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Friday, May 26, 2017

Self-Test Privilege

We have a question about self-testing involving compliance with the Equal Credit Opportunity Act. In a recent compliance meeting, we raised some questions about the nature of the self-test. These are the questions. What is a self-test and is it voluntary? What is the self-test privilege?

A self-test is designed and used specifically to determine the extent or effectiveness of a creditor's compliance with the Equal Credit Opportunity Act (“ECOA”). To qualify for the self-test privilege, a self-test must be sufficient to constitute a determination of the extent or effectiveness of the creditor's compliance with the ECOA and Regulation B, its implementing regulation.

The results of a self-test that a creditor voluntarily conducts (or authorizes) are entitled to the self-test privilege under certain circumstances. Data collection required by law or by any governmental authority is not a voluntary self-test. [12 CFR Part 1002.15(a)(1)]

Because the self-test privilege may only be asserted if the review procedures are designed and performed in accordance with appropriate review criteria, many financial institutions retain auditors, such as Lenders Compliance Group, to conduct them.

The self-test privilege applies to the report or results of the self-test, data or factual information created by the self-test, and any analysis, opinions, and conclusions pertaining to the self-test report or results. It also covers workpapers or draft documents as well as final documents. But the self-test privilege does not apply to information about whether a creditor conducted a self-test, the methodology used or the scope of the self-test, the time period covered by the self-test, or the dates it was conducted; or, loan and application files or other business records related to credit transactions, and information derived from such files and records, even if the information has been aggregated, summarized, or reorganized to facilitate analysis. [12 CFR Part 1002.15(b)(2) and (3)]

A self-test is only permitted the privilege if it was designed and used for a specific purpose. A self-test that is designed or used to determine compliance with other laws or regulations or for other purposes is not privileged. If a self-test is designed for multiple purposes, only the portion designed to determine compliance with the ECOA is eligible for the self-test privilege.

Under Regulation B, the self-test privilege applies only if the creditor has taken or is taking appropriate corrective action. To qualify for the self-test privilege, appropriate corrective action is required when the results of a self-test show that it is more likely than not that there has been a violation of the ECOA. The self-test privilege also is available when the self-test identifies no violations.

In some cases, the issue of whether certain information is entitled to the privilege may arise before the self-test is complete or corrective actions are fully under way. This would not necessarily prevent a creditor from asserting the self-test privilege. In situations where the self-test is not complete, for the privilege to apply the lender must satisfy the regulation's requirements within a reasonable period of time. To assert the self-test privilege where the self-test shows a likely violation, the rule requires, at a minimum, that the creditor establish a plan for corrective action and a method to demonstrate progress in implementing the plan. In effect, creditors must take appropriate corrective action on a timely basis after the results of the self-test are known.

A creditor's own determination about the type of corrective action needed, or a finding that no corrective action is required, is not conclusive in determining whether regulatory requirements have been satisfied. If a creditor's claim of the self-test privilege is challenged, an assessment of the need for corrective action or the type of corrective action that is appropriate must be based on a review of the self-testing results, which may require an in camera inspection of the privileged documents. [12 CFR Part 1002.15(a)(2), Official Interpretation]

Still, an assertion of any other privilege that may also apply is not necessarily precluded. A creditor may assert the privilege established under Regulation B for self-tests, but may also assert any other privilege that may apply, such as the attorney-client privilege or the work-product privilege. Self-testing data may be privileged for self-tests whether or not the creditor's assertion of another privilege is upheld. [12 CFR Part 1002.15(a)(3), Official Interpretation]

Jonathan Foxx 
Managing Director 
Lenders Compliance Group