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F ederal R eserve Bank
Dallas

of

R O B E R T D. M c T E E R , J R .
DALLAS, TEXAS

PR ES ID EN T

75265-5906

A N D C H IE F E X E C U T I V E O F F I C E R

January 14, 1998

Notice 98-04

TO:

The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Revisions to Regulation B
(Equal Credit Opportunity)
DETAILS

The Board of Governors of the Federal Reserve System has published 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 informa­
tion 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 Develop­
ment will publish similar revisions to the regulations implementing the Fair Housing Act.
The rule becomes effective January 30, 1998.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 66412-21, Vol. 62, No. 243 of
the Federal Register dated December 18, 1997, is attached.
MORE INFORMATION
For more information, please contact Dean Pankonien at (214) 922-6154. For addi­
tional copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,
f

t

j

Q

.

.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

66412 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations
possible violations that may be
discovered. Privileged information may
not be obtained by a government agency
12CFR Part 202
for use in an examination or
[Regulation B; Docket No. R-0955]
investigation relating to compliance
with the ECOA, or by a government
Equal Credit Opportunity
agency or credit applicant in any
AGEN CY: Board of Governors of the
proceeding in which a violation of the
Federal Reserve System.
ECOA is alleged. The 1996 Act also
provides that a challenge to a creditor’s
ACTION: Final rule.
claim of privilege may be filed in any
SUMMARY: The Board is publishing
court or administrative law proceeding
revisions to Regulation B (Equal Credit
with appropriate jurisdiction.
Opportunity). The revisions implement
The 1996 Act directs the Board to
recent amendments to the Equal Credit
issue implementing regulations,
Opportunity Act (ECOA). These
including a definition of what
amendments create a legal privilege for
constitutes a “self-test.” The Act also
information developed by creditors as a establishes a privilege for creditor self­
result of “self-tests” that they
testing under the Fair Housing Act (42
voluntarily conduct to determine the
U.S.C. 3601 et seq.), which is
level of their compliance with the
administered by the Department of
Housing and Urban Development
ECOA. The Department of Housing and
Urban Development will publish similar (HUD). The statute directs the Board
and HUD to issue substantially similar
revisions to the regulations
regulations. In January, the Board
implementing the Fair Housing Act.
published a proposed rule to Regulation
D A TES: The rule is effective January 30,
B implementing the amendments to the
1998.
ECOA (62 FR 56, January 2,1997). After
FO R FU RTHER INFORMATION CONTACT:
consultation with the federal agencies
James A. Michaels, Senior Attorney, or
responsible for enforcing the ECOA and
Natalie E. Taylor, Staff Attorney,
with HUD, the Board is publishing final
Division of Consumer and Community
rules to implement the 1996 Act’s
Affairs, Board of Governors of the
amendments to the ECOA. HUD will
Federal Reserve System, at (202) 452publish rules to implement the
3667 or 452-2412; for the hearing
amendments to the Fair Housing Act.
impaired only, Diane Jenkins,
After reviewing both regulations, the
Telecommunications Device for the Deaf
Board and HUD believe that there is no
(TDD), at (202) 452-3544.
substantial difference in the final rules
SU PP LE M E NT A RY INFORMATION:
and that they should be interpreted to
have the same effect, except where
I. Background
differences in the coverage of the ECOA
The Equal Credit Opportunity Act
and FHA dictate otherwise. For
(ECOA), 15 U.S.C. 1691, makes it
example, the ECOA covers nonmortgage
unlawful for creditors to discriminate in credit transactions that are not covered
any aspect of a credit transaction on the by the FHA. Moreover, although there
basis of sex, race, color, religion,
are organizational differences in the
national origin, marital status, age
agencies rules, these differences are not
(provided the applicant has the capacity intended to have any substantive effect,
to contract), because all or part of an
and merely reflect the Board’s
applicant’s income derives from any
longstanding practice of publishing its
public assistance, or because an
interpretative rules in a separate Staff
applicant has in good faith exercised
Commentary. HUD has no staff
any right under the Consumer Credit
commentary and has generally included
Protection Act. The act is implemented
these interpretations in the text of its
by the Board’s Regulation B (12 CFR
regulation. The consistency of the Board
part 202).
and HUD rules is evident based on a
On September 30,1996, the President comparison of the complete documents
signed into law amendments to the
published by the agencies, including the
ECOA as part of the Economic Growth
preambles to the regulatory
and Regulatory Paperwork Reduction
amendments, and the revisions to the
Act of 1996 (Pub. L. 104-208, 110 Stat.
Board’s Official Staff Commentary to
3009) (1996 Act). Section 2302 of the
Regulation B.
1996 Act creates a legal privilege for
II. Regulatory Provisions
information developed by creditors
The amendments to Regulation B
through voluntary “self-tests” that are
implement the 1996 Act by defining
conducted to determine the level or
effectiveness of their compliance with
what constitutes a privileged self-test. A
the ECOA, provided that appropriate
“self-test” is defined as any program,
corrective action is taken to address any practice, or study that is designed and
FEDERAL RESERVE SYSTEM

used specifically to determine the extent
or effectiveness of a creditor’s
compliance with the ECOA or
Regulation B, if it creates data or factual
information that is not available and
cannot be derived from loan or
application files or other records related
to credit transactions. The privilege
serves as an incentive, by assuring that
evidence of discrimination voluntarily
produced by a self-test will not be used
against a creditor, provided the creditor
takes appropriate corrective actions for
any discrimination that is found.
This definition of “self-test” includes,
but is not limited to, the practice of
using fictitious applicants for credit
(testers). A creditor also may develop
and use other methods of generating
information that is not available in loan
and application files, for example, by
surveying mortgage loan applicants to
assess whether applications were
processed appropriately. The definition
does not include creditor reviews and
evaluations of loan and application
files, either with or without a statistical
analysis.
The 1996 Act makes the results or
report of a self-test privileged if the
creditor takes appropriate corrective
action to address possible violations
identified by the self-test. In response to
commenters’ concerns about the
proposal’s effectiveness as an incentive
for self-correction, the final rule
provides additional guidance on the
corrective action requirement.
The Board’s final rule becomes
effective January 30, 1998. The 1996 Act
provides that self-tests will be
privileged even if they were conducted
before the regulation’s effective date,
with two exceptions. Self-tests
previously conducted will not become
privileged on the regulation’s effective
date if a court action or administrative
proceeding has already commenced
against the creditor alleging a violation
of the ECOA or Regulation B or the Fair
Housing Act. In addition, a self-test
previously conducted will not become
privileged on the regulation’s effective
date if any part of the report or results
has already been voluntarily disclosed
by the creditor.
III. Section-by-Section Analysis

Section 202.12—Record Retention
12(b)(6) Self-Tests
Paragraph 12(b)(6) contains
provisions on record retention that were
designated as Paragraph 15(e) of the
proposed rule. There are no substantive
changes to the provision as proposed.
The redesignation allows all of the
regulation’s record retention
requirements to be listed together in one

Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66413
section. Paragraph 12(b)(6) states that a
creditor has a duty to retain self-testing
records for 25 months, which is the
general standard for retaining other
records required under the regulation.
Several commenters opposed any
retention requirement for self-testing
records. Some commenters suggested
that retention of self-testing records
should only be required if the creditor
claims the self-testing privilege. Under
the approach suggested by these
commenters, a creditor that did not
intend to claim privilege for the 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 SelfTesting and Self-Correction
15(a)

General Rules

15(a)(1) Voluntary Self-Testing and
Correction
Paragraph 15(a)(1) states the general
rule that the report or results of a
creditor’s voluntary self-test are
privileged if the conditions specified in
this rule are satisfied. The language has
been modified slightly for clarification.
Data collection that is required by law
or any government authority is not a
voluntary self-test and does not qualify
for the privilege.

15 (a) (2) Corrective Action Required
Paragraph 15(a)(2) implements the
requirement imposed by the 1996 Act
that a creditor must take appropriate
corrective action in order for the
privilege to apply. A self-test is also
privileged when it identifies no
violations. The Board believes this is
necessary to avoid the anomaly of
requiring creditors to disclose self-test
results when no violations are
identified, which would make a
creditor’s claim of privilege tantamount
to an admission that violations were
found.
In some cases, the issue of whether
certain information is privileged may
arise before the self-test is complete or
corrective actions are fully under way.
This would not necessarily prevent a
creditor from asserting the privilege. In
situations where the self-test is not
complete, for the privilege to apply the
lender must satisfy the regulation’s
requirements within a reasonable period
of time. To assert the privilege where
the self-test shows a likely violation, the
rule requires, at a minimum, that the
creditor establish a plan for corrective
action and a method to demonstrate
progress in implementing the plan.
Creditors must take corrective action on
a timely basis after the results of the
self-test are known. An adjudicator’s
final decision on whether the privilege
applies should be withheld until the
creditor has taken the appropriate
corrective action.
A creditor’s determination about the
type of corrective action needed, or a
finding that no corrective action is
required, is not conclusive in
determining whether the requirements
of this paragraph have been satisfied. If
a creditor’s claim of privilege is
challenged, an assessment of the need
for corrective action or the type of
corrective action that is appropriate
must be based on a review of the 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

66414 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations
develop methods that go beyond
traditional pre-application testing, such
as arranging for testers to submit
fictitious loan applications for
processing.
A creditor’s evaluation or analysis of
credit applications, loan files, Home
Mortgage Disclosure Act data or similar
types of records (such as broker or loan
officer compensation records), does not
produce new factual information about
a creditor’s compliance and is not a 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 selfevaluation, frequently involving the
review or evaluation of actual loan files,
even though the results of such
evaluations currently are not privileged.
As a matter of policy, the Office of the
Comptroller of the Currency does not
require national banks to disclose the
results of self-evaluations, although
banks that do so voluntarily may be
eligible for more streamlined
examinations. Generally, banks could be
expected to continue their audit
programs if the Board adopts a broader
privilege, however, they probably would
be less likely to share the results with
their supervisory agencies because, if
they did, they would lose any privilege
to withhold the results from private
litigants.
The bank regulatory agencies also
expressed concern that a broader
privilege is likely to result in more
disputes over what information lenders
may withhold from examiners, thereby
making the examination process more
adversarial. The enforcement agencies
noted that a broader privilege is likely
to require the commitment of greater
resources to the adjudication of
privilege claims.
The Department of Justice preferred
the implementation of a narrow
privilege so that the rule’s benefits,
risks, and overall effect could be studied
before considering a broader rule with
potentially greater impact on the
government’s and private litigants’
access to creditor records.
The Board also consulted extensively
with HUD in connection with that
agency’s mandate to implement the 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.

Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66415
The statutory language does not
mandate a privilege that covers every
method that a creditor might use to
evaluate its performance. The only
statutory guidance is language stating
that the regulation should specify that a
self-test must be sufficient to determine
the level and effectiveness of the
creditor’s compliance with the law. That
language has been incorporated into the
final rule.
The Board believes that the Congress
intended the agencies to weigh the
competing interests of creditors, private
litigants, and the regulatory and
enforcement agencies in developing a
definition that furthers compliance with
the antidiscrimination policies of the
ECOA and Fair Housing Act, as well as
the purpose of the self-testing privilege,
which is to increase creditor 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 selfcorrection can be strengthened without
impairing other enforcement
mechanisms.
15(b)(2) Types of Information
Privileged
Paragraph 15(b)(2) of the final rule
was designated as paragraph 15(b)(3) of
the proposed rule. The paragraph
clarifies what information generated by
a self-test is privileged. The examples of
self-tests that had been listed in
paragraph 15(b)(2) of the proposed rule
are discussed in the Official Staff
Commentary.
15(b)(3) Types of Information Not
Privileged
Paragraph 15(b)(3) of the final rule
had been designated as paragraph
15(b)(4) of the proposed rule. Paragraph
15(b)(3)(i) clarifies that information
about the existence of a self-test, its
scope, or the methodology used in
conducting the test, is not privileged.
Such information may be necessary to
determine whether the prerequisites for
a claim of privilege have been satisfied.
Paragraph 15(b)(3)(ii) clarifies that the
underlying loan and application files or
other business records related to actual
credit transactions are not privileged.

Information derived from such records
also is not privileged, even if it has been
aggregated, summarized, or reorganized
to facilitate analysis. Examples of the
types of records that are not privileged
include property appraisal reports, loan
policies or procedures, underwriting
standards, employee or broker
compensation records, and minutes of
loan committee meetings or other
documents reflecting the basis for a
decision to approve or deny an
application. If a creditor arranges for
testers to submit loan applications for
processing, the records are not related to
actual credit transactions for purposes
of this paragraph and may be privileged
self-testing records.
15(c) Appropriate Corrective Action
Paragraph 15(c) has been revised in
response to commenters’ concerns. To
give creditors more specific guidance,
the final rule lists certain situations that
will not require remedial relief to
individual applicants in order for the
privilege to apply.
The rule only addresses what
corrective actions are required for a
creditor to take advantage of the
privilege in this section. A creditor may
still be required to take other actions or
provide additional relief if a formal
finding of discrimination is made.
15 (c) (1) General Requirement
The final rule has been revised to
clarify that corrective action is required
when the results of a self-test show that
it is more likely than not that one or
more violations occurred. The proposed
rule used the language of the 1996 Act,
stating that corrective action would be
required when a creditor identified a
“possible” violation. The final rule has
been revised in light of commenters’
concerns that this language was capable
of differing interpretations. For
example, some commenters feared that
the rule might be construed to require
corrective action if a violation was
“possible” even if unlikely. The Board
believes the statute was intended to
require corrective action only if a
violation is more likely than not, and
that the reference to “possible”
violations merely recognizes that
corrective action is required even
though no violation has been formally
adjudicated or admitted. The language
of the final rule has been modified
accordingly.
In determining whether it is more
likely than not that a violation occurred,
a creditor must treat testers as if they are
actual applicants for credit. A creditor
may not refuse to take appropriate
corrective action under this section
because the self-test used fictitious loan

66416 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations
applicants. The fact that a tester’s
agreement with the creditor waives the
tester’s legal right to assert a violation
does not eliminate the requirement for
the creditor to take appropriate
corrective action, although no remedial
relief for the tester is required under
paragraph 15(c)(3).
15(c)(2) Determining the Scope of
Appropriate Corrective Action
Paragraph 15(c)(2) provides that a
creditor must take corrective actions
that are reasonably likely to remedy
both the cause and effects of the
violation; this requires identification of
the practice or policy that is the likely
cause and an assessment of the extent
and scope of the violation. This
determination must be made on a caseby-case basis. The rule is not intended
to suggest that in each case there is a
single, most appropriate response. To
provide additional guidance, a list of
sample corrective actions, including
both prospective and remedial relief, is
included in the Official Staff
Commentary.
Many commenters believed that
creditors will be less likely to self-test
if the availability of the privilege cannot
be determined until after their
corrective action has been determined to
be sufficient. A number of them
suggested adopting a good-faith
standard, so that creditors using
reasonable business judgment about
how to correct potential violations
would be deemed to satisfy the
corrective action requirement.
The Board recognizes that creditors’
incentive to self-test may be affected by
the fact that creditors’ claims that the
self-test report and results are privileged
are subject to challenge. This is inherent
in the statutory framework established
by the 1996 Act, which allows parties
who are denied access to self-test data
an opportunity to contest the creditor’s
assertion of the privilege in a formal
adjudication. The application of a goodfaith or business judgment rule would
significantly limit the right and ability
of these parties to do so, by allowing
creditors’ own business judgment to
serve as the ultimate guide on the
corrective action requirement. The
Board believes a good-faith or business
judgment rule would be inconsistent
with the legislative intent. Accordingly,
as proposed, the rule continues to
recognize that determining whether a
creditor has taken appropriate corrective
action must be made on a case-by-case
basis and that the applicable standard is
whether the corrective action is
reasonably likely to remedy both the
cause and effect of the violation.

Paragraph 15(c)(2) also provides that
in determining the appropriate
corrective action, creditors should
identify the practice or policy that is the
likely cause of the violation and assess
the extent and scope of the violation.
For example, a creditor might identify
inadequate or improper lending
policies, failure to implement
established policies, employee conduct,
or other causes. The extent and scope of
a likely violation may be assessed by
determining which areas of operations
are likely to be affected by those policies
and practices—for example, by
determining the types of loans and
stages of the application process
involved and the branches or offices
where the violations may have occurred.
15(c)(3) Types of Relief
Paragraph 15(c)(3) has been added in
response to commenters’ concerns. It is
intended to give creditors more specific
guidance, and lists certain situations
that do not require remedial relief to
individual applicants in order for the
privilege to apply.
The proposed rule stated that
corrective action includes both
prospective and retroactive relief, as
may be appropriate. Some commenters
believed that this was too broad,
especially in light of the narrow
definition of “self-test.” They expressed
the view that the use of pre-application
testers to identify policies and practices
that illegally discriminate should not
require creditors to review existing loan
files to identify and compensate
applicants who might have been
adversely affected.
The final rule has been revised. For
the privilege to apply, a creditor must
take corrective action that is appropriate
for the type of self-test and the scope of
the likely violation. A creditor is
required to provide remedial relief to an
applicant identified by the self-test as
one whose rights were more likely than
not violated, but is not required to
identify other persons who might have
been adversely affected. The use of 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

Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66417
orders a creditor to disclose self-test
results, that disclosure would not be a
voluntary waiver of the privilege for
purposes of the ECOA. But the privilege
could be undermined for purposes of
the ECOA if the privileged self-testing
data are made public. Creditors could
seek a protective order to limit the
availability and use of the self-testing
data and prevent its dissemination
beyond what is necessary in that
particular case. In any event, as long as
the self-testing privilege is not forfeited
by the creditor, paragraph 15(d)(1)
precludes a party who has obtained
privileged information from using it in
a case brought under the ECOA.
15(d)(2)

Loss of Privilege

Paragraph 15(d)(2) describes the
circumstances that would result in the
loss of privileged status. This paragraph
is adopted substantially as proposed
with only minor modifications for
clarification.
Paragraph 15(d)(2)(i) provides that the
results or report of a self-test, including
any data generated by the self-test, will
no longer be privileged under this
section once the creditor voluntarily
discloses all or part of the contents to
any government agency, loan applicant,
or the general public. This paragraph
has been revised to clarify that the
privilege is lost if the creditor discloses
privileged information, such as the
results of the self-test, but that the
privilege is not lost if the creditor
merely reveals or refers to the existence
of the self-test.
Comment was solicited on a possible
exception to the general rule in
paragraph 15(d)(2)(i), whereby creditors
could voluntarily share privileged
information with a regulatory or law
enforcement agency without causing the
information to lose its privileged status
when it is subsequently sought by
private litigants. Under such an
exception, however, such disclosures
would cause the documents or
information to lose their privileged
status with respect to all supervisory
and enforcement agencies.
A significant number of commenters
supported such an exception and
believed it would be particularly useful
in enabling creditors to seek guidance
from the agencies in determining the
appropriate corrective action that is a
prerequisite for the privilege. It would
also encourage financial institutions to
voluntarily share self-testing data with
examiners, to reduce the burden
associated with compliance
examinations performed by those
agencies. A few commenters believed
that mandatory sharing of self-test

results with regulatory and enforcement
agencies was appropriate.
Some commenters opposed any
exception that would allow creditors to
voluntarily share privileged information
with government agencies while
maintaining the privilege as to private
litigants. They also questioned whether
such an exception would be consistent
with the law.
The Board believes that such an
exception would be useful and could be
adopted pursuant to the Board’s
statutory authority to create regulatory
exceptions under the ECOA. The 1996
Act, however, directs the Board and
HUD to enact substantially similar
regulations under the ECOA and Fair
Housing Act. For the reasons stated in
its notice of final rulemaking under the
Fair Housing Act, HUD does not believe
that there is statutory authority for such
an exception, and also does not believe
it is advisable. Accordingly, the Board
has adopted the rule as initially
proposed.
As provided in the 1996 Act, the
proposed rule stated that self-testing
data loses its privileged status if it is
disclosed by a person with “lawful
access” to the self-test report or results.
Some commenters suggested the
privilege should be lost only if the
person with access to the privileged
information is also authorized to make
such a disclosure. However, if a creditor
has no formal method for authorizing
individual employees to disclose
privileged information, that approach
would impose the added burden of
determining the nature and scope of
particular employees’ duties and
authority. Several commenters also
requested that the rule expressly state
that the privilege is not lost through an
inadvertent or accidental disclosure.
The statutory language does not
specifically address these issues. It may
have been the legislative intent to allow
such matters to be resolved under the
substantial body of judicial law that has
already developed regarding privileges
generally. For example, some courts
have held that a privilege is lost even if
the disclosure was unintentional or
inadvertent. Other courts have declined
to adopt a strict rule and opt instead for
an approach that takes account of the
facts surrounding the particular
disclosure before deciding whether or
not the privilege should be deemed to
be lost. In the absence of any clear
legislative intent, the Board believes
these issues are best resolved under the
existing law concerning privileges and
the rules of evidence as administered by
the courts. Thus, the final rule has been
adopted as proposed.

Several commenters sought additional
clarification because they believed the
rule regarding loss of the privilege when
information is disclosed by a person
with “lawful access” might be
interpreted to include any person
lawfully on the creditor’s premises.
Whether a particular individual has
“lawful access” for purposes of
disclosing privileged information is a
factual issue. Consideration should be
given to whether the individual was an
employee or agent of the creditor who
reasonably should be expected to have
access to or knowledge of the privileged
information. The Board believes such
matters should be resolved by a court or
administrative law judge under the
existing law relating to privileges
generally. Accordingly, the proposed
rule has been adopted without change.
A few commenters requested
clarification that the privilege is not lost
if the creditor discloses self-testing
results to independent contractors
acting as auditors or consultants on
compliance matters. The Official Staff
Commentary is being revised to reflect
this interpretation.
Some commenters expressed concern
that if a creditor notified applicants or
loan customers that they were eligible
for remedial relief, that would be
viewed as a disclosure of the self-test
results, causing the privilege to be lost.
A provision has been added to the
Official Staff Commentary clarifying
that a creditor’s corrective actions alone
will not be considered a voluntary
disclosure of the self-test report or
results. For example, a creditor does not
disclose the results of a self-test merely
by offering to extend credit to a denied
applicant or by inviting the applicant to
reapply for credit. A voluntary
disclosure could occur, however, if the
creditor disclosed the self-test results in
connection with a new offer of credit.
Under paragraph 15(d)(2)(ii), if a
creditor elects to rely on the self-testing
results as a defense to alleged violations
of the ECOA in court or administrative
proceedings, the privilege will not apply
if the documents are sought in
connection with those proceedings. This
paragraph has been revised to clarify
that the privilege is lost if the creditor
discloses privileged information, such
as the results of the self-test, but that the
privilege is not lost if the creditor
merely reveals or refers to the existence
of the self-test.
15(d)(3) Limited Use of Privileged
Information
Paragraph 15(d)(3) is adopted as
proposed, and implements the statutory
provision that allows for a limited use
of privileged documents for the purpose

66418 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations
of determining a penalty or remedy after
a violation of the ECOA or Regulation B
has been formally adjudicated or
admitted. A creditor’s compliance with
this requirement does not evidence the
creditor’s intent to give up the privilege.
Supplement I to Part 202— Official Staff
Interpretations
The Official Staff Commentary is
being revised to reflect the amendments
to Regulation B and incorporate the
interpretations provided above.
IV. Regulatory Flexibility Analysis

In accordance with section 3(a) of the
Regulatory Flexibility Act (5 U.S.C.
603), the Board’s Office of the Secretary
has reviewed the amendments to
Regulation B. Overall, the amendments
are not expected to have any significant
impact on small entities. The
amendments implement the legal
privilege created by the 1996 Act for
certain information that creditors may
voluntarily develop about their
compliance with the fair lending laws
through self-testing. The regulation does
not impose any significant regulatory
requirements on creditors.
Consequently, the amendments are not
likely to have a significant impact on
institutions’ costs, including the costs to
small institutions.
V. Paperwork Reduction Act

In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506),
the Board has reviewed the rule under
the authority delegated to the Board by
the Office of Management and Budget
(OMB). 5 CFR 1320 Appendix A.I.
Regulation B applies to individuals
and businesses that regularly extend
credit or participate in the decision to
extend credit. This includes all types of
creditors. Under the Paperwork
Reduction Act, however, the Board
accounts for the paperwork burden
associated with Regulation B only for
state member banks. Any estimates of
paperwork burden for other financial
institutions would be provided by the
federal agency or agencies supervising
those lenders.
The collection of information relating
to self-tests and corrective actions is
mandatory under this final rule. These
requirements are located in 12 CFR
202.12(b)(6). The recordkeepers are forprofit financial institutions, including
small businesses that voluntarily
conduct self-tests as defined in the rule.
Records relating to self-tests must be
retained for at least twenty-five months
and may be stored electronically. The
purpose of the recordkeeping is to
facilitate a determination about whether
the results or report of a creditor’s 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:
A uthority: 15 U.S.C. 1691-1691f.

2. Section 202.12 is amended by
adding a new paragraph (b)(6) to read as
follows:

Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66419
§202.12

Record retention.

*

*

(ii) Loan and application files or other section, to an applicant or government
business records related to credit
agency or to the public;
(b) Preservation o f records. * * *
transactions, and information derived
(ii) Discloses any part of the report or
(6) Self-tests. For 25 months after a
from such files and records, even if it
results, or any other information
self-test (as defined in § 202.15) has
has been aggregated, summarized, or
privileged under this section, as a
been completed, the creditor shall retain reorganized to facilitate analysis.
defense to charges that the creditor has
all written or recorded information
(c) Appropriate corrective action—(1) violated the act or regulation; or
about the self-test. A creditor shall
General requirement. For the privilege
(iii) Fails or is unable to produce
retain information beyond 25 months if in this section to apply, appropriate
written or recorded information about
it has actual notice that it is under
corrective action is required when the
investigation or is subject to an
self-test shows that it is more likely than the self-test that is required to be
retained under § 202.12(b)(6) when the
enforcement proceeding for an alleged
not that a violation occurred, even
information is needed to determine
violation, or if it has been served with
though no violation has been formally
whether the privilege applies. This
notice of a civil action. In such cases,
adjudicated.
paragraph does not limit any other
the creditor shall retain the information
(2) Determining the scope o f
until final disposition of the matter,
appropriate corrective action. A creditor penalty or remedy that may be available
for a violation of § 202.12.
unless an earlier time is allowed by the
must take corrective action that is
appropriate agency or court order.
reasonably likely to remedy the cause
(3) Limited use o f privileged
3.
Section 202.15 is added to read as and effect of a likely violation by:
information. Notwithstanding paragraph
follows:
(i) Identifying the policies or practices (d)(1) of this section, the self-test report
that are the likely cause of the violation; or results and any other information
§ 202.15 Incentives for self-testing and
and
privileged under this section may be
self-correction.
(ii) Assessing the extent and scope of
obtained and used by an applicant or
(a) General rules—(1) Voluntary self­
any violation.
government agency solely to determine
testing and correction. The report or
(3) Types o f relief. Appropriate
a penalty or remedy after a violation of
results of the self-test that a creditor
corrective action may include both
the act or this regulation has been
voluntarily conducts (or authorizes) are
prospective and remedial relief, except
adjudicated or admitted. Disclosures for
privileged as provided in this section.
that to establish a privilege under this
this limited purpose may be used only
Data collection required by law or by
section:
for the particular proceeding in which
any governmental authority is not a
(i) A creditor is not required to
the adjudication or admission was
voluntary self-test.
provide remedial relief to a tester used
made. Information disclosed under this
(2) Corrective action required. The
in a self-test;
paragraph (d)(3) remains privileged
privilege in this section applies only if
(ii) A creditor is only required to
under paragraph (d)(1) of this section.
the creditor has taken or is taking
provide remedial relief to an applicant
appropriate corrective action.
4. In Supplement I to Part 202, under
identified by the self-test as one whose
(3) Other privileges. The privilege
Section 202.12—Record Retention, a
rights were more likely than not
created by this section does not
new paragraph 12(b)(6) is added to read
violated; and
preclude the assertion of any other
as follows:
(iii) A creditor is not required to
privilege that may also apply.
Supplement I To Part 202—Official
(b) Self-test defined—(1) Definition. A provide remedial relief to a particular
Staff Interpretations
applicant if the statute of limitations
self-test is any program, practice, or
applicable to the violation expired
*
*
*
*
*
study that:
(1) Is designed and used specifically to before the creditor obtained the results
Section 202.12—Record Retention
of the self-test or the applicant is
determine the extent or effectiveness of
*
*
*
*
*
otherwise ineligible for such relief.
a creditor’s compliance with the act or
(4) No admission o f violation. Taking
12(b) Preservation o f Records
this regulation; and
*
*
*
*
*
(ii) Creates data or factual information corrective action is not an admission
that a violation occurred.
that is not available and cannot be
12(b)(6) Self-tests
(d)(1) Scope o f privilege. The report or
derived from loan or application files or
1.
The rule requires all w ritten or recorded
results of a privileged self-test may not
other records related to credit
inform ation about a self-test to be retained for
be obtained or used:
transactions.
25 m onths after a self-test has been
(1) By a government agency in any
(2) Types o f information privileged.
completed. For this purpose, a self-test is
The privilege under this section applies examination or investigation relating to
com pleted after the creditor has obtained the
compliance with the act or this
to the report or results of the self-test,
results and m ade a determ ination about w hat
regulation; or
data or factual information created by
corrective action, if any, is appropriate.
(ii) By a government agency or an
the self-test, and any analysis, opinions,
Creditors are required to retain information
applicant (including a prospective
and conclusions pertaining to the self­
about the scope of the self-test, the
applicant who alleges a violation of
test report or results. The privilege
methodology used and time period covered
§ 202.5(a)) in any proceeding or civil
covers workpapers or draft documents
by the self-test, the report or results of the
action in which a violation of the act or
as well as final documents.
self-test including any analysis or
this regulation is alleged.
(3) Types o f information not
conclusions, and any corrective action taken
(2) Loss o f privilege. The report or
privileged. The privilege under this
in response to the self-test.
section does not apply to:
results of a self-test are not privileged
* * * * *
(i) Information about whether a
under paragraph (d)(1) of this section if
5. Supplement I to Part 202 is
creditor conducted a self-test, the
the creditor or a person with lawful
amended by adding Section 202.15—
methodology used or the scope of the
access to the report or results):
self-test, the time period covered by the
(i) Voluntarily discloses any part of Incentives for Self-testing and Self­
correction, to read as follows:
self-test, or the dates it was conducted;
the report or results, or any other
* * * * *
or
information privileged under this
*

*

*

66420 Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations
Section 202.15—Incentives for Self-testing
and Self-correction
15(a) General Rules
15(a)(1) Voluntary Self-Testing and
Correction
1. Activities required by any governm ental
authority are not voluntary self-tests. A
governmental authority includes both
adm inistrative 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 w hen 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 w hen it identifies no violations.
2. In some cases, the issue of w hether
certain inform ation is privileged may arise
before the self-test is com plete or corrective
actions are fully under way. This w ould not
necessarily prevent a creditor from asserting
the privilege. In situations w here the self-test
is not com plete, for the privilege to apply the
lender m ust satisfy the regulation’s
requirem ents w ithin a reasonable period of
time. To assert the privilege w here the self­
test shows a likely violation, the rule
requires, at a m inim um , that the creditor
establish a plan for corrective action and a
m ethod to dem onstrate progress in
im plem enting the plan. Creditors m ust take
appropriate corrective action on a timely
basis after the results of the self-test are
known.
3. A creditor’s determ ination about the
type of corrective action needed, or a finding
th at no corrective action is required, is not
conclusive in determ ining w hether the
requirem ents of this paragraph have been
satisfied. If a creditor’s claim of privilege is
challenged, an assessm ent of the n eed for
corrective action or the type of corrective
action that is appropriate m ust be based on
a review of the self-testing results, w hich
may require an in camera inspection of the
privileged documents.

1. The rule only addresses w hat 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 discrim ination is made.

Paragraph 15(b)(1)(H)

15(c)(1) General Requirement

1. The principal attribute of self-testing is
that it constitutes a voluntary undertaking by
the creditor to produce new data or factual
inform ation that otherwise w ould 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 lim ited to, the practice of using
fictitious applicants for credit (testers), either
w ith or w ithout the use of m atched pairs. A
creditor may elect to test a defined segment
of its business, for example, loan applications
processed by a specific b ranch or loan officer,
or applications m ade for a particular type of
credit or loan program. A creditor also may
use other m ethods of generating information
that is not available in loan and application
files, such as surveying mortgage loan
applicants. To the extent perm itted by law,
creditors might also develop new m ethods
th at 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 perform ed as part of
processing or underw riting a credit
application. A creditor’s evaluation or
analysis of its loan files, Home Mortgage
Disclosure Act data, or sim ilar types of
records (such as broker or loan officer
com pensation records) does not produce new
inform ation about a creditor’s com pliance
and is no t a self-test for purposes of this
section. Similarly, a statistical analysis of
data derived from existing loan files is not
privileged.

1. A ppropriate corrective action is required
even though no violation has been formally
adjudicated or adm itted by the creditor. In
determ ining w hether it is m ore likely than
not that a violation occurred, a creditor m ust
treat testers as if they are actual applicants
for credit. A creditor may n ot refuse to take
appropriate corrective action un der this
section because the self-test used fictitious
loan applicants. The fact that a tester’s
agreement w ith the creditor waives the
tester’s legal right to assert a violation does
not elim inate the requirem ent for the creditor
to take corrective action, although no
rem edial relief for the tester is required under
paragraph 15(c)(3).

15(b)(3) Types o f Information not Privileged
Paragraph 15(b)(3)(i)

15(b)(1) Definition

1. The inform ation listed in this paragraph
is not privileged and may be used to
determ ine w hether the prerequisites for the
privilege have been satisfied. Accordingly, a
creditor might be asked to identify the self­
testing m ethod, for example, w hether pre­
application testers w ere used or data were
com piled by surveying loan applicants.
Information about the scope of the self test
(such as the types of credit transactions
exam ined, or the geographic area covered by
the test) also is not privileged.

Paragraph 15(b)(l)(i)

Paragraph 15(b)(3)(H)

1. To qualify for the privilege, a self-test
m ust be sufficient to constitute a
determ ination of the extent or effectiveness
of the creditor’s com pliance w ith 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 determ ine com pliance w ith 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 custom ers’ satisfaction w ith the

1. Property appraisal reports, m inutes of
loan committee meetings or other docum ents
reflecting the basis for a decision to approve
or deny an application, loan policies or
procedures, underw riting standards, and
broker com pensation 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(a)(3) Other privileges
1. A creditor m ay assert the privilege
established u nd er this section in addition to
asserting any other privilege that may apply,
such as the attorney-client privilege or the
w ork product privilege. Self-testing data may
still be privileged u nd er this section, w hether
or not the creditor’s assertion of another
privilege is upheld.

15(b) Self-test Defined

15(c) Appropriate Corrective Action

level of service provided by the creditor is
not privileged even if evidence of
discrim ination is uncovered incidentally. If a
self-test is designed for m ultiple purposes,
only the portion designed to determine
com pliance w ith the ECOA is eligible for the
privilege.

15(c)(2) Determining the Scope o f
Appropriate Corrective Action
1. W hether a creditor has taken or is taking
corrective action that is appropriate w ill be
determ ined 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
discrim ination m ay 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 th e violation, a
creditor m ight identify inadequate or
im proper lending policies, failure to
im plem ent established policies, employee
conduct, or other causes. The extent and
scope of a likely violation may be assessed
by determ ining w hich areas of operations are
likely to be affected by those policies and
practices, for example, by determ ining the
types of loans and stages of the application
process involved and the branches or offices
w here the violations may have occurred.
3. D epending on the m ethod 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
w hose applications w ere inappropriately
processed, offering to extend credit if the
application was im properly denied and
com pensating such persons for out-of-pocket
costs and other com pensatory 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 em ployees involved;
iv. Developing outreach programs,
marketing strategies, or loan products to
serve more effectively segments of the
lend er’s markets that may have been affected
by the likely discrim ination; and
v. Improving audit and oversight systems
to avoid a recurrence of the likely violations.

Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / Rules and Regulations 66421
15(c)(3)

Types o f Relief

Paragraph 15(c)(3)(H)
1. The use of pre-application testers to
identify policies and practices that illegally
discrim inate does not require creditors to
review existing loan files for the purpose of
identifying and com pensating applicants
w ho m ight have been adversely affected.
2. If a self-test identifies a specific
applicant that was subject to discrim ination
on a prohibited basis, in order to qualify for
the privilege in this section the creditor must
provide appropriate rem edial relief to that
applicant; the creditor w ould not be required
u nd er this paragraph to identify other
applicants w ho m ight also have been
adversely affected.

Paragraph 15(c)(3)(iii)
1. A creditor is not required to provide
rem edial relief to an applicant that w ould not
be available by law. A n applicant m ight 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.

under the ECOA, the privilege established
under this section preem pts 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
u n d er 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 w aiver of the
privilege for purposes of paragraph 15(d)(2);
creditors may protect the inform ation by
seeking a protective order to lim it availability
and use of the self-testing data and prevent
dissem ination beyond w hat is necessary in
that case. Paragraph 15(d)(1) precludes a
party who has obtained privileged
inform ation from using it in a case brought
u nder the ECOA, provided the creditor has
not lost the privilege through voluntarily
disclosure u nd er paragraph 15(d)(2).

15(d)(2) Loss o f 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 m erely by offering to
extend credit to a denied applicant or by
inviting the applicant to reapply for credit.
15(d)(1) Scope o f Privilege
Voluntary disclosure could occur u n der this
1. The privilege applies w ith respect to any paragraph, however, if the creditor disclosed
exam ination, investigation or proceeding by
the self-test results in connection w ith a new
federal, state, or local governm ent agencies
offer of credit.
relating to com pliance w ith the Act or this
2. Disclosure of self-testing results to an
regulation. Accordingly, in a case brought
independent contractor acting as an auditor

or consultant for the creditor on com pliance
matters does not result in loss of the
privilege.

Paragraph 15(d)(2)(H)
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 adm inistrative law
proceeding w ith appropriate jurisdiction. In
resolving the issue, the presiding officer may
require the creditor to produce privileged
inform ation about the self-test.

Paragraph 15(d)(3) Limited use o f
Privileged Information
1. A creditor may be required to produce
privileged docum ents for the purpose of
determ ining a penalty or rem edy after a
violation of the ECOA or Regulation B has
been formally adjudicated or adm itted. A
creditor’s com pliance w ith this requirem ent
does not evidence the creditor’s intent to
forfeit the privilege.
*

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By order of the Board of Governors of the
Federal Reserve System, December 10, 1997.
W illia m W . W iles,

Secretary o f the Board.
[FR Doc. 97-32663 Filed 12-17-97; 8:45 am]
BILLING CODE 6 210 -01 -P


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102