[Federal Register Volume 62, Number 21 (Friday, January 31, 1997)]
[Proposed Rules]
[Pages 4882-4887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2453]



[[Page 4881]]

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Part IV





Department of Housing and Urban Development





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24 CFR Part 100



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Regulation on Self-testing Regarding Residential Real Estate-Related 
Lending Transactions and Compliance With the Fair Housing Act; Proposed 
Rule

Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / 
Proposed Rules

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 100

[Docket No. FR-4160-P-01]
RIN 2529-AA82


HUD's Regulation on Self-testing Regarding Residential Real 
Estate-Related Lending Transactions and Compliance With the Fair 
Housing Act

AGENCY: Office of the Assistant Secretary for Fair Housing and Equal 
Opportunity, HUD.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to implement section 2302 of the Economic 
Growth and Regulatory Paperwork Reduction Act (Pub. L. 104-208) 
(``Act''), which encourages voluntary compliance by lenders with the 
Fair Housing Act (FHAct) and the Equal Credit Opportunity Act (ECOA) 
through lender-initiated self-tests of lenders' residential real 
estate-related lending transactions and, where appropriate, corrective 
action designed to remedy any possible violations of the FHAct or ECOA 
revealed by such tests.

DATES: Comment due date: March 3, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Rules Docket Clerk, Office of General 
Counsel, Room 10278, Department of Housing and Urban Development, 451 
Seventh Street, SW., Washington, DC 20410. Communications should refer 
to the above docket number and title. A copy of each communication 
submitted will be available for public inspection and copying between 
7:30 a.m. and 5:30 p.m. weekdays at the above address. FAXED comments 
will not be accepted.

FOR FURTHER INFORMATION CONTACT: Peter Kaplan, Director, Office of 
Policy and Regulatory Initiatives, Fair Housing and Equal Opportunity, 
(202) 708-2904. Department of Housing and Urban Development, 451 
Seventh Street, SW., Washington, DC 20410. A telecommunications device 
for hearing-and speech-impaired persons (TTY) is available at (202) 
708-9300 (these are not toll-free telephone numbers).

SUPPLEMENTARY INFORMATION:

I. General. Incentives for Self-testing and Self-correction

Background:

    Section 2302 of the Omnibus Consolidated Appropriations Act for 
Fiscal Year 1997 (Pub. L. 104-208, approved September 30, 1996) 
(``Act''), found in Title II of the Act, entitled the ``Economic Growth 
and Regulatory Paperwork Reduction Act,'' creates a legal and 
administrative enforcement privilege for ``self-tests'' conducted by 
entities engaged in residential real estate-related lending to 
determine compliance under the Fair Housing Act (``FHAct'') and the 
Equal Credit Opportunity Act (``ECOA'').
    Congress has declared that the results of ``self-testing'' should 
be protected by enabling lenders to assert a privilege against 
divulging the results of self-tests under precisely limited 
circumstances. The privilege arises only if the self-test leads to the 
adoption of remedies to correct any possible violations 
discovered.<SUP>1 Congress did not intend for violations to be known by 
lenders and not be remedied.
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    \1\ Senate Report 104-185, page 15.
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    For purposes of the FHAct, under section 2302 of the Act (which 
adds a new section 814A to the FHAct), a report or result of a self-
test is considered privileged if a lender conducts, or authorizes an 
independent third party to conduct, a self-test of a real estate-
related lending transaction to determine the level or effectiveness of 
compliance with the FHAct, has identified any possible violations of 
the FHAct, and has taken, or is taking, appropriate corrective action 
to address the possible violations.
    The Act requires HUD, with respect to the FHAct, and the Federal 
Reserve Board, with respect to the ECOA, to define self-testing in 
substantially similar regulations within six months of enactment of the 
Act. To address this requirement, this proposed regulation has been 
drafted in consultation with the Federal Reserve, following discussion 
with the Department of Justice, and appropriate federal financial 
regulators, including the Federal Deposit Insurance Corporation, the 
Office of the Comptroller of the Currency, the Office of Thrift 
Supervision, the National Credit Union Administration, and the Federal 
Trade Commission.

II. Proposed Regulatory Provisions

    The proposed amendment to the FHAct would implement the Omnibus 
Consolidated Appropriations Act for Fiscal Year 1997 (Pub. L. 104-208, 
approved September 30, 1996) by defining what constitutes a privileged 
self-test. The Department proposes to define a ``self-test'' as any 
program, practice or study that a lender voluntarily conducts or 
authorizes a third party to conduct that creates data or factual 
information that is not available, and cannot be derived, from actual 
loan or application files or other records related to credit 
transactions, to determine the extent or effectiveness of the lender's 
compliance with the Fair Housing Act. This includes but is not limited 
to the practice of using fictitious loan applicants (``testers''), and 
may cover all or any part of a residential real estate lending 
transaction. The privilege would apply to the factual information 
generated by the self-test as well as any analysis or conclusions 
contained in reports prepared about the self-test. A self-test would 
not include any collection of data required by law or by any government 
authority, or a lender's review or evaluation of actual loan or 
application files.
    The Act provides that once the rule is in effect, self-tests would 
become privileged even if they were conducted before the regulation's 
effective date. As an exception to this, self-tests previously 
conducted will not be privileged if, before that date, a complaint 
against a lender: (1) Was formally filed in any court of competent 
jurisdiction or (2) was the subject of an administrative law proceeding 
or had been formally filed with HUD or a substantially equivalent 
agency. In addition, a self-test previously conducted will not become 
privileged on the regulation's effective date if any part of the report 
or results has already been disclosed.

III. Section-by-Section Analysis of Proposed Rule

Section 100.140  Incentives for self-testing and self-correction

    Section 100.140 would state the general rule that the report or 
results of a lender's self-test are privileged if the required 
conditions specified in this rule are satisfied. The privilege applies 
whether the lender conducts the self-test or employs the services of a 
third-party. However, a self-test must be conducted voluntarily; self-
tests that are required by a government authority, including those 
conducted pursuant to a judicial order or directed by a Federal or 
state regulator, would not qualify for the privilege. Similarly, any 
collection of data required by law would not be considered voluntary 
under this rule. The privilege for self-testing is in addition to and 
independent of any other privilege that may exist, such as the 
attorney-client privilege or the privilege for attorney work product.

Section 100.141  Corrective action required

    This section implements the requirement imposed by the Act that a

[[Page 4883]]

lender take appropriate corrective action to address any possible 
violations identified by the self-test in order for the privilege to 
apply. A lender must take whatever actions are reasonable given the 
nature and scope of the possible violations to fully remedy both their 
cause and effect(s). This may include both prospective and retroactive 
relief. Guidance on a lender's responsibility for taking appropriate 
corrective action is provided under Sec. 100.144.
    Although corrective actions are required when a possible violation 
is found, a self-test is also privileged when it does not identify any 
possible violations and no corrective action is necessary. The 
Department believes that the effectiveness of the privilege as an 
incentive to self-test would be significantly undermined if it only 
applied when violations were discovered. If that were the case, the 
mere assertion of the privilege would be tantamount to an admission 
that violations occurred. Under such circumstances, some lenders might 
be reluctant to engage in self-testing in light of the fact that the 
mere assertion of the privilege might prompt the filing of legal 
claims. In addition, a lender's findings made as a result of a self-
test might be influenced by a perceived need to establish the self-
test's eligibility for the privilege.
    The Department also notes that a lender's determinations about the 
type of corrective action needed, or a finding that no corrective 
action is required, would not be conclusive in determining whether the 
requirements of this paragraph have been satisfied. If a claim of 
privilege is challenged, it would be necessary to assess the need for 
corrective action and the type of corrective action that is appropriate 
based on a review of the self-testing results. Such an assessment might 
be accomplished by an adjudication where the judge may conduct an in 
camera inspection of the privileged documents, or by the methods 
described in the section of this preamble pertaining to Sec. 100.148. 
This section also recognizes that the privilege may be asserted by a 
lender even though the applicability of the privilege cannot be finally 
determined because the appropriate corrective actions have not yet been 
completed. To assert the privilege, a lender must be in the process of 
taking corrective actions which, at the minimum, requires establishing 
a plan for corrective action, a means for monitoring the lender's 
progress in implementing the plan, and activity to begin carrying out 
the plan. In such cases, a final decision on whether the privilege 
applies might be withheld pending the lender's having shown substantial 
progress in taking corrective action on a schedule imposed or agreed to 
by an agency or court, or by the other parties affected.

Section 100.142  Definitions

    Lender, for purposes of this subpart only, means a person who 
engages in a residential real estate-related lending transaction.
    Residential real estate-related lending transaction means the 
making of a loan:
    (1) For purchasing, constructing, improving, repairing, or 
maintaining a dwelling; or
    (2) Secured by residential real estate.
    Self-test. This section would state what constitutes a ``self-
test'' for purposes of this rule. The Act does not define ``self-test'' 
and authorizes the Department to define by regulation the practices to 
be covered by the privilege. The possible range of definitions includes 
a wide variety of practices, from matched pair testers to any form of 
self-assessment or self-evaluation.
    In establishing the self-testing privilege, the Congress sought to 
encourage lenders to undertake voluntary efforts to assess their 
compliance with fair lending laws. In particular, the proposed 
definition is a needed incentive for lenders to use self-testing to 
monitor the pre-application stage of the loan process. See S. Rept. 
104-185 at 15 (1995); GENERAL ACCOUNTING OFFICE, GAO/GGD-96-145, FAIR 
LENDING 10, 72 (1996). The pre-application process does not typically 
produce the type of documentation that lends itself to traditional file 
reviews. The privilege serves as an incentive, by assuring that 
evidence of discrimination voluntarily gathered through a self-test 
will not be used against a lender, provided the lender takes 
appropriate corrective actions for any possible discrimination found. 
Although the legislative history focuses on the traditional use of 
fictitious loan applicants in ``matched pair'' testing, it also 
recognizes the utility of other testing methods.
    The Department is proposing to define a ``self-test'' as any 
program, practice or study that a lender voluntarily conducts or 
authorizes a third party to conduct that creates data or factual 
information that is not available, and cannot be derived, from actual 
loan or application files or other records related to credit 
transactions, to determine the extent or effectiveness of the lender's 
compliance with the Fair Housing Act. This definition includes but is 
not limited to the practice of using fictitious loan applicants 
(``testers''). For example, self-testing would also include a survey of 
mortgage customers conducted by the lender for fair lending purposes, 
or a specially designed test to evaluate loan officers' knowledge about 
fair lending laws.
    Under the proposed rule, the principal attribute of self-testing is 
that it constitutes a voluntary undertaking by the lender to produce 
new factual information that otherwise would not be available or 
derived from actual loan or application files or other records related 
to credit transactions. The proposed rule does not define ``self-test'' 
so broadly as to include all types of self-evaluation or self-
assessment performed by a lender. Self-evaluations based on lender 
reviews of actual loan or application files or other records related to 
credit transactions, and reviews of HMDA and similar types of records 
(such as broker or loan officer compensation records) that do not 
produce new factual information about a lender's compliance which 
cannot be derived from those files or records would not be covered by 
the privilege. Accordingly, a compilation of data or a regression 
analysis derived from the data in actual loan or application files 
would not be privileged.
    A broader definition encompassing such audits or evaluations is 
within the Department's rulemaking authority under the statute. 
Principles of sound lending dictate that a lender have adequate 
policies and procedures in place to ensure compliance with applicable 
laws and regulations, and that lenders adopt appropriate audit and 
control systems. These may take the form of compliance reviews, file 
analyses, the use of second review committees, or other methods that 
examine lender records kept in the ordinary course of business. 
Notwithstanding any evaluation performed by the lender, the underlying 
loan records are themselves subject to examination by the supervisory 
and law enforcement agencies and must usually be disclosed to a private 
litigant alleging a violation. The Department believes that lenders 
already have adequate incentive to conduct such routine compliance 
reviews and file analyses as a good business practice to avoid or 
minimize potential liability for violations.
    At this time, the Department does not believe it is appropriate to 
extend the privilege to audits of actual business records and make 
unavailable to private litigants and to supervisory agencies records 
lenders currently maintain as part of routine fair lending activities. 
This could have an unintended negative effect on the levels of 
cooperation between lenders and the supervisory

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agencies and on actions by private litigants under the FHAct. The 
Department is soliciting public comment, however, on the scope of the 
proposed definition of ``self-test'' and how the definition could allow 
innovative, effective, non-routine lender monitoring and self-
correction without unduly affecting the ability of aggrieved persons, 
complainants, departments, or agencies to obtain needed information for 
enforcement of the FHAct or to monitor compliance with that law. 
Comments should include specific regulatory language as well as 
criteria for, and examples of, types of activities that would be 
included and not included in the revised definition.
    In order to qualify for the privilege, a self-test must be designed 
and conducted to assess the level or effectiveness of the lender's 
compliance with the rules prohibiting discrimination. Testing for 
compliance with the other requirements is not privileged. For instance, 
a self-test designed for other purposes, such as to observe employees' 
efficiency and thoroughness in meeting customer needs, is not covered 
by the privilege even if evidence of discrimination is uncovered 
incidentally.

Section 100.143  Types of information

    This section would clarify that the types of information that would 
be covered by the privilege would include draft documents and work 
papers, as well as the final results or report of the self-test. The 
Act does not prohibit an aggrieved person, complainant, department or 
agency from requesting information about whether a lender has conducted 
a self-test. This section clarifies that the privilege does not prevent 
an aggrieved person, complainant, department or agency from obtaining 
information sufficient to determine whether to seek the final results 
or report. The fact that a lender has conducted a privileged self-test, 
as well as the time period, the methodology, and the geographic 
location of that self-test are not privileged. This ensures that the 
tests about which the privilege is asserted can be properly identified 
in any proceeding.
    The Act provides that a challenge to a lender's claim of privilege 
may be filed in any court or administrative law proceeding with 
appropriate jurisdiction. The Department expects such challenges to be 
resolved according to the laws and procedures used for other types of 
privilege claims. This may include the use of in camera proceedings, 
the filing of documents and pleadings with the court under seal, or the 
production of documents to other parties under an appropriate 
protective order that limits the purpose for which they be used.

Section 100.144  Appropriate corrective action

    Congress intended for the self-test privilege to apply only where 
self-correction follows self-testing. The language of sec. 2302 is 
identical to section 302 of an earlier bill on this issue, S. 650. The 
Committee Report on S. 650, Senate Report 104-185, in discussing sec. 
302, reinforced the link between the discovery of potential violations 
and corrective remedial action.\2\
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    \2\ ``The purpose of this provision is to encourage institutions 
to undertake candid and complete self-tests for possible fair 
lending violations and to act decisively to correct any discovered 
problems. The privilege ensures that such self-test efforts will not 
be used against an institution if that institution has undertaken 
remedial action.'' (emphasis added) Senate Report 104-185, page 15.
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    This section clarifies that a determination of whether a lender has 
taken appropriate corrective action must be made on a case-by-case 
basis. In April, 1994, the Interagency Task Force on Fair Lending, 
comprised of officials from the 10 federal agencies responsible for 
implementing and enforcing the fair lending laws, issued a policy 
statement on credit discrimination.<SUP>3 That policy statement advised 
lenders that discover discriminatory practices as a result of a self-
test to ``make all reasonable efforts to determine the full extent of 
the discrimination and its cause'' and to ``determine whether the 
practices were grounded in defective policies, poor implementation or 
control of those policies, or isolated to a particular area of the 
lender's operations.'' The policy statement also provided a list of 
sample corrective actions that might be appropriate depending on the 
circumstances, while recognizing, however, that not all corrective 
measures listed would be appropriate in every case.
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    \3\ 59 FR 18266, 18270-71 (April 15, 1994).
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    The proposed rule reflects the 1994 Interagency Policy Statement 
regarding corrective action. A lender must take corrective action that 
is reasonable in light of the potential violations to fully remedy both 
the cause and effect of any possible violation. It must be commensurate 
with the scope of the discrimination and specifically tailored to 
address the particular type of problem identified by the self-test.
    To determine the appropriate corrective action, the lender must: 
(i) Identify the policies and practices that are the likely cause of 
the possible violation, such as inadequate or improper lending 
policies, failure to implement established policies, employee conduct, 
or other causes; and (ii) assess the extent and scope of any potential 
violation, by determining which areas of the operations are likely to 
be affected by those policies and practices. This would include 
identifying the stages of the loan application process, types of loans, 
or the particular branch where the possible discrimination has 
occurred.
    For example, where a pre-application test reveals that potential 
borrowers in minority areas are not offered or made aware of the full 
range of available loan products and that borrowers in non-minority 
areas are offered or made aware of the full range of products, the 
lender should examine its marketing, sales, and outreach activities 
generally and the practices of individual branches and implement 
actions to address the results of the test.
    The extent of this corrective action should be contrasted with the 
action appropriate where a test by a lender reveals disparate treatment 
with respect to a specific minority group at a single branch. In this 
situation, an examination of all branch loan officer activities would 
be appropriate, as would: A review to determine if there are other 
potential victims of disparate treatment at the branch; training; 
offers to extend credit and/or offers to provide compensation for 
damages to potential victims; notifications to potential victims 
regarding their legal rights; and appropriate monitoring procedures.
    If a self-test reveals that loan officers discourage the submission 
of loan applications by minorities by quoting more onerous loan terms, 
such as larger down-payments or higher interest rates, retroactive 
relief may also be required. Appropriate corrective action also would 
include reviewing of actual loan files to determine if minority 
borrowers were actually granted loans on less favorable terms, and 
providing them with more favorable loans.

Section 100.145  Scope of privilege

    This section explains the nature of the qualified privilege 
afforded by the Act. It states that privileged documents may not be 
obtained by an aggrieved person, complainant, department or agency for 
use in an examination or investigation relating to fair lending 
compliance or in any administrative or civil proceeding in which a 
violation of the FHAct is alleged. There may be other proceedings where 
the privilege would not apply, for example, in litigation unrelated to 
fair lending issues.

[[Page 4885]]

Section 100.146  Loss of privilege

    This section explains the circumstances that would result in 
documents losing their privileged status. Generally, as provided in the 
Act, the results or report of a self-test, including any data generated 
by the self-test, will not be considered privileged under this section 
once the lender--or the lender's officers, employees, agents or 
contractors--has voluntarily disclosed all or any part of the contents 
to an aggrieved person, complainant, department or agency or to the 
general public. Also, if a lender elects to rely on the self-testing 
results as a defense to alleged violations of the FHAct, the privilege 
would not apply as the disclosure is voluntary.
    Under the proposed rule, a lender's involuntary production of 
records in response to a judicial order, or a voluntary disclosure 
under circumstances where the privilege does not apply, does not 
necessarily evidence the lender's intent to give up the privilege. 
Accordingly, if such disclosures are made in a limited fashion that 
does not constitute a disclosure to the general public, e.g., under a 
protective order, it would not affect the privileged status of the 
documents.
    The statute also provides that the report or results of a self-test 
are not privileged if they are disclosed by a person with lawful access 
to the report or results. Accordingly, disclosures made by such persons 
are treated as disclosures made by the lender, without regard to 
whether the person was authorized to make the particular disclosure.
    The results or report of a self-test would not be privileged where 
a lender seeks to assert the privilege, but is unable to produce 
records or information pertaining to the self-test necessary to 
determine whether the requirements for the privilege have been met.
    The Department solicits comments on whether it should establish by 
regulation a provision whereby lenders could voluntarily share 
privileged information with a federal or state bank supervisory or law 
enforcement agency without causing the information to lose its 
privileged status when it is subsequently sought by private litigants. 
However, such disclosures would cause the documents to lose their 
privileged status with respect to all supervisory and law enforcement 
agencies. Would an expanded privilege for information voluntarily 
shared with a federal or state bank supervisory or law enforcement 
agency carry out the intent of Congress to provide a privilege only 
insofar as it is necessary to supply an incentive to lenders, without 
lessening the responsibility of regulators to refer potential 
violations to the agency? <SUP>4 Would this approach provide further 
incentives to lenders while encouraging greater cooperation between 
lenders and the supervisory/enforcement agencies and assuring that 
appropriate self-correction has occurred through their oversight?
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    \4\ ``This provision does not change the mandatory referral 
requirement for pattern and practice violations of ECOA or FHA.'' 
Senate Report 108-105, page 15. Similar referral requirements exist 
between the financial regulatory agencies and the Department.
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Section 100.147  Limited use of privileged information

    This section provides for a limited use of privileged documents 
that will not be treated as a voluntary disclosure affecting the 
privileged status of the documents under Sec. 100.145. The report or 
results of a privileged self-test may be obtained and used solely for 
the purpose of determining a penalty or remedy after a violation of the 
Act has been formally adjudicated or admitted. The production of 
privileged documents for this purpose does not necessarily evidence the 
lender's intent to give up the privilege. If such disclosures are made 
in a limited fashion that does not constitute a disclosure to the 
general public, the disclosure would not affect the privileged status 
of the documents.
    A finding by a government agency, as part of a bank examination or 
investigation, that discrimination has occurred would not constitute an 
adjudication for this purpose. If such findings lead to formal 
adjudication or an admission by the lender, the limited use of 
privileged documents under this section would apply.
    The Act provides that information disclosed for purposes of 
determining a penalty or remedy may be used only for the particular 
adjudication or proceeding in which the adjudication or admission is 
made. Accordingly, parties who obtain such information may be 
prohibited from any further dissemination.

Section 100.148  Adjudication

    The Act provides that the privilege may be challenged in any court 
or administrative law proceeding with appropriate jurisdiction. The 
Department expects such challenges to be resolved according to the laws 
and procedures used for other types of privilege claims, such as 
attorney-client or attorney work product. This may include the use of 
in camera proceedings, the filing of documents and pleadings with the 
court under seal, or the production of documents to other parties under 
an appropriate protective order that limits the purpose for which they 
may be used. The determination shall include consideration of whether 
appropriate corrective action has been taken, using the criteria set 
forth in the explanation of ``appropriate corrective action'' in 
Sec. 100.144.
    It is further expected that these rulings will turn on the evidence 
involved in each case. It is not expected, nor intended, that to invoke 
the privilege the respondent must have taken each corrective measure 
listed for each possible instance of discrimination.

Section 100.149  Effective date

    Lenders and others may invoke the self-testing privilege regarding 
self-tests undertaken prior to the effective date of the regulations, 
but not if either a formal complaint has been filed involving matters 
covered by the self-test, or if the privilege has been lost pursuant to 
Sec. 100.146. A formal complaint includes one filed with HUD or a 
substantially equivalent agency, pursuant to subsection 810(f) of the 
FHAct, alleging a violation of the FHAct. A complaint filed in a court 
with jurisdiction over the FHAct also qualifies as a ``formal 
complaint.'' Any other interpretation would conflict with Congress' 
intent in the Fair Housing Amendments Act of 1988 to establish an 
administrative process that is an equally effective alternative to the 
filing of a complaint in a Federal court.

Findings and Certifications

Justification for Shortened Comment Period

    It is the policy of the Department, consistent with 24 CFR part 10, 
that its notices of proposed rulemaking are to afford the public not 
less than sixty days for submission of comments. A shortened comment 
period is necessary for this proposed rule to ensure promulgation of a 
final rule within six months of enactment of the Act, as required by 
the authorizing statute. A substantially similar proposed rule by the 
Federal Reserve has been published in the Federal Register previously. 
To ensure broad and timely public review and comment, the Department is 
making available today the text of and preamble of this proposed rule 
on its World Wide Web site (http//www.HUD.gov).

Regulatory Planning and Review

    This proposed rule has been reviewed in accordance with Executive 
Order

[[Page 4886]]

12866, issued by the President on September 30, 1993 (58 FR 51735, 
October 4, 1993). Any changes to the proposed rule resulting from this 
review are available for public inspection between 7:30 a.m. and 5:30 
p.m. weekdays in the Office of the Rules Docket Clerk.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 establishes 
requirements for Federal agencies to assess the effects of their 
regulatory actions on State, local, local and tribal governments and 
the private sector. This proposed rule does not impose any Federal 
mandates on any State, local or tribal governments or the private 
sector within the meaning of the Unfunded Mandates Reform Act of 1995.

Environmental Impact

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.19(c)(1) of the HUD regulations, 
the policies and procedures contained in this proposed rule do not 
direct, provide for assistance or loan and mortgage insurance for, or 
otherwise govern or regulate property acquisition, disposition, lease, 
rehabilitation, alteration, demolition, or new construction, or set out 
or provide for standards for construction or construction materials, 
manufactured housing, or occupancy, and therefore, are categorically 
excluded from the requirements of the National Environmental Policy 
Act.

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)) has reviewed and approved this proposed rule, and in so 
doing certifies that this proposed rule will not have a significant 
economic impact on a substantial number of small entities, because the 
proposed rule only proposes to implement a statutory provision that 
allows an evidentiary privilege for the report and results of self-
tests of Fair Housing Act compliance undertaken by lenders.

Federalism Impact

    The General Counsel has determined, as the Designated Official for 
HUD under section 6(a) of Executive Order 12612, Federalism, that this 
proposed rule does not have federalism implications concerning the 
division of local, State, and federal responsibilities. The proposed 
rule only proposes to implement a statutory provision that allows an 
evidentiary privilege for the report and results of self-tests of Fair 
Housing Act compliance undertaken by lenders.

Impact on the Family

    The General Counsel, as the designated official under Executive 
Order 12606, The Family, has determined that this proposed rule would 
not have significant impact on family formation, maintenance, and 
general well-being. The rule only proposes to implement a statutory 
provision that allows an evidentiary privilege for the report and 
results of self-tests of Fair Housing Act compliance undertaken by 
lenders.

List of Subjects in 24 CFR part 100

    Aged, Fair housing, Individuals with disabilities, Mortgages, 
Reporting and recordkeeping requirements.
    Accordingly, part 100 of title 24 of the Code of Federal 
Regulations is proposed to be amended as follows:

PART 100--DISCRIMINATORY CONDUCT UNDER THE FAIR HOUSING ACT

    1. The authority citation for part 100 continues to read as 
follows:

    Authority: 42 U.S.C. 3535(d), 3600-3620.

    2. In subpart C, new Secs. 100.140, 100.141, 100.142, 100.143, 
100.144, 100.145, 100.146, 100.147, 100.148 and 100.149 are added to 
read as follows:


Sec. 100.140  Incentives for self-testing and self-correction.

    General rule. If a lender voluntarily conducts or authorizes a 
third party to conduct a self-test, the report or results of the self-
test are privileged as provided in this subpart. A self-test required 
by any government authority is not privileged.


Sec. 100.141  Corrective action required.

    The report or results of a self-test are privileged only if the 
lender has taken or is taking appropriate corrective action to address 
any possible violation identified by the self-test. The lender must 
take whatever actions are reasonable in light of the scope of the 
possible violations to fully remedy both their cause and effect.


Sec. 100.142  Definitions.

    As used in this subpart:
    Lender means a person who engages in a residential real estate-
related lending transaction.
    Residential real estate-related lending transaction means the 
making of a loan:
    (1) For purchasing, constructing, improving, repairing, or 
maintaining a dwelling; or
    (2) Secured by residential real estate.
    Self-test means any program, practice or study that a lender 
voluntarily conducts or authorizes a third party to conduct that 
creates data or factual information that is not available, and cannot 
be derived, from actual loan or application files or other records 
related to credit transactions, to determine the extent or 
effectiveness of the lender's compliance with the Fair Housing Act. 
Self-testing includes, but is not limited to, the practice of using 
fictitious applicants for credit (``testers''). Self-testing does not 
include the collection of data required by law or by any government 
authority, or a lender's review or evaluation of actual loan or 
application files or other records related to credit transactions.


Sec. 100.143  Types of information.

    (a) The privilege applies to the report or the results of a self-
test, including any data generated by the self-test and any analysis of 
such data and any workpapers and draft documents.
    (b) The privilege does not cover information about whether a lender 
has conducted a self-test, or information concerning the scope of or 
the methodology used in conducting the self-test.


Sec. 100.144  Appropriate corrective action.

    (a) Whether a lender has taken or is taking appropriate corrective 
action will be determined on a case-by-case basis. Corrective action 
may include both prospective and retroactive relief. To determine the 
appropriate corrective action, the lender must:
    (1) Identify the policies or practices that are the likely cause of 
the possible violation, such as inadequate or improper lending 
policies, failure to implement established policies, employee conduct, 
or other causes; and
    (2) Assess the extent and scope of any possible violation, by 
determining which areas of its operations are likely to be affected by 
those policies and practices. This would include identifying the stages 
of the loan application process, types of loans, or the particular 
branch where possible discrimination has occurred.
    (b) Depending on the specific facts involved, appropriate 
corrective action may include, but is not limited to, one or more of 
the following:
    (1) Identifying customers whose applications may have been 
inappropriately processed; offering to extend credit if they were 
improperly denied; compensating them for any damages, both out-of-
pocket and compensatory; and notifying them of their legal rights;

[[Page 4887]]

    (2) Correcting any institutional policies or procedures that may 
have contributed to the discrimination;
    (3) Identifying, and then training and/or disciplining, the 
employees involved;
    (4) Considering the need for community outreach programs and/or 
changes in marketing strategy or loan products to better serve minority 
segments of the lender's market; and
    (5) Improving audit and oversight systems to ensure there is no 
recurrence of the discrimination.
    (c) Not every corrective measure listed in paragraph (b) of this 
section, above, need be taken each time a possible violation is 
discovered. Rather, the determination of ``appropriate corrective 
action'' shall be based upon the facts of each situation.


Sec. 100.145  Scope of privilege.

    The report or results of a privileged self-test may not be obtained 
or used by an aggrieved person, complainant, department or agency in 
any:
    (a) Proceeding or civil action in which a violation of the Fair 
Housing Act or this regulation is alleged; or
    (b) Examination or investigation relating to compliance with the 
Fair Housing Act or this part.


Sec. 100.146  Loss of privilege.

    The report or results of a self-test are not privileged under 
Sec. 100.145 if the lender or any person with lawful access to the 
self-test:
    (a) Voluntarily discloses all or any part of the report or results 
of the self-test or any privileged information to any aggrieved person, 
complainant, department, agency, or to the public.
    (b) Refers to or describes the report or results or any privileged 
information as a defense to charges that the lender has violated the 
Fair Housing Act or this part.
    (c) In the case of the lender, fails or is unable to produce 
required records or information pertaining to the self-test that are 
necessary to determine whether the privilege applies.


Sec. 100.147  Limited use of privileged information.

    Notwithstanding the privilege under Sec. 100.145, the report or 
results of a privileged self-test may be obtained and used by an 
aggrieved person, applicant, department or agency solely for the 
purpose of determining a penalty or remedy after a violation of the 
Fair Housing Act or this part has been adjudicated or admitted. 
Disclosures made for this limited purpose may be used only for the 
particular proceeding in which the adjudication or admission has been 
made. Information disclosed under this section remains privileged.


Sec. 100.148  Adjudication.

    An aggrieved person, complainant, department or agency that 
challenges a privilege asserted under Sec. 100.145 may seek a 
determination of the existence and application of that privilege in:
    (a) A court of competent jurisdiction; or
    (b) An administrative law proceeding with appropriate jurisdiction.


Sec. 100.149  Effective date.

    The privilege applies to self-tests conducted both before and after 
the effective date of this regulation, except that a lender's self-test 
that was conducted before that date is not privileged:
    (a) If there was a court action or administrative proceeding, 
including a proceeding involving a complaint alleging a violation of 
the Fair Housing Act filed with HUD or a substantially equivalent 
agency; or
    (b) If any part of the report or results were disclosed before that 
date to any aggrieved person, complainant, department or agency, or to 
the public.

    Dated: January 10, 1997.
Susan M. Forward,
Deputy Assistant Secretary for Enforcement and Investigations, Fair 
Housing and Equal Opportunity.
[FR Doc. 97-2453 Filed 1-30-97; 8:45 am]
BILLING CODE 4210-28-P