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

SUMMARY: This rule proposes to implement section 2302 of the Economic

Growth and Regulatory Paperwork Reduction Act (Pub. L. 104-208)

(``Act''), which encourages voluntary compliance by lenders with the

Fair Housing Act (FHAct) and the Equal Credit Opportunity Act (ECOA)

through lender-initiated self-tests of lenders' residential real

estate-related lending transactions and, where appropriate, corrective

action designed to remedy any possible violations of the FHAct or ECOA

revealed by such tests.

DATES: Comment due date: March 3, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding

this proposed rule to the Rules Docket Clerk, Office of General

Counsel, Room 10278, Department of Housing and Urban Development, 451

Seventh Street, SW., Washington, DC 20410. Communications should refer

to the above docket number and title. A copy of each communication

submitted will be available for public inspection and copying between

7:30 a.m. and 5:30 p.m. weekdays at the above address. FAXED comments

will not be accepted.

FOR FURTHER INFORMATION CONTACT: Peter Kaplan, Director, Office of

Policy and Regulatory Initiatives, Fair Housing and Equal Opportunity,

(202) 708-2904. Department of Housing and Urban Development, 451

Seventh Street, SW., Washington, DC 20410. A telecommunications device

for hearing-and speech-impaired persons (TTY) is available at (202)

708-9300 (these are not toll-free telephone numbers).

SUPPLEMENTARY INFORMATION:

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

Background:

Section 2302 of the Omnibus Consolidated Appropriations Act for

Fiscal Year 1997 (Pub. L. 104-208, approved September 30, 1996)

(``Act''), found in Title II of the Act, entitled the ``Economic Growth

and Regulatory Paperwork Reduction Act,'' creates a legal and

administrative enforcement privilege for ``self-tests'' conducted by

entities engaged in residential real estate-related lending to

determine compliance under the Fair Housing Act (``FHAct'') and the

Equal Credit Opportunity Act (``ECOA'').

Congress has declared that the results of ``self-testing'' should

be protected by enabling lenders to assert a privilege against

divulging the results of self-tests under precisely limited

circumstances. The privilege arises only if the self-test leads to the

adoption of remedies to correct any possible violations

discovered.1 Congress did not intend for violations to be known by

lenders and not be remedied.

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\1\ Senate Report 104-185, page 15.

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For purposes of the FHAct, under section 2302 of the Act (which

adds a new section 814A to the FHAct), a report or result of a self-

test is considered privileged if a lender conducts, or authorizes an

independent third party to conduct, a self-test of a real estate-

related lending transaction to determine the level or effectiveness of

compliance with the FHAct, has identified any possible violations of

the FHAct, and has taken, or is taking, appropriate corrective action

to address the possible violations.

The Act requires HUD, with respect to the FHAct, and the Federal

Reserve Board, with respect to the ECOA, to define self-testing in

substantially similar regulations within six months of enactment of the

Act. To address this requirement, this proposed regulation has been

drafted in consultation with the Federal Reserve, following discussion

with the Department of Justice, and appropriate federal financial

regulators, including the Federal Deposit Insurance Corporation, the

Office of the Comptroller of the Currency, the Office of Thrift

Supervision, the National Credit Union Administration, and the Federal

Trade Commission.

II. Proposed Regulatory Provisions

The proposed amendment to the FHAct would implement the Omnibus

Consolidated Appropriations Act for Fiscal Year 1997 (Pub. L. 104-208,

approved September 30, 1996) by defining what constitutes a privileged

self-test. The Department proposes to define a ``self-test'' as any

program, practice or study that a lender voluntarily conducts or

authorizes a third party to conduct that creates data or factual

information that is not available, and cannot be derived, from actual

loan or application files or other records related to credit

transactions, to determine the extent or effectiveness of the lender's

compliance with the Fair Housing Act. This includes but is not limited

to the practice of using fictitious loan applicants (``testers''), and

may cover all or any part of a residential real estate lending

transaction. The privilege would apply to the factual information

generated by the self-test as well as any analysis or conclusions

contained in reports prepared about the self-test. A self-test would

not include any collection of data required by law or by any government

authority, or a lender's review or evaluation of actual loan or

application files.

The Act provides that once the rule is in effect, self-tests would

become privileged even if they were conducted before the regulation's

effective date. As an exception to this, self-tests previously

conducted will not be privileged if, before that date, a complaint

against a lender: (1) Was formally filed in any court of competent

jurisdiction or (2) was the subject of an administrative law proceeding

or had been formally filed with HUD or a substantially equivalent

agency. In addition, a self-test previously conducted will not become

privileged on the regulation's effective date if any part of the report

or results has already been disclosed.

III. Section-by-Section Analysis of Proposed Rule

Section 100.140 Incentives for self-testing and self-correction

Section 100.140 would state the general rule that the report or

results of a lender's self-test are privileged if the required

conditions specified in this rule are satisfied. The privilege applies

whether the lender conducts the self-test or employs the services of a

third-party. However, a self-test must be conducted voluntarily; self-

tests that are required by a government authority, including those

conducted pursuant to a judicial order or directed by a Federal or

state regulator, would not qualify for the privilege. Similarly, any

collection of data required by law would not be considered voluntary

under this rule. The privilege for self-testing is in addition to and

independent of any other privilege that may exist, such as the

attorney-client privilege or the privilege for attorney work product.

Section 100.141 Corrective action required

This section implements the requirement imposed by the Act that a

[[Page 4883]]

lender take appropriate corrective action to address any possible

violations identified by the self-test in order for the privilege to

apply. A lender must take whatever actions are reasonable given the

nature and scope of the possible violations to fully remedy both their

cause and effect(s). This may include both prospective and retroactive

relief. Guidance on a lender's responsibility for taking appropriate

corrective action is provided under Sec. 100.144.

Although corrective actions are required when a possible violation

is found, a self-test is also privileged when it does not identify any

possible violations and no corrective action is necessary. The

Department believes that the effectiveness of the privilege as an

incentive to self-test would be significantly undermined if it only

applied when violations were discovered. If that were the case, the

mere assertion of the privilege would be tantamount to an admission

that violations occurred. Under such circumstances, some lenders might

be reluctant to engage in self-testing in light of the fact that the

mere assertion of the privilege might prompt the filing of legal

claims. In addition, a lender's findings made as a result of a self-

test might be influenced by a perceived need to establish the self-

test's eligibility for the privilege.

The Department also notes that a lender's determinations about the

type of corrective action needed, or a finding that no corrective

action is required, would not be conclusive in determining whether the

requirements of this paragraph have been satisfied. If a claim of

privilege is challenged, it would be necessary to assess the need for

corrective action and the type of corrective action that is appropriate

based on a review of the self-testing results. Such an assessment might

be accomplished by an adjudication where the judge may conduct an in

camera inspection of the privileged documents, or by the methods

described in the section of this preamble pertaining to Sec. 100.148.

This section also recognizes that the privilege may be asserted by a

lender even though the applicability of the privilege cannot be finally

determined because the appropriate corrective actions have not yet been

completed. To assert the privilege, a lender must be in the process of

taking corrective actions which, at the minimum, requires establishing

a plan for corrective action, a means for monitoring the lender's

progress in implementing the plan, and activity to begin carrying out

the plan. In such cases, a final decision on whether the privilege

applies might be withheld pending the lender's having shown substantial

progress in taking corrective action on a schedule imposed or agreed to

by an agency or court, or by the other parties affected.

Section 100.142 Definitions

Lender, for purposes of this subpart only, means a person who

engages in a residential real estate-related lending transaction.

Residential real estate-related lending transaction means the

making of a loan:

(1) For purchasing, constructing, improving, repairing, or

maintaining a dwelling; or

(2) Secured by residential real estate.

Self-test. This section would state what constitutes a ``self-

test'' for purposes of this rule. The Act does not define ``self-test''

and authorizes the Department to define by regulation the practices to

be covered by the privilege. The possible range of definitions includes

a wide variety of practices, from matched pair testers to any form of

self-assessment or self-evaluation.

In establishing the self-testing privilege, the Congress sought to

encourage lenders to undertake voluntary efforts to assess their

compliance with fair lending laws. In particular, the proposed

definition is a needed incentive for lenders to use self-testing to

monitor the pre-application stage of the loan process. See S. Rept.

104-185 at 15 (1995); GENERAL ACCOUNTING OFFICE, GAO/GGD-96-145, FAIR

LENDING 10, 72 (1996). The pre-application process does not typically

produce the type of documentation that lends itself to traditional file

reviews. The privilege serves as an incentive, by assuring that

evidence of discrimination voluntarily gathered through a self-test

will not be used against a lender, provided the lender takes

appropriate corrective actions for any possible discrimination found.

Although the legislative history focuses on the traditional use of

fictitious loan applicants in ``matched pair'' testing, it also

recognizes the utility of other testing methods.

The Department is proposing to define a ``self-test'' as any

program, practice or study that a lender voluntarily conducts or

authorizes a third party to conduct that creates data or factual

information that is not available, and cannot be derived, from actual

loan or application files or other records related to credit

transactions, to determine the extent or effectiveness of the lender's

compliance with the Fair Housing Act. This definition includes but is

not limited to the practice of using fictitious loan applicants

(``testers''). For example, self-testing would also include a survey of

mortgage customers conducted by the lender for fair lending purposes,

or a specially designed test to evaluate loan officers' knowledge about

fair lending laws.

Under the proposed rule, the principal attribute of self-testing is

that it constitutes a voluntary undertaking by the lender to produce

new factual information that otherwise would not be available or

derived from actual loan or application files or other records related

to credit transactions. The proposed rule does not define ``self-test''

so broadly as to include all types of self-evaluation or self-

assessment performed by a lender. Self-evaluations based on lender

reviews of actual loan or application files or other records related to

credit transactions, and reviews of HMDA and similar types of records

(such as broker or loan officer compensation records) that do not

produce new factual information about a lender's compliance which

cannot be derived from those files or records would not be covered by

the privilege. Accordingly, a compilation of data or a regression

analysis derived from the data in actual loan or application files

would not be privileged.

A broader definition encompassing such audits or evaluations is

within the Department's rulemaking authority under the statute.

Principles of sound lending dictate that a lender have adequate

policies and procedures in place to ensure compliance with applicable

laws and regulations, and that lenders adopt appropriate audit and

control systems. These may take the form of compliance reviews, file

analyses, the use of second review committees, or other methods that

examine lender records kept in the ordinary course of business.

Notwithstanding any evaluation performed by the lender, the underlying

loan records are themselves subject to examination by the supervisory

and law enforcement agencies and must usually be disclosed to a private

litigant alleging a violation. The Department believes that lenders

already have adequate incentive to conduct such routine compliance

reviews and file analyses as a good business practice to avoid or

minimize potential liability for violations.

At this time, the Department does not believe it is appropriate to

extend the privilege to audits of actual business records and make

unavailable to private litigants and to supervisory agencies records

lenders currently maintain as part of routine fair lending activities.

This could have an unintended negative effect on the levels of

cooperation between lenders and the supervisory

[[Page 4884]]

agencies and on actions by private litigants under the FHAct. The

Department is soliciting public comment, however, on the scope of the

proposed definition of ``self-test'' and how the definition could allow

innovative, effective, non-routine lender monitoring and self-

correction without unduly affecting the ability of aggrieved persons,

complainants, departments, or agencies to obtain needed information for

enforcement of the FHAct or to monitor compliance with that law.

Comments should include specific regulatory language as well as

criteria for, and examples of, types of activities that would be

included and not included in the revised definition.

In order to qualify for the privilege, a self-test must be designed

and conducted to assess the level or effectiveness of the lender's

compliance with the rules prohibiting discrimination. Testing for

compliance with the other requirements is not privileged. For instance,

a self-test designed for other purposes, such as to observe employees'

efficiency and thoroughness in meeting customer needs, is not covered

by the privilege even if evidence of discrimination is uncovered

incidentally.

Section 100.143 Types of information

This section would clarify that the types of information that would

be covered by the privilege would include draft documents and work

papers, as well as the final results or report of the self-test. The

Act does not prohibit an aggrieved person, complainant, department or

agency from requesting information about whether a lender has conducted

a self-test. This section clarifies that the privilege does not prevent

an aggrieved person, complainant, department or agency from obtaining

information sufficient to determine whether to seek the final results

or report. The fact that a lender has conducted a privileged self-test,

as well as the time period, the methodology, and the geographic

location of that self-test are not privileged. This ensures that the

tests about which the privilege is asserted can be properly identified

in any proceeding.

The Act provides that a challenge to a lender's claim of privilege

may be filed in any court or administrative law proceeding with

appropriate jurisdiction. The Department expects such challenges to be

resolved according to the laws and procedures used for other types of

privilege claims. This may include the use of in camera proceedings,

the filing of documents and pleadings with the court under seal, or the

production of documents to other parties under an appropriate

protective order that limits the purpose for which they be used.

Section 100.144 Appropriate corrective action

Congress intended for the self-test privilege to apply only where

self-correction follows self-testing. The language of sec. 2302 is

identical to section 302 of an earlier bill on this issue, S. 650. The

Committee Report on S. 650, Senate Report 104-185, in discussing sec.

302, reinforced the link between the discovery of potential violations

and corrective remedial action.\2\

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\2\ ``The purpose of this provision is to encourage institutions

to undertake candid and complete self-tests for possible fair

lending violations and to act decisively to correct any discovered

problems. The privilege ensures that such self-test efforts will not

be used against an institution if that institution has undertaken

remedial action.'' (emphasis added) Senate Report 104-185, page 15.

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This section clarifies that a determination of whether a lender has

taken appropriate corrective action must be made on a case-by-case

basis. In April, 1994, the Interagency Task Force on Fair Lending,

comprised of officials from the 10 federal agencies responsible for

implementing and enforcing the fair lending laws, issued a policy

statement on credit discrimination.3 That policy statement advised

lenders that discover discriminatory practices as a result of a self-

test to ``make all reasonable efforts to determine the full extent of

the discrimination and its cause'' and to ``determine whether the

practices were grounded in defective policies, poor implementation or

control of those policies, or isolated to a particular area of the

lender's operations.'' The policy statement also provided a list of

sample corrective actions that might be appropriate depending on the

circumstances, while recognizing, however, that not all corrective

measures listed would be appropriate in every case.

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\3\ 59 FR 18266, 18270-71 (April 15, 1994).

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The proposed rule reflects the 1994 Interagency Policy Statement

regarding corrective action. A lender must take corrective action that

is reasonable in light of the potential violations to fully remedy both

the cause and effect of any possible violation. It must be commensurate

with the scope of the discrimination and specifically tailored to

address the particular type of problem identified by the self-test.

To determine the appropriate corrective action, the lender must:

(i) Identify the policies and practices that are the likely cause of

the possible violation, such as inadequate or improper lending

policies, failure to implement established policies, employee conduct,

or other causes; and (ii) assess the extent and scope of any potential

violation, by determining which areas of the operations are likely to

be affected by those policies and practices. This would include

identifying the stages of the loan application process, types of loans,

or the particular branch where the possible discrimination has

occurred.

For example, where a pre-application test reveals that potential

borrowers in minority areas are not offered or made aware of the full

range of available loan products and that borrowers in non-minority

areas are offered or made aware of the full range of products, the

lender should examine its marketing, sales, and outreach activities

generally and the practices of individual branches and implement

actions to address the results of the test.

The extent of this corrective action should be contrasted with the

action appropriate where a test by a lender reveals disparate treatment

with respect to a specific minority group at a single branch. In this

situation, an examination of all branch loan officer activities would

be appropriate, as would: A review to determine if there are other

potential victims of disparate treatment at the branch; training;

offers to extend credit and/or offers to provide compensation for

damages to potential victims; notifications to potential victims

regarding their legal rights; and appropriate monitoring procedures.

If a self-test reveals that loan officers discourage the submission

of loan applications by minorities by quoting more onerous loan terms,

such as larger down-payments or higher interest rates, retroactive

relief may also be required. Appropriate corrective action also would

include reviewing of actual loan files to determine if minority

borrowers were actually granted loans on less favorable terms, and

providing them with more favorable loans.

Section 100.145 Scope of privilege

This section explains the nature of the qualified privilege

afforded by the Act. It states that privileged documents may not be

obtained by an aggrieved person, complainant, department or agency for

use in an examination or investigation relating to fair lending

compliance or in any administrative or civil proceeding in which a

violation of the FHAct is alleged. There may be other proceedings where

the privilege would not apply, for example, in litigation unrelated to

fair lending issues.

[[Page 4885]]

Section 100.146 Loss of privilege

This section explains the circumstances that would result in

documents losing their privileged status. Generally, as provided in the

Act, the results or report of a self-test, including any data generated

by the self-test, will not be considered privileged under this section

once the lender--or the lender's officers, employees, agents or

contractors--has voluntarily disclosed all or any part of the contents

to an aggrieved person, complainant, department or agency or to the

general public. Also, if a lender elects to rely on the self-testing

results as a defense to alleged violations of the FHAct, the privilege

would not apply as the disclosure is voluntary.

Under the proposed rule, a lender's involuntary production of

records in response to a judicial order, or a voluntary disclosure

under circumstances where the privilege does not apply, does not

necessarily evidence the lender's intent to give up the privilege.

Accordingly, if such disclosures are made in a limited fashion that

does not constitute a disclosure to the general public, e.g., under a

protective order, it would not affect the privileged status of the

documents.

The statute also provides that the report or results of a self-test

are not privileged if they are disclosed by a person with lawful access

to the report or results. Accordingly, disclosures made by such persons

are treated as disclosures made by the lender, without regard to

whether the person was authorized to make the particular disclosure.

The results or report of a self-test would not be privileged where

a lender seeks to assert the privilege, but is unable to produce

records or information pertaining to the self-test necessary to

determine whether the requirements for the privilege have been met.

The Department solicits comments on whether it should establish by

regulation a provision whereby lenders could voluntarily share

privileged information with a federal or state bank supervisory or law

enforcement agency without causing the information to lose its

privileged status when it is subsequently sought by private litigants.

However, such disclosures would cause the documents to lose their

privileged status with respect to all supervisory and law enforcement

agencies. Would an expanded privilege for information voluntarily

shared with a federal or state bank supervisory or law enforcement

agency carry out the intent of Congress to provide a privilege only

insofar as it is necessary to supply an incentive to lenders, without

lessening the responsibility of regulators to refer potential

violations to the agency? 4 Would this approach provide further

incentives to lenders while encouraging greater cooperation between

lenders and the supervisory/enforcement agencies and assuring that

appropriate self-correction has occurred through their oversight?

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\4\ ``This provision does not change the mandatory referral

requirement for pattern and practice violations of ECOA or FHA.''

Senate Report 108-105, page 15. Similar referral requirements exist

between the financial regulatory agencies and the Department.

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Section 100.147 Limited use of privileged information

This section provides for a limited use of privileged documents

that will not be treated as a voluntary disclosure affecting the

privileged status of the documents under Sec. 100.145. The report or

results of a privileged self-test may be obtained and used solely for

the purpose of determining a penalty or remedy after a violation of the

Act has been formally adjudicated or admitted. The production of

privileged documents for this purpose does not necessarily evidence the

lender's intent to give up the privilege. If such disclosures are made

in a limited fashion that does not constitute a disclosure to the

general public, the disclosure would not affect the privileged status

of the documents.

A finding by a government agency, as part of a bank examination or

investigation, that discrimination has occurred would not constitute an

adjudication for this purpose. If such findings lead to formal

adjudication or an admission by the lender, the limited use of

privileged documents under this section would apply.

The Act provides that information disclosed for purposes of

determining a penalty or remedy may be used only for the particular

adjudication or proceeding in which the adjudication or admission is

made. Accordingly, parties who obtain such information may be

prohibited from any further dissemination.

Section 100.148 Adjudication

The Act provides that the privilege may be challenged in any court

or administrative law proceeding with appropriate jurisdiction. The

Department expects such challenges to be resolved according to the laws

and procedures used for other types of privilege claims, such as

attorney-client or attorney work product. This may include the use of

in camera proceedings, the filing of documents and pleadings with the

court under seal, or the production of documents to other parties under

an appropriate protective order that limits the purpose for which they

may be used. The determination shall include consideration of whether

appropriate corrective action has been taken, using the criteria set

forth in the explanation of ``appropriate corrective action'' in

Sec. 100.144.

It is further expected that these rulings will turn on the evidence

involved in each case. It is not expected, nor intended, that to invoke

the privilege the respondent must have taken each corrective measure

listed for each possible instance of discrimination.

Section 100.149 Effective date

Lenders and others may invoke the self-testing privilege regarding

self-tests undertaken prior to the effective date of the regulations,

but not if either a formal complaint has been filed involving matters

covered by the self-test, or if the privilege has been lost pursuant to

Sec. 100.146. A formal complaint includes one filed with HUD or a

substantially equivalent agency, pursuant to subsection 810(f) of the

FHAct, alleging a violation of the FHAct. A complaint filed in a court

with jurisdiction over the FHAct also qualifies as a ``formal

complaint.'' Any other interpretation would conflict with Congress'

intent in the Fair Housing Amendments Act of 1988 to establish an

administrative process that is an equally effective alternative to the

filing of a complaint in a Federal court.

Findings and Certifications

Justification for Shortened Comment Period

It is the policy of the Department, consistent with 24 CFR part 10,

that its notices of proposed rulemaking are to afford the public not

less than sixty days for submission of comments. A shortened comment

period is necessary for this proposed rule to ensure promulgation of a

final rule within six months of enactment of the Act, as required by

the authorizing statute. A substantially similar proposed rule by the

Federal Reserve has been published in the Federal Register previously.

To ensure broad and timely public review and comment, the Department is

making available today the text of and preamble of this proposed rule

on its World Wide Web site (http//www.HUD.gov).

Regulatory Planning and Review

This proposed rule has been reviewed in accordance with Executive

Order

[[Page 4886]]

12866, issued by the President on September 30, 1993 (58 FR 51735,

October 4, 1993). Any changes to the proposed rule resulting from this

review are available for public inspection between 7:30 a.m. and 5:30

p.m. weekdays in the Office of the Rules Docket Clerk.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 establishes

requirements for Federal agencies to assess the effects of their

regulatory actions on State, local, local and tribal governments and

the private sector. This proposed rule does not impose any Federal

mandates on any State, local or tribal governments or the private

sector within the meaning of the Unfunded Mandates Reform Act of 1995.

Environmental Impact

In accordance with 40 CFR 1508.4 of the regulations of the Council

on Environmental Quality and 24 CFR 50.19(c)(1) of the HUD regulations,

the policies and procedures contained in this proposed rule do not

direct, provide for assistance or loan and mortgage insurance for, or

otherwise govern or regulate property acquisition, disposition, lease,

rehabilitation, alteration, demolition, or new construction, or set out

or provide for standards for construction or construction materials,

manufactured housing, or occupancy, and therefore, are categorically

excluded from the requirements of the National Environmental Policy

Act.

Impact on Small Entities

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)) has reviewed and approved this proposed rule, and in so

doing certifies that this proposed rule will not have a significant

economic impact on a substantial number of small entities, because the

proposed rule only proposes to implement a statutory provision that

allows an evidentiary privilege for the report and results of self-

tests of Fair Housing Act compliance undertaken by lenders.

Federalism Impact

The General Counsel has determined, as the Designated Official for

HUD under section 6(a) of Executive Order 12612, Federalism, that this

proposed rule does not have federalism implications concerning the

division of local, State, and federal responsibilities. The proposed

rule only proposes to implement a statutory provision that allows an

evidentiary privilege for the report and results of self-tests of Fair

Housing Act compliance undertaken by lenders.

Impact on the Family

The General Counsel, as the designated official under Executive

Order 12606, The Family, has determined that this proposed rule would

not have significant impact on family formation, maintenance, and

general well-being. The rule only proposes to implement a statutory

provision that allows an evidentiary privilege for the report and

results of self-tests of Fair Housing Act compliance undertaken by

lenders.

List of Subjects in 24 CFR part 100

Aged, Fair housing, Individuals with disabilities, Mortgages,

Reporting and recordkeeping requirements.

Accordingly, part 100 of title 24 of the Code of Federal

Regulations is proposed to be amended as follows:

PART 100--DISCRIMINATORY CONDUCT UNDER THE FAIR HOUSING ACT

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

follows:

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

2. In subpart C, new Secs. 100.140, 100.141, 100.142, 100.143,

100.144, 100.145, 100.146, 100.147, 100.148 and 100.149 are added to

read as follows:

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

General rule. If a lender voluntarily conducts or authorizes a

third party to conduct a self-test, the report or results of the self-

test are privileged as provided in this subpart. A self-test required

by any government authority is not privileged.

Sec. 100.141 Corrective action required.

The report or results of a self-test are privileged only if the

lender has taken or is taking appropriate corrective action to address

any possible violation identified by the self-test. The lender must

take whatever actions are reasonable in light of the scope of the

possible violations to fully remedy both their cause and effect.

Sec. 100.142 Definitions.

As used in this subpart:

Lender means a person who engages in a residential real estate-

related lending transaction.

Residential real estate-related lending transaction means the

making of a loan:

(1) For purchasing, constructing, improving, repairing, or

maintaining a dwelling; or

(2) Secured by residential real estate.

Self-test means any program, practice or study that a lender

voluntarily conducts or authorizes a third party to conduct that

creates data or factual information that is not available, and cannot

be derived, from actual loan or application files or other records

related to credit transactions, to determine the extent or

effectiveness of the lender's compliance with the Fair Housing Act.

Self-testing includes, but is not limited to, the practice of using

fictitious applicants for credit (``testers''). Self-testing does not

include the collection of data required by law or by any government

authority, or a lender's review or evaluation of actual loan or

application files or other records related to credit transactions.

Sec. 100.143 Types of information.

(a) The privilege applies to the report or the results of a self-

test, including any data generated by the self-test and any analysis of

such data and any workpapers and draft documents.

(b) The privilege does not cover information about whether a lender

has conducted a self-test, or information concerning the scope of or

the methodology used in conducting the self-test.

Sec. 100.144 Appropriate corrective action.

(a) Whether a lender has taken or is taking appropriate corrective

action will be determined on a case-by-case basis. Corrective action

may include both prospective and retroactive relief. To determine the

appropriate corrective action, the lender must:

(1) Identify the policies or practices that are the likely cause of

the possible violation, such as inadequate or improper lending

policies, failure to implement established policies, employee conduct,

or other causes; and

(2) Assess the extent and scope of any possible violation, by

determining which areas of its operations are likely to be affected by

those policies and practices. This would include identifying the stages

of the loan application process, types of loans, or the particular

branch where possible discrimination has occurred.

(b) Depending on the specific facts involved, appropriate

corrective action may include, but is not limited to, one or more of

the following:

(1) Identifying customers whose applications may have been

inappropriately processed; offering to extend credit if they were

improperly denied; compensating them for any damages, both out-of-

pocket and compensatory; and notifying them of their legal rights;

[[Page 4887]]

(2) Correcting any institutional policies or procedures that may

have contributed to the discrimination;

(3) Identifying, and then training and/or disciplining, the

employees involved;

(4) Considering the need for community outreach programs and/or

changes in marketing strategy or loan products to better serve minority

segments of the lender's market; and

(5) Improving audit and oversight systems to ensure there is no

recurrence of the discrimination.

(c) Not every corrective measure listed in paragraph (b) of this

section, above, need be taken each time a possible violation is

discovered. Rather, the determination of ``appropriate corrective

action'' shall be based upon the facts of each situation.

Sec. 100.145 Scope of privilege.

The report or results of a privileged self-test may not be obtained

or used by an aggrieved person, complainant, department or agency in

any:

(a) Proceeding or civil action in which a violation of the Fair

Housing Act or this regulation is alleged; or

(b) Examination or investigation relating to compliance with the

Fair Housing Act or this part.

Sec. 100.146 Loss of privilege.

The report or results of a self-test are not privileged under

Sec. 100.145 if the lender or any person with lawful access to the

self-test:

(a) Voluntarily discloses all or any part of the report or results

of the self-test or any privileged information to any aggrieved person,

complainant, department, agency, or to the public.

(b) Refers to or describes the report or results or any privileged

information as a defense to charges that the lender has violated the

Fair Housing Act or this part.

(c) In the case of the lender, fails or is unable to produce

required records or information pertaining to the self-test that are

necessary to determine whether the privilege applies.

Sec. 100.147 Limited use of privileged information.

Notwithstanding the privilege under Sec. 100.145, the report or

results of a privileged self-test may be obtained and used by an

aggrieved person, applicant, department or agency solely for the

purpose of determining a penalty or remedy after a violation of the

Fair Housing Act or this part has been adjudicated or admitted.

Disclosures made for this limited purpose may be used only for the

particular proceeding in which the adjudication or admission has been

made. Information disclosed under this section remains privileged.

Sec. 100.148 Adjudication.

An aggrieved person, complainant, department or agency that

challenges a privilege asserted under Sec. 100.145 may seek a

determination of the existence and application of that privilege in:

(a) A court of competent jurisdiction; or

(b) An administrative law proceeding with appropriate jurisdiction.

Sec. 100.149 Effective date.

The privilege applies to self-tests conducted both before and after

the effective date of this regulation, except that a lender's self-test

that was conducted before that date is not privileged:

(a) If there was a court action or administrative proceeding,

including a proceeding involving a complaint alleging a violation of

the Fair Housing Act filed with HUD or a substantially equivalent

agency; or

(b) If any part of the report or results were disclosed before that

date to any aggrieved person, complainant, department or agency, or to

the public.

Dated: January 10, 1997.

Susan M. Forward,

Deputy Assistant Secretary for Enforcement and Investigations, Fair

Housing and Equal Opportunity.

[FR Doc. 97-2453 Filed 1-30-97; 8:45 am]

BILLING CODE 4210-28-P