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Inactive Financial Institution Letters 


[Federal Register: January 31, 1997 (Volume 62, Number 21)]
[Proposed Rules]
[Page 4882-4887]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[[Page 4882]]

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 100

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


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

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

ACTION: Proposed rule.

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

DATES: Comment due date: March 3, 1997.

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

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

SUPPLEMENTARY INFORMATION:

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

Background:

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

II. Proposed Regulatory Provisions

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

III. Section-by-Section Analysis of Proposed Rule

Section 100.140  Incentives for self-testing and self-correction

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

Section 100.141  Corrective action required

    This section implements the requirement imposed by the Act that a

[[Page 4883]]

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

Section 100.142  Definitions

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

[[Page 4884]]

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

Section 100.143  Types of information

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

Section 100.144  Appropriate corrective action

    Congress intended for the self-test privilege to apply only where
self-correction follows self-testing. The language of sec. 2302 is
identical to section 302 of an earlier bill on this issue, S. 650. The
Committee Report on S. 650, Senate Report 104-185, in discussing sec.
302, reinforced the link between the discovery of potential violations
and corrective remedial action.\2\
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    \2\ ``The purpose of this provision is to encourage institutions
to undertake candid and complete self-tests for possible fair
lending violations and to act decisively to correct any discovered
problems. The privilege ensures that such self-test efforts will not
be used against an institution if that institution has undertaken
remedial action.'' (emphasis added) Senate Report 104-185, page 15.
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    This section clarifies that a determination of whether a lender has
taken appropriate corrective action must be made on a case-by-case
basis. In April, 1994, the Interagency Task Force on Fair Lending,
comprised of officials from the 10 federal agencies responsible for
implementing and enforcing the fair lending laws, issued a policy
statement on credit discrimination.3 That policy statement advised
lenders that discover discriminatory practices as a result of a self-
test to ``make all reasonable efforts to determine the full extent of
the discrimination and its cause'' and to ``determine whether the
practices were grounded in defective policies, poor implementation or
control of those policies, or isolated to a particular area of the
lender's operations.'' The policy statement also provided a list of
sample corrective actions that might be appropriate depending on the
circumstances, while recognizing, however, that not all corrective
measures listed would be appropriate in every case.
---------------------------------------------------------------------------

    \3\ 59 FR 18266, 18270-71 (April 15, 1994).
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    The proposed rule reflects the 1994 Interagency Policy Statement
regarding corrective action. A lender must take corrective action that
is reasonable in light of the potential violations to fully remedy both
the cause and effect of any possible violation. It must be commensurate
with the scope of the discrimination and specifically tailored to
address the particular type of problem identified by the self-test.
    To determine the appropriate corrective action, the lender must:
(i) Identify the policies and practices that are the likely cause of
the possible violation, such as inadequate or improper lending
policies, failure to implement established policies, employee conduct,
or other causes; and (ii) assess the extent and scope of any potential
violation, by determining which areas of the operations are likely to
be affected by those policies and practices. This would include
identifying the stages of the loan application process, types of loans,
or the particular branch where the possible discrimination has
occurred.
    For example, where a pre-application test reveals that potential
borrowers in minority areas are not offered or made aware of the full
range of available loan products and that borrowers in non-minority
areas are offered or made aware of the full range of products, the
lender should examine its marketing, sales, and outreach activities
generally and the practices of individual branches and implement
actions to address the results of the test.
    The extent of this corrective action should be contrasted with the
action appropriate where a test by a lender reveals disparate treatment
with respect to a specific minority group at a single branch. In this
situation, an examination of all branch loan officer activities would
be appropriate, as would: A review to determine if there are other
potential victims of disparate treatment at the branch; training;
offers to extend credit and/or offers to provide compensation for
damages to potential victims; notifications to potential victims
regarding their legal rights; and appropriate monitoring procedures.
    If a self-test reveals that loan officers discourage the submission
of loan applications by minorities by quoting more onerous loan terms,
such as larger down-payments or higher interest rates, retroactive
relief may also be required. Appropriate corrective action also would
include reviewing of actual loan files to determine if minority
borrowers were actually granted loans on less favorable terms, and
providing them with more favorable loans.

Section 100.145  Scope of privilege

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

[[Page 4885]]

Section 100.146  Loss of privilege

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

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

Section 100.148  Adjudication

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

Section 100.149  Effective date

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

Findings and Certifications

Justification for Shortened Comment Period

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

Regulatory Planning and Review

    This proposed rule has been reviewed in accordance with Executive
Order

[[Page 4886]]

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

Unfunded Mandates Reform Act

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

Environmental Impact

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

Impact on Small Entities

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

Federalism Impact

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

Impact on the Family

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

List of Subjects in 24 CFR part 100

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

PART 100--DISCRIMINATORY CONDUCT UNDER THE FAIR HOUSING ACT

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

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

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

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

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

Sec. 100.141  Corrective action required.

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

Sec. 100.142  Definitions.

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

Sec. 100.143  Types of information.

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

Sec. 100.144  Appropriate corrective action.

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

[[Page 4887]]

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

Sec. 100.145  Scope of privilege.

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

Sec. 100.146  Loss of privilege.

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

Sec. 100.147  Limited use of privileged information.

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

Sec. 100.148  Adjudication.

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

Sec. 100.149  Effective date.

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

    Dated: January 10, 1997.
Susan M. Forward,
Deputy Assistant Secretary for Enforcement and Investigations, Fair
Housing and Equal Opportunity.
[FR Doc. 97-2453 Filed 1-30-97; 8:45 am]
BILLING CODE 4210-28-P
Last Updated 07/17/1999 communications@fdic.gov