loan officers and processors will not have access to the data. If the loan application is by phone, the applicant can be switched to a different person in the compliance section of the bank in order for the bank to request voluntary monitoring information. Internet applications can offer customers an e- mail option for submitting the monitoring information separately from the application. Software can insert the application number into the monitoring information form. All of these methods would serve to separate the voluntarily collected information from the credit application or loan file and would defeat the Board's attempt to place this information into the loan file for the purpose of denying the self-testing privilege. Since the law, logic, and practical considerations would apply the selftesting privilege to the voluntary collection of this ECOA monitoring information, the obvious rational for not doing so is that political factors prevail. The Attorney General s letters and statements make clear that the Justice Department s primary purpose in advocating data collection is to give HUD, the Justice Department, and other agencies greater political and enforcement leverage through access and use (or misuse) of this data. That primary purpose would be defeated if the information were privileged. But mandatory collection would highlight the question of whether the issue is properly a Congressional matter, as the Board had previously concluded, rather than one for the Board. It appears the Board has chosen to propose voluntary collection without the obviously 10

11 applicable self-testing privilege in order to circumvent Congressional intent and to avoid Congressional intervention. We appreciate the Board's rationale but it is neither legal nor logical reasoning. It misinterprets and contradicts the Board's own regulation on the self-testing privilege. Most banks oppose the proposal because experience indicates that if they collect the data, regulators, followed soon after by the Justice Department and private class-action attorneys, all with their own agendas, will be swarming in on the bank to discover alleged evidence of illegal discrimination. Accusations alone, without thoughtful analysis or bank opportunity to respond, as a practical matter, will leave them unfairly labeled or convicted. Yet, many banks would support voluntary collection of the data, if it were privileged, for the purpose of detecting and correcting illegal discrimination. ABA believes that the Board s conclusion with regard to the application of the self-testing privilege is legally incorrect and that it has tainted the rulemaking process with regard to the proposed removal of the prohibition against noting certain applicant characteristics. Had the Board properly proposed applying the self-testing privilege, we believe many comments would be radically different. For example, many banks opposing the current proposal would support a proposal to allow voluntary collection of data if the self-testing privilege applied. Similarly, many groups supporting the proposal would likely oppose it under those circumstances. Accordingly, we respectfully urge the Board to withdraw this proposal and issue a new proposal that allows lenders to voluntarily collect fair lending monitoring information and specifically provides that voluntary collection of monitoring information is indeed covered by the self-testing privilege Notifications. 9(a)(3) Notification to Business Credit Applicants. The Board is proposing to include in creditors notices of action taken to businesses with gross revenues in excess of $1 million the applicant s right to a written statement of reasons. We believe this may be useful to some businesses, though we believe that most businesses of this size know to inquire about reasons for denial Record Retention. 12(b) Preservation of Records. The Board is proposing to lengthen the record retention requirements for certain business applications. Currently, for credit involving businesses with 11

12 gross revenues of $1 million or less, creditors must retain credit applications and other records for 12 months. The Board is proposing to extend this period to 25 months. The Board s stated reasons for the extension are: 1) the relatively low volume of business loans on a yearly basis for some institutions, and 2) the agencies reduction of examination frequency from 18 to 24 months. We again object to the extension of the record retention period. Longer retention periods translate into expensive storage space and costly record monitoring. The volume of file space needed may be significant, particularly for institutions heavily engaged in small business lending. For institutions located in high-rent areas, the cost of the additional space may be substantial. Because records for business credit tend to be more voluminous and extensive than consumer lending, the cost of storage could increase significantly. We disagree with the Board s assumption that concerns about the cost of storage no longer apply given the technological advances and the use of electronic storage. First, much of the paper documentation is still retained. Frequently, records are retained both in paper and electronically. Also, some documentation is only retainable in paper form. Second, there are significant costs associated with retaining records electronically: systems have to be upgraded and changed to accommodate the additional information and records, ensure integrity, etc. In addition, whether or not the records are retained electronically, there remains the cost of monitoring records for a longer period. For these reasons, we believe the Board should follow the Act s suggested period of 12 months. The Board has not justified extending the record retention period provided in the Act. 12(b)(7) Preapplication marketing information. The Board is proposing that creditors be required to retain certain information related to prescreened solicitations: the list of criteria used to select potential recipients, the solicitation used, correspondence related to the solicitation, and the marketing plan to which the solicitation relates the Board asserts that. We agree with the Board s decision to generally not apply the regulation s requirements to solicitations. As noted by the Board, subjecting them to the regulation s requirements without providing many exceptions could have unintended and undesirable consequences. In most cases, it simply is not practical and would inhibit the development of desirable credit products. However, we strongly object to the Board s unjustified extension of the regulation to include people who have not applied for credit, even though the proposed extension is limited to record retention requirements. The Act simply does not apply to people who have not applied for credit and the Board has not 12

13 justified the expansion. Moreover, contrary to the Board s assumption, the record retention proposal will mean additional compliance burdens. The Act and regulation prohibit discrimination against applicants, i.e., people who have requested or received credit. With solicitations, it is the creditor, not a person, initiating the relationship. While acknowledging this point, the Board notes that the regulation does expressly prohibit creditors from engaging in practices that would discourage a reasonable person from applying for credit. However, targeting marketing like prescreened solicitations does not discourage people from applying. To the contrary, solicitations encourage applications. As the Board admits, solicitations are used to expand creditors markets, not restrict them, and they allow creditors to develop creative, differentiated products that respond to the public s preferences. Those not receiving a solicitation are free to apply for the product and cannot be considered to have been "discouraged" because they did not receive a personal solicitation for that particular product. Moreover, the proposal will impose new burdens on creditors by expanding record retention requirements. The proposal requires banks to retain: Any preapproved credit solicitation; The list of criteria the creditor used to select potential recipients of the solicitation; and Any correspondence (to and from the selected recipients) related to complaints about the solicitation. However, of these, Section 615(d)(3) of the Fair Credit Reporting Act only requires retention of the criteria used to select the consumer. It does not require creditors to retain the actual solicitations or the correspondence about complaints. The Board should not add the burden of retaining a copy of every credit solicitation. It will not be useful, but will be expensive. The Fair Credit Reporting Act already requires retention of the criteria used for solicitations. This is sufficient to determine whether illegal criteria are being used. The actual solicitation adds no useful information to that already required. Yet, the cost of retaining costs is significant. Card issuers can have hundreds of different card solicitations with dozens of variations though the solicitations are based on the same criteria. Organizing, filing, storing, and maintaining these records is costly, but will add little to evaluating whether improper criteria are being used. Requiring retention of solicitations was considered when FCRA was amended in 1996, but was rejected. Accordingly, the Board should delete this requirement. 13

14 In addition, requiring retention of correspondence is an unnecessary burden that will only invite unavoidable violations without any obvious benefit. Correspondence is undefined and could be very broadly interpreted to include notes handed to a teller, notes on an recipient annoyed about receiving unsolicited mail, and other paper that is delivered to anyone related to the bank card issur. Such correspondence is not easily tracked and then directed to the special Center for Complaints Related to Credit Solicitation Materials. It is difficult to educate all employees who might receive such a complaint to necessarily recognize it as legal correspondence and then know to direct it to the correct place. Moreover, we seriously doubt that the kinds of complaints the Board is interested in will be sent to the card issuer. Few, if any, complaints will relate to whether the solicitations are discouraging applicants. Complaints most likely involve unrelated matters such as the amount of credit line approved, the volume of solicitations received etc. It is doubtful that recipients of credit applications will complain that they have been discouraged from applying on an illegal basis or that they did not receive the right solicitation. Yet, banks will have to design, implement, and maintain systems and procedures to capture that rare correspondence that could be in any form delivered to any employee. We do not believe that this is productive or justified for purposes of monitoring compliance or detecting illegal discrimination Definitions. PROPOSED COMMENTARY TO REGULATION B (c)(1) (i)-2 Adverse action: Counteroffer. This comment address credit solicitations and clarifies that where a consumer who receives a solicitation requests a specific amount of credit and the creditor offers a different amount, the creditor s action constitutes a counteroffer. We recommend that the Board omit this comment in the final commentary. It is not consistent with the regulation s definition of application and will be burdensome with little benefit to consumers. Section 202.2(f) of the regulation explains that a request for credit is an application when it is made in accordance with procedures established by [the] creditor. Reinforcing this notion, the commentary provides that a refusal for credit qualifies as an adverse action only if the applicant applied in accordance with the creditor s procedures. Credit card issuers often fashion their applications and application procedures to offer a range of credit line limits, but the procedures do not permit the applicant to specify the credit limit in the initial request. Instead, under these creditor s procedures, applicants are not being offered the opportunity to apply for a specific line of credit, but are offered an 14

15 amount to be determined after the consumer has responded. A request for a specific amount is not a request in accordance with procedures established by [the] creditor. Thus, the creditor s decision not to grant the specific amount requested is not adverse action so long as the amount provided is within the range initially disclosed. Any other interpretation challenges the well-established concept that creditors may freely fashion their own application procedures. In addition, the proposed interpretation would be costly with little benefit to consumers. Creditors would have to establish new systems that identify and respond to individualized credit requests. In today s highly automated environment, the proposal would add a costly manual element. Moreover, the benefit to consumers is vague; they receive an adverse action along with the credit card. This seems more confusing than informative or helpful. 2(c)2(ii) 3 Adverse action: Performance on a different account. This proposed comment would clarify that an adverse action notice is required if a creditor treats an account as delinquent or in default due to activity on another account, even if the performance is defined as a default under the terms of the credit agreement. We recommend that this comment be revised. The proposal inappropriately interferes with creditors ability to draft their own contract terms and manage their risk. Whether or not the creditor treats an account as delinquent or in default based on nonperformance on another account should depend on whether the consumer expressly agreed to the condition. If the consumer has agreed to the condition, no adverse action notice should be required. In addition, creditors should have the choice, as part of their risk management efforts, to monitor and consider their customers performance on other financial obligations and take appropriate action to minimize their own losses. (f) Application: Examples of an application. Comments to this section explain when a preapproval becomes an application. However, in comment 3, the term prequalification request, is used but in comment 5, the terms preapprove and preapproved" are used. Pursuant to our comments to the proposed changes to this section of the regulation, we suggest that the Board consistently use the term preapproval when referring to the type of procedure that is considered an application and "prequalification" for those not considered to be an application. 15

16 202.2(l) Creditor (a) 5 Special Purpose Credit Programs: Determining need. We support the proposed addition explaining that in determining the need for special purpose credit programs, the creditor may design new products to reach consumers who would not meet, or have not met, traditional standards of creditworthiness because of credit inexperience or the use of credit sources that may not report to a consumer reporting agency. We believe that this will be helpful in expanding credit outreach programs Notifications: Prequalification and preapproval programs. As mentioned in comments to Section 202.2(f) of the regulation and commentary, we suggest that the Board use the term preapproved for programs that are considered to be applications and prequalified for those that are considered inquiries. * * * * * * ABA appreciates the opportunity to submit our comments on this important matter. We would be happy to supply any additional comments or information. Sincerely, Nessa Eileen Feddis 16