4882 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

1Senate Report 104–185, page 15.

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 EstateRelated 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.

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 hearingand 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.1 Congress did not intend for

violations to be known by lenders and

not be remedied.

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 selftesting 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 selftest or employs the services of a thirdparty. 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
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 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 § 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

§ 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 selftesting 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
4884 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

2 ‘‘The purpose of this provision is to encourage

institutions to undertake candid and complete selftests 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.

3 59 FR 18266, 18270–71 (April 15, 1994).

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 selfcorrection 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

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.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.

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 nonminority 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.
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4885

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.

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 selftest, 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? 4

Would this approach provide further

incentives to lenders while encouraging

greater cooperation between lenders and

the supervisory/enforcement agencies

and assuring that appropriate selfcorrection has occurred through their

oversight?

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 § 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 § 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

§ 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
4886 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

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 §§ 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:

§ 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.

§ 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.

§ 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’’). Selftesting 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.

§ 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.

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

§ 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.

§ 100.146 Loss of privilege.

The report or results of a self-test are

not privileged under § 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 selftest 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.

§ 100.147 Limited use of privileged

information.

Notwithstanding the privilege under

§ 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.

§ 100.148 Adjudication.

An aggrieved person, complainant,

department or agency that challenges a

privilege asserted under § 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.

§ 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