We originate and service mortgage loans and consumer loans. We just completed a banking examination and had our exit discussion with the examiners.
The examiners brought up that we should be doing self-testing and self-correction of the ECOA. They mentioned that there is a privilege that we can use in doing the self-test.
However, we were unable to prove that we do a self-test for the ECOA. They said the recommendation would be in the report they will issue to us soon.
We were told this self-test is going to involve our consumer loan products, which are not mortgage-related products. We know you specialize in residential mortgage compliance; however, we think many of your clients may also originate consumer loan products. So, we hope you will make an exception and answer our question.
We would like to understand what they expect of us. What is the self-testing of ECOA requirement? What kind of privilege is involved in undertaking the self-testing?
ANSWER
We concentrate on residential mortgage banking, originating and servicing, Many of our clients do also originate consumer loan products. It is not unusual for them to seek guidance involving their consumer loan products. As a courtesy, I will provide an answer to your question since I sense the urgency.
For your mortgage-related products, you might want to consider our Compliance Tune-up for the ECOA, the ECOA Tune-up. It provides an approach to the review criteria, is conducted independently, and provides a report and risk rating. It is not a good idea to wait for a regulator to determine that you are also not self-identifying ECOA compliance issues in your mortgage loan originations. Contact Us for more information.
Self-testing is designed to encourage lenders to voluntarily assess their fair lending compliance level and identify and correct any problems they find. The rules establish a legal privilege that prohibits financial institution’s regulatory agencies and private parties from obtaining information generated by voluntary self-tests for use in ECOA-related compliance examinations or investigations or in proceedings in which ECOA violations are alleged.
But the privilege applies only if the self-test is voluntary, meets the general standards outlined in the regulations, and the lender takes action to correct or address possible violations discovered in the self-test.
A self-test is best understood as any program, practice, or study that is designed and used specifically to determine the extent or effectiveness of a creditor’s compliance with the Equal Credit Opportunity Act (ECOA), or its implementing Regulation B, if it creates data or factual information that is not available and cannot be derived from loan or application files or other records related to credit transactions.
Regarding the privilege, it is designed to serve as an incentive by assuring that evidence of discrimination produced by a self-test will not be used against a creditor, provided the creditor takes appropriate corrective actions for any discrimination that is found. The privilege includes work papers and draft documents as well as final documents.
Self-testing may include using fictitious applicants for credit (i.e., testers), whether with or without the use of matched pairs. You could test, for example, a particular branch of your financial institution. Lender surveys or mortgage loan applications may also be taken to see if applications were processed properly.
But be advised, creditor reviews and evaluations of loan and applications files, HMDA data, or records such as broker or loan officer compensation are not considered a self-test and are not privileged.
Now, let’s drill down a little by taking a brief, cursory look at data collection, corrective action, and the types of relief.
Collection of Data
The Federal Reserve Board recently amended Regulation B to allow the collection of an applicant’s personal characteristics in connection with non-mortgage credit.
If you decide to conduct a self-test and request information about personal characteristics, you must disclose to applicants that providing the information is optional, that it is being collected to monitor compliance with the ECOA, that it will not be used in making the credit decision, and, where applicable, that information may be noted by visual observations or surname.
Correction Action
For the privilege to apply, a financial institution must take appropriate corrective action when the self-test shows that a violation likely occurred, even though no violation has been formally adjudicated. The action must likely remedy the cause and effect of the violation.
The collection of this data is only allowed in a self-test for compliance with the ECOA. Because of this, the self-test must meet the standards set by the regulations.
Types of Relief
Corrective action may include both prospective and remedial relief.
As a creditor, you are not required to provide:
- Remedial relief to a tester used in a self-test.
- Remedial relief only to applicants identified by the self-test, whose rights more likely than not were violated.
- Remedial relief to a particular applicant if the statute of limitations applicable to the violation expired before obtaining the results of the self-test or if the applicant otherwise is ineligible for such relief.
- Remedial relief to a tester used in a self-test.
- Remedial relief only to applicants identified by the self-test, whose rights more likely than not were violated.
- Remedial relief to a particular applicant if the statute of limitations applicable to the violation expired before obtaining the results of the self-test or if the applicant otherwise is ineligible for such relief.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
