Feds Seek Reversal of Equal Credit Opportunity Regulation

July 7, 2008 - 8:02 PM

(CNSNews.com) - The Federal Reserve Board is set to reverse a 25-year-old regulation, in effect forcing banks and financial institutions to record race, ethnic, religion and other personal data on loan applicants - a practice which was banned in an effort to comply with non-discrimination laws.

The Board is currently seeking public comment on its proposed changes to Regulation B, the rule implemented to enforce the Equal Credit Opportunity Act (ECOA), which Congress passed in the 1970s.

According to the Federal Reserve Board, the proposed revisions would "remove the general prohibition against creditors noting characteristics such as race, sex and national origin of applicants for nonmortgage credit." The revisions would also "require creditors to retain certain records for preapproved credit solicitations and expand from 12 to 25 months the record retention period for most business credit applications."

Under ECOA, it is illegal for creditors to discriminate against an applicant on the basis of race, color, religion, national origin, sex, marital status, age or whether a person receives taxpayer-funded welfare. The intent behind Regulation B was to protect applicants from being denied access to bank loans as a result of their race, gender or religion.

The agency is now seeking to drop its prohibition against collecting on applicant's race, religion, sex and other data, suggesting that returning to pre-1977 practices will allow the government and banking industry to enforce civil rights laws, specifically, the Equal Credit Opportunity Act (ECOA).

But some government watchdog groups aren't fully convinced that moving away from the regulation is in the best interest of consumers.

"Our privacy will be severely compromised by the Fed's turnabout on Regulation B," said Lisa S. Dean, Vice President of Technology Policy at the Free Congress Foundation. "Now banks could reject your loan application just because you are the 'wrong' sex, have the 'wrong' skin color, or believe in the 'wrong' religion."

The Free Congress Foundation was at the forefront of the battle against another Federal Reserve proposal known as the Know Your Customer program, which would have forced banks and financial institutions to police the activities of their customers.

Dean added that reversing Regulation B could create and environment where financial institutions are left to defend themselves against increased legal action.

"Lawsuits will multiply because of this invasion of privacy," Dean said. "Trial lawyers will love the opportunity to prove to a jury that their clients' application was denied because of their race, sex or religion. But I can't imagine that banks would be excited about that scenario."

The American Community Bankers Association (ACB) represents 2,000 savings and community banks and related business firms nationwide. Glenn Gimble, one of ACB's regulatory affairs specialists, suggests the revocation of Regulation B is a step in the wrong direction.

"ACB believes this will lead to additional regulatory burden without any benefit," Gimble told CNSNews.com. "We feel like that the type of info allowed to be collected doesn't have a place in the credit decision process. This is not the type of information that a community bank takes into consideration when determining who is eligible for a loan."

As a former loan officer Gimble said customers are not happy with bank officials asking questions about race, religion, sex and other personal information. "If you talk to consumers, they're offended that the topic even comes up. The relationship between the banker and the customer is soured when they encounter this line of questioning," Gimble added.