Business Glossary

Federal Reserve regulation prohibiting discrimination against consumer credit applicants, and establishing guidelines for collecting and evaluating credit information. Regulation B prohibits creditors from discriminating on the basis of age, sex, race, color, religion, national origin, marital status, or receipt of public assistance. The regulation also requires creditors to give written notification of rejection, a statement of the applicant's rights under the Equal Credit Opportunity Act, and a statement listing reasons for rejection, or the applicant has the right to request the reasons. If an applicant was denied credit because of adverse information in a credit bureau report, the applicant is entitled to receive, at no cost, a copy of the bureau report. Creditors who furnish credit information when reporting information on married borrowers must report information in the name of each spouse.

method of assessing the discriminatory impact of supposedly neutral credit policies. In general, the effects test works this way: a person who alleges illegal discrimination need only establish a prima facie case by showing that the action in question has a disproportionately discriminant effect on a member of a protected class, and therefore is discriminatory in effect. The statutory basis of the effects test is the Equal Credit Opportunity Act, which prohibits credit denials on the basis of marital status, national origin, age, or whether applicants are receiving public assistance, and also the Fair Housing Act. The effects test is most frequently applied in evaluating the fairness of statistically based credit scoring systems and alternative mortgages, such as graduated payment mortgages, where future income is considered.