[Federal Register Volume 62, Number 243 (Thursday, December 18, 1997)]
[Rules and Regulations]
[Pages 66412-66421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32663]



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Part II





Federal Reserve System





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12 CFR Part 202



Equal Credit Opportunity; Final Rule

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

[[Page 66412]]



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.

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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 self-testing 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

[[Page 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 
self-testing 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 self-test results.
    The provision requiring record retention has been adopted as 
proposed. The Board believes that retention of self-testing 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 Self-Testing 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 
self-testing 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 self-testing 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 self-
testing 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

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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 
self-test 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 self-testing 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 ``self-examinations.'' 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 self-
evaluation, 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 self-testing 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 ``self-
test.'' 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.

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    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 self-correction 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 ``self-test,'' 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 self-correction 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

[[Page 66416]]

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 case-by-
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 good-faith 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 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. Because 
this rule only addresses the types of relief required in order to 
assert the self-testing 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

[[Page 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

[[Page 66418]]

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 for-profit 
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 self-test 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 self-testing 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 self-test 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:

[[Page 66419]]

Sec. 202.12  Record retention.

* * * * *
    (b) Preservation of records. * * *
    (6) Self-tests. For 25 months after a self-test (as defined in 
Sec. 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:


Sec. 202.15  Incentives for self-testing and self-correction.

    (a) General rules--(1) Voluntary self-testing 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 self-test 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 Sec. 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 
Sec. 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 Sec. 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 Self-correction, to read as follows:
* * * * *

[[Page 66420]]

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 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 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 self-testing method, for example, whether pre-
application 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.

[[Page 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