[Federal Register Volume 62, Number 1 (Thursday, January 2, 1997)]
[Proposed Rules]
[Pages 56-62]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32919]
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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: Proposed rule.
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SUMMARY: The Board is publishing for comment proposed revisions to
Regulation B (Equal Credit Opportunity). The revisions would 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 be publishing for
comment a substantially similar proposal to revise the regulations
implementing the Fair Housing Act.
DATES: Comments must be received on or before January 31, 1997.
ADDRESSES: Comments should refer to Docket No. R-0955, and may be
mailed
[[Page 57]]
to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, N.W., Washington,
D.C. 20551. Comments also may be delivered to Room B-2222 of the Eccles
Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard
station in the Eccles Building courtyard on 20th Street, N.W. (between
Constitution Avenue and C Street) at any time. Comments received will
be available for inspection in Room MP-500 of the Martin Building
between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in 12 CFR
261.8 of the Board's rules regarding availability of information.
FOR FURTHER INFORMATION CONTACT: James A. Michaels, Senior Attorney, or
Manley Williams, 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, Dorothea Thompson,
Telecommunications Device for the Deaf, 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 ``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 or credit applicant for use in
an examination or investigation relating to fair lending compliance, or
in any civil 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 Act directs the Board to issue implementing regulations,
including a definition of what constitutes a ``self-test.'' After
consultation with the federal agencies responsible for enforcing the
ECOA and with the Department of Housing and Urban Development (HUD),
the Board is publishing proposed rules to implement the 1996 Act's
amendments to the ECOA. The 1996 Act also establishes a privilege for
creditor self-testing under the Fair Housing Act (42 U.S.C. 3601 et
seq). HUD will be publishing for comment substantially similar rules to
implement the amendments to the Fair Housing Act.
II. Proposed Regulatory Provisions
The proposed amendment to Regulation B would implement the 1996 Act
by defining what constitutes a privileged self-test. The Board proposes
to define a ``self-test'' as any program, practice, or study that
creates data or factual information about the creditor's compliance
with the ECOA that is not available or derived from loan files or other
records related to credit transactions. This includes but is not
limited to the practice of using fictitious loan applicants (testers).
The privilege would apply to the factual evidence 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 a creditor's review or evaluation
of loan files.
The Board expects to publish a final rule in March 1997, which
would become effective 30 days later. The 1996 Act provides that once
the rule is issued, self-tests will become privileged even if they were
conducted before the regulation's effective date. As an exception to
this, 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 disclosed.
III. Section-by-Section Analysis
Section 202.15 Incentives for Self-Testing and Self-Correction
15(a) General Rule
Proposed paragraph 15(a) states the general rule that the report or
results of a creditor's self-test are privileged if the conditions
specified in this rule are satisfied. The privilege applies whether the
creditor conducts the self-test or employs the services of a third
party. A self-test must, however, be conducted voluntarily; self-tests
that are required by a government authority (including those conducted
pursuant to a judicial order) would not qualify for the privilege.
Similarly, any collection of data required by law would not be
considered voluntary under this section. 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.
This paragraph would also implement the requirement imposed by the
1996 Act that a creditor take appropriate corrective action to address
any possible violations identified by the self-test in order for the
privilege to apply. A creditor must take whatever actions are
reasonable in light of the scope of the possible violations to fully
remedy both their cause and effects. This may include both prospective
and retroactive relief. Guidance on a creditor's responsibility for
taking appropriate corrective action is provided under paragraph 15(c).
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 Board
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
had occurred. Under such circumstances, some creditors might be
reluctant to use self-testing in light of the fact that the mere
assertion of the privilege might prompt the filing of legal claims.
The Board also notes that a creditor'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 creditor's
claim of privilege is challenged, it would be necessary to assess the
need for corrective action or 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 a judge may
conduct an in camera inspection of the privileged documents.
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Under the statute, the privilege applies only if the creditor has
already taken or is in the process of taking appropriate corrective
action. In some cases, the issue of whether certain information is
privileged may arise before the corrective actions are fully underway.
The rule requires, at a minimum, that the creditor establish a plan for
corrective action, a means for monitoring the creditor's progress in
implementing the plan, and activity to begin carrying out the plan. A
schedule may be imposed by the court or agreed to by an agency or the
other parties affected. A creditor's failure to fully implement planned
corrective action may be cause for subsequently reevaluating whether
the privilege applies.
15(b) Self-test defined
15(b)(1) Definition
Proposed paragraph 15(b)(1) states what constitutes a ``self-test''
for purposes of this rule. The 1996 Act does not define ``self-test''
and authorizes the Board to define by regulation the practices to be
covered by the privilege. The Board proposes to define a ``self-test''
as any program, practice, or study used to create data or factual
information about the creditor's compliance with the ECOA and
Regulation B that is not available and cannot be derived from loan or
application files or other records related to credit transactions. This
definition of self-test includes but is not limited to the practice of
using testers. For example, self-testing would also include a survey of
mortgage customers conducted by a creditor for fair lending purposes,
or a program specially designed to test loan officers' knowledge about
fair lending laws.
In establishing the self-testing privilege, the Congress sought to
encourage lenders to undertake voluntary efforts to assess their
compliance with fair lending laws. The proposed definition is an
incentive for creditors to use self-testing to monitor the pre-
application stage of the loan process in particular; 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 possible
discrimination voluntarily gathered through a self-test will not be
used against a creditor, provided the creditor takes appropriate
corrective actions for any discrimination that is found. Although the
legislative history focuses on the traditional use of matched-pair
testers, it also recognizes that other testing methods may also be
useful.
Under the proposed rule, the principal attribute of self-testing is
that it constitutes a voluntary undertaking by the creditor to produce
new factual evidence that otherwise would not be available from credit
records. The proposed rule does not define ``self-test'' so broadly as
to include all types of self-evaluation or self-assessment performed by
a creditor. Self-evaluations involving creditor reviews of loan or
application files, and reviews of HMDA data or similar types of records
(such as broker or loan officer compensation records) that do not
produce new data or factual evidence about a creditor's compliance
would not be covered by the privilege. Accordingly, a compilation of
data or a regression analysis derived from the data in existing loan
files would not be privileged.
Although a broader definition encompassing such audits or
evaluations would be within the Board's rulemaking authority under the
statute, the Board does not believe that this broader definition of
self-test is necessary. Principles of sound lending dictate that a
creditor 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 creditor records kept in the ordinary
course of business. Notwithstanding any evaluation performed by the
creditor, the underlying loan records are themselves subject to
examination by the regulatory and enforcement agencies and must usually
be disclosed to a private litigant alleging a violation. The Board
believes that creditors already have adequate incentive to conduct such
routine compliance reviews and file analyses as a good business
practice and to avoid or minimize potential liability for violations.
Insured financial institutions also have an incentive to conduct
such audits to assist the regulatory agencies in streamlining the bank
examination process and thereby minimizing the burden and costs
associated with that process. A broader definition of self-test would
allow creditors to withhold information relating to self-audits from a
regulatory agency. At this time, the Board does not believe it is
necessary to extend the privilege to audits of existing business
records, which could have an unintended negative effect on the levels
of cooperation between creditors and the regulatory agencies. The Board
solicits public comment, however, on the scope of the proposed
definition of ``self-test'' and whether a broader definition would
adversely affect the ability of supervisory or enforcement agencies or
private parties to obtain needed information or whether it would
provide needed incentive for creditor monitoring and self-correction.
In order to qualify for the privilege, a self-test must be designed
and conducted to assess the level and effectiveness of the creditor's
compliance with the rules prohibiting discrimination or discouraging
loan applications on a prohibited basis. Testing for compliance with
the other regulatory requirements of Regulation B is not privileged.
For example, a test to determine whether adverse action notices are
mailed within applicable time limits would not be privileged. A self-
test designed for other purposes, such as a self-test designed to
observe employees' efficiency and thoroughness in meeting customer
needs, is not covered by the privilege even if evidence of
discrimination is uncovered incidentally.
15(b)(2) Examples
Proposed paragraph 15(b)(2) gives examples of some activities that
would and would not be included as self-tests for purposes of this
section.
15(b)(3) Types of information covered
Under the 1996 Act, the privilege covers the report or results of a
self-test. Proposed paragraph 15(b)(3) clarifies that this includes any
data generated by the self-test and any analysis of such data, and any
workpapers or draft documents.
15(b)(4) Types of information not covered
The 1996 Act does not prohibit an agency or applicant from
requesting information about whether a creditor has conducted a self-
test. Proposed paragraph 15(b)(4) clarifies the right of a government
agency or private litigant to obtain sufficient information about the
existence of the self-test, including its scope or the methodology used
in conducting the test, to determine whether to challenge a creditor's
claim of privilege. The 1996 Act 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 Board
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,
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or the production of documents to other parties under an appropriate
protective order that limits the purpose for which they may be used.
15(c) Appropriate corrective action
Proposed paragraph 15(c) clarifies that a determination of whether
a creditor has taken appropriate corrective action must be made on a
case-by-case basis. Under the statute, an issue regarding the
sufficiency of the corrective action may be resolved in a court or
administrative law proceeding. A creditor must take whatever actions
are reasonable given the nature and scope of the possible violations to
fully remedy both their cause and effects. To determine the appropriate
corrective action, the creditor must: (1) identify the policies or
practices that are the 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 the
stages of the application process and the areas of operations likely to
be affected by those policies or practices, and the particular branches
or offices involved.
The Board proposes to provide additional guidance in the Official
Staff Commentary to Regulation B, by including a list of sample
corrective actions, including both prospective and retroactive relief.
Not all of the listed corrective measures would be appropriate in every
case. Comments are solicited on this approach.
In 1994, the Interagency Task Force on Fair Lending, representing
the ten federal agencies responsible for implementing and enforcing the
fair lending laws, issued a policy statement on credit discrimination
(59 FR 18266, 18270-71 (April 15, 1994)). 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
prospective and retroactive corrective actions that might be
appropriate depending on the circumstances.
The proposed regulation and revisions to the Official Staff
Commentary substantially follow the discussion of self-testing and the
list of sample corrective actions set out in the Interagency Policy
Statement. Appropriate corrective action may include, but is not
limited to, one or more of the following:
1. Identifying persons whose applications may have been
inappropriately processed; offering to extend credit if the
applications were improperly denied; compensating applicants for
damages, both out-of-pocket and compensatory; and notifying them of
their legal rights.
2. Correcting institutional polices or procedures that may have
contributed to possible discrimination, and adopting new policies as
appropriate;
3. Identifying and then training and/or disciplining the employees
involved;
4. Developing outreach programs, marketing strategies, or loan
products to more effectively serve segments of the lender's markets
that may have been affected by the possible discrimination; and
5. Improving audit and oversight systems to avoid a recurrence of
the possible violations.
A creditor must take corrective action that is commensurate with
the scope of the discrimination and is specifically tailored to address
the particular type of problem identified by the self-test. For
example, if self-testing reveals that minority applicants do not
receive the same level of assistance during the pre-application stage,
but reveals no discrepancy in loan decisions, underwriting criteria or
credit terms for loan applications that were actually filed, it may be
sufficient for a creditor to take prospective action relating to the
creditor's policies and employee training. On the other hand, if a
self-test reveals that loan officers treat the submission of loan
applications by minorities differently by quoting more onerous loan
terms such as larger down-payments or higher interest rates, in
addition to prospective action (such as outreach efforts) retroactive
relief may also be required; appropriate corrective action would
include a review of existing loan files to determine if minority
borrowers were actually granted loans on less favorable terms.
15(d)(1) Scope of privilege
Proposed paragraph 15(d)(1) explains the nature of the qualified
privilege afforded by the new law. This paragraph states that
privileged documents may not be obtained by a government agency for use
in an examination or investigation relating to fair lending compliance,
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. There may be other proceedings
where the privilege would not apply, for example, if the documents were
sought in litigation unrelated to fair lending issues. Comment is
solicited on how the rule should apply to state agencies for purposes
of the ECOA.
15(d)(2) Loss of privilege
Proposed paragraph 15(d)(2) describes the circumstances that would
result in documents losing their privileged status. As provided in the
1996 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 creditor has voluntarily disclosed all or part of
the contents to any government agency, loan applicant, or the general
public. This is explained in proposed paragraph 15(d)(2)(i).
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 would not apply if the documents are sought
in connection with those proceedings--the disclosure would be treated
as a voluntary disclosure under this paragraph. This loss of privilege
is covered in proposed paragraph 15(d)(2)(ii). However, a creditor's
involuntary production of records in response to a judicial order does
not evidence the creditor'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, for example
under a protective order, that disclosure would not affect the
privileged status of the documents.
The 1996 Act 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. The statute draws no distinction based on
whether the person was authorized by the creditor to make the
particular disclosure.
The Board solicits comments on whether it should establish by
regulation an exception to the general rule in paragraph 15(d)(2)(i),
whereby creditors could voluntarily share privileged information with a
federal or state bank supervisory agency 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 or information to lose their privileged
status with respect to all supervisory or enforcement agencies. The
purpose of the exception would be to encourage greater cooperation
between creditors and enforcement agencies in monitoring compliance and
to encourage creditors
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to seek guidance from the agencies in developing appropriate corrective
action.
As noted above, a creditor's claim of privilege may be challenged
in an appropriate court or administrative law proceeding. Proposed
paragraph 15(d)(2)(iii) addresses the situation where a creditor seeks
to assert the privilege but fails or is unable to produce information
pertaining to the self-test that is necessary for determining whether
the privilege applies. The results or report of a self-test would not
be privileged in such cases. The judge may determine in each case
whether the creditor has met its burden of producing the relevant
evidence.
15(d)(3) Limited use of privileged information
Proposed paragraph 15(d)(3) implements the statutory provision that
allows for a limited use of privileged documents. The report or results
of a privileged self-test may be obtained and used for the purpose of
determining a penalty or remedy after a violation of the ECOA or
Regulation B has been formally adjudicated or admitted. The production
of privileged documents for this purpose does not evidence the
creditor'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 a formal
adjudication or an admission by the creditor, the limited use of
privilege documents under this paragraph would apply.
The 1996 Act also provides that information disclosed for purposes
of determining a penalty or remedy may be used only for the particular
proceeding in which the adjudication or admission is made. Accordingly,
parties who obtain such information are prohibited from any further
dissemination and the judge in that proceeding may issue an appropriate
order.
15(e) Record retention
Proposed paragraph 15(e) provides that a creditor has a duty to
retain self-testing records for a limited time. This retention is
necessary to facilitate a determination about whether the results or
report of the self-test are privileged or for the purpose of
determining the appropriate penalty or remedy when a violation has been
adjudicated or admitted. The Board proposes to adopt the same standard
for the retention of self-testing records as applies to other records,
which must be retained for 25 months.
IV. Form of Comment Letters
Comment letters should refer to Docket No. R-0955. The Board
requests that, when possible, comments be prepared using a standard
courier typeface with a type size of 10 or 12 characters per inch. This
will enable the Board to convert the text into machine-readable form
through electronic scanning, and will facilitate automated retrieval of
comments for review. Comments may also be submitted on 3.5 inch or 5.25
inch computer diskettes, in any IBM-compatible DOS-based format.
Comments on computer diskettes must be accompanied by a paper version.
The comment period ends on January 31, 1997. Normally the Board
provides a 60-day comment period, in keeping with the Board's policy
statement on rulemaking (44 FR 3957, January 19, 1979). In this case,
the 1996 Act directs the Board to prescribe final regulations by March
31, 1997. The Board believes that an abbreviated comment period is
necessary in order to meet this schedule.
V. Regulatory Flexibility Analysis
The proposed 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 proposed amendments are
not likely to have a significant impact on institutions' costs,
including the costs to small institutions.
VI. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44
U.S.C.3506), the Board has reviewed the proposed rule under authority
delegated to the Board by the Office of Management and Budget (OMB). 5
CFR 1320 Appendix A.1. Comments on the collection or disclosure of
information associated with this regulation should be sent to the
Office of Management and Budget, Paperwork Reduction Project (7100-
0201), Washington, DC 20503, with copies of such comments sent to Mary
M. McLaughlin, Chief, Financial Reports Section, Division of Research
and Statistics, Mail Stop 97, Board of Governors of the Federal Reserve
System, Washington, DC 20551.
Regulation B applies to individuals and businesses that regularly
extend credit or participate in the decision of whether or not 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 that supervise those
lenders. There are 1,028 state member banks that are respondents and/or
recordkeepers, with an estimated average frequency of 4,765 responses
per bank each year. The current estimated burden for Regulation B
ranges from fifteen seconds to five minutes per response. The combined
annual burden for all state member banks under Regulation B is
estimated to be 129,015 hours.
The collection of information requirements in the proposed
regulation are found in 12 CFR 202.15(e). The recordkeepers are for-
profit financial institutions, including small businesses. Records
relating to self-tests must be retained for at least twenty-five
months. The purpose is to facilitate the determination about whether
the results or report of a creditor's self-test are privileged. The
recordkeeping burden associated with the proposal 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.
The privilege for information developed through self-tests is
intended to serve as an incentive for lenders to undertake voluntary
efforts to assess their compliance with fair lending laws. The Federal
Reserve welcomes comments that would help it estimate the number of
state member banks that would use self-testing under the proposal. At a
typical state member bank that conducts one self-testing program per
year, it is estimated to take between one and eight hours (or an
average of two hours) for the additional effort to retain the relevant
records. Some portion of banks that conduct self-tests will find errors
in compliance and will have to take appropriate corrective action. The
amount of time needed would depend on the nature and scope of the
possible violation. The Federal Reserve estimates that the
recordkeeping associated with corrective action would take an
additional two to twenty hours, with an average of eight recordkeeping
burden hours annually. 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
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issue of confidentiality under the Freedom of Information Act arises.
Comments are also invited on: a. whether the proposed collection of
information is necessary for the proper performance of the Federal
Reserve's functions; including whether the information has practical
utility; b. the accuracy of the Federal Reserve's estimate of the
burden of the proposed information collection, including the cost of
compliance; c. ways to enhance the quality, utility, and clarity of the
information to be collected; and d. ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology.
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.
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, the Board proposes to
amend 12 CFR part 202 as set forth below:
PART 202--EQUAL CREDIT OPPORTUNITY (REGULATION B)
1. The authority citation for Part 202 would continue to read as
follows:
Authority: 15 U.S.C. 1691-1691f.
2. Section 202.15 would be added to read as follows:
Sec. 202.15 Incentives for self-testing and self-correction
(a) General rule. If a creditor 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 section if the creditor
has taken or is taking appropriate corrective action to address any
possible violations identified by the self-test. A self-test required
by any government authority is not privileged.
(b) Self-test defined--(1) Definition. A self-test is any program,
practice, or study that:
(i) 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; and
(ii) Is used to determine the extent or effectiveness of the
creditor's compliance with the regulation's prohibition on
discrimination in Sec. 202.4 or the prohibition on discouraging
applications for credit in Sec. 202.5(a).
(2) Examples. 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 creditor's review or evaluation of loan
files.
(3) Types of information covered. The privilege applies to the
report or results of a self-test, including any data generated by the
self-test and any analysis of such data, and any workpapers or draft
documents.
(4) Types of information not covered. The privilege does not cover
information about whether a creditor has conducted a self-test, or
information concerning the scope of or the methodology used in
conducting the self-test.
(c) Appropriate corrective action. Whether a creditor has taken or
is taking appropriate corrective action will be determined on a case-
by-case basis. A creditor must take whatever action is reasonable in
light of the scope of the possible violations to fully remedy both
their cause and effects. Corrective action includes both prospective
and retroactive relief, as may be appropriate. To determine the
appropriate corrective action, the creditor 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 the stages of the application process, the areas of the
creditor's operations likely to be affected by the policies or
practices identified, and the particular branches or offices involved.
(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 the regulations in this part; or
(ii) By a government agency or an applicant (including a
prospective applicant who alleges a violation of Sec. 202.5(a)) in any
proceeding or civil action in which a violation of the act or
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 self-test:
(i) Voluntarily discloses all or any part of the report or results
of the self-test or any privileged information to an applicant or
government agency or to the public; or
(ii) Refers to or describes the report or results of the self-test
or any privileged information as a defense to charges that the creditor
has violated the act or the regulations in this part; or
(iii) If the creditor fails or is unable to produce required
records or information pertaining to the self-test that are necessary
to determine whether the privilege applies.
(3) Limited use of privileged information. Notwithstanding the
provisions of paragraph (d)(1) of this section, the report or results
of a privileged self-test may be obtained and used by an applicant or
government agency for the sole purpose of determining a penalty or
remedy for a violation of the act or this regulation that 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 was made, and remains privileged under paragraph (d)(1) of
this section.
(e) Record retention. For 25 months after a self-test has been
conducted, the creditor shall retain information about the self-test,
including any corrective action taken to address possible violations
identified by 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 that case, the
creditor shall retain the information until final disposition of the
matter, unless an earlier time is allowed by the agency or court order.
3. Supplement I to Part 202 would be amended by adding Section
202.15--Incentives for Self-Testing and Self-Correction, to read as
follows:
Supplement I to Part 202--Official Staff Interpretations
* * * * *
Section 202.15--Incentives for Self-Testing and Self-Correction
15(a) General rule
1. 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.
2. Although corrective actions are required when a possible
violation is found, a self-test that identifies no possible
violations and requires no corrective action is also
[[Page 62]]
privileged. 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. Such an assessment might be
accomplished by an adjudication where a judge conducts an in camera
inspection of the privileged documents.
3. The privilege applies only if the creditor has taken or is
taking the appropriate corrective action. In some cases, the issue
of whether certain information is privileged may arise before the
corrective actions are fully underway. The rule requires, at a
minimum, that the creditor establish a plan for corrective action, a
means for monitoring the creditor's progress in implementing the
plan, and activity to begin carrying out the plan. A schedule may be
imposed by the court or agreed to by an agency or the other parties
affected.
15(b) Self-test defined
15(b)(1) Definition
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. A ``self-test'' includes but
is not limited to the practice of using fictitious loan applicants
(also known as testers or mystery shoppers). For example, self-
testing would also include a survey of mortgage customers conducted
by a creditor for fair lending purposes or a program specially
designed to test loan officers' knowledge about fair lending laws.
Self-evaluations involving creditor reviews of loan files, and
reviews of HMDA data or similar types of records (such as broker or
loan officer compensation records) do not produce new information
about a creditor's compliance and would not be covered by the
privilege. Accordingly, a compilation of data or a regression
analysis derived from the data in existing loan files would not be
privileged.
2. To qualify for the privilege, a self-test must be designed
and conducted to assess the level and effectiveness of the
creditor's compliance with the rules prohibiting discrimination or
discouraging loan applications on a prohibited basis. Self-testing
for compliance with other regulatory requirements of Regulation B is
not privileged.
15(c) Appropriate corrective action
1. A creditor must take whatever action is reasonable in light
of the scope of the possible violations to fully remedy both their
cause and effects. Appropriate corrective action may include, but is
not limited to, one or more of the following:
i. Identifying persons whose applications may have been
inappropriately processed; offering to extend credit if the
applications were improperly denied; compensating applicants for
damages, both out-of pocket and compensatory; and notifying them of
their legal rights;
ii. Correcting institutional polices or procedures that may have
contributed to possible discrimination, 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 more effectively serve segments of the lender's markets
that may have been affected by the possible discrimination; and
v. Improving audit and oversight systems to avoid a recurrence
of the possible violations.
15(d)(2) Loss of privilege
Paragraph 15(d)(2)(iii)
1. A creditor's claim of privilege may be challenged in an
appropriate court or administrative law proceeding. The results or
report of a self-test are not privileged if the creditor fails or is
unable to produce the relevant information pertaining to the self-
test that is necessary for determining whether the privilege
applies. A judge may determine in each case whether the creditor has
met its burden of producing the relevant evidence.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, December 20, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-32919 Filed 12-31-96; 8:45 am]
BILLING CODE 6210-01-P
