66424 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

1 OCC Bulletin 95–51 (September 15, 1995);

Deval Patrick, Assistant Attorney General for Civil

Rights, Letter to the Mortgage Bankers Association,

et al. (February 21, 1995).

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

24 CFR Parts 100 and 103

[Docket No. FR–4160–F–02]

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: Final rule.

SUMMARY: This rule implements section

814A of the Fair Housing Act, which

encourages voluntary compliance by

lenders with the Fair Housing Act

(FHAct) through lender-initiated selftests of lenders’ residential real estaterelated lending transactions and, where

appropriate, corrective action designed

to remedy any possible violations of the

FHAct revealed by such tests. This rule

also makes technical amendments to the

fair housing complaint processing

regulations.

EFFECTIVE DATE: January 30, 1998.

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

On January 31, 1997 at 62 FR 4882,

the Department published a proposed

rule to implement section 814A of the

FHAct, promulgated at section 2302 of

the Omnibus Consolidated

Appropriations Act for Fiscal Year 1997

(Pub. L. 104–208, approved September

30, 1996). Section 2302, found in title II

of Pub. L. 104–208, entitled the

‘‘Economic Growth and Regulatory

Paperwork Reduction Act’’ (‘‘Act’’),

amends the FHAct to promote

compliance by establishing a privilege

for lender-initiated self-tests of

residential real estate-related lending

transactions.

The Economic Growth and Regulatory

Paperwork Reduction Act: Sec. 2302

Section 2302 adds a new section 814A

to the FHAct which 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 FHAct. This provision also adds a

new section 704A to the Equal Credit

Opportunity Act (‘‘ECOA’’) which

creates the same privilege with respect

to credit transactions by a creditor. A

report or result of a self-test is privileged

from disclosure if a lender conducts, or

authorizes an independent third party to

conduct, a self-test of a real estaterelated lending transaction to determine

the level or effectiveness of compliance

with the FHAct, and has taken, or is

taking, appropriate corrective action to

address possible violations discovered

as a result of the self-test.

The Act requires the Department,

with respect to the FHAct, and the

Federal Reserve Board (the Board), with

respect to the ECOA, to implement

section 2302 and define ‘‘self-testing’’ in

substantially similar regulations within

six months of enactment. This final rule

was drafted after consideration of the

comments the Department received on

the January 31, 1997 proposed rule, and

in consultation with the Board, the

Department of Justice (DOJ), and

appropriate Federal regulatory and

enforcement agencies, including the

Federal Deposit Insurance Corporation

(FDIC), the Office of the Comptroller of

the Currency (OCC), the Office of Thrift

Supervision (OTS), the National Credit

Union Administration (NCUA), and the

Federal Trade Commission (FTC). The

Act’s requirement that the Board’s and

the Department’s regulations be

substantially similar, the comments

received on the proposed rule, and the

consultation which followed, delayed

publication of the final rule beyond the

six months the Act prescribed.

After reviewing both regulations, the

Department and the Board have

determined that there is no substantial

difference in the final rules and that

they should be interpreted to have the

same effect except where differences in

the FHAct and ECOA dictate otherwise.

For example, ECOA covers nonmortgage credit transactions which are

not residential real estate-related

transactions under the FHAct. This

dictated slight differences in the

definition of ‘‘self-test’’ in the agencies’

rules.

Moreover, although there are

organizational differences in the

agencies’ rules, these differences are not

intended to have any substantive effect,

and merely reflect the Board’s

longstanding practice of publishing its

interpretative rules in a separate staff

commentary. The Department has no

staff commentary, therefore some of this

material appears in the Department’s

rule and other material appears in its

preamble. The consistency of the

Department and the Board rules is

evident based on a comparison of the

complete documents published by the

agencies, including the preambles to the

regulatory amendments and the

revisions to the Board’s Official Staff

Commentary to Regulation B.

Public Comments

In the proposed rule, the Department

invited public comments for

consideration in drafting a final rule.

The Department received a total of 52

public comments, 18 of which were

from lenders, 16 from public interest

organizations, 15 from lending industry

associations, and one each from a law

firm, a government agency, and an

individual. The comments are

addressed in the Section-by-Section

Analysis of this final rule preamble. The

Department revised the proposed rule

based on its consideration of the

comments received. The Department

also made editorial, non-substantive

revisions to use plain English wherever

possible and to meet Congress’s

mandate of substantial similarity

between final rules issued by it and the

Board. The preamble discusses the

revisions made to the proposed rule to

effect a substantive change.

Existing Self-testing Policies

The Department notes that prior to the

amendment of the FHAct to create this

privilege, several agencies stated their

enforcement policy in regard to selftesting by a lender.1 To the extent this

final rule does not contravene an

agency’s or department’s enforcement

policies, those policies remain in effect

until the agency or department

determines otherwise. Accordingly, for

example, OCC Bulletin 95–51

(September 15, 1995) remains in effect.

The Department’s prior policy, on the

other hand, is superseded by this

regulation.

Review of Rule

As the proposed rule noted, in

developing the regulation to implement

the self-testing privilege, the

Department seeks to provide a real

incentive for innovative, effective, and

non-routine fair lending monitoring and

self-correction while ensuring the rights

of discrimination victims. Lending

discrimination, however, is an evolving

area of the law, and modifications may

be appropriate. Therefore, the
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66425

Department and the Board may review

this rule, including the definition of

self-test, after several years’ experience.

Should it determine to conduct such a

review, the Department will seek public

comment on whether the rule should be

amended. A review would focus on

whether the self-testing incentives

created by Congress and implemented

in this rule should be strengthened, and

whether the definition of self-test

should be broadened. Since there is a

corresponding relationship between the

breadth of the definition of self-test and

the scope of corrective actions, the

review would also examine the extent to

which corrective actions as defined in

the rule provide appropriate relief for

victims of discrimination.

II. Changes From the Proposed Rule

This final rule includes several

changes from the proposed rule:

—The statement of the general rule

applying the self-testing privilege

contained in § 100.140 has been

modified to reflect the need to address

only likely violations and to

incorporate the requirement to take

appropriate corrective action. As a

result, § 100.141 of the proposed rule

is deleted and the sections which

followed were renumbered. As more

fully explained in § 100.143,

Appropriate Corrective Action, the

revised rule provides a privilege when

a lender takes corrective action which

is reasonably likely to remedy the

cause and effect of a violation

identified by a self-test in instances

where it is more likely than not that

a violation has occurred.

—The section on Definitions, now

§ 100.141, explicitly includes

applicant and customer surveys

within the definition of self-test and

makes clear that self-tests are not

limited to the pre-application stage of

loan processing.

—Section 100.142 now specifies that

material such as appraisal reports,

loan committee meeting minutes,

underwriting standards or

compensation records is not

privileged, nor is any information or

data derived from them privileged.

—As discussed above, Appropriate

Corrective Action, § 100.143, now

refers to ‘‘likely violations’’ rather

than ‘‘possible violations.’’ Rather

than requiring appropriate corrective

action to address possible violations,

this section now specifies that

corrective action is only required

when it is more likely than not that

a violation occurred, even though no

violation was adjudicated formally.

—The proposed rule § 100.141

requirement (now deleted) that

lenders ‘‘take whatever actions are

reasonable in light of the scope of the

possible violations to fully remedy

both their cause and effect’’ is now

addressed in § 100.143(b), which

requires a lender to take action

‘‘reasonably likely to remedy the

cause and effect of a likely violation.’’

—A new § 100.143(c) states that to

establish a privilege a lender is not

required to provide remedial relief to

a tester in a self-test; is only required

to provide remedial relief to an

applicant if the self-test identified that

applicant as one who was more likely

than not the subject of a violation; and

is not required to provide remedial

relief to a particular applicant if the

statute of limitations applicable to the

violation expired before the lender

obtained the results of the self-test or

the applicant is otherwise ineligible

for such relief.

—The illustrative list of appropriate

corrective actions contained in

§ 100.143 no longer includes notifying

persons whose applications were

inappropriately processed of their

legal rights.

—Section 100.143(f) clarifies that taking

appropriate corrective action is not an

admission a violation occurred.

—Section 100.145(b), Loss of Privilege,

specifies that lenders will not lose

their privilege by notifying persons

about remedial relief.

In discussing the public comments

received on the proposed rule, the next

section provides a more detailed

description of these and other changes

made in the final rule.

III. Section-by-Section Analysis of the

Rule

Section 100.140 General Rule

Voluntary Self-Testing and SelfCorrection

Section 100.140(a) states the general

rule that the report or results of a selftest a lender voluntarily conducts or

authorizes are privileged if the lender

has taken or is taking appropriate

corrective action to address likely

violations identified by the self-test. The

privilege applies whether the lender

conducts the self-test or employs the

services of a third-party. Data collection

required by law or governmental

authority is not a voluntary self-test.

Subsection (a) also implements the

Act’s requirement that a lender must

take appropriate corrective action to

address likely violations identified by

the self-test before the privilege can be

invoked. This subsection incorporates

the requirement that corrective action

must be taken for the privilege to apply,

as stated in § 100.141 in the proposed

rule. The requirement in the proposed

rule § 100.141 that lenders ‘‘fully

remedy possible violations’’ has been

modified and is now addressed in

§ 100.143, Appropriate Corrective

Action, which also discusses ‘‘likely

violation.’’

Other Privileges

Subsection (b), a new subsection,

clarifies in the final rule itself the

language contained in the preamble to

the proposed rule at § 100.140, which

stated that the privilege of self-testing is

in addition to any other privileges

which may exist, such as attorney-client

privilege or the privilege for attorney

work product. This change was

requested by some commenters. A

lender may assert the privilege created

by this subpart as well as any other

applicable privilege.

Section 100.141 Definitions

The Act does not define ‘‘self-test’’

and authorizes the Department to define

by regulation the practices covered by

the privilege. The Department received

substantial comment on the definition

of self-test.

The Department defines a self-test as

any program, practice or study a lender

voluntarily conducts or authorizes

which is designed and used specifically

to determine the extent or effectiveness

of compliance with the FHAct. The selftest must create data or factual

information that is not available and

cannot be derived from loan files,

application files, or other residential

real estate-related lending transaction

records. The final rule substitutes the

phrase ‘‘residential real estate-related

lending transaction records’’ in place of

‘‘records related to credit transactions’’

to reflect more accurately the coverage

of the FHAct.

Self-testing includes, but is not

limited to, using fictitious credit

applicants (testers), including matchedpair testers. It includes surveys of

applicants and mortgage customers, and

is not restricted to the pre-application

stage of the credit process.

As the proposed rule’s preamble

noted, the principal attribute of selftesting is that it constitutes a voluntary

undertaking by the lender to produce

new—otherwise unavailable—factual

information. The definition contained in

the rule provides added incentives for

lenders to look beyond their business

records and develop new factual

evidence about the level of their

compliance. The rule does not define

self-test so broadly as to include all

types of lender self-evaluation or selfassessment. While versions of the

legislation initially introduced in
66426 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

Congress extended the privilege to a

lender’s test or review, the statute as

adopted refers only to a self-test.

The Department notes that a lender’s

analysis performed as part of processing

or underwriting a credit application is

not privileged under the final rule. A

lender’s evaluation or analysis of its

loan files, Home Mortgage Disclosure

Act data or similar types of records

(such as broker or loan officer

compensation records) is derived from

loan files, application files and other

real-estate-related lending transaction

records and is, therefore, not a self-test

and is not privileged under this rule.

However, new data or factual

information created as a result of selftesting would be privileged.

A broader definition of self-testing is

within the Department’s rulemaking

authority under the statute. A broad

definition of self-testing, however, was

generally opposed by Federal regulatory

and enforcement agencies, civil rights

and consumer organizations, and fair

lending enforcement agencies.

As the proposed rule’s preamble

noted, 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 subject to examination

by the supervisory and law enforcement

agencies and must usually be disclosed

to a private litigant alleging a violation.

In consultation with Federal

regulatory and enforcement agencies in

developing the proposed and final rules,

the Department found that, according to

a 1994 survey of large depository

institutions by one regulator,

approximately 78% of the institutions

surveyed performed reviews that

included comparative file reviews or

statistical modeling as part of their fair

lending management and oversight.

This is evidence that an additional

incentive for such reviews may not be

required. Providing a privilege for such

reviews could make information now

provided to supervisory agencies

unavailable, and could make

examinations less efficient.

A comment letter on the proposed

rule from a Federal regulatory agency

noted:

We agree that a broader definition of selftest could have an unintended negative effect

on the levels of cooperation between

creditors and the regulatory agencies.

Institutions use internal fair lending audits

and reviews to monitor their compliance

with the Fair Housing Act and regulatory

agencies consider them valuable examination

tools to identify areas most in need of

supervisory attention . . . [M]oreover, a

broader definition could create a more

confrontational examination setting due to

arguments over the scope of the privilege.

There would be no clear line between

documents that institutions maintain in the

ordinary course of business and documents

that are part of an internal audit.

Civil rights and community

organization comments generally

opposed a broad definition of selftesting. A comment letter from a

national civil rights organization said

the self-testing privilege should not

extend beyond the proposed rule’s

definition to encompass other selfevaluations and self-assessments,

including fair lending business records

lenders now maintain routinely. The

organization said incentives for selftesting should not undermine the strong

Federal interest in full relief for all

victims of discrimination, and should

not place an undue burden on

regulators, enforcement agencies or

litigants. The letter further noted:

In general, the new privilege is likely to

lead to more lengthy and expensive

litigation. In the context of litigation or

enforcement investigation, many lenders will

have an incentive to overreach by broadly

defining ‘‘self-test’’ in order to shield more

information under the new privilege.

Furthermore, some lenders may try to

narrowly define ‘‘any possible violation’’ to

mean ‘‘only clear violations,’’ and many

lenders may prefer a low standard for

‘‘appropriate corrective action.’’ Plaintiffs

alleging discrimination, on the other hand,

will be forced to challenge every assertion of

privilege.

A national community advocacy

organization cited the history of legal

privileges while commenting in

opposition to a broad definition of selftesting. That organization said:

Historically in this country, we have

granted legal privilege in very limited

circumstances. It applies to communications

between individuals and their clergy, to

communications between individuals and

their attorneys, and in few, if any, other

circumstances. In these cases, the need for

open, honest and unrestricted

communication is viewed as outweighing the

need of the legal system for access to

information. This historical practice of

limiting the scope of privilege should

certainly be applied in this case. It may be

beneficial to encourage lenders to undertake

self-testing. However, given the rudimentary

nature of the nation’s understanding of the

problem of lending discrimination and the

evolving nature of the field of fair lending

enforcement, it is critical not to unduly limit

the availability of information necessary to

enforce the law.

Comments from lenders were

generally in opposition to a narrow

definition of self-testing. A coalition of

national mortgage lenders and servicers

said in a comment letter:

It is clear from the statute that Congress

intended a broad definition of self-test.

Congress essentially forged a quid pro quo for

obtaining the self-test privilege under which

a lender is allowed not to disclose self-test

reports if it undertakes appropriate corrective

action with respect to the findings. Given this

tradeoff, there is every reason to expand the

types of self-assessments which are to be

subject to this rule, not limit them.

Otherwise, Congress’ efforts to encourage

self-tests will largely have been in vain.

At this time, the Department believes

lenders already have adequate incentive

to conduct routine compliance reviews

and file analyses as good business

practices to avoid or minimize potential

liability for violations. Therefore, the

Department does not believe it is now

appropriate to extend the privilege to

audits of actual business records. A

broader privilege, which would extend

to comparative reviews of file contents

(whether or not conducted with use of

statistical methods such as sampling

and regression analysis) would greatly

limit the availability of evidence of

violations. To do so also would make

the analysis of records lenders now

maintain as part of routine fair lending

activities unavailable to supervisory and

enforcement agencies conducting fair

lending examinations. Moreover, it

could have the unintended result of

effectively precluding the use of

discovery and other fact-finding

mechanisms by private litigants seeking

relief under the FHAct.

Testing designed and used for

compliance with other laws, or for other

purposes, is not privileged under this

rule. For instance, a self-test designed to

observe employees’ efficiency and

thoroughness in meeting customer

needs is not covered by the privilege

even if it incidentally uncovers

evidence of discrimination. The final

rule clarifies that to qualify for the

privilege, a self-test must be designed

and used specifically to determine the

extent or effectiveness of a lender’s

compliance with the FHAct, giving

effect to the statutory language of the

Act at paragraph 814(a)(1). If a test is

designed for multiple purposes, only the

portion designed to determine

compliance with the FHAct would be

eligible for the privilege.

Some commenters were critical of the

emphasis on matched-pair testing in the

proposed rule, stating such tests are

expensive and may, due to a small
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66427

sample size, yield statistically invalid

conclusions. In addition, some

commenters maintained such tests are

often inadequately performed or

analyzed, leading to unwarranted

conclusions. Matched-pair testing, they

asserted, is impractical for many small

community banks because of the

expense and because testers would be

obvious in many rural areas where

‘‘strangers’’ would be readily apparent

to bank personnel.

As defined in the final 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 loan or

application files or other residential real

estate-related lending transaction

records. While this includes matchedpair testing, it is not limited to such

testing. A lender is not required to use

matched-pair testing or to test only in

the pre-application process. For

instance, a lender could survey

mortgage brokers with whom it has a

relationship to determine whether

minority applicants were treated

similarly to non-minority applicants, or

use testers (in matched-pairs or

otherwise) in the mortgage process.

Section 100.142 Types of Information

Subsection (a) provides that the types

of information the privilege covers

include: the report or results of the selftest; data or factual information created

by the self-test; workpapers, draft

documents and final documents;

analyses, opinions, and conclusions if

they directly result from the self-test

report or results.

The final rule clarifies the self-testing

privilege applies to any data generated

by the self-test, as well as any analysis

of that data, workpapers and draft

documents. Thus, testers, attorneys,

auditors, experts and others who

participate in the testing, or who review

the results to help the lender determine

what corrective action, if any, is needed,

may not be compelled to produce

testimony or documents describing

these matters. This assurance to lenders

responds to concerns expressed in the

comments.

Subsection (b) lists exclusions from

the privilege. The privilege does not

cover information about whether a

lender has conducted a self-test, the

methodology or scope of the self-test,

the time period covered, or the dates it

was conducted. This list of exclusions is

exemplary and not exhaustive.

Commenters differed on whether

lenders must disclose the fact that tests

were conducted, and the scope and

methodologies of the tests. A few

commenters wanted the existence of the

test and its methodology to be

privileged. One commenter suggested

that requiring lenders to disclose the

existence of a self-testing program, its

scope, and its methodology defeats the

purpose of the privilege. That

commenter stated that only the factual

information underlying the analysis

should be excluded from the privilege

coverage. Another commenter

maintained that since nothing in the

statute requires disclosure of the

parameters of the analysis, the

regulation should not require it. Yet

another commenter stated the rule

should limit privilege-related

disclosures to a reasonable

identification of purportedly privileged

documents, together with a general

description of the basis of that claim.

The Department considered these

views. This section of the rule is

consistent with the statute, which

specifically provides that only reports or

results of self-tests are privileged. The

statute does not prohibit an aggrieved

person, complainant, department or

agency from requesting information

about whether and, if so, how a lender

has conducted a self-test. Disclosure of

the existence of a privileged self-test,

the self-test’s scope, methodology or the

time period when it was conducted are

essential to a decision as to whether to

seek the final results or report or to

challenge the lender’s claim of privilege.

This disclosure is essential to ensure the

testing information at issue can properly

be identified in any proceeding

challenging a lender’s claim of privilege.

This subsection also clarifies that loan

and application files, or other real-estate

related lending transaction records, or

information derived from such sources,

are not privileged, even if the data is

aggregated, summarized or reorganized

to facilitate analysis. Records related to

applications submitted by testers are not

‘‘real estate-related lending transaction

records’’ for purposes of this subsection

and may be privileged self-testing

records.

Section 100.143 Appropriate

Corrective Action

Section 100.143(a) Generally

Commenters expressed diverse

opinions about the standard by which

corrective measures should be judged.

Several wanted a ‘‘good faith’’ standard

for corrective actions which would be

met if the lender in good faith takes the

corrective actions it determines

appropriate. Neither the statute nor the

legislative history suggests Congress

intended a ‘‘good faith’’ standard.

Other commenters suggested a

‘‘business judgment rule’’ as a measure

of appropriate corrective action. Under

that standard, the prevailing practices in

the lending industry would dictate what

corrective actions are appropriate. As

with the ‘‘good faith’’ standard, the

Department believes a ‘‘business

judgment rule’’ would be inconsistent

with the legislative intent.

The rule does provide a standard by

which corrective actions are to be

measured. The action must be

reasonably likely to remedy the cause

and effect of a likely violation. Although

an action may be taken in good faith, it

may not be reasonably likely to remedy

the cause and effect.

The Department further notes that a

lender’s determination as to whether

corrective action is needed, and, if so,

what type, is not conclusive in

determining whether the privilege

requirements are satisfied.

If a lender asserts a claim of privilege,

the adjudicator would have to assess the

need for, and the type of, appropriate

corrective action based on a review of

the self-testing results. Such an

assessment might be accomplished by

an in camera inspection of the

privileged documents, or by sealed

pleadings.

Section 100.143(a) Has Taken or Is

Taking

This subsection also states that the

report or results of a self-test are

privileged if the lender has taken or is

taking appropriate corrective action to

address likely violations identified by

the self-test. In some cases, the issue of

whether certain information is

privileged may arise before self-tests are

complete or before the corrective actions

are fully under way. This would not

necessarily prevent a lender from

asserting the privilege.

In situations where the self-test is not

complete, the lender must complete the

requirements of this subpart within a

reasonable period of time. To assert the

privilege where the self-test shows a

likely violation, the rule requires, at a

minimum, that the lender establish a

plan for corrective action and a method

to demonstrate progress in

implementing the plan. Furthermore,

lenders must take corrective action on a

timely basis after the results of the selftests are known. An adjudicator’s final

decision on whether the privilege

applies should be withheld until the

creditor has taken the appropriate

corrective action.

Section 100.143(a) Likely Violations

The Act states that corrective action is

required for possible violations. Some
66428 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

2 59 FR 18266, 18270–18271 (April 15, 1994).

commenters noted lenders have no

FHAct liability for ‘‘possible

violations,’’ only proven ones. The term

‘‘possible violations’’ means that there

need not have been an adjudication by

a court or an administrative law judge

before lenders should begin corrective

actions. Otherwise, corrective actions

would only begin following an

adjudication, which would effectively

render the privilege moot.

The Act requires appropriate selfcorrection in the case of possible

violations for the privilege to apply. To

implement the Act and address the

interpretation of possible violations, the

final rule now refers to ‘‘likely

violations,’’ which means instances

where it is more likely than not that a

violation has occurred even though no

violation was adjudicated formally.

Although corrective actions are

required when a likely violation is

found, a self-test is also privileged when

it does not identify any likely violation

and no corrective action is necessary.

The self-test incentive would be

undermined if the privilege applied

only when violations were discovered,

because the mere assertion of the

privilege would amount to an admission

that it is more likely than not that a

violation occurred.

Section 100.143(b) and (d) Cause and

Effect

Some commenters asserted that

corrective action must include both

prospective and retroactive relief to

fully remedy both the cause and effect

of the violations. For example, in the

instance of charging higher interest rates

to minorities, they urged that relief

would require not only lowering the

rate, but reimbursing the overpayment

with interest, and paying damages for

pain and suffering.

The final rule requires a lender to take

corrective action reasonably likely to

remedy the cause and effect of a likely

violation. The Department revised the

phrase ‘‘fully remedy’’ that appeared in

the proposed rule since, as many

commenters argued, that phrase implied

that damages paid, or remedies

provided, would have to equal those a

court would award if there had been an

adjudication. It would be difficult or

impossible for a lender to determine in

advance whether corrective action met

that standard, and the Act included no

such requirement. However, there may

be situations where the violation and

the facts known to the lender are such

that limiting the corrective action solely

to out-of-pocket damages would be

inappropriate. The final rule standard of

‘‘reasonably likely to remedy the cause

and effect’’ intends that payments of

out-of-pocket and other compensatory

damages be determined on a case-bycase basis without any adjudication.

Section 100.143(b) and (d) Policies or

Practices; Extent and Scope

A lender must: (1) Identify the

policies or practices that are the likely

cause of the 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 likely violation, by

determining which areas of its operation

are likely to be affected by those policies

and practices, such as stages of the loan

application process, types of loans, or

the branches or offices where likely

discrimination has occurred.

Generally, if the scope of the testing

is broad, the need to examine

information beyond that generated by

the self-test is correspondingly broad.

For example, a lender that self-tests its

marketing practices and discovers

evidence of discrimination may focus its

corrective actions on its marketing

practices, and is not required to expand

its testing to other aspects of its

operation. Also, for example, if the

testing focuses on a particular loan

officer at a particular branch, and a

likely violation is found, then the lender

need not commence a nationwide loan

file review. Nevertheless, a

comprehensive examination of that loan

officer’s activities would be required,

covering all mortgage loan products

handled by that officer.

In some instances, a pre-application

matched-pair test may reveal that

potential borrowers in minority areas

are not offered or made aware of the full

range of available loan products offered

or advertised to borrowers in nonminority areas. In this case, the lender,

in determining prospective relief,

should examine its marketing, sales, and

outreach activities both as a whole and

in its individual branches, and should

implement prospective actions to

address the results of the test, where

necessary.

Section 100.143(b) and (d) Interagency

Guidance

Subsection (d) provides lenders with

additional direction on what is

appropriate corrective action to remedy

the cause and effect of a likely violation,

as required by subsection (b).

Several commenters recommended

the rule should offer greater guidance on

what is and is not appropriate corrective

action, and on how to apply the actions

listed in the proposed rule. Some

suggested the actions listed were too

vague, thereby diluting the self-test

incentive. These commenters generally

recommended that specific standards be

established and limitations be placed

upon the amount of corrective action

required in connection with past

discrimination.

Others maintained a case-by-case

analysis invites unrestrained secondguessing of difficult judgments on likely

violations and remedies. Several

commenters viewed the case-by-case

approach as an ex post facto assessment

of a lender’s corrective actions. Other

commenters, generally those supporting

case-by-case determinations, argued that

if the rule mandated any particular

corrective action, it would impede fair

lending litigation and/or settlement

proceedings.

The Department carefully weighed the

comments received and recognizes the

need for certainty as to whether

corrective actions are appropriate.

However, it is not possible to develop a

standard that would describe the

specific appropriate action in every

hypothetical situation. Rather, the final

rule contains a standard that describes

the criteria for determining the

corrective action appropriate to the fact

pattern involved, and retains the general

categories developed by the Interagency

Task Force on Fair Lending.2 The final

rule does note that not every corrective

measure listed need be taken for each

likely violation.

Section 100.143(c) Prospective and

Remedial Relief

There were many comments with

differing views on the issue of whether

corrective action should be prospective

only, or whether retrospective actions

also should be necessary. Those

favoring prospective action only argued

that Congress intended to eliminate

disincentives to self-testing, and that a

requirement for retrospective relief

deterred self-testing. Some commenters

suggested that while corrective action

should generally be limited to

prospective relief, if the self-test has

confirmed actual violations of law by

the lender in connection with the

lender’s extension of credit to specific

individuals, retrospective relief may be

appropriate. Another commenter

opposed any unilateral determination

and payment of out-of-pocket and

compensatory damages since such

damages are only determinable and

obligatory following a finding of a

violation of the FHAct at the conclusion

of a contested case.

With respect to whether remedial

relief is required, the final rule does not

require a lender who seeks to establish
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66429

3 42 U.S.C. 3613(a).

a self-testing privilege to provide

remedial relief to individuals if the selftest does not discover evidence of likely

discrimination against an actual

applicant identified by the self-test.

Accordingly, a pre-application matchedpair test which reveals that potential

borrowers in minority areas were not

offered or made aware of the full range

of available loan products which

borrowers in non-minority areas were

offered would require prospective, but

not remedial, relief because the self-test

did not discover evidence of likely

discrimination against an actual

applicant identified by the self-test.

Were lenders required to undertake

reviews of loan or application files to

identify actual applicants who were

victims in such instances, the result of

such a review would not be privileged

as a self-test under this subpart, since it

involves information contained in or

derived from a loan or application file.

Such an outcome, therefore, could

require a lender who undertook a selftest with the expectation of a privilege

to be required to provide incriminating

evidence.

It is also worth noting that the fact

that a tester has an agreement with a

lender that waives the tester’s legal right

to assert a violation does not eliminate

the requirement for the lender to take

corrective action although no remedial

relief for the tester is required.

Lenders should note that while

application of the privilege does not

require a lender to take extra measures

to identify and compensate individual

victims of discrimination, such persons

still may file a complaint with the

Department or in court and may obtain

the remedies available in such cases. A

lender should consider an effort to

identify such individuals as a good

business practice to avoid or minimize

potential liability.

The final rule does not require a

lender to provide remedial relief to an

actual applicant if the FHAct’s two year

statute of limitations 3 expired before the

lender obtained the results of the selftest, or if the applicant is otherwise

ineligible for such relief.

Changed circumstances might

mitigate against giving an applicant

certain types of relief. For example, a

lender is not required to offer credit to

an unlawfully denied applicant if the

applicant no longer qualifies for credit

due to a change in financial

circumstances, although some other

type of relief may be appropriate.

Section 100.143(e)

Determination of appropriate

corrective action is fact-based. Not every

corrective measure listed in subsection

(d) need be taken for each likely

violation.

Section 100.143(f)

In response to commenters who fear

incriminating themselves by taking

corrective actions, the Department

added a new subsection (f) which

provides that taking corrective action by

a lender is not an admission a violation

occurred.

Section 100.144 Scope of Privilege

This section, which explains the

nature of the qualified privilege afforded

by the Act, states that the report or

results of a self-test may not be obtained

or used by an aggrieved person,

complainant, department or agency in

any: (1) Proceeding or civil action in

which a violation of the FHAct is

alleged, or (2) examination or

investigation relating to compliance

with the FHAct.

Several commenters wanted the

privilege extended to encompass alleged

violations of State and local fair housing

laws. In addition, one commenter

wanted the Department to clarify that if,

in litigation involving the Real Estate

Settlement Procedures Act (RESPA), a

court orders a lender to perform a selftest, and to furnish the results of that

test to the opposing party, those results

may not later be used in a proceeding

or investigation pursuant to the FHAct.

The Department did not adopt either

suggestion. The Act states specifically

that the self-testing privilege applies

only in proceedings, civil actions,

examinations, and investigations under

the FHAct. Congress indicated no intent

to have the privilege apply to actions

under any other law, including State

and local fair housing laws. The

Department lacks the legal authority to

extend the privilege’s application

beyond the FHAct. However, the

Department will encourage States or

localities, who have sought and received

a determination that their law is

substantially equivalent to the FHAct in

the rights and remedies accorded, to

provide a privilege equal to that

provided by Congress and implemented

in this rule. Such States and localities

will be asked to provide a privilege

through the application of their fair

housing law, its regulations or binding

rules, or they must agree to refer all

complaints involving lending

discrimination where the privilege has

been invoked to the Department for

processing.

The Department intends to propose

rulemaking which would require States

and localities seeking a substantial

equivalency determination in the future

to accord a self-testing privilege

substantially equivalent to the Act and

this subpart. Under such a rule, if the

proceeding, civil action, examination or

investigation is pursuant to the FHAct,

or pursuant to a State or local law which

has been deemed substantially

equivalent to the FHAct, the privilege

would apply. States and localities

which do not have laws which are

substantially equivalent to the FHAct

may choose to adopt the privilege for

use in proceedings under their laws.

As to the furnishing of information in

a RESPA proceeding, the self-testing

privilege applies only if the test is

performed ‘‘in order to determine the

level or effectiveness of compliance’’

with the FHAct. Since a court-ordered

self-test under RESPA would be

performed to ascertain compliance with

RESPA, rather than the FHAct, the selftest would not come within the

parameters of the privilege.

Consequently, unless the court in the

RESPA matter ordered that use of the

RESPA-related self-testing information

was limited to that proceeding, the

information would not be privileged in

a FHAct proceeding.

If, however, the RESPA court ordered

the lender to produce information

privileged under the Act, that

information could not, by virtue of that

order, be used in a subsequent FHAct

case. The privilege would still apply

because material privileged under this

subpart may not be ‘‘used’’ in FHAct

litigation, regardless of how it was

‘‘obtained,’’ unless it was obtained by

the lender’s voluntary disclosure. Thus,

the privilege covers material obtained

involuntarily in collateral litigation,

such as suits filed under RESPA, the

Truth-in-Lending Act, or under State

laws.

Another commenter suggested the

final rule’s use of the term ‘‘agency,’’

with regard to those who may not obtain

or use privileged information, must be

construed to encompass State,

municipal and other agencies. The

Department agrees that ‘‘agency’’ would

include a State or local agency that

sought to obtain or use the privileged

information in a proceeding or civil

action alleging a violation of, or an

examination or investigation relating to,

the FHAct, or pursuant to a State or

local law which provides for the

privilege and has been deemed

substantially equivalent to the FHAct, as

discussed above. If, however, the State

or local agency sought the information

under the auspices of a law, other than
66430 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

those discussed in the preceding

sentence, including a State or local fair

housing law, the privilege would not

apply.

Section 100.145 Loss of Privilege

This section explains the

circumstances that would cause

documents to lose their privileged

status. Generally, the self-test report or

results are not privileged if the lender or

person with lawful access to the report

or results, or any other information

otherwise privileged under this subpart,

discloses or uses the report, results or

such information as a defense to charges

a lender violated the FHAct, or fails or

is unable to produce self-test records or

information needed to determine

whether the privilege applies. This

section has been revised to clarify that

the privilege is lost if the lender

discloses privileged information, such

as the results of the self-test, but that the

privilege is not lost if the creditor

merely reveals or refers to the existence

of the self-test. As discussed, future

rulemaking will address record

retention requirements.

The Department received a number of

comments on this section of the

proposed rule. Several commenters

wanted the rule to specify that

unauthorized disclosure would not

forfeit the privilege. The Department did

not adopt this suggestion. To do so

would require a plaintiff to disprove a

lender’s assertions as to what its

internal policies, practices, and chainof-command are, which is an

unreasonable burden. Moreover, the

statute provides that the report or

results of a self-test are not privileged if

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. Existing law

adequately addresses the issues of scope

of employment and agency.

Under the rule, a lender’s production

of records in response to a judicial

order, or a disclosure in a case where

the privilege does not apply, e.g., in a

non-FHAct case, does not necessarily

mean that the lender intended to give

up the privilege voluntarily.

Accordingly, if such disclosures are not

voluntary, e.g., under a court order, they

will not affect the privileged status of

the documents.

One commenter stated that without a

record retention requirement, lenders

could conduct self-tests, find violations,

and destroy all records without taking

corrective action. According to this

commenter, the rule should require any

records, results, analyses, work product,

or other material related to or created

from self-tests to be maintained by the

lender and/or its agents for at least 48

months if litigation or an enforcement

action is pending against the lender.

The Department’s proposed rule

included no provision on record

retention. Since the issue was not

addressed in the proposed rule, the

Department has not included it in the

final regulation. Instead, the Department

in the near future will propose for

comment a rule on record retention as

it relates to self-testing information and

the FHAct, with appropriate recognition

of the ECOA requirements in this area.

In the meantime, to assert the self-test

privilege, lenders who are subject to

ECOA must comply with the record

retention requirements of the Board’s

rule for ECOA purposes.

Some commenters wanted the

regulation changed to specify that

release of part of a report only forfeits

the privilege as to that part of the report

released. However, the statute does not

permit this result, since it states that

release of ‘‘all, or any part of, the report

or results’’ waives the privilege.

In the proposed rule, the Department

solicited comments on whether the

regulation should provide that lenders

could voluntarily share privileged

information with a Federal or State bank

supervisory or law enforcement agency

without the information losing its

privileged status in litigation by private

plaintiffs. The disclosures on which

comments were solicited, however,

would have caused the documents to

lose their privileged status with respect

to all supervisory and law enforcement

agencies, e.g., HUD and DOJ, as well as

the Board, the OCC, the FDIC, the OTS,

the NCUA, and the FTC.

A substantial number of commenters

supported the idea. According to these

commenters, this would encourage

lenders to seek guidance from regulators

in developing appropriate corrective

actions. The commenters stated further

that the Department should draw no

negative inferences from a lender’s

decision not to provide information

voluntarily. Another group of

commenters wanted mandatory sharing

of self-test results with regulatory and

enforcement agencies to ensure that the

scope of the remedy is appropriate and

that the remedy is entirely and

effectively implemented. One

commenter strongly opposed allowing

lenders to voluntarily share privileged

information with a supervisory agency

while maintaining the privilege as to

private litigants. Yet, another

commenter argued that such a

mechanism directly conflicts with the

statute, which specifically provides that

voluntary disclosure in such instances

constitutes a waiver of the privilege. A

number of other commenters similarly

maintained there is nothing in the

statute which suggests the Department

could adopt a partial waiver of

privilege. Furthermore, they

maintained, the law of privileges

generally does not recognize a right to

waive a privilege (as with the attorneyclient privilege) only as to some parties

but not others. According to these

commenters, several bank counsel

expressed reluctance to rely on such a

split privilege if based on the

Department’s rulemaking authority,

absent specific legislative language, or a

court ruling upholding such an

interpretation of the privilege.

Other commenters supported limited

disclosure to determine whether

appropriate corrective action had been

taken, but opposed any interpretation of

the privilege that allowed blanket

protection for all voluntary disclosures

of ‘‘self-tests’’ to banking or enforcement

agencies so as to immunize banks or

enforcement agencies from disclosure in

private litigation. Another commenter

asserted the Act was enacted to provide

creditors with the necessary protection

to encourage them to self-test, not to

promote cooperation between creditors

and their regulators.

The Department concluded that a

mechanism that would permit lenders

to provide privileged information to the

independent financial regulatory

agencies, and simultaneously to

enforcement agencies, e.g., HUD, DOJ,

while still maintaining a privilege as to

private litigants, is not allowed by the

statute. Such a mechanism might help

lenders secure certainty that the

privilege was properly asserted.

However, some commenters were

concerned that allowing disclosure to

the regulatory agencies with

simultaneous disclosure to enforcement

agencies might result in enforcement

action if the self-test were not within the

statutory privilege, and that this would

be a deterrent to self-testing. The

process would also raise resource issues

concerning the capacity of the

regulatory and enforcement agencies to

issue advisory opinions. In any case,

after careful study, the Department

determined that in addition to the

policy consequences, this step is not

allowed by the statutory language.

Section 100.146 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
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66431

4See 42 U.S.C. 3612(p), 3613(c)(2), and

3614(d)(2); 24 CFR 180.705.

5 5 U.S.C. 504.

documents under § 100.144. 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.

Disclosures for this limited purpose may

be used only for the particular

proceeding in which the adjudication or

admission is made. Information

disclosed under this section remains

otherwise privileged under this subpart.

Section 100.147 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.

One commenter recommended the

privilege remain in effect during the

period in which an adjudicator is

determining whether the privilege

applies. The Department agrees. As with

other privileges, a lender’s claim that

information is privileged protects that

information from disclosure during the

time the adjudicator is determining

whether the lender is entitled to the

privilege. However, the adjudicator may

order the lender to disclose the

information so that the adjudicator can

determine whether the privilege was

invoked properly. The adjudicator may

require in camera proceedings, the filing

of documents and pleadings under seal,

and the production of documents to

other parties under a protective order

limiting the purpose for which they may

be used. If the adjudicator orders

disclosure for the limited purpose of

determining whether the privilege was

invoked properly, the information is

protected from use in any proceeding,

civil action, examination or

investigation until the adjudicator

determines the privilege does not apply.

One commenter urged that since

assertion of, and challenges to, the

privilege will result in more lengthy and

expensive litigation, the Department

should include a provision for

attorney’s fees and costs for private

plaintiffs who successfully challenge

the assertion of the privilege. If a judge

finds, during the discovery phase of a

proceeding, that a lender improperly

invoked the privilege, the judge may

order appropriate sanctions, including

those provided by Rule 37 of the Federal

Rules of Civil Procedure or by 24 CFR

180.540. In appropriate circumstances,

this may include attorneys’ fees and

costs. Moreover, the FHAct and its

implementing regulations specifically

provide for the award of attorney’s fees

to the prevailing party in any court or

administrative proceeding.4 A party is

entitled to reasonable attorney’s fees

and costs to the extent provided under

the Equal Access to Justice Act.5 Any

award of fees would be made in

accordance with those provisions.

Section 100.148 Effective Date

Lenders and others may invoke the

self-testing privilege regarding self-tests

undertaken prior to the effective date of

the final rule, 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

§ 100.145. A complaint filed in a court

with jurisdiction over the FHAct is a

‘‘formal complaint.’’ Moreover, as the

proposed rule preamble noted, a formal

complaint alleging a FHAct violation

includes one filed with the Department

or a substantially equivalent agency

(pursuant to subsection 810(f) of the

FHAct, 42 U.S.C. 3610(f)). 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.

Technical Correction to 24 CFR Part 103

A final rule published October 4, 1996

(61 FR 52216) consolidated HUD’s

hearing procedures for

nondiscrimination and equal

opportunity matters in a new 24 CFR

part 180. In that rulemaking, conforming

changes were made throughout 24 CFR

to replace references to parts eliminated

as a result of the consolidation with

references to new part 180. Although

part 103 was included in the list of parts

in which all references to part 104 were

to be replaced by 180, paragraph (b) of

§ 103.215 contained two references to

104, and only the first reference was

changed to 180. The reference in this

paragraph to § 104.590 is corrected to

read § 180.545. Similarly, references to

part 104 are corrected to read part 180

in §§ 103.1(c), 13.230(a)(1),

103.405(b)(2) and (3).

IV. Findings and Certifications

Regulatory Planning and Review

This rule has been reviewed in

accordance with Executive Order 12866,

issued by the President on September

30, 1993 (58 FR 51735, October 4, 1993).

Any changes to the rule resulting from

this review area 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, and tribal

governments and the private sector.

This 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 Department’s

regulations, the policies and procedures

contained in this 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

rule, and in so doing certifies that this

rule will not have a significant

economic impact on a substantial

number of small entities, because the

rule only proposes to implement a

statutory provision that allows an

evidentiary privilege for the report and

results of self-tests of FHAct compliance

undertaken by lenders.

Executive Order 13145, Protection of

Children From Environmental Health

Risks and Safety Risks

This rule will not pose an

environmental health risk or safety risk

for children.

List of Subjects

24 CFR Part 100

Aged, Fair housing, Individuals with

disabilities, Mortgages, Reporting and

recordkeeping requirements.

24 CFR Part 103

Administrative practice and

procedure, Aged, Fair housing,

Individuals with disabilities,

Intergovernmental relations,

Investigations, Mortgages, Penalties,
66432 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

Reporting and recordkeeping

requirements.

Accordingly, parts 100 and 103 of title

24 of the Code of Federal Regulations

are 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 sections 100.140,

100.141, 100.142, 100.143, 100.144,

100.145, 100.146, 100.147, and 100.148

are added to read as follows:

§ 100.140 General rules.

(a) Voluntary self-testing and

correction. The report or results of a

self-test a lender voluntarily conducts or

authorizes are privileged as provided in

this subpart if the lender has taken or is

taking appropriate corrective action to

address likely violations identified by

the self-test. Data collection required by

law or any governmental authority

(federal, state, or local) is not voluntary.

(b) Other privileges. This subpart does

not abrogate any evidentiary privilege

otherwise provided by law.

§ 100.141 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 a lender voluntarily conducts

or authorizes which is designed and

used specifically to determine the extent

or effectiveness of compliance with the

Fair Housing Act. The self-test must

create data or factual information that is

not available and cannot be derived

from loan files, application files, or

other residential real estate-related

lending transaction records. Self-testing

includes, but is not limited to, using

fictitious credit applicants (testers) or

conducting surveys of applicants or

customers, nor is it limited to the preapplication stage of loan processing.

§ 100.142 Types of information.

(a) The privilege under this subpart

covers:

(1) The report or results of the selftest;

(2) Data or factual information created

by the self-test;

(3) Workpapers, draft documents and

final documents;

(4) Analyses, opinions, and

conclusions if they directly result from

the self-test report or results.

(b) The privilege does not cover:

(1) Information about whether a

lender conducted a self-test, the

methodology used or scope of the selftest, the time period covered by the selftest or the dates it was conducted;

(2) Loan files and application files, or

other residential real estate-related

lending transaction records (e.g.,

property appraisal reports, loan

committee meeting minutes or other

documents reflecting the basis for a

decision to approve or deny a loan

application, loan policies or procedures,

underwriting standards, compensation

records) and information or data derived

from such files and records, even if such

data has been aggregated, summarized

or reorganized to facilitate analysis.

§ 100.143 Appropriate corrective action.

(a) The report or results of a self-test

are privileged as provided in this

subpart if the lender has taken or is

taking appropriate corrective action to

address likely violations identified by

the self-test. Appropriate corrective

action is required when a self-test shows

it is more likely than not that a violation

occurred even though no violation was

adjudicated formally.

(b) A lender must take action

reasonably likely to remedy the cause

and effect of the likely violation and

must:

(1) Identify the policies or practices

that are the likely cause of the 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

likely violation, by determining which

areas of operation are likely to be

affected by those policies and practices,

such as stages of the loan application

process, types of loans, or the particular

branch where the likely violation has

occurred. Generally, the scope of the

self-test governs the scope of the

appropriate corrective action.

(c) Appropriate corrective action may

include both prospective and remedial

relief, except that to establish a privilege

under this subpart:

(1) A lender is not required to provide

remedial relief to a tester in a self-test;

(2) A lender is only required to

provide remedial relief to an applicant

identified by the self-test as one whose

rights were more likely than not

violated;

(3) A lender is not required to provide

remedial relief to a particular applicant

if the statute of limitations applicable to

the violation expired before the lender

obtained the results of the self-test or

the applicant is otherwise ineligible for

such relief.

(d) Depending on the facts involved,

appropriate corrective action may

include, but is not limited to, one or

more of the following:

(1) If the self-test identifies

individuals whose applications were

inappropriately processed, offering to

extend credit if the applications were

improperly denied; compensating such

persons for any damages, both out-ofpocket and compensatory;

(2) Correcting any institutional

policies or procedures that may have

contributed to the likely violation, and

adopting new policies as appropriate;

(3) Identifying, and then training and/

or disciplining the employees involved;

(4) Developing outreach programs,

marketing strategies, or loan products to

serve more effectively the segments of

the lender’s market that may have been

affected by the likely violation; and

(5) Improving audit and oversight

systems to avoid a recurrence of the

likely violations.

(e) Determination of appropriate

corrective action is fact-based. Not every

corrective measure listed in paragraph

(d) of this section need be taken for each

likely violation.

(f) Taking appropriate corrective

action is not an admission by a lender

that a violation occurred.

§ 100.144 Scope of privilege.

The report or results of a 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 is

alleged; or

(b) Examination or investigation

relating to compliance with the Fair

Housing Act.

§ 100.145 Loss of privilege.

(a) The self-test report or results are

not privileged under this subpart if the

lender or person with lawful access to

the report or results:

(1) Voluntarily discloses any part of

the report or results or any other

information privileged under this

subpart to any aggrieved person,

complainant, department, agency, or to

the public; or

(2) Discloses the report or results or

any other information privileged under

this subpart as a defense to charges a

lender violated the Fair Housing Act; or

(3) Fails or is unable to produce selftest records or information needed to

determine whether the privilege applies.

(b) Disclosures or other actions

undertaken to carry out appropriate
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66433

corrective action do not cause the lender

to lose the privilege.

§ 100.146 Limited use of privileged

information.

Notwithstanding § 100.145, the selftest report or results may be obtained

and used by an aggrieved person,

applicant, department or agency solely

to determine a penalty or remedy after

the violation of the Fair Housing Act has

been adjudicated or admitted.

Disclosures for this limited purpose may

be used only for the particular

proceeding in which the adjudication or

admission is made. Information

disclosed under this section remains

otherwise privileged under this subpart.

§ 100.147 Adjudication.

An aggrieved person, complainant,

department or agency that challenges a

privilege asserted under § 100.144 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.

§ 100.148 Effective date.

The privilege under this subpart

applies to self-tests conducted both

before and after January 30, 1998, except

that a self-test conducted before January

30, 1998 is not privileged:

(a) If there was a court action or

administrative proceeding before

January 30, 1998, including the filing of

a complaint alleging a violation of the

Fair Housing Act with the Department

or a substantially equivalent state or

local agency; or

(b) If any part of the report or results

were disclosed before January 30, 1998

to any aggrieved person, complainant,

department or agency, or to the general

public.

PART 103—FAIR HOUSING—

COMPLAINT PROCESSING

3. The authority citation for part 103

continues to read as follows:

Authority: 42 U.S.C. 3535(d), 3600–3619.

4. In the list below, for each section

indicated in the left column, remove the

reference indicated in the middle

column from wherever it appears in the

section, and add the reference indicated

in the right column:

Section Remove Add

103.1(c) ................................................................................................................................. Part 104 ..................... Part 180 of this chapter.

103.215(b) ............................................................................................................................. 104.590 ..................... 180.545.

103.230(a)(1) ......................................................................................................................... Part 104 ..................... Part 180 of this chapter.

103.405(b)(2) ......................................................................................................................... 104.410(b) ................. 24 CFR 180.410(b).

103.405(b)(3) ......................................................................................................................... 104.410(a) ................. 180.410(a).

Dated: December 8, 1997.

Susan M. Forward,

General Deputy Assistant Secretary for Fair

Housing and Equal Opportunity.

[FR Doc. 97–32657 Filed 12–17–97; 8:45 am]

BILLING CODE 4210–28–P