66412 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

FEDERAL RESERVE SYSTEM

12 CFR Part 202

[Regulation B; Docket No. R–0955]

Equal Credit Opportunity

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board is publishing

revisions to Regulation B (Equal Credit

Opportunity). The revisions implement

recent amendments to the Equal Credit

Opportunity Act (ECOA). These

amendments create a legal privilege for

information developed by creditors as a

result of ‘‘self-tests’’ that they

voluntarily conduct to determine the

level of their compliance with the

ECOA. The Department of Housing and

Urban Development will publish similar

revisions to the regulations

implementing the Fair Housing Act.

DATES: The rule is effective January 30,

1998.

FOR FURTHER INFORMATION CONTACT:

James A. Michaels, Senior Attorney, or

Natalie E. Taylor, Staff Attorney,

Division of Consumer and Community

Affairs, Board of Governors of the

Federal Reserve System, at (202) 452–

3667 or 452–2412; for the hearing

impaired only, Diane Jenkins,

Telecommunications Device for the Deaf

(TDD), at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

The Equal Credit Opportunity Act

(ECOA), 15 U.S.C. 1691, makes it

unlawful for creditors to discriminate in

any aspect of a credit transaction on the

basis of sex, race, color, religion,

national origin, marital status, age

(provided the applicant has the capacity

to contract), because all or part of an

applicant’s income derives from any

public assistance, or because an

applicant has in good faith exercised

any right under the Consumer Credit

Protection Act. The act is implemented

by the Board’s Regulation B (12 CFR

part 202).

On September 30, 1996, the President

signed into law amendments to the

ECOA as part of the Economic Growth

and Regulatory Paperwork Reduction

Act of 1996 (Pub. L. 104–208, 110 Stat.

3009) (1996 Act). Section 2302 of the

1996 Act creates a legal privilege for

information developed by creditors

through voluntary ‘‘self-tests’’ that are

conducted to determine the level or

effectiveness of their compliance with

the ECOA, provided that appropriate

corrective action is taken to address any

possible violations that may be

discovered. Privileged information may

not be obtained by a government agency

for use in an examination or

investigation relating to compliance

with the ECOA, or by a government

agency or credit applicant in any

proceeding in which a violation of the

ECOA is alleged. The 1996 Act also

provides that a challenge to a creditor’s

claim of privilege may be filed in any

court or administrative law proceeding

with appropriate jurisdiction.

The 1996 Act directs the Board to

issue implementing regulations,

including a definition of what

constitutes a ‘‘self-test.’’ The Act also

establishes a privilege for creditor selftesting under the Fair Housing Act (42

U.S.C. 3601 et seq.), which is

administered by the Department of

Housing and Urban Development

(HUD). The statute directs the Board

and HUD to issue substantially similar

regulations. In January, the Board

published a proposed rule to Regulation

B implementing the amendments to the

ECOA (62 FR 56, January 2, 1997). After

consultation with the federal agencies

responsible for enforcing the ECOA and

with HUD, the Board is publishing final

rules to implement the 1996 Act’s

amendments to the ECOA. HUD will

publish rules to implement the

amendments to the Fair Housing Act.

After reviewing both regulations, the

Board and HUD believe 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 coverage of the ECOA

and FHA dictate otherwise. For

example, the ECOA covers nonmortgage

credit transactions that are not covered

by the FHA. 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. HUD has no staff

commentary and has generally included

these interpretations in the text of its

regulation. The consistency of the Board

and HUD 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.

II. Regulatory Provisions

The amendments to Regulation B

implement the 1996 Act by defining

what constitutes a privileged self-test. A

‘‘self-test’’ is defined as any program,

practice, or study that is designed and

used specifically to determine the extent

or effectiveness of a creditor’s

compliance with the ECOA or

Regulation B, if it creates data or factual

information that is not available and

cannot be derived from loan or

application files or other records related

to credit transactions. The privilege

serves as an incentive, by assuring that

evidence of discrimination voluntarily

produced by a self-test will not be used

against a creditor, provided the creditor

takes appropriate corrective actions for

any discrimination that is found.

This definition of ‘‘self-test’’ includes,

but is not limited to, the practice of

using fictitious applicants for credit

(testers). A creditor also may develop

and use other methods of generating

information that is not available in loan

and application files, for example, by

surveying mortgage loan applicants to

assess whether applications were

processed appropriately. The definition

does not include creditor reviews and

evaluations of loan and application

files, either with or without a statistical

analysis.

The 1996 Act makes the results or

report of a self-test privileged if the

creditor takes appropriate corrective

action to address possible violations

identified by the self-test. In response to

commenters’ concerns about the

proposal’s effectiveness as an incentive

for self-correction, the final rule

provides additional guidance on the

corrective action requirement.

The Board’s final rule becomes

effective January 30, 1998. The 1996 Act

provides that self-tests will be

privileged even if they were conducted

before the regulation’s effective date,

with two exceptions. Self-tests

previously conducted will not become

privileged on the regulation’s effective

date if a court action or administrative

proceeding has already commenced

against the creditor alleging a violation

of the ECOA or Regulation B or the Fair

Housing Act. 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 voluntarily disclosed

by the creditor.

III. Section-by-Section Analysis

Section 202.12—Record Retention

12(b)(6) Self-Tests

Paragraph 12(b)(6) contains

provisions on record retention that were

designated as Paragraph 15(e) of the

proposed rule. There are no substantive

changes to the provision as proposed.

The redesignation allows all of the

regulation’s record retention

requirements to be listed together in one
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66413

section. Paragraph 12(b)(6) states that a

creditor has a duty to retain self-testing

records for 25 months, which is the

general standard for retaining other

records required under the regulation.

Several commenters opposed any

retention requirement for self-testing

records. Some commenters suggested

that retention of self-testing records

should only be required if the creditor

claims the self-testing privilege. Under

the approach suggested by these

commenters, a creditor that did not

intend to claim privilege for the selftesting results could discard all related

records even if the self-test identified

violations; the creditor could decide

whether or not to take corrective action,

and the creditor could be required to

provide oral testimony about the selftest results.

The provision requiring record

retention has been adopted as proposed.

The Board believes that retention of selftesting records is warranted whether or

not the creditor ultimately decides to

assert a privilege for the results. If the

privilege is asserted, the self-test results

may be needed to determine whether

the creditor’s claim of privilege is

consistent with the corrective action

requirement and other prerequisites. But

in any event, allowing creditors to

choose between claiming the privilege

and discarding the self-testing records

would be inconsistent with the intent of

the legislation. The statute encourages

testing, but its ultimate goal is to

provide incentive for creditors to use

the results to take appropriate corrective

actions that increase compliance with

the law. This goal is not furthered if

creditors elect to destroy evidence of

self-test results as one alternative to

taking corrective action. The Board

intends for the record retention

requirement to encourage creditors to

take the full measure of corrective

action that is warranted in light of the

self-test results.

Section 202.15—Incentives for SelfTesting and Self-Correction

15(a) General Rules

15(a)(1) Voluntary Self-Testing and

Correction

Paragraph 15(a)(1) states the general

rule that the report or results of a

creditor’s voluntary self-test are

privileged if the conditions specified in

this rule are satisfied. The language has

been modified slightly for clarification.

Data collection that is required by law

or any government authority is not a

voluntary self-test and does not qualify

for the privilege.

15(a)(2) Corrective Action Required

Paragraph 15(a)(2) implements the

requirement imposed by the 1996 Act

that a creditor must take appropriate

corrective action in order for the

privilege to apply. A self-test is also

privileged when it identifies no

violations. The Board believes this is

necessary to avoid the anomaly of

requiring creditors to disclose self-test

results when no violations are

identified, which would make a

creditor’s claim of privilege tantamount

to an admission that violations were

found.

In some cases, the issue of whether

certain information is privileged may

arise before the self-test is complete or

corrective actions are fully under way.

This would not necessarily prevent a

creditor from asserting the privilege. In

situations where the self-test is not

complete, for the privilege to apply the

lender must satisfy the regulation’s

requirements 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

creditor establish a plan for corrective

action and a method to demonstrate

progress in implementing the plan.

Creditors must take corrective action on

a timely basis after the results of the

self-test are known. An adjudicator’s

final decision on whether the privilege

applies should be withheld until the

creditor has taken the appropriate

corrective action.

A creditor’s determination about the

type of corrective action needed, or a

finding that no corrective action is

required, is not conclusive in

determining whether the requirements

of this paragraph have been satisfied. If

a creditor’s claim of privilege is

challenged, an assessment of the need

for corrective action or the type of

corrective action that is appropriate

must be based on a review of the selftesting results, which may require an in

camera inspection of the privileged

documents by a court or administrative

law judge.

15(a)(3) Other Privileges

Several commenters requested that

the Board clarify the effect of the selftesting rule on other privileges that may

also apply, such as the attorney-client

privilege or the privilege for attorney

work product. Paragraph 15(a)(3) has

been added to clarify that the selftesting privilege may be asserted in

addition to any other privilege.

15(b) Self-Test Defined

15(b)(1) Definition

Paragraph 15(b)(1) states what

constitutes a ‘‘self-test’’ for purposes of

the ECOA. The 1996 Act does not define

‘‘self-test’’ and authorizes the Board to

define by regulation the practices

covered by the privilege. In the

proposed rule, the privilege was limited

to self-tests that create data or factual

information about a creditor’s

compliance that is not available and

cannot be derived from the creditor’s

loan or application files or other records

related to credit transactions. The Board

solicited views on whether a broader

definition should be considered, for

example, a definition that would also

include creditors’ analyses of their loan

and application files. Comments were

sought on whether a broader definition

might adversely affect the ability of

enforcement agencies and private

parties to obtain needed information or

whether it would provide needed

incentives for creditor monitoring and

self-correction.

Most of the comments received, from

creditors and their representatives,

favored a broad definition of ‘‘self-test.’’

The Board has carefully considered all

the comments along with the views of

the agencies charged with enforcement

of the act and regulation. For the

reasons explained below, the scope of

the definition as proposed has been

retained in the final rule, although the

language has been revised somewhat for

clarity.

Under the final rule, the principal

attribute of self-testing is that it

constitutes a voluntary undertaking by

the creditor to produce new data or

factual information that otherwise

would not be available and could not be

derived from loan or application files or

other records related to credit

transactions. The privilege does not

protect a creditor’s analysis performed

as part of processing or underwriting a

credit application. Self-testing includes,

but is not limited to, the practice of

using fictitious applicants for credit

(testers), either with or without the use

of matched pairs. A creditor may elect

to test a defined segment of its business,

for example, loan applications handled

by a particular loan officer or processed

by a specific branch, or applications

made for a particular type of credit or

loan program. A creditor also may use

other methods of generating information

that is not available in loan and

application files, for example, by

surveying mortgage loan applicants to

assess whether applications were

processed appropriately. To the extent

permitted by law, creditors might also
66414 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

develop methods that go beyond

traditional pre-application testing, such

as arranging for testers to submit

fictitious loan applications for

processing.

A creditor’s evaluation or analysis of

credit applications, loan files, Home

Mortgage Disclosure Act data or similar

types of records (such as broker or loan

officer compensation records), does not

produce new factual information about

a creditor’s compliance and is not a selftest for purposes of this section.

Information derived from such records,

even if it has been aggregated or

reorganized to facilitate the creditor’s

analysis, also would not be privileged.

Similarly, a statistical analysis of data

derived from existing loan files is not

privileged.

As some commenters pointed out, the

proposed rule focused only on testing

for compliance with the prohibitions on

discrimination contained in sections

202.4 and 202.5(a) of Regulation B. The

statute refers, however, to self-testing for

compliance with the ECOA generally.

Accordingly, the language of the final

rule has been modified to apply to selftesting for compliance with any

requirement of the ECOA as

implemented by Regulation B.

To qualify for the privilege, a self-test

must be sufficient to constitute a

determination of the extent or

effectiveness of the creditor’s

compliance with the act and Regulation

B. Accordingly, a self-test is only

privileged if it was designed and used

for that purpose. A self-test that is

designed and used to determine

compliance with other laws or

regulations or for other purposes, is not

privileged under this rule. For example,

a self-test designed to evaluate

employee efficiency or customers’

satisfaction with the level of service

provided by the creditor is not

privileged even if evidence of

discrimination is uncovered

incidentally. If a self-test is designed for

multiple purposes, only the portion

designed to determine compliance with

the ECOA is eligible for the privilege.

Most creditors that commented

believed that the proposed definition of

‘‘self-test’’ was too narrow because it

would not provide incentives for

creditors to review their existing loan

files, either with or without a statistical

analysis. These commenters asserted

that the proposed definition would

effectively be limited to testing for a

narrow range of discriminatory

practices—tests for illegal

discouragement of loan applicants

during the pre-application process.

They believed there should be

incentives to analyze a creditor’s

policies and evaluate its underwriting or

other lending practices after an

application is made, and that an audit

and review of actual credit transactions

are the most effective ways of

monitoring compliance with the ECOA.

These activities were generally

characterized as ‘‘self-audits’’ or ‘‘selfexaminations.’’ In addition, some

commenters suggested using an even

broader definition, one that would

privilege any critical self-analysis

performed by a creditor.

A few commenters believed that a

narrow definition of ‘‘self-test’’ only

encourages the use of ‘‘testers,’’ and will

effectively limit the privilege to certain

creditors and loan products. They cited

wholesale lenders and secondary market

purchasers as parties that do not have

retail operations and cannot use testers.

Also, testers generally are not used for

credit cards, automobile loans, or other

loan programs that do not typically

involve personal contacts. Some

commenters noted that ‘‘mystery

shopper’’ tests are relatively expensive

and are not used as frequently among

smaller institutions, which are more

likely to rely on paper audits.

Civil rights and community

organizations favored a narrow

definition of ‘‘self-test.’’ Some claimed

that creditors already have adequate

incentives to monitor their loan and

application files because they are

subject to review by regulatory and

enforcement agencies. They asserted

that the risks and costs of litigation and

creditors’ potential liability are also

sufficient incentives for creditors to

audit their loan files. These commenters

believed that the Board should

maximize the amount of information

available to private litigants by reading

the privilege narrowly. In addition, one

commenter believed that a broad

definition would encourage creditors to

shield as much information as possible

and would force plaintiffs alleging

discrimination to engage in lengthy and

expensive litigation to challenge

creditors’ claims of privilege.

As directed by the statute, the Board

consulted with the other federal bank

regulatory agencies, and with the

Federal Trade Commission and

Department of Justice, all of which share

some responsibility for enforcement of

the ECOA. As a general matter, the

agencies expressed support for

implementing the privilege in a manner

that encourages creditors to self-test and

take voluntary corrective action, but

does not hinder appropriate

enforcement efforts that are undertaken

through compliance examinations and,

when necessary, the filing of legal

actions. All of the agencies favored the

narrow definition used in the proposed

rule.

The bank regulatory agencies

consulted by the Board believed that a

broad privilege would make compliance

examinations less efficient and more

burdensome for financial institutions

without necessarily increasing the level

of self-testing. They noted that most

large depository institutions already

conduct some type of audit or selfevaluation, frequently involving the

review or evaluation of actual loan files,

even though the results of such

evaluations currently are not privileged.

As a matter of policy, the Office of the

Comptroller of the Currency does not

require national banks to disclose the

results of self-evaluations, although

banks that do so voluntarily may be

eligible for more streamlined

examinations. Generally, banks could be

expected to continue their audit

programs if the Board adopts a broader

privilege, however, they probably would

be less likely to share the results with

their supervisory agencies because, if

they did, they would lose any privilege

to withhold the results from private

litigants.

The bank regulatory agencies also

expressed concern that a broader

privilege is likely to result in more

disputes over what information lenders

may withhold from examiners, thereby

making the examination process more

adversarial. The enforcement agencies

noted that a broader privilege is likely

to require the commitment of greater

resources to the adjudication of

privilege claims.

The Department of Justice preferred

the implementation of a narrow

privilege so that the rule’s benefits,

risks, and overall effect could be studied

before considering a broader rule with

potentially greater impact on the

government’s and private litigants’

access to creditor records.

The Board also consulted extensively

with HUD in connection with that

agency’s mandate to implement the selftesting privilege under the Fair Housing

Act. As noted in its notice of final

rulemaking, HUD too favored the

narrower rule.

The Board believes that adoption of

either the broad or narrow definition of

‘‘self-test’’ would be within the Board’s

rulemaking authority under the statute,

which does not define the term ‘‘selftest.’’ There is some evidence in the

legislative history that the congressional

sponsors intended a narrow definition.

The statute itself, however, defers to the

agencies by expressly delegating to the

Board and HUD the task of defining the

term under the ECOA and the FHA.
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66415

The statutory language does not

mandate a privilege that covers every

method that a creditor might use to

evaluate its performance. The only

statutory guidance is language stating

that the regulation should specify that a

self-test must be sufficient to determine

the level and effectiveness of the

creditor’s compliance with the law. That

language has been incorporated into the

final rule.

The Board believes that the Congress

intended the agencies to weigh the

competing interests of creditors, private

litigants, and the regulatory and

enforcement agencies in developing a

definition that furthers compliance with

the antidiscrimination policies of the

ECOA and Fair Housing Act, as well as

the purpose of the self-testing privilege,

which is to increase creditor selfcorrection efforts. Balancing these

interests to derive a definition calls for

the agencies to make a prediction about

future events that is necessarily

imprecise—which definition and which

enforcement methods are likely to

produce the greatest increase in

compliance with the two statutes.

The narrow definition of ‘‘self-test’’

provides added incentive for creditors

to look beyond their ordinary business

records and develop new factual

evidence about the level and

effectiveness of their compliance. In

particular, it creates an incentive for

creditors to use self-testing to monitor

the pre-application process, a stage

which typically does not produce the

type of documentation that lends itself

to traditional compliance reviews. But

even under a narrow definition of ‘‘selftest,’’ principles of sound lending

dictate that a creditor have 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 loan and application files that

are subject to examination by the

regulatory and enforcement agencies

and may be obtained by a private

litigant alleging a violation. Creditors

have incentives to conduct routine

compliance reviews and file analyses as

good business practices and to avoid or

minimize potential liability for

violations.

A broad definition of ‘‘self-test’’ might

give some creditors greater incentive to

evaluate their performance. To the

extent they conduct such evaluations, a

broad definition would also provide less

information to government agencies or

private litigants seeking to enforce the

ECOA. It is difficult to know whether a

broad definition would significantly

increase creditor self-monitoring, or

merely prevent or deter disclosure of

audit results by creditors that routinely

undertake such audits as a prudent

business practice.

In the proposed rule, the Board also

noted that extending the self-testing

privilege to audits of existing business

records could have an unintended

negative effect on the levels of

cooperation between creditors and the

regulatory agencies. The agencies

consulted by the Board agreed with that

view. In addition to the Board, these

agencies possess considerable expertise

in supervising and regulating financial

institutions and in enforcing the fair

lending laws. In view of the concerns

about the uncertain benefits and

potential impact of a broader rule on

government enforcement and the legal

rights of private litigants, the Board is

adopting the narrower definition as

proposed. In reaching this decision, the

Board has also given some weight to the

argument that a broadly defined

privilege would result in more disputed

claims of privilege that must be

adjudicated.

The Board expects creditors to

continue conducting routine

compliance reviews as a good business

practice to eliminate discrimination and

avoid or minimize their potential

liability for violations, even without the

self-testing privilege. After several years’

experience, it may be appropriate to

review the rule to determine if the

incentives for self-testing and selfcorrection can be strengthened without

impairing other enforcement

mechanisms.

15(b)(2) Types of Information

Privileged

Paragraph 15(b)(2) of the final rule

was designated as paragraph 15(b)(3) of

the proposed rule. The paragraph

clarifies what information generated by

a self-test is privileged. The examples of

self-tests that had been listed in

paragraph 15(b)(2) of the proposed rule

are discussed in the Official Staff

Commentary.

15(b)(3) Types of Information Not

Privileged

Paragraph 15(b)(3) of the final rule

had been designated as paragraph

15(b)(4) of the proposed rule. Paragraph

15(b)(3)(i) clarifies that information

about the existence of a self-test, its

scope, or the methodology used in

conducting the test, is not privileged.

Such information may be necessary to

determine whether the prerequisites for

a claim of privilege have been satisfied.

Paragraph 15(b)(3)(ii) clarifies that the

underlying loan and application files or

other business records related to actual

credit transactions are not privileged.

Information derived from such records

also is not privileged, even if it has been

aggregated, summarized, or reorganized

to facilitate analysis. Examples of the

types of records that are not privileged

include property appraisal reports, loan

policies or procedures, underwriting

standards, employee or broker

compensation records, and minutes of

loan committee meetings or other

documents reflecting the basis for a

decision to approve or deny an

application. If a creditor arranges for

testers to submit loan applications for

processing, the records are not related to

actual credit transactions for purposes

of this paragraph and may be privileged

self-testing records.

15(c) Appropriate Corrective Action

Paragraph 15(c) has been revised in

response to commenters’ concerns. To

give creditors more specific guidance,

the final rule lists certain situations that

will not require remedial relief to

individual applicants in order for the

privilege to apply.

The rule only addresses what

corrective actions are required for a

creditor to take advantage of the

privilege in this section. A creditor may

still be required to take other actions or

provide additional relief if a formal

finding of discrimination is made.

15(c)(1) General Requirement

The final rule has been revised to

clarify that corrective action is required

when the results of a self-test show that

it is more likely than not that one or

more violations occurred. The proposed

rule used the language of the 1996 Act,

stating that corrective action would be

required when a creditor identified a

‘‘possible’’ violation. The final rule has

been revised in light of commenters’

concerns that this language was capable

of differing interpretations. For

example, some commenters feared that

the rule might be construed to require

corrective action if a violation was

‘‘possible’’ even if unlikely. The Board

believes the statute was intended to

require corrective action only if a

violation is more likely than not, and

that the reference to ‘‘possible’’

violations merely recognizes that

corrective action is required even

though no violation has been formally

adjudicated or admitted. The language

of the final rule has been modified

accordingly.

In determining whether it is more

likely than not that a violation occurred,

a creditor must treat testers as if they are

actual applicants for credit. A creditor

may not refuse to take appropriate

corrective action under this section

because the self-test used fictitious loan
66416 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

applicants. The fact that a tester’s

agreement with the creditor waives the

tester’s legal right to assert a violation

does not eliminate the requirement for

the creditor to take appropriate

corrective action, although no remedial

relief for the tester is required under

paragraph 15(c)(3).

15(c)(2) Determining the Scope of

Appropriate Corrective Action

Paragraph 15(c)(2) provides that a

creditor must take corrective actions

that are reasonably likely to remedy

both the cause and effects of the

violation; this requires identification of

the practice or policy that is the likely

cause and an assessment of the extent

and scope of the violation. This

determination must be made on a caseby-case basis. The rule is not intended

to suggest that in each case there is a

single, most appropriate response. To

provide additional guidance, a list of

sample corrective actions, including

both prospective and remedial relief, is

included in the Official Staff

Commentary.

Many commenters believed that

creditors will be less likely to self-test

if the availability of the privilege cannot

be determined until after their

corrective action has been determined to

be sufficient. A number of them

suggested adopting a good-faith

standard, so that creditors using

reasonable business judgment about

how to correct potential violations

would be deemed to satisfy the

corrective action requirement.

The Board recognizes that creditors’

incentive to self-test may be affected by

the fact that creditors’ claims that the

self-test report and results are privileged

are subject to challenge. This is inherent

in the statutory framework established

by the 1996 Act, which allows parties

who are denied access to self-test data

an opportunity to contest the creditor’s

assertion of the privilege in a formal

adjudication. The application of a goodfaith or business judgment rule would

significantly limit the right and ability

of these parties to do so, by allowing

creditors’ own business judgment to

serve as the ultimate guide on the

corrective action requirement. The

Board believes a good-faith or business

judgment rule would be inconsistent

with the legislative intent. Accordingly,

as proposed, the rule continues to

recognize that determining whether a

creditor has taken appropriate corrective

action must be made on a case-by-case

basis and that the applicable standard is

whether the corrective action is

reasonably likely to remedy both the

cause and effect of the violation.

Paragraph 15(c)(2) also provides that

in determining the appropriate

corrective action, creditors should

identify the practice or policy that is the

likely cause of the violation and assess

the extent and scope of the violation.

For example, a creditor might identify

inadequate or improper lending

policies, failure to implement

established policies, employee conduct,

or other causes. The extent and scope of

a likely violation may be assessed by

determining which areas of operations

are likely to be affected by those policies

and practices—for example, by

determining the types of loans and

stages of the application process

involved and the branches or offices

where the violations may have occurred.

15(c)(3) Types of Relief

Paragraph 15(c)(3) has been added in

response to commenters’ concerns. It is

intended to give creditors more specific

guidance, and lists certain situations

that do not require remedial relief to

individual applicants in order for the

privilege to apply.

The proposed rule stated that

corrective action includes both

prospective and retroactive relief, as

may be appropriate. Some commenters

believed that this was too broad,

especially in light of the narrow

definition of ‘‘self-test.’’ They expressed

the view that the use of pre-application

testers to identify policies and practices

that illegally discriminate should not

require creditors to review existing loan

files to identify and compensate

applicants who might have been

adversely affected.

The final rule has been revised. For

the privilege to apply, a creditor must

take corrective action that is appropriate

for the type of self-test and the scope of

the likely violation. A creditor is

required to provide remedial relief to an

applicant identified by the self-test as

one whose rights were more likely than

not violated, but is not required to

identify other persons who might have

been adversely affected. The use of preapplication testers to identify policies

and practices that illegally discriminate

does not require creditors to review

existing loan files for the purpose of

identifying and compensating

applicants who might have been

adversely affected. Because this rule

only addresses the types of relief

required in order to assert the selftesting privilege, creditors should make

efforts to identify other potential

victims, however, as a good business

practice and to avoid or minimize

potential liability.

Some commenters asserted that

creditors’ incentive to self-test would be

weakened if the rule is interpreted to

require remedial relief equal to or

beyond what applicants could obtain in

a legal action. The final rule clarifies

that a creditor is not required to provide

remedial relief to an applicant if the

statute of limitations expired before the

results of the self-test were obtained or

if the applicant is otherwise ineligible

for such relief. For example, the creditor

need not offer credit to a denied

applicant who no longer qualifies for

the credit due to a change in financial

circumstances, although some other

type of relief might be appropriate.

15(c)(4) No Admission of Violation

This paragraph has been added in

response to commenters’ requests for

clarification that a creditor’s corrective

actions not be deemed an admission

that a violation occurred. The provision

is intended to provide additional

incentive for creditors to take preventive

measures that may address potential

problems even though a violation has

not yet occurred.

15(d)(1) Scope of Privilege

Paragraph 15(d)(1) describes the scope

of the privilege for covered self-tests.

Privileged documents may not be

obtained by a government agency for

use in an examination or investigation

relating to compliance with the ECOA,

or by a government agency or applicant

(including prospective applicants

alleging they were discouraged from

pursuing an application on a prohibited

basis) in any civil proceeding in which

a violation of the ECOA or Regulation B

is alleged. This paragraph applies to

federal, state, and local government

agencies. Accordingly, in a case brought

under the ECOA, the privilege

established under this section would

preempt inconsistent laws or court rules

to the extent they might require

disclosure of privileged self-testing data.

Some commenters believed that the

privilege should also apply in cases

filed under state law if the information

would be privileged in a case filed

under the ECOA. They argued that

creditors would be unable to rely on the

privilege as an incentive to self-test if

parties can obtain the information by

filing state law claims. The 1996 Act,

however, establishes only a limited

privilege, that protects self-testing data

from disclosure or use in examinations

and investigations conducted under the

ECOA and Fair Housing Act, and in

proceedings alleging a violation of those

laws.

In proceedings where the self-testing

privilege does not apply (for example,

litigation that is filed only under a

state’s fair lending statute), if the court
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66417

orders a creditor to disclose self-test

results, that disclosure would not be a

voluntary waiver of the privilege for

purposes of the ECOA. But the privilege

could be undermined for purposes of

the ECOA if the privileged self-testing

data are made public. Creditors could

seek a protective order to limit the

availability and use of the self-testing

data and prevent its dissemination

beyond what is necessary in that

particular case. In any event, as long as

the self-testing privilege is not forfeited

by the creditor, paragraph 15(d)(1)

precludes a party who has obtained

privileged information from using it in

a case brought under the ECOA.

15(d)(2) Loss of Privilege

Paragraph 15(d)(2) describes the

circumstances that would result in the

loss of privileged status. This paragraph

is adopted substantially as proposed

with only minor modifications for

clarification.

Paragraph 15(d)(2)(i) provides that the

results or report of a self-test, including

any data generated by the self-test, will

no longer be privileged under this

section once the creditor voluntarily

discloses all or part of the contents to

any government agency, loan applicant,

or the general public. This paragraph

has been revised to clarify that the

privilege is lost if the creditor 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.

Comment was solicited on a possible

exception to the general rule in

paragraph 15(d)(2)(i), whereby creditors

could voluntarily share privileged

information with a regulatory or law

enforcement agency without causing the

information to lose its privileged status

when it is subsequently sought by

private litigants. Under such an

exception, however, such disclosures

would cause the documents or

information to lose their privileged

status with respect to all supervisory

and enforcement agencies.

A significant number of commenters

supported such an exception and

believed it would be particularly useful

in enabling creditors to seek guidance

from the agencies in determining the

appropriate corrective action that is a

prerequisite for the privilege. It would

also encourage financial institutions to

voluntarily share self-testing data with

examiners, to reduce the burden

associated with compliance

examinations performed by those

agencies. A few commenters believed

that mandatory sharing of self-test

results with regulatory and enforcement

agencies was appropriate.

Some commenters opposed any

exception that would allow creditors to

voluntarily share privileged information

with government agencies while

maintaining the privilege as to private

litigants. They also questioned whether

such an exception would be consistent

with the law.

The Board believes that such an

exception would be useful and could be

adopted pursuant to the Board’s

statutory authority to create regulatory

exceptions under the ECOA. The 1996

Act, however, directs the Board and

HUD to enact substantially similar

regulations under the ECOA and Fair

Housing Act. For the reasons stated in

its notice of final rulemaking under the

Fair Housing Act, HUD does not believe

that there is statutory authority for such

an exception, and also does not believe

it is advisable. Accordingly, the Board

has adopted the rule as initially

proposed.

As provided in the 1996 Act, the

proposed rule stated that self-testing

data loses its privileged status if it is

disclosed by a person with ‘‘lawful

access’’ to the self-test report or results.

Some commenters suggested the

privilege should be lost only if the

person with access to the privileged

information is also authorized to make

such a disclosure. However, if a creditor

has no formal method for authorizing

individual employees to disclose

privileged information, that approach

would impose the added burden of

determining the nature and scope of

particular employees’ duties and

authority. Several commenters also

requested that the rule expressly state

that the privilege is not lost through an

inadvertent or accidental disclosure.

The statutory language does not

specifically address these issues. It may

have been the legislative intent to allow

such matters to be resolved under the

substantial body of judicial law that has

already developed regarding privileges

generally. For example, some courts

have held that a privilege is lost even if

the disclosure was unintentional or

inadvertent. Other courts have declined

to adopt a strict rule and opt instead for

an approach that takes account of the

facts surrounding the particular

disclosure before deciding whether or

not the privilege should be deemed to

be lost. In the absence of any clear

legislative intent, the Board believes

these issues are best resolved under the

existing law concerning privileges and

the rules of evidence as administered by

the courts. Thus, the final rule has been

adopted as proposed.

Several commenters sought additional

clarification because they believed the

rule regarding loss of the privilege when

information is disclosed by a person

with ‘‘lawful access’’ might be

interpreted to include any person

lawfully on the creditor’s premises.

Whether a particular individual has

‘‘lawful access’’ for purposes of

disclosing privileged information is a

factual issue. Consideration should be

given to whether the individual was an

employee or agent of the creditor who

reasonably should be expected to have

access to or knowledge of the privileged

information. The Board believes such

matters should be resolved by a court or

administrative law judge under the

existing law relating to privileges

generally. Accordingly, the proposed

rule has been adopted without change.

A few commenters requested

clarification that the privilege is not lost

if the creditor discloses self-testing

results to independent contractors

acting as auditors or consultants on

compliance matters. The Official Staff

Commentary is being revised to reflect

this interpretation.

Some commenters expressed concern

that if a creditor notified applicants or

loan customers that they were eligible

for remedial relief, that would be

viewed as a disclosure of the self-test

results, causing the privilege to be lost.

A provision has been added to the

Official Staff Commentary clarifying

that a creditor’s corrective actions alone

will not be considered a voluntary

disclosure of the self-test report or

results. For example, a creditor does not

disclose the results of a self-test merely

by offering to extend credit to a denied

applicant or by inviting the applicant to

reapply for credit. A voluntary

disclosure could occur, however, if the

creditor disclosed the self-test results in

connection with a new offer of credit.

Under paragraph 15(d)(2)(ii), if a

creditor elects to rely on the self-testing

results as a defense to alleged violations

of the ECOA in court or administrative

proceedings, the privilege will not apply

if the documents are sought in

connection with those proceedings. This

paragraph has been revised to clarify

that the privilege is lost if the creditor

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.

15(d)(3) Limited Use of Privileged

Information

Paragraph 15(d)(3) is adopted as

proposed, and implements the statutory

provision that allows for a limited use

of privileged documents for the purpose
66418 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

of determining a penalty or remedy after

a violation of the ECOA or Regulation B

has been formally adjudicated or

admitted. A creditor’s compliance with

this requirement does not evidence the

creditor’s intent to give up the privilege.

Supplement I to Part 202—Official Staff

Interpretations

The Official Staff Commentary is

being revised to reflect the amendments

to Regulation B and incorporate the

interpretations provided above.

IV. Regulatory Flexibility Analysis

In accordance with section 3(a) of the

Regulatory Flexibility Act (5 U.S.C.

603), the Board’s Office of the Secretary

has reviewed the amendments to

Regulation B. Overall, the amendments

are not expected to have any significant

impact on small entities. The

amendments implement the legal

privilege created by the 1996 Act for

certain information that creditors may

voluntarily develop about their

compliance with the fair lending laws

through self-testing. The regulation does

not impose any significant regulatory

requirements on creditors.

Consequently, the amendments are not

likely to have a significant impact on

institutions’ costs, including the costs to

small institutions.

V. Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3506),

the Board has reviewed the rule under

the authority delegated to the Board by

the Office of Management and Budget

(OMB). 5 CFR 1320 Appendix A.1.

Regulation B applies to individuals

and businesses that regularly extend

credit or participate in the decision to

extend credit. This includes all types of

creditors. Under the Paperwork

Reduction Act, however, the Board

accounts for the paperwork burden

associated with Regulation B only for

state member banks. Any estimates of

paperwork burden for other financial

institutions would be provided by the

federal agency or agencies supervising

those lenders.

The collection of information relating

to self-tests and corrective actions is

mandatory under this final rule. These

requirements are located in 12 CFR

202.12(b)(6). The recordkeepers are forprofit financial institutions, including

small businesses that voluntarily

conduct self-tests as defined in the rule.

Records relating to self-tests must be

retained for at least twenty-five months

and may be stored electronically. The

purpose of the recordkeeping is to

facilitate a determination about whether

the results or report of a creditor’s selftest are privileged under the rule, in the

event of a challenge. The recordkeeping

requirement also encourages creditors to

take appropriate corrective action if the

self-testing results demonstrate that

violations are likely. The recordkeeping

burden consists of the additional effort

necessary to retain self-testing records;

it does not include the effort necessary

to conduct and document the self-test.

There are 1,005 state member banks

that are potential recordkeepers under

this rule. In connection with the

proposed rule, the Board estimated the

recordkeeping burden based on each

state member bank conducting one selftesting program per year. This was done

in order to estimate the potential burden

under the broad definition of ‘‘self-test’’

on which the Board was soliciting

comment. Although the Board

anticipates that all institutions will

conduct audits of their performance

under the fair lending laws, compliance

programs that are covered by the final

rule’s narrow definition of self-test,

which requires the production of new

data, are most likely to be adopted by

large institutions. The Board believes

that the banks most likely to use

compliance programs that also meet the

rule’s definition of ‘‘self-test’’ are those

having assets of over $250 million,

which is about 18 percent of the state

member banks. The Board estimates that

about half of these banks (approximately

90) will conduct such tests about once

every 24 months, which is

approximately once during each

examination cycle. This is the

equivalent of self-tests being conducted

by approximately 45 state member

banks during any one calendar year.

The Board previously estimated

between one and eight hours (or an

average of two hours) as the burden for

retaining the relevant records of a selftest conducted by a state member bank.

One comment was received from a bank

holding company that believed the

Board’s estimate was too low. This

commenter did not provide an

explanation or provide any other

estimate of the burden on state member

banks or its organization. The Board is

retaining its initial estimate.

The Board estimates that 25 percent of

the state member banks that conduct

self-tests will improve their compliance

programs or take other actions in

response to the self-test results, even if

no likely violations are found. The

improvements or corrective action taken

will depend on self-test findings, and

the nature and scope of any possible

violation. The amount of time needed to

document the creditors’ actions will

also vary. The Board estimates that at a

typical state member bank the effort to

retain records associated with corrective

action would take an additional two to

20 hours, with an average of eight

recordkeeping burden hours per year.

The total annual burden that this rule

adds to the burden of Regulation B on

a combined basis for all state member

banks is estimated to be 178 hours.

There is estimated to be no annual cost

burden over the annual hour burden,

and no capital or start up costs.

Because the records would be

maintained at state member banks, no

issue of confidentiality under the

Freedom of Information Act normally

will arise. If information does come into

the Board’s possession, it will be

protected from disclosure by

exemptions 4 and 6 of the Freedom of

Information Act (FOIA). 5 U.S.C. 552(b)

(4) and (6). In addition, if such

information is in the workpapers of

Board examiners or extracted in Board

reports of examination, the information

would also be protected by exemption 8

of the FOIA. 5 U.S.C. 552(b)(8).

An agency may not collect or sponsor

the collection or disclosure of

information, and an organization is not

required to collect or disclose

information unless a currently valid

OMB control number is displayed. The

OMB control number for Regulation B is

7100–0201.

The Board has a continuing interest in

the public’s opinions about the

collection of information under the

Board’s rules. At any time, comments

regarding the burden estimate, or any

other aspect of this collection of

information, including suggestions for

reducing the burden, may be sent to:

Secretary, Board of Governors of the

Federal Reserve System, 20th and C

Streets, N.W., Washington, DC 20551;

and to the Office of Management and

Budget, Paperwork Reduction Project

(7100–0201), Washington, DC 20503.

List of Subjects in 12 CFR Part 202

Aged, Banks, banking, Civil rights,

Credit, Federal Reserve System, Marital

status discrimination, Penalties,

Religious discrimination, Reporting and

recordkeeping requirements, Sex

discrimination.

For the reasons set forth in the

preamble, 12 CFR part 202 is amended

as follows:

PART 202—EQUAL CREDIT

OPPORTUNITY (REGULATION B)

1. The authority citation for part 202

continues to read as follows:

Authority: 15 U.S.C. 1691–1691f.

2. Section 202.12 is amended by

adding a new paragraph (b)(6) to read as

follows:
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66419

§ 202.12 Record retention.

* * * * *

(b) Preservation of records. * * *

(6) Self-tests. For 25 months after a

self-test (as defined in § 202.15) has

been completed, the creditor shall retain

all written or recorded information

about the self-test. A creditor shall

retain information beyond 25 months if

it has actual notice that it is under

investigation or is subject to an

enforcement proceeding for an alleged

violation, or if it has been served with

notice of a civil action. In such cases,

the creditor shall retain the information

until final disposition of the matter,

unless an earlier time is allowed by the

appropriate agency or court order.

3. Section 202.15 is added to read as

follows:

§ 202.15 Incentives for self-testing and

self-correction.

(a) General rules—(1) Voluntary selftesting and correction. The report or

results of the self-test that a creditor

voluntarily conducts (or authorizes) are

privileged as provided in this section.

Data collection required by law or by

any governmental authority is not a

voluntary self-test.

(2) Corrective action required. The

privilege in this section applies only if

the creditor has taken or is taking

appropriate corrective action.

(3) Other privileges. The privilege

created by this section does not

preclude the assertion of any other

privilege that may also apply.

(b) Self-test defined—(1) Definition. A

self-test is any program, practice, or

study that:

(i) Is designed and used specifically to

determine the extent or effectiveness of

a creditor’s compliance with the act or

this regulation; and

(ii) Creates data or factual information

that is not available and cannot be

derived from loan or application files or

other records related to credit

transactions.

(2) Types of information privileged.

The privilege under this section applies

to the report or results of the self-test,

data or factual information created by

the self-test, and any analysis, opinions,

and conclusions pertaining to the selftest report or results. The privilege

covers workpapers or draft documents

as well as final documents.

(3) Types of information not

privileged. The privilege under this

section does not apply to:

(i) Information about whether a

creditor conducted a self-test, the

methodology used or the scope of the

self-test, the time period covered by the

self-test, or the dates it was conducted;

or

(ii) Loan and application files or other

business records related to credit

transactions, and information derived

from such files and records, even if it

has been aggregated, summarized, or

reorganized to facilitate analysis.

(c) Appropriate corrective action—(1)

General requirement. For the privilege

in this section to apply, appropriate

corrective action is required when the

self-test shows that it is more likely than

not that a violation occurred, even

though no violation has been formally

adjudicated.

(2) Determining the scope of

appropriate corrective action. A creditor

must take corrective action that is

reasonably likely to remedy the cause

and effect of a likely violation by:

(i) Identifying the policies or practices

that are the likely cause of the violation;

and

(ii) Assessing the extent and scope of

any violation.

(3) Types of relief. Appropriate

corrective action may include both

prospective and remedial relief, except

that to establish a privilege under this

section:

(i) A creditor is not required to

provide remedial relief to a tester used

in a self-test;

(ii) A creditor 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; and

(iii) A creditor is not required to

provide remedial relief to a particular

applicant if the statute of limitations

applicable to the violation expired

before the creditor obtained the results

of the self-test or the applicant is

otherwise ineligible for such relief.

(4) No admission of violation. Taking

corrective action is not an admission

that a violation occurred.

(d)(1) Scope of privilege. The report or

results of a privileged self-test may not

be obtained or used:

(i) By a government agency in any

examination or investigation relating to

compliance with the act or this

regulation; or

(ii) By a government agency or an

applicant (including a prospective

applicant who alleges a violation of

§ 202.5(a)) in any proceeding or civil

action in which a violation of the act or

this regulation is alleged.

(2) Loss of privilege. The report or

results of a self-test are not privileged

under paragraph (d)(1) of this section if

the creditor or a person with lawful

access to the report or results):

(i) Voluntarily discloses any part of

the report or results, or any other

information privileged under this

section, to an applicant or government

agency or to the public;

(ii) Discloses any part of the report or

results, or any other information

privileged under this section, as a

defense to charges that the creditor has

violated the act or regulation; or

(iii) Fails or is unable to produce

written or recorded information about

the self-test that is required to be

retained under § 202.12(b)(6) when the

information is needed to determine

whether the privilege applies. This

paragraph does not limit any other

penalty or remedy that may be available

for a violation of § 202.12.

(3) Limited use of privileged

information. Notwithstanding paragraph

(d)(1) of this section, the self-test report

or results and any other information

privileged under this section may be

obtained and used by an applicant or

government agency solely to determine

a penalty or remedy after a violation of

the act or this regulation has been

adjudicated or admitted. Disclosures for

this limited purpose may be used only

for the particular proceeding in which

the adjudication or admission was

made. Information disclosed under this

paragraph (d)(3) remains privileged

under paragraph (d)(1) of this section.

4. In Supplement I to Part 202, under

Section 202.12—Record Retention, a

new paragraph 12(b)(6) is added to read

as follows:

Supplement I To Part 202—Official

Staff Interpretations

* * * * *

Section 202.12—Record Retention

* * * * *

12(b) Preservation of Records

* * * * *

12(b)(6) Self-tests

1. The rule requires all written or recorded

information about a self-test to be retained for

25 months after a self-test has been

completed. For this purpose, a self-test is

completed after the creditor has obtained the

results and made a determination about what

corrective action, if any, is appropriate.

Creditors are required to retain information

about the scope of the self-test, the

methodology used and time period covered

by the self-test, the report or results of the

self-test including any analysis or

conclusions, and any corrective action taken

in response to the self-test.

* * * * *

5. Supplement I to Part 202 is

amended by adding Section 202.15—

Incentives for Self-testing and Selfcorrection, to read as follows:

* * * * *
66420 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations

Section 202.15—Incentives for Self-testing

and Self-correction

15(a) General Rules

15(a)(1) Voluntary Self-Testing and

Correction

1. Activities required by any governmental

authority are not voluntary self-tests. A

governmental authority includes both

administrative and judicial authorities for

federal, state, and local governments.

15(a)(2) Corrective Action Required

1. To qualify for the privilege, appropriate

corrective action is required when the results

of a self-test show that it is more likely than

not that there has been a violation of the

ECOA or this regulation. A self-test is also

privileged when it identifies no violations.

2. In some cases, the issue of whether

certain information is privileged may arise

before the self-test is complete or corrective

actions are fully under way. This would not

necessarily prevent a creditor from asserting

the privilege. In situations where the self-test

is not complete, for the privilege to apply the

lender must satisfy the regulation’s

requirements within a reasonable period of

time. To assert the privilege where the selftest shows a likely violation, the rule

requires, at a minimum, that the creditor

establish a plan for corrective action and a

method to demonstrate progress in

implementing the plan. Creditors must take

appropriate corrective action on a timely

basis after the results of the self-test are

known.

3. A creditor’s determination about the

type of corrective action needed, or a finding

that no corrective action is required, is not

conclusive in determining whether the

requirements of this paragraph have been

satisfied. If a creditor’s claim of privilege is

challenged, an assessment of the need for

corrective action or the type of corrective

action that is appropriate must be based on

a review of the self-testing results, which

may require an in camera inspection of the

privileged documents.

15(a)(3) Other privileges

1. A creditor may assert the privilege

established under this section in addition to

asserting any other privilege that may apply,

such as the attorney-client privilege or the

work product privilege. Self-testing data may

still be privileged under this section, whether

or not the creditor’s assertion of another

privilege is upheld.

15(b) Self-test Defined

15(b)(1) Definition

Paragraph 15(b)(1)(i)

1. To qualify for the privilege, a self-test

must be sufficient to constitute a

determination of the extent or effectiveness

of the creditor’s compliance with the act and

Regulation B. Accordingly, a self-test is only

privileged if it was designed and used for

that purpose. A self-test that is designed or

used to determine compliance with other

laws or regulations or for other purposes is

not privileged under this rule. For example,

a self-test designed to evaluate employee

efficiency or customers’ satisfaction with the

level of service provided by the creditor is

not privileged even if evidence of

discrimination is uncovered incidentally. If a

self-test is designed for multiple purposes,

only the portion designed to determine

compliance with the ECOA is eligible for the

privilege.

Paragraph 15(b)(1)(ii)

1. The principal attribute of self-testing is

that it constitutes a voluntary undertaking by

the creditor to produce new data or factual

information that otherwise would not be

available and could not be derived from loan

or application files or other records related to

credit transactions. Self-testing includes, but

is not limited to, the practice of using

fictitious applicants for credit (testers), either

with or without the use of matched pairs. A

creditor may elect to test a defined segment

of its business, for example, loan applications

processed by a specific branch or loan officer,

or applications made for a particular type of

credit or loan program. A creditor also may

use other methods of generating information

that is not available in loan and application

files, such as surveying mortgage loan

applicants. To the extent permitted by law,

creditors might also develop new methods

that go beyond traditional pre-application

testing, such as hiring testers to submit

fictitious loan applications for processing.

2. The privilege does not protect a

creditor’s analysis performed as part of

processing or underwriting a credit

application. A creditor’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) does not produce new

information about a creditor’s compliance

and is not a self-test for purposes of this

section. Similarly, a statistical analysis of

data derived from existing loan files is not

privileged.

15(b)(3) Types of Information not Privileged

Paragraph 15(b)(3)(i)

1. The information listed in this paragraph

is not privileged and may be used to

determine whether the prerequisites for the

privilege have been satisfied. Accordingly, a

creditor might be asked to identify the selftesting method, for example, whether preapplication testers were used or data were

compiled by surveying loan applicants.

Information about the scope of the self test

(such as the types of credit transactions

examined, or the geographic area covered by

the test) also is not privileged.

Paragraph 15(b)(3)(ii)

1. Property appraisal reports, minutes of

loan committee meetings or other documents

reflecting the basis for a decision to approve

or deny an application, loan policies or

procedures, underwriting standards, and

broker compensation records are examples of

the types of records that are not privileged.

If a creditor arranges for testers to submit

loan applications for processing, the records

are not related to actual credit transactions

for purposes of this paragraph and may be

privileged self-testing records.

15(c) Appropriate Corrective Action

1. The rule only addresses what corrective

actions are required for a creditor to take

advantage of the privilege in this section. A

creditor may still be required to take other

actions or provide additional relief if a formal

finding of discrimination is made.

15(c)(1) General Requirement

1. Appropriate corrective action is required

even though no violation has been formally

adjudicated or admitted by the creditor. In

determining whether it is more likely than

not that a violation occurred, a creditor must

treat testers as if they are actual applicants

for credit. A creditor may not refuse to take

appropriate corrective action under this

section because the self-test used fictitious

loan applicants. The fact that a tester’s

agreement with the creditor waives the

tester’s legal right to assert a violation does

not eliminate the requirement for the creditor

to take corrective action, although no

remedial relief for the tester is required under

paragraph 15(c)(3).

15(c)(2) Determining the Scope of

Appropriate Corrective Action

1. Whether a creditor has taken or is taking

corrective action that is appropriate will be

determined on a case-by-case basis.

Generally, the scope of the corrective action

that is needed to preserve the privilege is

governed by the scope of the self-test. For

example, a creditor that self-tests mortgage

loans and discovers evidence of

discrimination may focus its corrective

actions on mortgage loans, and is not

required to expand its testing to other types

of loans.

2. In identifying the policies or practices

that are the likely cause of the violation, a

creditor might identify inadequate or

improper lending policies, failure to

implement established policies, employee

conduct, or other causes. The extent and

scope of a likely violation may be assessed

by determining which areas of operations are

likely to be affected by those policies and

practices, for example, by determining the

types of loans and stages of the application

process involved and the branches or offices

where the violations may have occurred.

3. Depending on the method and scope of

the self-test and the results of the test,

appropriate corrective action may include

one or more of the following:

i. If the self-test identifies individuals

whose applications were inappropriately

processed, offering to extend credit if the

application was improperly denied and

compensating such persons for out-of-pocket

costs and other compensatory damages;

ii. Correcting institutional polices or

procedures that may have contributed to the

likely violation, and adopting new policies as

appropriate;

iii. Identifying and then training and/or

disciplining the employees involved;

iv. Developing outreach programs,

marketing strategies, or loan products to

serve more effectively segments of the

lender’s markets that may have been affected

by the likely discrimination; and

v. Improving audit and oversight systems

to avoid a recurrence of the likely violations.
Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66421

15(c)(3) Types of Relief

Paragraph 15(c)(3)(ii)

1. The use of pre-application testers to

identify policies and practices that illegally

discriminate does not require creditors to

review existing loan files for the purpose of

identifying and compensating applicants

who might have been adversely affected.

2. If a self-test identifies a specific

applicant that was subject to discrimination

on a prohibited basis, in order to qualify for

the privilege in this section the creditor must

provide appropriate remedial relief to that

applicant; the creditor would not be required

under this paragraph to identify other

applicants who might also have been

adversely affected.

Paragraph 15(c)(3)(iii)

1. A creditor is not required to provide

remedial relief to an applicant that would not

be available by law. An applicant might also

be ineligible from obtaining certain types of

relief due to changed circumstances. For

example, a creditor is not required to offer

credit to a denied applicant if the applicant

no longer qualifies for the credit due to a

change in financial circumstances, although

some other type of relief might be

appropriate.

15(d)(1) Scope of Privilege

1. The privilege applies with respect to any

examination, investigation or proceeding by

federal, state, or local government agencies

relating to compliance with the Act or this

regulation. Accordingly, in a case brought

under the ECOA, the privilege established

under this section preempts any inconsistent

laws or court rules to the extent they might

require disclosure of privileged self-testing

data. The privilege does not apply in other

cases, for example, litigation filed solely

under a state’s fair lending statute. In such

cases, if a court orders a creditor to disclose

self-test results, the disclosure is not a

voluntary disclosure or waiver of the

privilege for purposes of paragraph 15(d)(2);

creditors may protect the information by

seeking a protective order to limit availability

and use of the self-testing data and prevent

dissemination beyond what is necessary in

that case. Paragraph 15(d)(1) precludes a

party who has obtained privileged

information from using it in a case brought

under the ECOA, provided the creditor has

not lost the privilege through voluntarily

disclosure under paragraph 15(d)(2).

15(d)(2) Loss of Privilege

Paragraph 15(d)(2)(i)

1. Corrective action taken by a creditor, by

itself, is not considered a voluntary

disclosure of the self-test report or results.

For example, a creditor does not disclose the

results of a self-test merely by offering to

extend credit to a denied applicant or by

inviting the applicant to reapply for credit.

Voluntary disclosure could occur under this

paragraph, however, if the creditor disclosed

the self-test results in connection with a new

offer of credit.

2. Disclosure of self-testing results to an

independent contractor acting as an auditor

or consultant for the creditor on compliance

matters does not result in loss of the

privilege.

Paragraph 15(d)(2)(ii)

1. The privilege is lost if the creditor

discloses privileged information, such as the

results of the self-test. The privilege is not

lost if the creditor merely reveals or refers to

the existence of the self-test.

Paragraph 15(d)(2)(iii)

1. A creditor’s claim of privilege may be

challenged in a court or administrative law

proceeding with appropriate jurisdiction. In

resolving the issue, the presiding officer may

require the creditor to produce privileged

information about the self-test.

Paragraph 15(d)(3) Limited use of

Privileged Information

1. A creditor may be required to produce

privileged documents for the purpose of

determining a penalty or remedy after a

violation of the ECOA or Regulation B has

been formally adjudicated or admitted. A

creditor’s compliance with this requirement

does not evidence the creditor’s intent to

forfeit the privilege.

* * * * *

By order of the Board of Governors of the

Federal Reserve System, December 10, 1997.

William W. Wiles,

Secretary of the Board.

[FR Doc. 97–32663 Filed 12–17–97; 8:45 am]

BILLING CODE 6210–01–P