I. INTRODUCTION
The Federal Reserve Board (FRB) has made final revisions to Regulation B in connection with applications for “business credit.” The revisions are a result of the Congress’ adoption of the Women’s Business Ownership Act of 1988 (WBOA). The WBOA extends the provisions of the Equal Credit Opportunity Act (ECOA) to far more business, commercial, and agricultural lending transactions than has previously been the case. The final FRB rule defines the manner in which business credit applicants are to be notified when they are denied credit and establish how long their credit applications must be kept on file. Mandatory compliance with the final rule was required as of April 1, 1990.
II. BACKGROUND
The ECOA generally prohibits creditors from discriminating in any aspect of a credit transaction on the basis of the applicant’s sex, marital status, race, color, national origin, religion, age, because all or part of an applicant’s income derives from any public assistance source, or because an applicant has in good faith exercised any right under the Consumer Credit Protection Act. The ECOA also provides that a credit applicant has the right to obtain a written statement of reasons for a denial of credit. Regulation B, which implements the ECOA, has historically exempted “business credit” transactions from certain requirements, including adverse action notice requirements, record retention requirements, prohibitions on questions about marital status and information supplied to third parties about accounts held jointly by married persons.
In response to concerns that Regulation B’s broad exemptions provided cover for discrimination against women entrepreneurs on the basis of gender, Congress amended the ECOA in 1988 to require creditors to: (l) give business credit applicants written notice of the right to obtain reasons for a credit denial; and (2) retain records on business credit applications for at least one year. The amendments also provide that any exemption from the requirements of the Act or implementing regulations issued by the FRB will end after five years with the FRB authorized to extend an exemption for an additional five-year period upon an express finding that such an extension is appropriate.
III. REVISIONS TO REGULATION B
A. General Coverage
It is most important to note the definition of “business credit” for compliance purposes. “Business credit” is defined in Regulation B as “extensions of credit primarily for business or commercial (including agricultural) purposes but excluding certain public utilities credit; credit extensions subject to regulations under the Securities Exchange Act; credit payable in four or fewer installments in which no credit card is used and no finance charge imposed; and extensions of credit to federal and state governments.” The primary intent of the amendments to the ECOA was to provide small-business owners, particularly women entrepreneurs, the same ECOA rights that are afforded to consumer credit borrowers.
B. Small Business Credit Applicants
Applications from businesses that had gross revenues of $1,000,000 or less (small business credit) in the preceding fiscal year are subject to Regulation B. An application to start a business would also be subject to this regulation.
The rules that are now applicable to small business credit closely parallel the rules that already govern non-business credit. Creditors that follow the present Regulation B rules governing non-business credit will be in full compliance with the Act and regulation. The FRB proposal does, however, offer creditors additional flexibility as set forth below.
C. Notice of the Right to Reasons for a Small Business Credit Denial ($1,000,000 or Less)
Creditors are required to notify “small business” applicants orally or in writing of their right to a written statement of the reasons for the credit denial. Notice of the credit decision must typically be given within 30 days of receiving a “completed” application. An application is deemed to be completed when the creditor has received all the information it regularly obtains and considers in evaluating applications for credit.
1. How to Satisfy Notice Requirements
Creditors may satisfy the requirement of providing a written notice of the right to a statement of reasons for a credit denial in one of two ways: (l) a creditor may give the notice to all business applicants at the time of application, provided the notice is given in a form the applicant may retain (notice could be given on a separate piece of paper or included on any documentation provided to the applicant); or (2) a creditor may follow the rule used for non-business credit and give written notice of the right to a statement of reasons after a credit denial or other adverse action is taken or provide a statement of the specific reasons for a credit denial, instead of merely giving notice of the right.
2. Contents of Notice
Regardless of the timing of the notice, the notification must contain all the information required under Section 202.9(a)(2) of Regulation B, such information being: the name and address of the creditor; the “ECOA notice”; and the name and address of the federal agency that administers compliance with respect to the creditor. A creditor will continue to be allowed to notify business credit applicants of a credit decision orally or in writing.
3. Exceptions
The notification requirements may be satisfied by oral disclosure of the applicant’s right to a statement or reasons for denial of credit in connection with any application made solely by telephone. Additionally, a request for an advance under an existing line of credit is not considered an application for credit and therefore does not trigger the notification requirements nor do inquiries from potential applicants which only seek credit information.
D. Record Retention for Small Business Applicants
Creditors are required to retain records on small business transactions for a period of 12 months. Creditors will be required to retain the original or a copy of any application document and other written or recorded data used in evaluating an application. A creditor must also retain a copy of any statement of reasons for a credit denial provided to an applicant. Where a creditor provides a notice of rights, the creditor may evidence compliance by having a sample copy of the type of notice provided to applicants and demonstrating that there are procedures in place to ensure that such notices are being provided.
E. Notification and Record Retention for Business Credit Applicants with Revenues Exceeding $1,000,000
Credit applications by businesses with gross revenues exceeding $1,000,000, and applications for trade credit, credit incident to factoring and similar business credit (regardless of the applicants revenues) are subject to modified rules under Section 202.(a)(3)(ii) of Regulation B. Applicants for such business credit must be notified of a credit denial, orally or in writing within a reasonable time after the creditor receives a complete application. Notice given in accordance with timing requirements of Section 202.9(a)(1) is deemed “reasonable” in all instances. The applicant must submit a written request for a statement of credit denial within 60 days of denial.
Once a creditor has received a written request for a statement of reasons for credit denial, a creditor must both: (1) provide the reasons for such denial; and (2) retain the applicant’s records for a period of 12 months. In the absence of such a written request, a creditor will not have to retain records beyond the 60 day period within which a request may be received.
F. Questions Regarding Marital Status
Creditor inquiries about marital status of business credit applicants for unsecured credit are prohibited. Such inquiries may only be made where the applicant applies for secured credit, applies jointly for credit, resides in a community property state, or relies on property located in such a state as a basis for repaying a debt.
G. Allowable Exemptions
The 1988 amendments to the ECOA require that all exemptions from Regulation B terminate after a five year period, but allow the FRB to extend such exemptions for an additional five year period if the FRB expressly finds that an extension is appropriate.
IV. CONCLUSION
The increased notification and record retention requirements which accompany the 1988 amendments to the ECOA will certainly increase compliance costs for bankers. Additional forms will be necessary to ensure that a statement of the reasons for denial have been adequately explained to business credit applicants and the increased record retention requirements will increase storage and retrieval expenses.