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

SUMMARY: This rule implements section 814A of the Fair Housing Act,

which encourages voluntary compliance by lenders with the Fair Housing

Act (FHAct) 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 revealed by such tests. This rule also makes technical amendments

to the fair housing complaint processing regulations.

EFFECTIVE DATE: January 30, 1998.

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

On January 31, 1997 at 62 FR 4882, the Department published a

proposed rule to implement section 814A of the FHAct, promulgated at

section 2302 of the Omnibus Consolidated Appropriations Act for Fiscal

Year 1997 (Pub. L. 104-208, approved September 30, 1996). Section 2302,

found in title II of Pub. L. 104-208, entitled the ``Economic Growth

and Regulatory Paperwork Reduction Act'' (``Act''), amends the FHAct to

promote compliance by establishing a privilege for lender-initiated

self-tests of residential real estate-related lending transactions.

The Economic Growth and Regulatory Paperwork Reduction Act: Sec. 2302

Section 2302 adds a new section 814A to the FHAct which 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 FHAct. This provision also

adds a new section 704A to the Equal Credit Opportunity Act (``ECOA'')

which creates the same privilege with respect to credit transactions by

a creditor. A report or result of a self-test is privileged from

disclosure 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, and has taken, or is taking, appropriate corrective action

to address possible violations discovered as a result of the self-test.

The Act requires the Department, with respect to the FHAct, and the

Federal Reserve Board (the Board), with respect to the ECOA, to

implement section 2302 and define ``self-testing'' in substantially

similar regulations within six months of enactment. This final rule was

drafted after consideration of the comments the Department received on

the January 31, 1997 proposed rule, and in consultation with the Board,

the Department of Justice (DOJ), and appropriate Federal regulatory and

enforcement agencies, including the Federal Deposit Insurance

Corporation (FDIC), the Office of the Comptroller of the Currency

(OCC), the Office of Thrift Supervision (OTS), the National Credit

Union Administration (NCUA), and the Federal Trade Commission (FTC).

The Act's requirement that the Board's and the Department's regulations

be substantially similar, the comments received on the proposed rule,

and the consultation which followed, delayed publication of the final

rule beyond the six months the Act prescribed.

After reviewing both regulations, the Department and the Board have

determined that there is no substantial difference in the final rules

and that they should be interpreted to have the same effect except

where differences in the FHAct and ECOA dictate otherwise. For example,

ECOA covers non-mortgage credit transactions which are not residential

real estate-related transactions under the FHAct. This dictated slight

differences in the definition of ``self-test'' in the agencies' rules.

Moreover, although there are organizational differences in the

agencies' rules, these differences are not intended to have any

substantive effect, and merely reflect the Board's longstanding

practice of publishing its interpretative rules in a separate staff

commentary. The Department has no staff commentary, therefore some of

this material appears in the Department's rule and other material

appears in its preamble. The consistency of the Department and the

Board rules is evident based on a comparison of the complete documents

published by the agencies, including the preambles to the regulatory

amendments and the revisions to the Board's Official Staff Commentary

to Regulation B.

Public Comments

In the proposed rule, the Department invited public comments for

consideration in drafting a final rule. The Department received a total

of 52 public comments, 18 of which were from lenders, 16 from public

interest organizations, 15 from lending industry associations, and one

each from a law firm, a government agency, and an individual. The

comments are addressed in the Section-by-Section Analysis of this final

rule preamble. The Department revised the proposed rule based on its

consideration of the comments received. The Department also made

editorial, non-substantive revisions to use plain English wherever

possible and to meet Congress's mandate of substantial similarity

between final rules issued by it and the Board. The preamble discusses

the revisions made to the proposed rule to effect a substantive change.

Existing Self-testing Policies

The Department notes that prior to the amendment of the FHAct to

create this privilege, several agencies stated their enforcement policy

in regard to self-testing by a lender.\1\ To the extent this final rule

does not contravene an agency's or department's enforcement policies,

those policies remain in effect until the agency or department

determines otherwise. Accordingly, for example, OCC Bulletin 95-51

(September 15, 1995) remains in effect. The Department's prior policy,

on the other hand, is superseded by this regulation.

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\1\ OCC Bulletin 95-51 (September 15, 1995); Deval Patrick,

Assistant Attorney General for Civil Rights, Letter to the Mortgage

Bankers Association, et al. (February 21, 1995).

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Review of Rule

As the proposed rule noted, in developing the regulation to

implement the self-testing privilege, the Department seeks to provide a

real incentive for innovative, effective, and non-routine fair lending

monitoring and self-correction while ensuring the rights of

discrimination victims. Lending discrimination, however, is an evolving

area of the law, and modifications may be appropriate. Therefore, the

[[Page 66425]]

Department and the Board may review this rule, including the definition

of self-test, after several years' experience. Should it determine to

conduct such a review, the Department will seek public comment on

whether the rule should be amended. A review would focus on whether the

self-testing incentives created by Congress and implemented in this

rule should be strengthened, and whether the definition of self-test

should be broadened. Since there is a corresponding relationship

between the breadth of the definition of self-test and the scope of

corrective actions, the review would also examine the extent to which

corrective actions as defined in the rule provide appropriate relief

for victims of discrimination.

II. Changes From the Proposed Rule

This final rule includes several changes from the proposed rule:

--The statement of the general rule applying the self-testing privilege

contained in Sec. 100.140 has been modified to reflect the need to

address only likely violations and to incorporate the requirement to

take appropriate corrective action. As a result, Sec. 100.141 of the

proposed rule is deleted and the sections which followed were

renumbered. As more fully explained in Sec. 100.143, Appropriate

Corrective Action, the revised rule provides a privilege when a lender

takes corrective action which is reasonably likely to remedy the cause

and effect of a violation identified by a self-test in instances where

it is more likely than not that a violation has occurred.

--The section on Definitions, now Sec. 100.141, explicitly includes

applicant and customer surveys within the definition of self-test and

makes clear that self-tests are not limited to the pre-application

stage of loan processing.

--Section 100.142 now specifies that material such as appraisal

reports, loan committee meeting minutes, underwriting standards or

compensation records is not privileged, nor is any information or data

derived from them privileged.

--As discussed above, Appropriate Corrective Action, Sec. 100.143, now

refers to ``likely violations'' rather than ``possible violations.''

Rather than requiring appropriate corrective action to address possible

violations, this section now specifies that corrective action is only

required when it is more likely than not that a violation occurred,

even though no violation was adjudicated formally.

--The proposed rule Sec. 100.141 requirement (now deleted) that lenders

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

possible violations to fully remedy both their cause and effect'' is

now addressed in Sec. 100.143(b), which requires a lender to take

action ``reasonably likely to remedy the cause and effect of a likely

violation.''

--A new Sec. 100.143(c) states that to establish a privilege a lender

is not required to provide remedial relief to a tester in a self-test;

is only required to provide remedial relief to an applicant if the

self-test identified that applicant as one who was more likely than not

the subject of a violation; and is not required to provide remedial

relief to a particular applicant if the statute of limitations

applicable to the violation expired before the lender obtained the

results of the self-test or the applicant is otherwise ineligible for

such relief.

--The illustrative list of appropriate corrective actions contained in

Sec. 100.143 no longer includes notifying persons whose applications

were inappropriately processed of their legal rights.

--Section 100.143(f) clarifies that taking appropriate corrective

action is not an admission a violation occurred.

--Section 100.145(b), Loss of Privilege, specifies that lenders will

not lose their privilege by notifying persons about remedial relief.

In discussing the public comments received on the proposed rule,

the next section provides a more detailed description of these and

other changes made in the final rule.

III. Section-by-Section Analysis of the Rule

Section 100.140 General Rule

Voluntary Self-Testing and Self-Correction

Section 100.140(a) states the general rule that the report or

results of a self-test a lender voluntarily conducts or authorizes are

privileged if the lender has taken or is taking appropriate corrective

action to address likely violations identified by the self-test. The

privilege applies whether the lender conducts the self-test or employs

the services of a third-party. Data collection required by law or

governmental authority is not a voluntary self-test.

Subsection (a) also implements the Act's requirement that a lender

must take appropriate corrective action to address likely violations

identified by the self-test before the privilege can be invoked. This

subsection incorporates the requirement that corrective action must be

taken for the privilege to apply, as stated in Sec. 100.141 in the

proposed rule. The requirement in the proposed rule Sec. 100.141 that

lenders ``fully remedy possible violations'' has been modified and is

now addressed in Sec. 100.143, Appropriate Corrective Action, which

also discusses ``likely violation.''

Other Privileges

Subsection (b), a new subsection, clarifies in the final rule

itself the language contained in the preamble to the proposed rule at

Sec. 100.140, which stated that the privilege of self-testing is in

addition to any other privileges which may exist, such as attorney-

client privilege or the privilege for attorney work product. This

change was requested by some commenters. A lender may assert the

privilege created by this subpart as well as any other applicable

privilege.

Section 100.141 Definitions

The Act does not define ``self-test'' and authorizes the Department

to define by regulation the practices covered by the privilege. The

Department received substantial comment on the definition of self-test.

The Department defines a self-test as any program, practice or

study a lender voluntarily conducts or authorizes which is designed and

used specifically to determine the extent or effectiveness of

compliance with the FHAct. The self-test must create data or factual

information that is not available and cannot be derived from loan

files, application files, or other residential real estate-related

lending transaction records. The final rule substitutes the phrase

``residential real estate-related lending transaction records'' in

place of ``records related to credit transactions'' to reflect more

accurately the coverage of the FHAct.

Self-testing includes, but is not limited to, using fictitious

credit applicants (testers), including matched-pair testers. It

includes surveys of applicants and mortgage customers, and is not

restricted to the pre-application stage of the credit process.

As the proposed rule's preamble noted, the principal attribute of

self-testing is that it constitutes a voluntary undertaking by the

lender to produce new--otherwise unavailable--factual information. The

definition contained in the rule provides added incentives for lenders

to look beyond their business records and develop new factual evidence

about the level of their compliance. The rule does not define self-test

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

assessment. While versions of the legislation initially introduced in

[[Page 66426]]

Congress extended the privilege to a lender's test or review, the

statute as adopted refers only to a self-test.

The Department notes that a lender's analysis performed as part of

processing or underwriting a credit application is not privileged under

the final rule. A lender's evaluation or analysis of its loan files,

Home Mortgage Disclosure Act data or similar types of records (such as

broker or loan officer compensation records) is derived from loan

files, application files and other real-estate-related lending

transaction records and is, therefore, not a self-test and is not

privileged under this rule. However, new data or factual information

created as a result of self-testing would be privileged.

A broader definition of self-testing is within the Department's

rulemaking authority under the statute. A broad definition of self-

testing, however, was generally opposed by Federal regulatory and

enforcement agencies, civil rights and consumer organizations, and fair

lending enforcement agencies.

As the proposed rule's preamble noted, 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 subject to examination

by the supervisory and law enforcement agencies and must usually be

disclosed to a private litigant alleging a violation.

In consultation with Federal regulatory and enforcement agencies in

developing the proposed and final rules, the Department found that,

according to a 1994 survey of large depository institutions by one

regulator, approximately 78% of the institutions surveyed performed

reviews that included comparative file reviews or statistical modeling

as part of their fair lending management and oversight. This is

evidence that an additional incentive for such reviews may not be

required. Providing a privilege for such reviews could make information

now provided to supervisory agencies unavailable, and could make

examinations less efficient.

A comment letter on the proposed rule from a Federal regulatory

agency noted:

We agree that a broader definition of self-test could have an

unintended negative effect on the levels of cooperation between

creditors and the regulatory agencies. Institutions use internal

fair lending audits and reviews to monitor their compliance with the

Fair Housing Act and regulatory agencies consider them valuable

examination tools to identify areas most in need of supervisory

attention . . . [M]oreover, a broader definition could create a more

confrontational examination setting due to arguments over the scope

of the privilege. There would be no clear line between documents

that institutions maintain in the ordinary course of business and

documents that are part of an internal audit.

Civil rights and community organization comments generally opposed

a broad definition of self-testing. A comment letter from a national

civil rights organization said the self-testing privilege should not

extend beyond the proposed rule's definition to encompass other self-

evaluations and self-assessments, including fair lending business

records lenders now maintain routinely. The organization said

incentives for self-testing should not undermine the strong Federal

interest in full relief for all victims of discrimination, and should

not place an undue burden on regulators, enforcement agencies or

litigants. The letter further noted:

In general, the new privilege is likely to lead to more lengthy

and expensive litigation. In the context of litigation or

enforcement investigation, many lenders will have an incentive to

overreach by broadly defining ``self-test'' in order to shield more

information under the new privilege. Furthermore, some lenders may

try to narrowly define ``any possible violation'' to mean ``only

clear violations,'' and many lenders may prefer a low standard for

``appropriate corrective action.'' Plaintiffs alleging

discrimination, on the other hand, will be forced to challenge every

assertion of privilege.

A national community advocacy organization cited the history of

legal privileges while commenting in opposition to a broad definition

of self-testing. That organization said:

Historically in this country, we have granted legal privilege in

very limited circumstances. It applies to communications between

individuals and their clergy, to communications between individuals

and their attorneys, and in few, if any, other circumstances. In

these cases, the need for open, honest and unrestricted

communication is viewed as outweighing the need of the legal system

for access to information. This historical practice of limiting the

scope of privilege should certainly be applied in this case. It may

be beneficial to encourage lenders to undertake self-testing.

However, given the rudimentary nature of the nation's understanding

of the problem of lending discrimination and the evolving nature of

the field of fair lending enforcement, it is critical not to unduly

limit the availability of information necessary to enforce the law.

Comments from lenders were generally in opposition to a narrow

definition of self-testing. A coalition of national mortgage lenders

and servicers said in a comment letter:

It is clear from the statute that Congress intended a broad

definition of self-test. Congress essentially forged a quid pro quo

for obtaining the self-test privilege under which a lender is

allowed not to disclose self-test reports if it undertakes

appropriate corrective action with respect to the findings. Given

this tradeoff, there is every reason to expand the types of self-

assessments which are to be subject to this rule, not limit them.

Otherwise, Congress' efforts to encourage self-tests will largely

have been in vain.

At this time, the Department believes lenders already have adequate

incentive to conduct routine compliance reviews and file analyses as

good business practices to avoid or minimize potential liability for

violations. Therefore, the Department does not believe it is now

appropriate to extend the privilege to audits of actual business

records. A broader privilege, which would extend to comparative reviews

of file contents (whether or not conducted with use of statistical

methods such as sampling and regression analysis) would greatly limit

the availability of evidence of violations. To do so also would make

the analysis of records lenders now maintain as part of routine fair

lending activities unavailable to supervisory and enforcement agencies

conducting fair lending examinations. Moreover, it could have the

unintended result of effectively precluding the use of discovery and

other fact-finding mechanisms by private litigants seeking relief under

the FHAct.

Testing designed and used for compliance with other laws, or for

other purposes, is not privileged under this rule. For instance, a

self-test designed to observe employees' efficiency and thoroughness in

meeting customer needs is not covered by the privilege even if it

incidentally uncovers evidence of discrimination. The final rule

clarifies that to qualify for the privilege, a self-test must be

designed and used specifically to determine the extent or effectiveness

of a lender's compliance with the FHAct, giving effect to the statutory

language of the Act at paragraph 814(a)(1). If a test is designed for

multiple purposes, only the portion designed to determine compliance

with the FHAct would be eligible for the privilege.

Some commenters were critical of the emphasis on matched-pair

testing in the proposed rule, stating such tests are expensive and may,

due to a small

[[Page 66427]]

sample size, yield statistically invalid conclusions. In addition, some

commenters maintained such tests are often inadequately performed or

analyzed, leading to unwarranted conclusions. Matched-pair testing,

they asserted, is impractical for many small community banks because of

the expense and because testers would be obvious in many rural areas

where ``strangers'' would be readily apparent to bank personnel.

As defined in the final 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 loan or application files or other residential real

estate-related lending transaction records. While this includes

matched-pair testing, it is not limited to such testing. A lender is

not required to use matched-pair testing or to test only in the pre-

application process. For instance, a lender could survey mortgage

brokers with whom it has a relationship to determine whether minority

applicants were treated similarly to non-minority applicants, or use

testers (in matched-pairs or otherwise) in the mortgage process.

Section 100.142 Types of Information

Subsection (a) provides that the types of information the privilege

covers include: the report or results of the self-test; data or factual

information created by the self-test; workpapers, draft documents and

final documents; analyses, opinions, and conclusions if they directly

result from the self-test report or results.

The final rule clarifies the self-testing privilege applies to any

data generated by the self-test, as well as any analysis of that data,

workpapers and draft documents. Thus, testers, attorneys, auditors,

experts and others who participate in the testing, or who review the

results to help the lender determine what corrective action, if any, is

needed, may not be compelled to produce testimony or documents

describing these matters. This assurance to lenders responds to

concerns expressed in the comments.

Subsection (b) lists exclusions from the privilege. The privilege

does not cover information about whether a lender has conducted a self-

test, the methodology or scope of the self-test, the time period

covered, or the dates it was conducted. This list of exclusions is

exemplary and not exhaustive.

Commenters differed on whether lenders must disclose the fact that

tests were conducted, and the scope and methodologies of the tests. A

few commenters wanted the existence of the test and its methodology to

be privileged. One commenter suggested that requiring lenders to

disclose the existence of a self-testing program, its scope, and its

methodology defeats the purpose of the privilege. That commenter stated

that only the factual information underlying the analysis should be

excluded from the privilege coverage. Another commenter maintained that

since nothing in the statute requires disclosure of the parameters of

the analysis, the regulation should not require it. Yet another

commenter stated the rule should limit privilege-related disclosures to

a reasonable identification of purportedly privileged documents,

together with a general description of the basis of that claim.

The Department considered these views. This section of the rule is

consistent with the statute, which specifically provides that only

reports or results of self-tests are privileged. The statute does not

prohibit an aggrieved person, complainant, department or agency from

requesting information about whether and, if so, how a lender has

conducted a self-test. Disclosure of the existence of a privileged

self-test, the self-test's scope, methodology or the time period when

it was conducted are essential to a decision as to whether to seek the

final results or report or to challenge the lender's claim of

privilege. This disclosure is essential to ensure the testing

information at issue can properly be identified in any proceeding

challenging a lender's claim of privilege.

This subsection also clarifies that loan and application files, or

other real-estate related lending transaction records, or information

derived from such sources, are not privileged, even if the data is

aggregated, summarized or reorganized to facilitate analysis. Records

related to applications submitted by testers are not ``real estate-

related lending transaction records'' for purposes of this subsection

and may be privileged self-testing records.

Section 100.143 Appropriate Corrective Action

Section 100.143(a) Generally

Commenters expressed diverse opinions about the standard by which

corrective measures should be judged. Several wanted a ``good faith''

standard for corrective actions which would be met if the lender in

good faith takes the corrective actions it determines appropriate.

Neither the statute nor the legislative history suggests Congress

intended a ``good faith'' standard.

Other commenters suggested a ``business judgment rule'' as a

measure of appropriate corrective action. Under that standard, the

prevailing practices in the lending industry would dictate what

corrective actions are appropriate. As with the ``good faith''

standard, the Department believes a ``business judgment rule'' would be

inconsistent with the legislative intent.

The rule does provide a standard by which corrective actions are to

be measured. The action must be reasonably likely to remedy the cause

and effect of a likely violation. Although an action may be taken in

good faith, it may not be reasonably likely to remedy the cause and

effect.

The Department further notes that a lender's determination as to

whether corrective action is needed, and, if so, what type, is not

conclusive in determining whether the privilege requirements are

satisfied.

If a lender asserts a claim of privilege, the adjudicator would

have to assess the need for, and the type of, appropriate corrective

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

assessment might be accomplished by an in camera inspection of the

privileged documents, or by sealed pleadings.

Section 100.143(a) Has Taken or Is Taking

This subsection also states that the report or results of a self-

test are privileged if the lender has taken or is taking appropriate

corrective action to address likely violations identified by the self-

test. In some cases, the issue of whether certain information is

privileged may arise before self-tests are complete or before the

corrective actions are fully under way. This would not necessarily

prevent a lender from asserting the privilege.

In situations where the self-test is not complete, the lender must

complete the requirements of this subpart 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 lender establish a

plan for corrective action and a method to demonstrate progress in

implementing the plan. Furthermore, lenders must take corrective action

on a timely basis after the results of the self-tests are known. An

adjudicator's final decision on whether the privilege applies should be

withheld until the creditor has taken the appropriate corrective

action.

Section 100.143(a) Likely Violations

The Act states that corrective action is required for possible

violations. Some

[[Page 66428]]

commenters noted lenders have no FHAct liability for ``possible

violations,'' only proven ones. The term ``possible violations'' means

that there need not have been an adjudication by a court or an

administrative law judge before lenders should begin corrective

actions. Otherwise, corrective actions would only begin following an

adjudication, which would effectively render the privilege moot.

The Act requires appropriate self-correction in the case of

possible violations for the privilege to apply. To implement the Act

and address the interpretation of possible violations, the final rule

now refers to ``likely violations,'' which means instances where it is

more likely than not that a violation has occurred even though no

violation was adjudicated formally.

Although corrective actions are required when a likely violation is

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

likely violation and no corrective action is necessary. The self-test

incentive would be undermined if the privilege applied only when

violations were discovered, because the mere assertion of the privilege

would amount to an admission that it is more likely than not that a

violation occurred.

Section 100.143(b) and (d) Cause and Effect

Some commenters asserted that corrective action must include both

prospective and retroactive relief to fully remedy both the cause and

effect of the violations. For example, in the instance of charging

higher interest rates to minorities, they urged that relief would

require not only lowering the rate, but reimbursing the overpayment

with interest, and paying damages for pain and suffering.

The final rule requires a lender to take corrective action

reasonably likely to remedy the cause and effect of a likely violation.

The Department revised the phrase ``fully remedy'' that appeared in the

proposed rule since, as many commenters argued, that phrase implied

that damages paid, or remedies provided, would have to equal those a

court would award if there had been an adjudication. It would be

difficult or impossible for a lender to determine in advance whether

corrective action met that standard, and the Act included no such

requirement. However, there may be situations where the violation and

the facts known to the lender are such that limiting the corrective

action solely to out-of-pocket damages would be inappropriate. The

final rule standard of ``reasonably likely to remedy the cause and

effect'' intends that payments of out-of-pocket and other compensatory

damages be determined on a case-by-case basis without any adjudication.

Section 100.143(b) and (d) Policies or Practices; Extent and Scope

A lender must: (1) Identify the policies or practices that are the

likely cause of the 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 likely

violation, by determining which areas of its operation are likely to be

affected by those policies and practices, such as stages of the loan

application process, types of loans, or the branches or offices where

likely discrimination has occurred.

Generally, if the scope of the testing is broad, the need to

examine information beyond that generated by the self-test is

correspondingly broad. For example, a lender that self-tests its

marketing practices and discovers evidence of discrimination may focus

its corrective actions on its marketing practices, and is not required

to expand its testing to other aspects of its operation. Also, for

example, if the testing focuses on a particular loan officer at a

particular branch, and a likely violation is found, then the lender

need not commence a nationwide loan file review. Nevertheless, a

comprehensive examination of that loan officer's activities would be

required, covering all mortgage loan products handled by that officer.

In some instances, a pre-application matched-pair test may reveal

that potential borrowers in minority areas are not offered or made

aware of the full range of available loan products offered or

advertised to borrowers in non-minority areas. In this case, the

lender, in determining prospective relief, should examine its

marketing, sales, and outreach activities both as a whole and in its

individual branches, and should implement prospective actions to

address the results of the test, where necessary.

Section 100.143(b) and (d) Interagency Guidance

Subsection (d) provides lenders with additional direction on what

is appropriate corrective action to remedy the cause and effect of a

likely violation, as required by subsection (b).

Several commenters recommended the rule should offer greater

guidance on what is and is not appropriate corrective action, and on

how to apply the actions listed in the proposed rule. Some suggested

the actions listed were too vague, thereby diluting the self-test

incentive. These commenters generally recommended that specific

standards be established and limitations be placed upon the amount of

corrective action required in connection with past discrimination.

Others maintained a case-by-case analysis invites unrestrained

second-guessing of difficult judgments on likely violations and

remedies. Several commenters viewed the case-by-case approach as an ex

post facto assessment of a lender's corrective actions. Other

commenters, generally those supporting case-by-case determinations,

argued that if the rule mandated any particular corrective action, it

would impede fair lending litigation and/or settlement proceedings.

The Department carefully weighed the comments received and

recognizes the need for certainty as to whether corrective actions are

appropriate. However, it is not possible to develop a standard that

would describe the specific appropriate action in every hypothetical

situation. Rather, the final rule contains a standard that describes

the criteria for determining the corrective action appropriate to the

fact pattern involved, and retains the general categories developed by

the Interagency Task Force on Fair Lending.2 The final rule

does note that not every corrective measure listed need be taken for

each likely violation.

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\2\ 59 FR 18266, 18270-18271 (April 15, 1994).

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Section 100.143(c) Prospective and Remedial Relief

There were many comments with differing views on the issue of

whether corrective action should be prospective only, or whether

retrospective actions also should be necessary. Those favoring

prospective action only argued that Congress intended to eliminate

disincentives to self-testing, and that a requirement for retrospective

relief deterred self-testing. Some commenters suggested that while

corrective action should generally be limited to prospective relief, if

the self-test has confirmed actual violations of law by the lender in

connection with the lender's extension of credit to specific

individuals, retrospective relief may be appropriate. Another commenter

opposed any unilateral determination and payment of out-of-pocket and

compensatory damages since such damages are only determinable and

obligatory following a finding of a violation of the FHAct at the

conclusion of a contested case.

With respect to whether remedial relief is required, the final rule

does not require a lender who seeks to establish

[[Page 66429]]

a self-testing privilege to provide remedial relief to individuals if

the self-test does not discover evidence of likely discrimination

against an actual applicant identified by the self-test. Accordingly, a

pre-application matched-pair test which reveals that potential

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

range of available loan products which borrowers in non-minority areas

were offered would require prospective, but not remedial, relief

because the self-test did not discover evidence of likely

discrimination against an actual applicant identified by the self-test.

Were lenders required to undertake reviews of loan or application

files to identify actual applicants who were victims in such instances,

the result of such a review would not be privileged as a self-test

under this subpart, since it involves information contained in or

derived from a loan or application file. Such an outcome, therefore,

could require a lender who undertook a self-test with the expectation

of a privilege to be required to provide incriminating evidence.

It is also worth noting that the fact that a tester has an

agreement with a lender that waives the tester's legal right to assert

a violation does not eliminate the requirement for the lender to take

corrective action although no remedial relief for the tester is

required.

Lenders should note that while application of the privilege does

not require a lender to take extra measures to identify and compensate

individual victims of discrimination, such persons still may file a

complaint with the Department or in court and may obtain the remedies

available in such cases. A lender should consider an effort to identify

such individuals as a good business practice to avoid or minimize

potential liability.

The final rule does not require a lender to provide remedial relief

to an actual applicant if the FHAct's two year statute of limitations

3 expired before the lender obtained the results of the

self-test, or if the applicant is otherwise ineligible for such relief.

---------------------------------------------------------------------------

\3\ 42 U.S.C. 3613(a).

---------------------------------------------------------------------------

Changed circumstances might mitigate against giving an applicant

certain types of relief. For example, a lender is not required to offer

credit to an unlawfully denied applicant if the applicant no longer

qualifies for credit due to a change in financial circumstances,

although some other type of relief may be appropriate.

Section 100.143(e)

Determination of appropriate corrective action is fact-based. Not

every corrective measure listed in subsection (d) need be taken for

each likely violation.

Section 100.143(f)

In response to commenters who fear incriminating themselves by

taking corrective actions, the Department added a new subsection (f)

which provides that taking corrective action by a lender is not an

admission a violation occurred.

Section 100.144 Scope of Privilege

This section, which explains the nature of the qualified privilege

afforded by the Act, states that the report or results of a self-test

may not be obtained or used by an aggrieved person, complainant,

department or agency in any: (1) Proceeding or civil action in which a

violation of the FHAct is alleged, or (2) examination or investigation

relating to compliance with the FHAct.

Several commenters wanted the privilege extended to encompass

alleged violations of State and local fair housing laws. In addition,

one commenter wanted the Department to clarify that if, in litigation

involving the Real Estate Settlement Procedures Act (RESPA), a court

orders a lender to perform a self-test, and to furnish the results of

that test to the opposing party, those results may not later be used in

a proceeding or investigation pursuant to the FHAct.

The Department did not adopt either suggestion. The Act states

specifically that the self-testing privilege applies only in

proceedings, civil actions, examinations, and investigations under the

FHAct. Congress indicated no intent to have the privilege apply to

actions under any other law, including State and local fair housing

laws. The Department lacks the legal authority to extend the

privilege's application beyond the FHAct. However, the Department will

encourage States or localities, who have sought and received a

determination that their law is substantially equivalent to the FHAct

in the rights and remedies accorded, to provide a privilege equal to

that provided by Congress and implemented in this rule. Such States and

localities will be asked to provide a privilege through the application

of their fair housing law, its regulations or binding rules, or they

must agree to refer all complaints involving lending discrimination

where the privilege has been invoked to the Department for processing.

The Department intends to propose rulemaking which would require

States and localities seeking a substantial equivalency determination

in the future to accord a self-testing privilege substantially

equivalent to the Act and this subpart. Under such a rule, if the

proceeding, civil action, examination or investigation is pursuant to

the FHAct, or pursuant to a State or local law which has been deemed

substantially equivalent to the FHAct, the privilege would apply.

States and localities which do not have laws which are substantially

equivalent to the FHAct may choose to adopt the privilege for use in

proceedings under their laws.

As to the furnishing of information in a RESPA proceeding, the

self-testing privilege applies only if the test is performed ``in order

to determine the level or effectiveness of compliance'' with the FHAct.

Since a court-ordered self-test under RESPA would be performed to

ascertain compliance with RESPA, rather than the FHAct, the self-test

would not come within the parameters of the privilege. Consequently,

unless the court in the RESPA matter ordered that use of the RESPA-

related self-testing information was limited to that proceeding, the

information would not be privileged in a FHAct proceeding.

If, however, the RESPA court ordered the lender to produce

information privileged under the Act, that information could not, by

virtue of that order, be used in a subsequent FHAct case. The privilege

would still apply because material privileged under this subpart may

not be ``used'' in FHAct litigation, regardless of how it was

``obtained,'' unless it was obtained by the lender's voluntary

disclosure. Thus, the privilege covers material obtained involuntarily

in collateral litigation, such as suits filed under RESPA, the Truth-

in-Lending Act, or under State laws.

Another commenter suggested the final rule's use of the term

``agency,'' with regard to those who may not obtain or use privileged

information, must be construed to encompass State, municipal and other

agencies. The Department agrees that ``agency'' would include a State

or local agency that sought to obtain or use the privileged information

in a proceeding or civil action alleging a violation of, or an

examination or investigation relating to, the FHAct, or pursuant to a

State or local law which provides for the privilege and has been deemed

substantially equivalent to the FHAct, as discussed above. If, however,

the State or local agency sought the information under the auspices of

a law, other than

[[Page 66430]]

those discussed in the preceding sentence, including a State or local

fair housing law, the privilege would not apply.

Section 100.145 Loss of Privilege

This section explains the circumstances that would cause documents

to lose their privileged status. Generally, the self-test report or

results are not privileged if the lender or person with lawful access

to the report or results, or any other information otherwise privileged

under this subpart, discloses or uses the report, results or such

information as a defense to charges a lender violated the FHAct, or

fails or is unable to produce self-test records or information needed

to determine whether the privilege applies. This section has been

revised to clarify that the privilege is lost if the lender 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. As discussed, future rulemaking will

address record retention requirements.

The Department received a number of comments on this section of the

proposed rule. Several commenters wanted the rule to specify that

unauthorized disclosure would not forfeit the privilege. The Department

did not adopt this suggestion. To do so would require a plaintiff to

disprove a lender's assertions as to what its internal policies,

practices, and chain-of-command are, which is an unreasonable burden.

Moreover, the statute provides that the report or results of a self-

test are not privileged if 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.

Existing law adequately addresses the issues of scope of employment and

agency.

Under the rule, a lender's production of records in response to a

judicial order, or a disclosure in a case where the privilege does not

apply, e.g., in a non-FHAct case, does not necessarily mean that the

lender intended to give up the privilege voluntarily. Accordingly, if

such disclosures are not voluntary, e.g., under a court order, they

will not affect the privileged status of the documents.

One commenter stated that without a record retention requirement,

lenders could conduct self-tests, find violations, and destroy all

records without taking corrective action. According to this commenter,

the rule should require any records, results, analyses, work product,

or other material related to or created from self-tests to be

maintained by the lender and/or its agents for at least 48 months if

litigation or an enforcement action is pending against the lender. The

Department's proposed rule included no provision on record retention.

Since the issue was not addressed in the proposed rule, the Department

has not included it in the final regulation. Instead, the Department in

the near future will propose for comment a rule on record retention as

it relates to self-testing information and the FHAct, with appropriate

recognition of the ECOA requirements in this area. In the meantime, to

assert the self-test privilege, lenders who are subject to ECOA must

comply with the record retention requirements of the Board's rule for

ECOA purposes.

Some commenters wanted the regulation changed to specify that

release of part of a report only forfeits the privilege as to that part

of the report released. However, the statute does not permit this

result, since it states that release of ``all, or any part of, the

report or results'' waives the privilege.

In the proposed rule, the Department solicited comments on whether

the regulation should provide that lenders could voluntarily share

privileged information with a Federal or State bank supervisory or law

enforcement agency without the information losing its privileged status

in litigation by private plaintiffs. The disclosures on which comments

were solicited, however, would have caused the documents to lose their

privileged status with respect to all supervisory and law enforcement

agencies, e.g., HUD and DOJ, as well as the Board, the OCC, the FDIC,

the OTS, the NCUA, and the FTC.

A substantial number of commenters supported the idea. According to

these commenters, this would encourage lenders to seek guidance from

regulators in developing appropriate corrective actions. The commenters

stated further that the Department should draw no negative inferences

from a lender's decision not to provide information voluntarily.

Another group of commenters wanted mandatory sharing of self-test

results with regulatory and enforcement agencies to ensure that the

scope of the remedy is appropriate and that the remedy is entirely and

effectively implemented. One commenter strongly opposed allowing

lenders to voluntarily share privileged information with a supervisory

agency while maintaining the privilege as to private litigants. Yet,

another commenter argued that such a mechanism directly conflicts with

the statute, which specifically provides that voluntary disclosure in

such instances constitutes a waiver of the privilege. A number of other

commenters similarly maintained there is nothing in the statute which

suggests the Department could adopt a partial waiver of privilege.

Furthermore, they maintained, the law of privileges generally does not

recognize a right to waive a privilege (as with the attorney-client

privilege) only as to some parties but not others. According to these

commenters, several bank counsel expressed reluctance to rely on such a

split privilege if based on the Department's rulemaking authority,

absent specific legislative language, or a court ruling upholding such

an interpretation of the privilege.

Other commenters supported limited disclosure to determine whether

appropriate corrective action had been taken, but opposed any

interpretation of the privilege that allowed blanket protection for all

voluntary disclosures of ``self-tests'' to banking or enforcement

agencies so as to immunize banks or enforcement agencies from

disclosure in private litigation. Another commenter asserted the Act

was enacted to provide creditors with the necessary protection to

encourage them to self-test, not to promote cooperation between

creditors and their regulators.

The Department concluded that a mechanism that would permit lenders

to provide privileged information to the independent financial

regulatory agencies, and simultaneously to enforcement agencies, e.g.,

HUD, DOJ, while still maintaining a privilege as to private litigants,

is not allowed by the statute. Such a mechanism might help lenders

secure certainty that the privilege was properly asserted. However,

some commenters were concerned that allowing disclosure to the

regulatory agencies with simultaneous disclosure to enforcement

agencies might result in enforcement action if the self-test were not

within the statutory privilege, and that this would be a deterrent to

self-testing. The process would also raise resource issues concerning

the capacity of the regulatory and enforcement agencies to issue

advisory opinions. In any case, after careful study, the Department

determined that in addition to the policy consequences, this step is

not allowed by the statutory language.

Section 100.146 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

[[Page 66431]]

documents under Sec. 100.144. 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. Disclosures for this limited purpose

may be used only for the particular proceeding in which the

adjudication or admission is made. Information disclosed under this

section remains otherwise privileged under this subpart.

Section 100.147 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.

One commenter recommended the privilege remain in effect during the

period in which an adjudicator is determining whether the privilege

applies. The Department agrees. As with other privileges, a lender's

claim that information is privileged protects that information from

disclosure during the time the adjudicator is determining whether the

lender is entitled to the privilege. However, the adjudicator may order

the lender to disclose the information so that the adjudicator can

determine whether the privilege was invoked properly. The adjudicator

may require in camera proceedings, the filing of documents and

pleadings under seal, and the production of documents to other parties

under a protective order limiting the purpose for which they may be

used. If the adjudicator orders disclosure for the limited purpose of

determining whether the privilege was invoked properly, the information

is protected from use in any proceeding, civil action, examination or

investigation until the adjudicator determines the privilege does not

apply.

One commenter urged that since assertion of, and challenges to, the

privilege will result in more lengthy and expensive litigation, the

Department should include a provision for attorney's fees and costs for

private plaintiffs who successfully challenge the assertion of the

privilege. If a judge finds, during the discovery phase of a

proceeding, that a lender improperly invoked the privilege, the judge

may order appropriate sanctions, including those provided by Rule 37 of

the Federal Rules of Civil Procedure or by 24 CFR 180.540. In

appropriate circumstances, this may include attorneys' fees and costs.

Moreover, the FHAct and its implementing regulations specifically

provide for the award of attorney's fees to the prevailing party in any

court or administrative proceeding.4 A party is entitled to

reasonable attorney's fees and costs to the extent provided under the

Equal Access to Justice Act.5 Any award of fees would be

made in accordance with those provisions.

---------------------------------------------------------------------------

\4\ See 42 U.S.C. 3612(p), 3613(c)(2), and 3614(d)(2); 24 CFR

180.705.

\5\ 5 U.S.C. 504.

---------------------------------------------------------------------------

Section 100.148 Effective Date

Lenders and others may invoke the self-testing privilege regarding

self-tests undertaken prior to the effective date of the final rule,

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. 100.145. A complaint filed in a court with jurisdiction over the

FHAct is a ``formal complaint.'' Moreover, as the proposed rule

preamble noted, a formal complaint alleging a FHAct violation includes

one filed with the Department or a substantially equivalent agency

(pursuant to subsection 810(f) of the FHAct, 42 U.S.C. 3610(f)). 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.

Technical Correction to 24 CFR Part 103

A final rule published October 4, 1996 (61 FR 52216) consolidated

HUD's hearing procedures for nondiscrimination and equal opportunity

matters in a new 24 CFR part 180. In that rulemaking, conforming

changes were made throughout 24 CFR to replace references to parts

eliminated as a result of the consolidation with references to new part

180. Although part 103 was included in the list of parts in which all

references to part 104 were to be replaced by 180, paragraph (b) of

Sec. 103.215 contained two references to 104, and only the first

reference was changed to 180. The reference in this paragraph to

Sec. 104.590 is corrected to read Sec. 180.545. Similarly, references

to part 104 are corrected to read part 180 in Secs. 103.1(c),

13.230(a)(1), 103.405(b)(2) and (3).

IV. Findings and Certifications

Regulatory Planning and Review

This rule has been reviewed in accordance with Executive Order

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

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

area 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, and tribal governments and the

private sector. This 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 Department's

regulations, the policies and procedures contained in this 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 rule, and in so doing

certifies that this rule will not have a significant economic impact on

a substantial number of small entities, because the rule only proposes

to implement a statutory provision that allows an evidentiary privilege

for the report and results of self-tests of FHAct compliance undertaken

by lenders.

Executive Order 13145, Protection of Children From Environmental Health

Risks and Safety Risks

This rule will not pose an environmental health risk or safety risk

for children.

List of Subjects

24 CFR Part 100

Aged, Fair housing, Individuals with disabilities, Mortgages,

Reporting and recordkeeping requirements.

24 CFR Part 103

Administrative practice and procedure, Aged, Fair housing,

Individuals with disabilities, Intergovernmental relations,

Investigations, Mortgages, Penalties,

[[Page 66432]]

Reporting and recordkeeping requirements.

Accordingly, parts 100 and 103 of title 24 of the Code of Federal

Regulations are 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 sections 100.140, 100.141, 100.142, 100.143,

100.144, 100.145, 100.146, 100.147, and 100.148 are added to read as

follows:

Sec. 100.140 General rules.

(a) Voluntary self-testing and correction. The report or results of

a self-test a lender voluntarily conducts or authorizes are privileged

as provided in this subpart if the lender has taken or is taking

appropriate corrective action to address likely violations identified

by the self-test. Data collection required by law or any governmental

authority (federal, state, or local) is not voluntary.

(b) Other privileges. This subpart does not abrogate any

evidentiary privilege otherwise provided by law.

Sec. 100.141 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 a lender voluntarily

conducts or authorizes which is designed and used specifically to

determine the extent or effectiveness of compliance with the Fair

Housing Act. The self-test must create data or factual information that

is not available and cannot be derived from loan files, application

files, or other residential real estate-related lending transaction

records. Self-testing includes, but is not limited to, using fictitious

credit applicants (testers) or conducting surveys of applicants or

customers, nor is it limited to the pre-application stage of loan

processing.

Sec. 100.142 Types of information.

(a) The privilege under this subpart covers:

(1) The report or results of the self-test;

(2) Data or factual information created by the self-test;

(3) Workpapers, draft documents and final documents;

(4) Analyses, opinions, and conclusions if they directly result

from the self-test report or results.

(b) The privilege does not cover:

(1) Information about whether a lender conducted a self-test, the

methodology used or scope of the self-test, the time period covered by

the self-test or the dates it was conducted;

(2) Loan files and application files, or other residential real

estate-related lending transaction records (e.g., property appraisal

reports, loan committee meeting minutes or other documents reflecting

the basis for a decision to approve or deny a loan application, loan

policies or procedures, underwriting standards, compensation records)

and information or data derived from such files and records, even if

such data has been aggregated, summarized or reorganized to facilitate

analysis.

Sec. 100.143 Appropriate corrective action.

(a) The report or results of a self-test are privileged as provided

in this subpart if the lender has taken or is taking appropriate

corrective action to address likely violations identified by the self-

test. Appropriate corrective action is required when a self-test shows

it is more likely than not that a violation occurred even though no

violation was adjudicated formally.

(b) A lender must take action reasonably likely to remedy the cause

and effect of the likely violation and must:

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

the 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 likely violation, by

determining which areas of operation are likely to be affected by those

policies and practices, such as stages of the loan application process,

types of loans, or the particular branch where the likely violation has

occurred. Generally, the scope of the self-test governs the scope of

the appropriate corrective action.

(c) Appropriate corrective action may include both prospective and

remedial relief, except that to establish a privilege under this

subpart:

(1) A lender is not required to provide remedial relief to a tester

in a self-test;

(2) A lender is only required to provide remedial relief to an

applicant identified by the self-test as one whose rights were more

likely than not violated;

(3) A lender is not required to provide remedial relief to a

particular applicant if the statute of limitations applicable to the

violation expired before the lender obtained the results of the self-

test or the applicant is otherwise ineligible for such relief.

(d) Depending on the facts involved, appropriate corrective action

may include, but is not limited to, one or more of the following:

(1) If the self-test identifies individuals whose applications were

inappropriately processed, offering to extend credit if the

applications were improperly denied; compensating such persons for any

damages, both out-of-pocket and compensatory;

(2) Correcting any institutional policies or procedures that may

have contributed to the likely violation, and adopting new policies as

appropriate;

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

employees involved;

(4) Developing outreach programs, marketing strategies, or loan

products to serve more effectively the segments of the lender's market

that may have been affected by the likely violation; and

(5) Improving audit and oversight systems to avoid a recurrence of

the likely violations.

(e) Determination of appropriate corrective action is fact-based.

Not every corrective measure listed in paragraph (d) of this section

need be taken for each likely violation.

(f) Taking appropriate corrective action is not an admission by a

lender that a violation occurred.

Sec. 100.144 Scope of privilege.

The report or results of a 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 is alleged; or

(b) Examination or investigation relating to compliance with the

Fair Housing Act.

Sec. 100.145 Loss of privilege.

(a) The self-test report or results are not privileged under this

subpart if the lender or person with lawful access to the report or

results:

(1) Voluntarily discloses any part of the report or results or any

other information privileged under this subpart to any aggrieved

person, complainant, department, agency, or to the public; or

(2) Discloses the report or results or any other information

privileged under this subpart as a defense to charges a lender violated

the Fair Housing Act; or

(3) Fails or is unable to produce self-test records or information

needed to determine whether the privilege applies.

(b) Disclosures or other actions undertaken to carry out

appropriate

[[Page 66433]]

corrective action do not cause the lender to lose the privilege.

Sec. 100.146 Limited use of privileged information.

Notwithstanding Sec. 100.145, the self-test report or results may

be obtained and used by an aggrieved person, applicant, department or

agency solely to determine a penalty or remedy after the violation of

the Fair Housing Act has been adjudicated or admitted. Disclosures for

this limited purpose may be used only for the particular proceeding in

which the adjudication or admission is made. Information disclosed

under this section remains otherwise privileged under this subpart.

Sec. 100.147 Adjudication.

An aggrieved person, complainant, department or agency that

challenges a privilege asserted under Sec. 100.144 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. 100.148 Effective date.

The privilege under this subpart applies to self-tests conducted

both before and after January 30, 1998, except that a self-test

conducted before January 30, 1998 is not privileged:

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

January 30, 1998, including the filing of a complaint alleging a

violation of the Fair Housing Act with the Department or a

substantially equivalent state or local agency; or

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

January 30, 1998 to any aggrieved person, complainant, department or

agency, or to the general public.

PART 103--FAIR HOUSING--COMPLAINT PROCESSING

3. The authority citation for part 103 continues to read as

follows:

Authority: 42 U.S.C. 3535(d), 3600-3619.

4. In the list below, for each section indicated in the left

column, remove the reference indicated in the middle column from

wherever it appears in the section, and add the reference indicated in

the right column:

----------------------------------------------------------------------------------------------------------------

Section Remove Add

----------------------------------------------------------------------------------------------------------------

103.1(c)........................... Part 104......................... Part 180 of this chapter.

103.215(b)......................... 104.590.......................... 180.545.

103.230(a)(1)...................... Part 104......................... Part 180 of this chapter.

103.405(b)(2)...................... 104.410(b)....................... 24 CFR 180.410(b).

103.405(b)(3)...................... 104.410(a)....................... 180.410(a).

----------------------------------------------------------------------------------------------------------------

Dated: December 8, 1997.

Susan M. Forward,

General Deputy Assistant Secretary for Fair Housing and Equal

Opportunity.

[FR Doc. 97-32657 Filed 12-17-97; 8:45 am]

BILLING CODE 4210-28-P