QUESTION
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?
ANSWER
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
