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Regulation
B and Small Business Data Reporting
Docket
No. R-1008
Jennifer
J. Johnson, Secretary
Board of Governors of the
Federal Reserve System
20th Street and Constitution Ave., NW Washington, DC 20551
Dear
Secretary Johnson:
The
Lawyers' Committee for Civil Rights Under Law ("The
Committee") generally supports the proposed modifications
to Regulation B, which implements the Equal Credit Opportunity
Act ("ECOA"). The Committee is a nonpartisan,
nonprofit organization, formed in 1963 at the request of
President John F. Kennedy to involve the private bar in
providing legal services to address racial discrimination.
One of our areas of focus is community development, which
includes identifying and combating lending discrimination.
We believe that access to capital on a non-discriminatory
basis is of paramount importance and, therefore, support
any mechanism that furthers that goal.
I.
REPORTING OF RACE AND GENDER INFORMATION
Because we believe that the reporting of race and gender
information on applications for small business and other
non-mortgage loans will permit greater access to capital
by minorities and other disadvantaged and underserved populations,
as well as stronger enforcement of the ECOA, we support
race and gender data collection. As borne out by the increase
in the percentage of low- and moderate-income borrowers
who have received home mortgage loans and the increase in
Black and Hispanic borrowers who have received mortgage
loans generally following the collection of race and gender
information in connection with such loans, we believe that
the collection of such data in connection with small business
and non-mortgage loans will also increase the number of
minorities receiving non-mortgage loans. The collection
of such data in connection with mortgage lending has been
instrumental in resolving many disputes against lending
institutions for violations of fair lending laws. Without
such data, it is more difficult for federal government regulatory
agencies and the general public to hold financial institutions
accountable for establishing or practicing unfair and biased
lending policies. We believe that the lack of detailed data
in small business lending has contributed to minorities
and working-class populations experiencing less access to
small business loans than home loans.
We
believe that data disclosure benefits lenders, borrowers,
and underserved communities in several respects in that
it strengthens fair lending enforcement, encourages partnerships
between banks and community organizations, and stimulates
competition among banks for an underserved market. Thus,
data disclosure plays a significant role in revitalizing
and stabilizing working class and minorities communities.
Accordingly, it is our position that after a brief voluntary
reporting period, the Federal Reserve Board ("Board")
should then require mandatory reporting of race and gender
information in connection with small business and non-home
mortgage loans. Mandatory data collection is the best way
to ensure that all lenders are making more loans to traditionally
underserved populations in a nondiscriminatory manner.
II.
RECORD RETENTION REQUIREMENT
We also support the Board's proposal that lending institutions
be required to retain documentation regarding their small
business lending decisions for 25 months, rather than the
current 12 months. The Committee believes that this proposed
record retention requirement will aid fair lending examinations
conducted by federal regulatory agencies. We urge, however,
that this record retention requirement apply to businesses
with revenues over, as well as under, $1 million, contrary
to the Board's current proposal.
III.
WRITTEN NOTICE OF LOAN DENIALS
Likewise, we urge the Board to reconsider its decision
to maintain the exemption from the requirement that creditors
automatically provide written notices of loan denials in
cases involving business borrowers with more than $1 million
in gross revenues. There is no evidence that the possibility
of discrimination is proportional to the amount of a business'
gross revenues. Therefore, businesses with revenues of more
than $1 million should have the same protection as those
with less revenues.
The
Committee applauds the Board's proposal that written denials
must include specific reasons for the adverse action. This
proposal is consistent with an important purpose for adverse
notices, to allow the applicant to take steps to improve
his or her deficient credit history or income status. Vague
notices of adverse actions do not provide applicants with
needed specifics to improve their chances of receiving loans.
IV.
PRE-SCREENED SOLICITATIONS
The Committee also urges the Board to reconsider its
position to exempt prescreened solicitations from Regulation
B. We believe that residents of minority and low-income
neighborhoods are disproportionately targeted for inferior
products, e.g., secured credit cards and supreme home loans.
By exempting prescreened solicitations from Regulation B,
predatory lending will be permitted to continue unchecked.
V.
DEFINITION OF CREDITOR
We also urge the Board to reconsider its decision against
broadening the definition of creditor. The current definition
provides a loophole whereby financial institutions may not
be responsible for the discriminatory practices of parties
with which they contract to conduct lending transactions.
Because of industry consolidation, it is increasingly common
for banks to acquire or contract with subprime lenders that
offer high interest loans to borrowers with less than good
credit histories. Fair lending violations occur when subprime
lenders target minority populations and offer high interest
products for minorities with good credit histories that
qualify them for regular conventional loans with prevailing
market rates of interest. Federal agencies (e.g., the Department
of Justice and the Office of the Comptroller of the Currency)
increasingly are requiring financial institutions to be
responsible for the subprime lending practices of lenders
that they acquire or with which they contract. The current
wording makes it possible and legitimate for courts and
federal agencies to find financial institutions responsible
for ECOA violations, but it does not guarantee such an interpretation.
We urge the Board to add language that financial institutions
are responsible for the ECOA violations of lenders they
acquire, from which they purchase loans, or with which they
contract. This reasonable strengthening would protect vulnerable
populations from widespread abuses that may occur merely
because lenders evade responsibility by stating that they
out-sourced particular marketing or underwriting decisions.
VI.
CONFIDENTIALITY OF SELF TESTING
The current version of Regulation B allows banks to
keep data derived from tests confidential if the banks take
corrective action when the tests reveal the existence of
discriminatory practices. We support the BoardÍs proposal
that voluntary data on the race and gender of applicants
seeking small business and other non-mortgage loans does
not qualify for the self-test confidentiality privilege.
Any confidentiality privilege extended to voluntary data
collection would defeat the public accountability purpose
of collecting such data.
VII.
TREATMENT OF INTERNET APPLICATIONS
We also support the Board's proposal to amend its official
staff commentary to Regulation B regarding creditor treatment
of applications for home loans received via the Internet.
Hopefully, the Board's action will stem the steadily rising
incidence of "race unknown" on applications, and
thereby increase the accuracy of fair lending data for enforcement
purposes.
VIII.
EXTENDED COVERAGE OF REGULATION B
Our recommendation that a number of companies not be
exempt from Regulation B reporting compliments our position
that this information is essential data for fair lending
examiners and is beneficial to consumers. We agree that
utility companies should be required to report credit payment
information since this information will help consumers establish
credit histories that may help them acquire mortgage loans
and other types of credit. We urge that the Board reverse
its decision to exempt public utilities from record retention
requirements. Likewise, we also urge that broker-dealers
that make loans to customers purchasing mutual funds and
other securities products not be exempt. The Board should
end the exemption for informal lending arrangements that
involve less than four payments as this type of credit may
be common in the small business sector of the economy, particularly
in immigrant communities.
We
believe that our recommendations, as set forth above, are
consistent with the critical goals of ECOA to identify and
combat discrimination. Toward this end, the Lawyers' Committee
is committed to improving lending opportunities available
to those in underserved communities, as well as to holding
lending institutions accountable for discriminatory practices.
Should further explication be required on any of the discussion
points above, please feel free to contact Ms. Cheryl Ziegler,
the Director of our Housing & Community Development Project.
Ms. Ziegler may be reached directly at (202) 662-8331.
We
thank you for soliciting and reviewing our comments.
Sincerely,
Barbara
R. Arnwine, Executive Director
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